Kinder Morgan outlook upgraded to positive, ratings affirmed at S&P Global
Investing.com -- Energy company Kinder Morgan Inc. (NYSE: KMI ) has seen its outlook revised to positive from stable, while all its ratings, including the 'BBB' issuer credit rating, have been affirmed by S&P Global. The revision is due to the company's strong balance sheet, credit measures, and continued expansion of its natural gas franchise both organically and through strategic acquisitions.
The positive outlook is reflective of the expectation that Kinder Morgan's growth strategy and potential acquisitions will be conservative, aligning with credit measures and a financial policy suitable for a higher rating over the next 12 to 18 months. The company has consistently operated within the middle of its target range in recent years and is projected to maintain a debt to EBITDA ratio in the 3.8x-4.2x range, based on adjusted metrics.
In the past, the upper end of the 3.5x-4.5x target range has been reserved for large and exceptional acquisition opportunities. The company is expected to continue its trend of funding potential transactions in a conservative or balanced manner that would preserve the strength of its balance sheet.
The company's credit measures are forecasted to trend below the midpoint of its target range in 2025. The base case forecast has Kinder Morgan's adjusted EBITDA at about $8.1 billion, slightly higher than the estimated adjusted EBITDA for 2024. This increase is due to higher cash flow from the natural gas pipeline segment from growth projects and new well connects, and higher EBITDA from the CO2 business.
Kinder Morgan is projected to generate free cash flow of about $2.7 billion after total capital spending of about $3.4 billion, including $1.1 billion of maintenance capital. Dividends are forecasted at about $2.6 billion, leaving a modestly positive amount of discretionary cash flow of about $135 million.
The positive outlook also reflects the expectation that the company will maintain credit measures of about 3.9x-4.1x over the forecast period and generate sufficient cash flow to fund its capital spending and dividends. However, if Kinder Morgan's cash flows and credit measures come under pressure, resulting in debt to EBITDA above 4.25x for an extended period, the outlook could be revised to stable.
Higher ratings could be considered if Kinder Morgan continues to maintain a prudent financial policy related to acquisitions, shareholder returns, and its organic growth initiatives. This would be contingent on leverage around the mid-point or trending to the lower half of its stated range of 3.5x-4.5x for the next 12 to 18 months.
Environmental factors are viewed as a negative consideration in the credit rating analysis of Kinder Morgan. The company's extensive natural gas, crude oil , and refined products infrastructure network exposes it to environmental challenges. However, its focus on natural gas transportation and storage makes it somewhat less exposed to leaks and spills compared to peers with a higher proportion of assets focused on crude oil and refined products logistics.
Kinder Morgan formed its Energy Transition Ventures (ETV) group in March 2021 to focus on low-carbon and emerging energy transition opportunities. Since its formation, ETV has invested in renewable natural gas projects, renewable diesel and sustainable aviation fuel projects, and the Red Cedar carbon capture and storage project, which is expected to be in service in the first quarter of 2025. While these investments are not material credit drivers for the rating, it is believed that Kinder Morgan will allocate a larger portion of its capital for these types of projects, enabling it to scale the ETV business in the coming years.
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