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Kinder Cuts

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After a recent acquisition which triggered a Moody’s downgrade, Kinder Morgan announced on Tuesday that they will be reducing their dividend from $2.04 to $0.50 per year, starting with their February 2016 payment.   After the Tuesday evening announcement, MLP investors were feeling nervous about how this news may impact other highly leveraged Midstream units.  Prior to market open on Wednesday, Management held a conference call where Rich Kinder, who as recently as October 21st, reaffirmed their 6-10% dividend growth guidance, offered the following comments:

 

 

 

- Despite the weakness in the energy value chain, Kinder expects to achieve 95% of their forecasted EBITDA for 2015.  The $5B DCF 2016 forecast is based upon the current energy environment

 

- The downgrade was unexpected, as Rating agencies had not previously included proportional debt from unconsolidated joint ventures, which is what triggered the negative outlook change from Moody’s after the announced NGPL acquisition the week prior

 

- With maintaining an Investment Grade credit the highest priority, Kinder Morgan had to make a decision to reduce growth projects for 2016 forward, in which they could maintain the dividend with perhaps some growth.  They chose not to reduce growth investments, but rather use their cash flows to fund their 2016 capex budget, and improve the balance sheet.  

 

- As a result of the above, Rich Kinder, who made the point to reminder investors that Management, which owns 1/6th of the equity will feel equal short term pain from the new dividend policy, summarized Kinder Morgan’s position with these four points

 

  • Expect to have no need to access equity market in foreseeable future
  • Substantially reduce need for debt
  • Expect to maintain Investment Grade credit
  • Expect to grow DCF

 

During the Q&A, the Management team was certainly humbled by the recent market events, and mentioned they set the new dividend to be slightly higher than the S&P yield, which they thought would continue to attract income focused funds.  CFO Kim Dang suggested that when using Distributable Cash Flow per unit as the peer metric, Kinder will be trading at a 7.0x multiple, vs the market average of 10-11x, implying that there is the potential for share appreciation as the investor base transitions from Income to Value focused investors.  As the chart below shows, Income focused retail investors will continue to sell their shares

 


 

 

On Wednesday, the Master Limited Partnership benchmark index traded higher 7.6%, as the market likely focused on the health of Kinder’s EBITDA outlook ($7.8B 8% YoY growth) and the assumption that other midstream providers may have better 2016 cash flows than expected.  MLP management teams also will now have the benefit of understanding how Moody’s may evaluate future transactions, reducing the risk of creating a similar set of circumstances which forced Kinder to take action.  Kinder Morgan's precipitous fall was triggered by an acquisition and not a dramatic change to their expected cash flows, which should provide some relief to investors, at least for the time being.  

 

 

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