KMI - Kinder Morgan

[LearningMachine]

Perhaps this Fitch analysis is worth a look for anyone interested (there's also a bit on WMB): https://www.fitchratings.com/research/corporate-finance/fitch-affirms-kinder-morgan-inc-at-bbb-outlook-stable-29-05-2020

 

They are aware of the unconsolidated leverage at JVs fyi.

 

Seems very reasonable that Fitch does not include unconsolidated JV equity income in their EBITDA calculations, but rather uses the actual amount of the cash distributions that KMI receives from them instead (the accounting income not available to service debt, but rather the cash that is).

 

Thanks kab60 and PeridotCapital. 

 

Good to see that "Fitch supplements this EBITDA in its leverage calculations with an ancillary leverage calculation, which is to include pro rata EBITDA and pro rata debt of levered joint ventures."

 

Wonder if they publish this "ancillary leverage calculation."

[JayGatsby]

Decent quarter it seems, but the share repurchase authorization is just getting annoying and stupid.

[LearningMachine]

Decent quarter it seems, but the share repurchase authorization is just getting annoying and stupid.

 

One risk folks might be underestimating here is if interest rates went up quickly, given KMI's debt maturity schedule, they will start getting into trouble fast.

[lnofeisone]

Decent quarter it seems, but the share repurchase authorization is just getting annoying and stupid.

 

One risk folks might be underestimating here is if interest rates went up quickly, given KMI's debt maturity schedule, they will start getting into trouble fast.

 

@Learning Machine What specifically do you anticipate is a risk if interest rates go up quickly?

 

@JayGatsby - I quickly read the press release and didn't catch anything on share buyback other than 450M for opportunistic buying. Did I miss anything? I didn't think they were going to be buying any shares for a while. My faint yellow flag went off on their plan to invest 800M into expansion and ventures. The good: 1) it's internally financed 2) they know project financials have to be lucrative enough to make this investment or markets will punish them. The bad: 1) I was hoping they would bring their leverage down closer to 4 before doing any further projects.

[JRM]

Decent quarter it seems, but the share repurchase authorization is just getting annoying and stupid.

 

One risk folks might be underestimating here is if interest rates went up quickly, given KMI's debt maturity schedule, they will start getting into trouble fast.

 

Could you elaborate?

 

I see $750M due in February and  $1,150M due in March of 2021.  All of their debt looks fixed except for the revolver (unused $4B).

[LearningMachine]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

[KJP]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

 

What percentage, if any, of KMI's revenues are indexed to inflation?  There are some suggesting midstream is at least somewhat protected from inflation via inflation escalators built into tariffs.  See, e.g., https://sl-advisors.com/democrats-will-test-the-limits-on-spending

[JRM]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

 

So your statement is premised on KMI rolling debt into higher interest rates and/or issuing new debt at higher rates?

 

They are currently in a mode of paying down debt, and unless they acquire somebody I don't see many expansion projects in the coming years due to government obstruction.

 

The current balance sheet looks immune to rising rates, and the more debt they can pay off or refinance at fixed low rates the better.  Theoretically, low interest fixed rate debt is optimal in an inflationary environment.

[LearningMachine]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

 

So your statement is premised on KMI rolling debt into higher interest rates and/or issuing new debt at higher rates?

 

They are currently in a mode of paying down debt, and unless they acquire somebody I don't see many expansion projects in the coming years due to government obstruction.

 

The current balance sheet looks immune to rising rates, and the more debt they can pay off or refinance at fixed low rates the better.  Theoretically, low interest fixed rate debt is optimal in an inflationary environment.

 

Totally agree low interest rate fixed debt is optimal, but maturity has to be long.  If the maturity was much longer, they could have been immune but that is not the case.

[LearningMachine]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

 

What percentage, if any, of KMI's revenues are indexed to inflation?  There are some suggesting midstream is at least somewhat protected from inflation via inflation escalators built into tariffs.  See, e.g., https://sl-advisors.com/democrats-will-test-the-limits-on-spending

 

The revenue increase from inflation-adjusted income happens slowly year-by-year.  However, interest rates can move up much quicker in line with inflation rates.  Getting caught up in having to renew debt at 10+% interest rate, thereby increasing cost of servicing debt multiple times, which can eat into revenue and impact any covenants faster than many years it will take for inflation to start bringing in more revenue.

[peridotcapital]

 

The revenue increase from inflation-adjusted income happens slowly year-by-year.  However, interest rates can move up much quicker in line with inflation rates.  Getting caught up in having to renew debt at 10+% interest rate, thereby increasing cost of servicing debt multiple times, which can eat into revenue and impact any covenants faster than many years it will take for inflation to start bringing in more revenue.

 

KMI debt maturing in 10 years is currently trading at 2-3% yields. In order for that to rise to 10%+ you would need a dramatic deterioration in their business outlook. Even if CPI got to 5%, which I don't think the Fed would allow, KMI's funding costs would not approach 10% because higher CPI alone does not crush their revenues. Heck, if energy prices moved up in an inflationary environment, energy stocks would probably get a bid from investors and KMI's assets would be worth even more.

[JRM]

They have reduced their debt burden by $10B in the last 5 years.  They appear to be focused on reducing debt and self-funding any new projects.  They can always suspend share buybacks and reduce the dividend if they need to.  I just don't see the issue.  They've proven the resiliency of their business in 2020.

[LearningMachine]

 

The revenue increase from inflation-adjusted income happens slowly year-by-year.  However, interest rates can move up much quicker in line with inflation rates.  Getting caught up in having to renew debt at 10+% interest rate, thereby increasing cost of servicing debt multiple times, which can eat into revenue and impact any covenants faster than many years it will take for inflation to start bringing in more revenue.

 

KMI debt maturing in 10 years is currently trading at 2-3% yields. In order for that to rise to 10%+ you would need a dramatic deterioration in their business outlook. Even if CPI got to 5%, which I don't think the Fed would allow, KMI's funding costs would not approach 10% because higher CPI alone does not crush their revenues. Heck, if energy prices moved up in an inflationary environment, energy stocks would probably get a bid from investors and KMI's assets would be worth even more.

 

KMI debt will always yield more than 10 year treasuries, regardless of how good energy prices are doing.  You don't need dramatic deterioration in their business model for treasury rates to go up. 

[LearningMachine]

They have reduced their debt burden by $10B in the last 5 years.  They appear to be focused on reducing debt and self-funding any new projects.  They can always suspend share buybacks and reduce the dividend if they need to.  I just don't see the issue.  They've proven the resiliency of their business in 2020.

 

If you look at one of my earlier posts, some of that debt reduction came from them moving debt under a subsidary, and of course, we know how some of it came from asset sales. 

 

Yes, they've proven the resiliency of their business in 2020 against covid.  They haven't proven their resiliency against interest rates going up.

 

Yes, they can suspend share buybacks and reduce the dividend, and print more shares to stay alive.  No question about that.  I am not saying they won't stay alive.  I am talking about whether it is a good investment.

[lnofeisone]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

 

I have to dig up my notes on their debt so doing math with your numbers.

-47% of their debt maturing in the next 10 years translates to about $15B of maturity in the next 10 years.

-Of that, $10B is maturing in the next 5 (there is a massive 4B note that's due at the end of 2023)

-They've shown that they can pay down that much in 5 years

-Nearly all loans are fixed-rate (they have/had a small floater last I looked)

 

If they remain as resilient as they have through COVID and continue focusing on debt, I just don't see any risks/issues from rising interest rates.

[LearningMachine]

I fixed my message above by removing "quickly" and "fast". 

 

Last time I calculated their average debt maturity couple of months ago, it was about 10.9 years, with about 47% of their debt maturing within 10 years. I understand for some folks this might be a very long maturity.

 

10 year treasuries are yielding at 1.115% today and KMI has been able to issue debt recently at low percent interest rates.  I understand some will disagree with me, but I am of the opinion that we cannot ignore the probability of inflation finally showing up in what CPI measures, e.g. 5-10% inflation figures and correspondingly 5-10% treasury rates, and correspondingly 10+% interest for KMI when renewing debt. 

 

I understand some folks think that they will be able to get out before others, but when market realizes it, it might realize very quickly not giving an opportunity to get out.

 

I have to dig up my notes on their debt so doing math with your numbers.

-47% of their debt maturing in the next 10 years translates to about $15B of maturity in the next 10 years.

-Of that, $10B is maturing in the next 5 (there is a massive 4B note that's due at the end of 2023)

-They've shown that they can pay down that much in 5 years

-Nearly all loans are fixed-rate (they have/had a small floater last I looked)

 

If they remain as resilient as they have through COVID and continue focusing on debt, I just don't see any risks/issues from rising interest rates.

 

You might want to double check how they are claiming they paid down debt by moving some to a subsidiary and paying off some from opportunistic asset sales in a low interest rate environment, including to the Canadian government, and how much of that they will be able to do that going forward and what those assets will fetch when interest rates are higher.

[frommi]

You might want to double check how they are claiming they paid down debt by moving some to a subsidiary and paying off some from opportunistic asset sales in a low interest rate environment, including to the Canadian government, and how much of that they will be able to do that going forward and what those assets will fetch when interest rates are higher.

 

Do you see rising interest rates without inflation going up?

[longlake95]

I've owned this dog for a couple of years...with an ACB of 15 or so...thinking it's worth mid 20's, while I sit and collect the 7% yield. Am I out to lunch?

 

LL

 

[thepupil]

LearningMachine,

 

Some food for thought. Below are the coupons for KMI's debt. Note that all are well above market and that KMI's debt trades for well above par.

 

 

2021 Maturity: 5%, 5.8%, 5.0%,

2022: 8 5/8%, 4.1%, 1.5%, 3.9%

2023: 1.5%, 3.4%, 3.5%, 5 5/8%

2024: 4.1% 4.3%, 4.3%

2025: 7.25%

2026: 7.5%

2027: 6.7% , 7.0%, 2.25%, 6.7%

2028: 4.3%, 7.25%, 7.0%

2030: 2.9%, 8.0%

 

It'd be better if the bonds were shorter in duration so that they could refi more of them to lower rates, so I don't understand your concern here. Eyeballing it, KMI's bonds with maturities in the next 10 years trade between 105 and 145, reflecting their well-above market coupons.

 

Now of course rates can go up, but you have 300-400+ bps of cushion on the vast majority of the debt.

 

Based on your prior post, you think this is a possibility, that tsy's will go to very high yields. Some of the rates you are talking would cause bonds to fall by 30-50%+.

 

This is a low probability, tail risk scenario. to give some idea of that, let's look at random examples from the options market.

 

For example, the LQD ETF owns IG bonds with a duration of 9.5. If treasuries went up by 500 bps, this would be worth about 40% less (this is a rough spitball), linear duration would say 50% but duration isn't linear once bonds are positively convex so I'm unscientifically saying down 40%. If bonds fell 40%, then LQD qould trade for $80. The furthest out of the money farthest out put is the $124 put of January 2023 which you can buy for $5. If LQD goes to $80, those would be worth $45 or 9x your money.

 

TLT represents pure duration exposure; It has duration of over 20, so rates going up a lot will destroy it. It trades for $150 and the furthest out of the money and longest put is the $100 of Jan 2023 which is about $2. Let's say 50% downside in a huge rate sell-off, so its worth $75. this would make you 12.5x your money on the put.

 

I actually think the above puts are overpriced and likely overstate the probability of a rate sell-off of this magnitude and severity. I don't have access or familiarity on swaptions, but I assure you they'd probably offer much better payoffs for this degree of a rate move.

 

the market can be wrong, but I think it's important to seperate a low (<10%) probability tail scenario from the base case. if you bake in a 5 (much less 10%) tsy into your assumptions, I doubt you can buy any risk asset and not envision doom. 

 

if you actually think bond yields are going to those levels (or that the probability of them doing so is much > than the market prices), I suggest you short bonds/duration in some fashion as your view diverges widely from the market and you will get paid handsomely if you are right.

 

 

[LearningMachine]

You might want to double check how they are claiming they paid down debt by moving some to a subsidiary and paying off some from opportunistic asset sales in a low interest rate environment, including to the Canadian government, and how much of that they will be able to do that going forward and what those assets will fetch when interest rates are higher.

 

Do you see rising interest rates without inflation going up?

 

We can't always predict correctly, but I think probability is high that they will both go up together.  The crux here is that interest rates will follow inflation right away, while inflation-indexed revenue will go up year-over-year over many years.  To use an example, say inflation went from around 2.5% to around 10%.  Interest rates will immediately follow from around 2.5% to around 10%, immediately increasing cost of new debt 4 times.  On the other hand, it will take 15 years for income to catch up to 4 times at 10% inflation rate.

[Spekulatius]

You might want to double check how they are claiming they paid down debt by moving some to a subsidiary and paying off some from opportunistic asset sales in a low interest rate environment, including to the Canadian government, and how much of that they will be able to do that going forward and what those assets will fetch when interest rates are higher.

 

Do you see rising interest rates without inflation going up?

 

FERC regulated pipeline tariffs are indexed to inflation + increases. Not all of KMI's pipes are FERC regulated but quite a few are and many private party contracts are mimicked to FERC contracts, I think. So higher inflation may not be bad for them even with higher interest rates. What would be great is higher inflation and low interest rates as the FED actually has indicated  they may accept for a while.

 

We can't always predict correctly, but I think probability is high that they will both go up together.  The crux here is that interest rates will follow inflation right away, while inflation-indexed revenue will go up year-over-year over many years.  To use an example, say inflation went from around 2.5% to around 10%.  Interest rates will immediately follow from around 2.5% to around 10%, immediately increasing cost of new debt 4 times.  On the other hand, it will take 15 years for income to catch up to 4 times at 10% inflation rate.

[LearningMachine]

if you actually think bond yields are going to those levels (or that the probability of them doing so is much > than the market prices), I suggest you short bonds/duration in some fashion as your view diverges widely from the market and you will get paid handsomely if you are right.

 

Indeed, safest way I have found is to borrow very long term at low interest rates. 

 

I've also been finding it interesting how much you can tell about a company by just looking at what they are doing with debt financing.

 

On one end of the spectrum, many take on relatively shorter-term debt to show income to the shareholders while taking on interest rate risk even though they are in the middle of an amazing opportunity to take on much longer term debt at a little higher interest rate.  When things blow up, they will just tell the shareholders, sorry, this was unpredictable, but we need to cut dividend, and print shares to stay alive now. 

 

On the other end of the spectrum, very few take on very long-term debt with somewhat higher interest rate which results in less current income to shareholders but gets them insurance against this probability. 

 

Some are in the middle between the two ends of the spectrum.

 

[kab60]

Quick numbers have KMI at a 10 pct FCF yield on 34b mcap, so more than 3b FCF annually. That is 30b they could pay off over 10 years all else equal. I don't see the risk. At all. On the other hand, Pupils numbers show there is a large oppurtunity  over the next decade by retiring bonds trading way above par.

[LearningMachine]

Quick numbers have KMI at a 10 pct FCF yield on 34b mcap, so more than 3b FCF annually. That is 30b they could pay off over 10 years all else equal. I don't see the risk. At all. On the other hand, Pupils numbers show there is a large oppurtunity  over the next decade by retiring bonds trading way above par.

 

Only if you can guarantee that interest rates won't go up long enough for them to be able to do it.

 

For figuring out what price to go in and get out, I end up relying more on EBITDA yield on top of the entire EV and see if that is big enough to pay high interest rates and have something left over for shareholders.

[JayGatsby]

The whole world blows up if interest rates go up fast, no? There's debt everywhere. So government options are either keep interest rates low, or print money (inflation), or both. Is there anything different about the risk to KMI than every other levered real estate company and individual? I guess long-term contracts lock in pricing for some of their volume.

 

The cancellation of the Keystone XL pipeline is probably a neutral. Upside is consensus is no new interstate pipelines will be built (which makes no sense since they're the cleanest way to transport, but oh well), downside is growth opportunities will be limited.