KML : DBRS Commences Review-Negative

DBRS has announced that it:

placed the following ratings Under Review with Negative Implications:

— Kinder Morgan Canada Limited (KML), Preferred Shares – Cumulative rating of Pfd-3 (high)
— Kinder Morgan Cochin ULC (KMU), Issuer Rating of BBB (high)

The rating action follows the announcement by KML’s board that the Government of Canada (Rated AAA with Stable trend by DBRS) has agreed to purchase the existing Trans Mountain Pipeline System and the $7.4 billion Trans Mountain Expansion Project (TMEP) for $4.5 billion. As part of the agreement, the Government of Canada has agreed to fund the resumption of TMEP planning and construction work by guaranteeing TMEP’s expenditures under a separate federal government recourse credit facility until the transaction closes. The parties expect to close the transaction by late Q3 2018 or early Q4 2018, subject to KML shareholder and applicable regulatory approvals.

DBRS’s view is that, following the sale of the Trans Mountain Pipeline System and TMEP to the Government of Canada, KMU’s residual assets may not be supportive of the BBB (high) rating. The Company will continue to operate an integrated network of crude oil tank storage and rail terminals in Alberta; the Vancouver Wharves Terminal, a mineral concentrate export/import facility; and the Canadian portion of the Cochin Pipeline system, which transports light condensate originating from the United States to Fort Saskatchewan. Although the TMEP project overhang and legal risks are removed for the Company, the remaining assets have a relatively weaker credit profile compared with the assets being sold. The existing assets are contractually supported, but they lack the scale, diversification and the rate-regulated underpinnings that the Company had prior to the sale. Furthermore, the contract duration for the remaining assets are shorter, with a mix of investment grade and non-investment counterparties. DBRS notes that the Company had minimal debt at Q1 2018 and the capital expenditure requirements going forward are expected to be reasonable.

Affected issues are KML.PR.A and KML.PR.C

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