A coalition of New Hampshire town officials has announced “grave concerns” with an energy company’s ability to finance and construct a proposed natural gas pipeline through the southern part of the state. It comes on the heels of news last week that Kinder Morgan cut dividends to stockholders by 75 percent.
The N.H. Municipal Pipeline Coalition, a group of 15 towns opposed to the Northeast Energy Direct pipeline project, issued a statement last week pointing to several factors, including the dividend payout, that it says indicate Kinder Morgan is in financial turmoil.
However, Kinder Morgan said the company is financially sound, and the dividend reduction will help ensure its cash flow and even fuel growth of 6 to 10 percent in 2016.
Kinder Morgan, through its subsidiary, Tennessee Gas Pipeline Co., has proposed the approximately $5 billion project to expand the company’s existing pipeline system in Pennsylvania, New York and New England, and connect it to low-cost natural gas supplies from northern Pennsylvania to New York and New England markets.
The project has met strong resistance from residents and local officials in the southwestern New Hampshire towns slated to be in its path. In Cheshire County, the pipeline would cross the towns of Fitzwilliam, Richmond, Rindge, Troy and Winchester. Their concerns range from the potential environmental and health effects that the high pressure transmission pipeline could cause to concerns about the federal government taking property by eminent domain for the project.
In the New Hampshire coalition’s statement last week, Milford Town Administrator Mark Bender said, “Let’s put this into perspective. Kinder Morgan is the company trying to convince 19 southern New Hampshire towns and over 100,000 residents that they should be entrusted to construct and operate an 80-mile, high-pressure, 30-inch pipeline through our communities, conservation lands, private property, rivers and aquifers. However, recent assurances they made to their own stockholders about dividend increases were flipped on their head Tuesday. This sends up a number of red flags for me.”
Rindge Selectmen Chairman Robert A. Hamilton said in an interview the latest news from Kinder Morgan has him very concerned for what lies ahead if the pipeline is approved by federal regulators.
Not finishing the project “is a large concern,” Hamilton said. “I’d hate to see them come in and start clearing things out and then find out that they can’t finance the rest of the project. That would leave us in a pretty shabby-looking situation.”
Kinder Morgan spokesman Richard Wheatley could not be reached by phone, but said in an email to The Sentinel: “We have reviewed our expected investments in 2017 and 2018 and believe that our stable and internally generated cash flow will allow us to continue to fund the equity portion of our capital budget without the need to access the equity market. Even with the dividend reduction, it enables us to fund the equity portion of our expansion capital requirements using a significant portion of our cash flow. Remember $5 billion in cash flow is projected for 2016, and we expect to fund all of the 2016 project equity and a significant portion of our debt requirements.”
It’s been a rough year for the company.
In December 2014, Kinder Morgan stock was trading for just over $38 per share and reached a high of $44 per share.
As of this morning, its stock is down to $16.67 per share, a drop of nearly 40 percent from its high.
On Dec. 1, Moody’s, a service that rates corporations on their credit-worthiness, downgraded Kinder Morgan’s stock from stable to negative based on its debt ratio (the proportion of a company’s assets that are financed by debt, and its acquisition of the struggling Natural Gas Pipeline Company of America LLC).
“The negative outlook reflects Kinder Morgan’s increased business risk profile and additional pressure on its already high leverage that will result from its agreement to increase ownership in NGPL, a distressed company,” said Terry Marshall, Moody’s senior vice president, in a statement at the time of the announcement. “NGPL is facing potential default on its pending interest payments, suggesting that (Kinder Morgan) will need to provide cash injections, which will likely be debt-funded initially.”
Moody’s, in the same statement, further threatened to downgrade the company’s stock to junk status if it took on more debt. However, the other two big credit rating agencies — Standard & Poor’s and Fitch — did not downgrade the company, and both listed it as stable.
And now, news of the dividend cut caused Moody’s to raise the company’s stock back to stable.
On Tuesday, the company announced that it would be slashing its dividend to shareholders from $2.04 per share annually to 50 cents per share annually.
Richard Kinder, co-founder and executive chairman of Kinder Morgan Inc., explained the move in a conference call to analysts last week.
First, Kinder Morgan’s business model was based on funding its projects through a combination of debt and its own money. With Moody’s threatening to downgrade if the company took on more debt, the company had to look to other options to raise money for the projects in the works, he said.
The company also couldn’t just sell more of its stock, since the price of the stock was so low, it wasn’t financially sensible, he said.
So Kinder said, the company considered abandoning its backlog of pipeline projects.
According to Wheatley, the backlog includes more than 40 projects in the U.S. The total backlog, which includes natural gas projects and projects in other Kinder Morgan businesses, totals approximately $21.3 billion, he said.
About half of the natural gas projects are in progress, in permitting or in various stages of construction, he said.
During the conference call, Kinder said, the company decided against abandoning those projects, figuring those projects mean growth for the company, which is what it needs.
The only option left, Kinder said, was to slash the stock. By doing this, he said, the company anticipates it will be able to cover the construction of nearly all of its backlogged projects, pay down some of its debt and grow roughly 6 to 10 percent in the next year.
Wheatley said the company’s expected cash flow for 2016 is more than $5 billion, an increase of more than 8 percent from 2015.
He also said that Kinder Morgan anticipates meeting all of the rating agencies’ requirements to remain investment-grade.
While the company painted an optimistic picture for analysts, what happens if its projected growth doesn’t pan out?
While Wheatley declined to say whether abandoning the backlog of projects would be a consideration should the company not reach its targets over the next two years, that’s what has the New Hampshire coalition of municipalities nervous.
“This is news that I associate with a company in a cash crunch and struggling to meet its commitments,” said Brian McCarthy, the town administrator in Pelham.
“Over the past year, many towns in southern New Hampshire have been hearing a lot of promises from Kinder Morgan and I now have serious concerns about how this news could impact the NED pipeline,” McCarthy said. “Unfortunately, our country has seen many examples of companies cutting corners on projects to save a buck. This news is not reassuring.”
It’s not reassuring to some analysts either, according to a Dec. 12 report in Barron’s by associate editor Andrew Bary. He said one of the risks for Kinder Morgan is leverage, given its net debt of $42.5 billion and higher debt ratio than similar companies its size. Other companies, Bary noted, which have a lower ratio than Kinder Morgan, have already been downgraded to junk status.
“It has the highest leverage ratio of any S&P 500 company with investment-grade debt ratings,” Bary said. “Kinder Morgan aims to get its debt ratio down to 5.5 next year, but it won’t come through debt repayment and instead through a projected increase in cash flow, which could be tough to achieve in a depressed energy-price environment.”
According to the statement from coalition member towns, they question if Kinder Morgan could become another example of a U.S. company that grew quickly by racking up significant long-term debt, but then became challenged when the inevitable business pressures arose.
Coalition members say they’re also concerned that if the pipeline does get the go-ahead and the company runs short of money to pay for it, it may start cutting corners.
“The regulatory agencies need to look very carefully at the finances of this project and the solvency of its sponsor,” said Mason Selectman Charlie Moser. “If such a company came before a town board proposing a large project in Mason, we would require bonding or other financial assurances to protect our town and its residents from a firm with financial incentives to scrimp on construction costs. The damage towns would suffer from Kinder Morgan’s financial failure during and even after construction could be staggering.”
Wheatley said Kinder Morgan would never do that.
“We don’t cut corners to keep costs down, especially regarding the safety and the operation of our pipelines,” Wheatley said, adding that the company spent more than $400 million in 2014 on pipeline safety and integrity programs.
The N.H. Municipal Pipeline Coalition consists of municipal officials from Amherst, Brookline, Fitzwilliam, Greenville, Litchfield, Mason, Merrimack, Milford, New Ipswich, Pelham, Richmond, Rindge, Temple, Troy and Winchester.
The project is now in the hands of the Federal Energy Regulatory Commission, which has final say over its approval.