DBRS Upgrades Rating of Knight Inc. to BB (high), Trend now Positive

DBRS has today upgraded the rating of the Secured Medium-Term Notes and Debentures of Knight Inc. (Knight or the Company) to BB (high) from BB, with a Positive trend, following the closing of the sale of 80% of the ownership interests of MidCon to Myria Acquisition Inc. (Myria). This removes the rating from Under Review with Developing Implications, where it was placed on December 11, 2007, when the aforementioned sale was proposed. MidCon owns Natural Gas Pipeline Company of America (NGPL).

The rating upgrade with a Positive trend reflects considerations outlined in more detail below, principally substantial de-leveraging as a result of the MidCon transaction, stable and rising cash flow contributions from its 14% affiliate (including general partner interest), Kinder Morgan Energy Partners, L.P. (KMP – rated BBB (high) and R-2 (high) ) and retention of a remaining 20% interest in NGPL, which is a regulated pipeline with relatively low business risk and stable cash flow. The Company also owns a one-third interest in Express Pipeline Limited Partnership & Express Pipeline LLC.

1. The abovementioned transaction is a major step towards restoring Knight’s financial profile and is in line with DBRS’s expectations for de-leveraging. The Company will use net proceeds after tax of approximately $5.3 billion from the proposed sale to pay down a large portion of its existing secured debt, primarily bank loans associated with the management buyout. DBRS expects the remaining debt load to be approximately $3.8 billion based on total debt of $9.1 billion at September 30, 2007 (assuming no other repayments in the interim). This substantial debt reduction as a result of the transaction, which is in a greater proportion than reduction in cash flow, will improve the Company’s credit metrics from levels achieved on September 30, 2007. DBRS estimates debt-to-capital of approximately 35% and cash flow-to-debt of 11% pro forma for the transaction (compared with 54% and 9% respectively at September 30, 2007).

2. Following the closing of the sale, Knight has a greater reliance on KMP for earnings and cash flow contributions, which could rise to an estimated 75% to 85% of total cash flow from 50% to 55% prior to the transaction. The key mitigating factors to this increased reliance are KMP’s mostly regulated and fee-based operations that provide stability to cash flow and expected growth at KMP (refer to rating report of January 3, 2008 for more detail). The foregoing is largely driven by three natural gas pipeline projects in process for completion by 2009, principally the Rockies Express Pipeline, which is in partial operation with full service expected by mid-2009.

Cash flow from KMP’s more volatile CO2 segment, while subject to commodity pricing movements, is mostly protected through substantial hedges put in place for the period of 2007 to 2011 and helped by a favourable pricing environment expected in the near- to medium-term.

The greater reliance on KMP combined with a much smaller interest in MidCon (20% retained) result in a modest increase in business risk that is more than offset by the significant improvement in financial profile.

3. The growth prospects at KMP exist through substantial expansion and greenfield projects that should add significant incremental cash flow by 2009 as mentioned above. As a result, Knight should benefit from KMP’s projected longer-term growth of 8% per annum in terms of distributable cash flow per unit (16% expected increase in 2008 announced relative to the 2007 levels) as typically about half of the cash distributions are directed towards Knight through its general and limited partner interests.

To restore Knight to investment grade status, DBRS expects further de-leveraging leading to improved credit metrics from pro forma levels, particularly higher cash flow support for the remaining debt. Debt-to-capital was at 43% and cash flow-to-debt at 20% in 2004, when the Company’s rating was BBB with a Stable trend. DBRS estimates these ratios at approximately 30% and 15% respectively by year end 2008 in the context of the expected rise in KMP distributions mentioned above. In addition, DBRS notes that Knight will maintain sufficient liquidity through the $1 billion revolving facility, particularly in view of minimal debt maturities over the next few years.

Note:
All figures are in U.S. dollars unless otherwise noted.