DBRS Upgrades Rating of Kinder Morgan, Inc. to BBB (low), Stable

DBRS has today upgraded the rating of the Secured Medium-Term Notes and Debentures of Kinder Morgan, Inc. (KMI or the Company – formerly, Knight Inc.) to BBB (low) with a Stable trend from BB (high) with a Positive trend. The rating upgrade reflects the positive developments outlined in detail below, principally the improved financial profile, in line with DBRS’s expectations, which is anticipated to be sustained through stable cash distributions from the Company’s equity investments and its minimal financing requirements as a holding company:

(1) KMI’s credit profile has improved substantially through debt reduction, using proceeds of approximately $5.9 billion from the sale of 80% of KMI’s indirect interest in Natural Gas Pipeline Company of America (NGPL) in February 2008. DBRS’s February 15, 2008, press release stated, “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” – DBRS estimated 15% by year-end 2008 versus 11% pro forma. “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.” These ratios were achieved as of March 31, 2009, as estimated by DBRS, with debt-to-EBITDA at 2.32 times (6.78 times in 2007). KMI’s EBIT-to-interest of 4.78 times compares favorably with its peers, although it is lower than that reported prior to 2006.

(2) Stable and rising cash flow contributions from Kinder Morgan Energy Partners, L.P. (KMP – rated BBB (high) and R-2 (high) – see the separate KMP rating report dated April 9, 2009) are expected to adequately cover KMI’s debt load and other minor expenses. Following KMI’s substantial divestiture program completed in the first quarter of 2008, KMI’s ability to generate cash flow is largely driven by its 14% ownership stake, and 50% economic interest in KMP primarily through its 2% General Partner (GP) interest and the associated incentive distributions. KMP accounted for approximately 95% of KMI’s EBIT (including equity earnings) in the first quarter ended March 31, 2009 (Q1 2009), with the remaining 5% from its 20% interest in NGPL, which it also operates.

(3) Going forward, major expansion projects will likely be undertaken at the KMP level, with minimal expansions at KMI. No incremental debt is expected at KMI, while it continues to focus on reinforcing its balance sheet strength and acts primarily as a holding company. On an unconsolidated basis, KMI’s credit metrics are expected to remain strong and consistent with the BBB (low) rating category. The consolidated ratios were affected by a goodwill impairment (approximately $4 billion) in KMI’s investments in KMP in Q2 2008 due to accounting adjustments as no value was attributed to the GP interest. DBRS notes that KMI also maintains sufficient liquidity through a largely undrawn $1 billion revolving facility to 2013, with no material debt maturities until 2011.

KMI indirectly benefits from KMP’s mostly regulated, low-risk and fee-based businesses, which contributed about 82% of KMP’s EBIT in 2008 (81% for KMI in 2008 and 95% in Q1 2009). Having KMP’s three major natural gas pipeline projects in full operation by year-end 2008, principally the Rockies Express Pipeline (REX), all supported by long-term take-or-pay contracts, should enhance its business risk profile and stability of cash flow and, therefore, cash distributions to KMI. Regulated pipelines and take-or-pay contracts are estimated to account for 48% to 53% of KMP’s EBIT and distributable cash flow in 2009 (3% to 5% above 2008 levels) and should rise over time.

There are limiting factors for the rating, which are considered manageable. After the 80% NGPL sale, KMI has an almost total reliance on KMP for earnings and cash flow contributions (with the remaining 5% from NGPL in Q1 2009). Furthermore, KMP has yet to fully complete its largest ever REX project (expected in November 2009), which reported a considerable increase in project costs (about 50%, $1.1 billion net to KMP) and full start-up delays (over a year to November 2009). However, REX is substantially complete, with staged in-service since early 2008, and the other two projects, Kinder Morgan Louisiana Pipeline and Midcontinent Express, are in full service. The foregoing should augment cash flow for future growth projects, which are expected to be of lesser scale and financial commitment in aggregate than these three pipelines (estimated total costs of $9.5 billion, $5 billion net to KMP). While going through a substantial growth phase, KMP has demonstrated its ability to obtain the bulk of its external funding through a combination of debt and equity issuance ($1 billion of debt and approximately $750 million of equity raised to date), alleviating concerns about its financing capability in a difficult credit market and recessionary climate. KMI’s commitment to inject $750 million of capital into KMP over an 18-month period from early 2009 is unlikely to be required.

Given its commodity pricing exposure, KMP’s oil producing activities (within its CO2 segment) are the most volatile portion of the operation, which is projected to account for about 18% of KMP’s distributable cash flow in 2009, or an estimated 8% to 9% of KMI’s EBIT. KMP’s substantial hedging strategy, with well over half of the expected production volumes to 2012 (73% in 2009 and 63% in 2010 at $49 and $56 per barrel, respectively) covered by swap arrangements, should somewhat mitigate the commodity risk. Production edged up slightly in the first half of 2009, with most operational issues in the last two years resolved.

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

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies

This is a Corporate rating.