DBRS Confirms Ratings of Kinder Morgan, Inc. and Kinder Morgan Energy Partners, L.P., Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Notes and Debentures rating of Kinder Morgan, Inc. (KMI or the Company) at BBB (low). DBRS has concurrently confirmed the Medium-Term Notes & Unsecured Debentures rating of its wholly owned subsidiary, Kinder Morgan Energy Partners, L.P. (KMP) at BBB (low). All trends are Stable. The ratings reflect KMI’s consolidated business risk profile supported by a well-diversified fee-based infrastructure asset portfolio of regulated oil, liquids and natural gas pipeline operations. Approximately 85% of KMI’s cash flow is generated from fee-based and contracted businesses with minimal volume risk and limited sensitivity to commodity prices; however, the Company’s gas gathering and processing, as well as oil production and transportation related businesses in the carbon-dioxide segment expose KMI to earnings volatility from commodity prices. Furthermore, KMI’s ratings are constrained by its relatively weak cash flow metrics resulting from the Company’s high dividend payout and its substantial growth capital needs, including acquisition plans.

In November 2014, KMI became the largest midstream energy infrastructure company in North America by acquiring all of its material subsidiaries including KMP, Kinder Morgan Management, LLC and El Paso Pipeline Partners LP and consolidating them under a single corporate structure (please refer to the DBRS press release dated December 3, 2014). DBRS notes that consolidated KMI intends to increase dividends by 16% in 2015 to approximately $4.4 billion and to grow dividends each year thereafter by 10% to 2020. Furthermore, the Company has identified nearly $18.3 billion of growth projects over the next five years (nearly $4.2 billion to be spent in 2015). KMI also plans to pursue acquisitions in the midstream space by taking advantage of the lower commodity prices. In February 2015, KMI acquired Hiland Partners, LP, a midstream company consisting of crude oil gathering and transportation pipelines as well as gathering and processing systems which serves the Bakken Formation in North Dakota and Montana, for approximately $3.0 billion. The transaction was largely debt financed at closing (please see DBRS press release dated January 22, 2015).

A major portion of KMI’s operating cash flow is used to pay dividends (82% for 2014), limiting organic growth of its equity base and resulting in dependence on external financing for growth capital and acquisitions. DBRS expects KMI’s credit metrics to be pressured as free cash flow deficits, resulting from high levels of capital expenditure (capex) and dividends, are expected to be largely debt financed. Leverage could trend modestly higher as the Company executes its substantial capex program and pursues midstream acquisition opportunities; however, as a major portion of the expansion projects are commercially secured, credit metrics are expected to improve as these projects are completed and placed into service over the medium term.

KMI’s financial profile remains reasonable with a DBRS adjusted debt-to-capital ratio of 56.5% at the last 12 months ending March 31, 2015, however, cash flow-to-adjusted total debt of 10.2% continues to be weak and at the lower end of the current rating category. Large debt-based acquisitions or delays in the completion of large growth projects could potentially weaken the Company’s financial profile and affect the current ratings. DBRS expects KMI to finance its free cash flow deficits with a prudent mixture of equity and debt in order to maintain credit metrics reasonable for the BBB (low) rating.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Pipeline and Diversified Energy Industry and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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