TEXT-S&P rates Kinder Morgan new debt 'BB'

Thu Apr 26, 2012 5:49pm EDT

April 26 - Overview	
     -- Houston-based midstream energy company Kinder Morgan Inc. 
initiated $13.55 billion of bank credit facilities. 	
     -- We are assigning our 'BB' senior secured rating and our '4' recovery 	
rating to the facilities. The company will use proceeds from the facilities to 	
assist in funding its pending $38 billion purchase of El Paso Corp. 	
     -- We also removed Kinder Morgan Finance's secured debt rating from 	
CreditWatch with developing implications.	
	
Rating Action	
On April 26, 2012, Standard & Poor's Ratings Services assigned its 'BB' rating 	
and its '4' recovery rating to Houston-based midstream energy company Kinder 	
Morgan Inc.'s (KMI) $1.75 billion senior secured revolving credit facility, 	
$6.8 billion 364-day revolving credit facility, and $5 billion three-year term 	
loan. We also removed Kinder Morgan Finance Co. ULC's secured debt rating from 	
CreditWatch with developing implications.	
	
Rationale	
Our ratings on KMI reflect the company's "strong" business risk profile and 	
"aggressive" financial risk profile. KMI's credit quality centers on its 	
ownership of Kinder Morgan G.P. Inc., the general partner of master limited 	
partnership Kinder Morgan Energy Partners L.P. (KMP; BBB/Stable/A-2), a 	
leading provider of midstream energy services, bulk product storage, and oil 	
production. As of Dec. 31, 2011, KMI had about $3.2 billion of debt.	
	
We expect that KMI's pending acquisition of El Paso Corp. for $38 billion to 	
close in late May. Following the acquisition, KMI will have an impressive 	
business risk profile, but worsening financial metrics. The combination will 	
create the fourth-largest energy company in North America, with the largest 	
natural gas pipeline network by a significant margin. 	
	
While the new organization will have impressive scale and cash flow stability, 	
KMI will incur about $12 billion of new debt (excluding proceeds from the 	
pending sale of El Paso's oil and gas exploration and production (E&P) unit 	
for $7.15 billion and any drop-downs to KMP and El Paso Pipeline Partners 	
L.P.), causing credit ratios to deteriorate significantly. Through asset sales 	
and drop-downs, we expect ratios to improve, but to remain somewhat elevated 	
in 2012-2013.	
	
The following factors form the basis for our financial risk assessment:	
     -- KMI's credit metrics, both stand-alone and consolidated, will 	
materially weaken when the transaction closes. KMI intends to issue about $12 	
billion in debt to finance the cash component of the acquisition, causing 	
KMI's stand-alone and consolidated debt to EBITDA to increase to about 4x and 	
6.5x, respectively, from our previous expectations of about 2.5x and 5x to 	
5.5x. However, we believe these ratios could improve to about 3.25x and 5.75x, 	
respectively, by year-end 2012. 	
     -- KMP and El Paso partially own several joint ventures with substantial 	
debt leverage. In our ratios, we include the upstream dividends as EBITDA, but 	
do not include the joint-venture debt. The ratios would not differ materially 	
if we proportionately consolidated the joint ventures' debt and EBITDA.	
     -- We assume that acquisition debt will go down and debt leverage metrics 	
will improve based on the pending sale of El Paso's E&P business, asset 	
drop-downs to the two master limited partnerships (MLP), KMP and El Paso 	
Pipeline Partners (which we presume KMP will fund with 50% debt and 50% 	
equity), and savings from cost synergy. 	
     -- We generally regard the company's deleveraging plan to be credible and 	
on track, but market conditions could always cause timing to slip. We could 	
change our forecast 2012 debt-to-EBITDA ratio by about 0.25x to 0.50x in 	
either direction depending on the pending sale of the E&P assets, dropdown 	
valuations, and the extent of synergies realized. 	
	
We base our assumption that the business risk profile will improve because of 	
the following:	
     -- The combined enterprise's massive size, with an extensive geographic 	
footprint and asset diversity, correlates to an excellent competitive 	
position, and should support its ability to raise external capital. The last 	
downturn demonstrated that large, well-known MLPs maintained superior market 	
access during poor economic times.	
     -- KMI will get roughly 70% of consolidated EBITDA from the natural gas 	
and petroleum products pipelines (its lowest-risk assets), up from current 	
levels of about 50%. In addition, KMI will get slightly more than 15% of 	
consolidated EBITDA from its high-risk carbon dioxide business, down from 	
current levels of nearly 30%. 	
     -- KMI's cash flow diversity will improve. Within the first year of the 	
acquisition, we estimate KMP will contribute about 70% of KMI's total 	
consolidated EBITDA, with El Paso contributing the vast majority of the 	
remainder. (KMI subsidiary NGPL PipeCo. LLC will contribute a minimal 1%.) On 	
a stand-alone basis, roughly two-thirds of KMI's cash flow will consist of KMP 	
distributions, with one-third from El Paso. Currently, KMP distributions 	
constitute nearly all of KMI's stand-alone EBITDA. 	
     -- The mix of general partner (GP) and limited partner (LP) distributions 	
that KMI receives will improve. The near-term pro forma split is about 	
three-quarters GP distributions and one-quarter LP distributions, although we 	
expect that GP distributions will return to more than 80% with time. Because 	
of their incentive distribution rights, GP distributions essentially represent 	
a leveraged cash flow stream because they increase disproportionately as MLPs 	
increase their distribution levels. Conversely, if the MLPs were to cut 	
distributions, the cash flow KMI receives would also decline 	
disproportionately. 	
	
Liquidity	
KMI's liquidity is adequate for the rating. For the coming 12 months, we 	
expect liquidity sources to exceed uses by roughly 1.7x. KMI's cash sources 	
consist of $1.6 billion of projected distributions from its investments minus 	
interest expense, general and sustaining capital spending, and taxes of about 	
$615 million before the El Paso acquisition. When the El Paso transaction 	
closes, KMI will have a $1.75 billion revolving credit facility, a $6.8 	
billion 364-day revolving credit facility, and a $5 billion three-year term 	
loan facility. These facilities are sufficient to fund the acquisition and 	
separately the pending sale of El Paso's E&P unit will support acquisition 	
financing. As of Dec. 31, 2011, KMI's debt leverage was 2.6x as defined under 	
its financial covenant, compared with the maximum allowable 6.0x. Thus, the 	
company has ample cushion to withstand a material decline in EBITDA or 	
increase in debt. We estimate that KMI's dividends before the El Paso 	
acquisition will be about $950 million in 2012. KMI's normal capital 	
expenditures are minimal, so the company should be able to fund them 	
internally and maintain a modest working capital cushion, as it typically 	
does. KMI's debt maturities in 2012 are modest at about $839 million. The key 	
short-term credit factor for KMI is the reliability of distributions from KMP, 	
and from El Paso when the transaction closes. A sustained decline in these 	
distributions over a few quarters would erode the company's liquidity 	
position. Any material decline in general partnership distributions is a key 	
credit concern.	
	
Recovery analysis	
We rate KMI's senior secured debt 'BB', with a recovery rating of '4'. The 	
recovery rating indicates our expectation of average (30% to 50%) recovery if 	
a payment default occurs. For the complete recovery analysis, see the recovery 	
report on Kinder Morgan Inc. forthcoming shortly on RatingsDirect.	
	
Outlook	
Our outlook on KMI's ratings is stable. KMI's pro forma size and improved cash 	
flow profile balance the material amount of acquisition debt and degradation 	
in credit metrics. Execution on KMI's deleveraging plan may ultimately lead to 	
a higher rating, although we would not expect a positive ratings action for at 	
least 12 months. The likelihood of a downgrade is low because we believe that 	
the 'BB' rating appropriately captures the risk of a somewhat delayed 	
deleveraging plan.	
	
Related Criteria And Research	
     -- Key Credit Factors: Criteria For Rating The Global Midstream Energy 	
Industry, April 18, 2012	
     -- Top 10 Investor Questions For U.S. Midstream Energy Companies In 2012, 	
Jan. 20, 2012	
	
Ratings List	
Kinder Morgan Inc.	
Corporate credit rating          BB/Stable	
	
New Ratings	
$1.75 bil. revolving credit facility     BB	
 Recovery rating                         4	
$6.8 bil. revolving credit facility      BB	
 Recovery rating                         4	
$5 bil. term loan                        BB	
 Recovery rating                         4	
                                 To      From	
Rating Removed From CreditWatch 	
Kinder Morgan Finance Co. ULC	
Senior secured                   BB      BB/Watch Dev	
 Recovery rating                 4	
	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.
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