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