Moody's Lifts Outlook on Kinder Morgan (KMI) to Stable Following Chopped Dividend

Moody's Investors Service (Moody's) changed Kinder Morgan Inc.'s (NYSE: KMI) outlook to stable from negative and affirmed its Baa3 senior unsecured and Prime-3 commercial paper ratings. A complete list of Moody's rating actions is below.

On December 8, KMI announced that would reduce its annual dividend to $1.1 billion from about $4.4 billion and reduce its targeted ratio of net debt to EBITDA to 5.5x from 5.6x.

"The change in outlook to stable reflects the very significant change Kinder Morgan has made to its dividend policy, slashing its 2016 dividend by 75% and thereby eliminating its 2016 reliance on debt and equity markets access. Negative free cash flow in 2016 of about $2.2 billion, which includes debt maturities totalling $1.7 billion, could be funded under the company's revolving credit facility," said Terry Marshall, Moody's Senior Vice President. "Kinder Morgan is also slightly reducing its target leverage, which will remain high at about 5.7x on a Moody's adjusted basis. However, Kinder Morgan will have much greater flexibility in managing its leverage with the elimination of its reliance on equity capital markets access."

Outlook Actions:

..Issuer: Colorado Interstate Gas Company

....Outlook, Changed To Stable From Negative

..Issuer: Copano Energy, LLC

....Outlook, Changed To Stable From Negative

..Issuer: El Paso CGP Company

....Outlook, Changed To Stable From Negative

..Issuer: El Paso Energy Capital Trust I

....Outlook, Changed To Stable From Negative

..Issuer: El Paso Natural Gas Company

....Outlook, Changed To Stable From Negative

..Issuer: El Paso Pipeline Partners Operating Company

....Outlook, Changed To Stable From Negative

..Issuer: El Paso Tennessee Pipeline Co.

....Outlook, Changed To Stable From Negative

..Issuer: Hiland Partners, LP

....Outlook, Changed To Stable From Negative

..Issuer: K N Capital Trust I

....Outlook, Changed To Stable From Negative

..Issuer: K N Capital Trust III

....Outlook, Changed To Stable From Negative

..Issuer: Kinder Morgan Energy Partners, L.P.

....Outlook, Changed To Stable From Negative

..Issuer: Kinder Morgan Finance Company, LLC

....Outlook, Changed To Stable From Negative

..Issuer: Kinder Morgan G.P., Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Kinder Morgan Inc.

....Outlook, Changed To Stable From Negative

..Issuer: Southern Natural Gas Company

....Outlook, Changed To Stable From Negative

..Issuer: Tennessee Gas Pipeline Company

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Colorado Interstate Gas Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Copano Energy, LLC

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: El Paso CGP Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: El Paso Energy Capital Trust I

....Pref. Stock Preferred Stock, Affirmed Ba1

..Issuer: El Paso Holdco LLC

....Subordinate Conv./Exch. Bond/Debenture, Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: El Paso Natural Gas Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: El Paso Pipeline Partners Operating Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: El Paso Tennessee Pipeline Co.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Hiland Partners, LP

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: K N Capital Trust I

....Pref. Stock Preferred Stock, Affirmed Ba1

..Issuer: K N Capital Trust III

....Pref. Stock Preferred Stock, Affirmed Ba1

..Issuer: Kinder Morgan Energy Partners, L.P.

....Senior Unsecured Shelf Affirmed (P)Baa3

....Backed Subordinate Shelf, Affirmed (P)Ba1

....Backed Senior Unsecured Shelf, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Kinder Morgan Finance Company, LLC

....Senior Secured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Kinder Morgan G.P., Inc.

....Pref. Stock Preferred Stock, Affirmed Ba2

..Issuer: Kinder Morgan Inc.

....Senior Unsecured Shelf, Affirmed (P)Baa3

....Senior Unsecured Commercial Paper, Affirmed P-3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Kinder Morgan Kansas Inc.

....Junior Subordinated Regular Bond/Debenture , Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Sonat Inc.

....Senior Secured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Southern Natural Gas Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Tennessee Gas Pipeline Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

RATINGS RATIONALE

KMI's Baa3 rating reflects its significant scale, high quality assets, fee-based cash flows and dividend coverage, tempered by its high leverage. Moody's forecasted debt to EBITDA for KMI of around 5.7x (5.8x including proportionate consolidation of NGPL Pipe Co. LLC (Caa2 negative) is high for an investment grade company. (Moody's calculation of adjusted debt to EBITDA increases Kinder Morgan's measurement of net debt to EBITDA by about 0.2x. Adding the proportionate consolidation of NGPL and Moody's other adjustments increases KMI's measurement by about 0.3x). KMI's year-end leverage focus means leverage (including Moody's standard adjustments) may be above 5.7x for part of the year, but with the substantive elimination of reliance on equity markets access, it will be well positioned to manage leverage with incremental equity market access, if necessary. With the change in dividend policy KMI's dividend coverage moves to a very large 4.4x from a very tight 1x. This dividend coverage is comparable to non-MLP and non-MLP-like companies, reflecting the significance of this change in KMI's corporate strategy. KMI benefits from relatively stable cash flow generated by a combination of long term contracts and regulated returns from energy infrastructure assets. We estimate that about 10% of the company's operating cash flow is subject to short-term market volatility, primarily related to oil production tied to the CO2 business segment, which we expect to remain weak through 2016 due to low commodity prices.

As part of the November 2014 re-organization of KMI, a cross-guarantee was executed by most of its domestic, wholly-owned subsidiaries, leading to the Baa3 rating for all of the included entities. Four rated entities are not part of the cross-guarantee group. Three of these entities have issued preferred stock that is rated Ba1: El Paso Energy Capital Trust I, KN Capital Trust I, and KN Capital Trust III. The sole asset of each is subordinated debt of KMI, which was funded by the rated preferred stock, which is the principal liability of each entity. The preferred stock issued by these entities is rated one notch lower than KMI at Ba1, reflecting the credit quality of the subordinated payment obligation of KMI that supports the preferreds. The fourth non-cross guaranteed entity is Kinder Morgan GP Inc., which issued preferred stock that is rated Ba2. This entity has ownership interests that generate about $100 million of annual distributable cash flow and the preferreds have a preferential right to dividends over KMI's common shareholder. The preferreds are rated two notches below KMI's senior unsecured rating at Ba2.

KMI's liquidity is good. In 2016 Moody's expects the company will have about $5.5 billion of cash from operations and a $4 billion undrawn revolver (expiry 2019) to fund capital expenditures ($4.8 billion), dividends ($1.1 billion), and debt maturities of $1.7 billion, totaling $7.6 billion in cash uses. The approximate $2.1 billion cash from operations shortfall can be funded under the company's revolver. We expect KMI to be in compliance with its sole financial covenant (consolidated total debt to consolidated EBITDA not greater than 6.5x).

The stable outlook reflects KMI's stable cash flow and leverage that we expect to be consistently around 5.7x.

The rating could be upgraded if Moody's adjusted debt to EBITDA appears to be sustainable around 5.0x and the company's dividend policy remains intact.

The ratings could be downgraded if it appears that Moody's adjusted debt to EBITDA will be sustained above 5.8x or business risk increases.

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