Kinder Morgan (KMI) Ratings Affirms by S&P Following Diced Dividend

Standard & Poor's Ratings Services affirmed its 'BBB-' corporate credit rating and 'A-3' short-term credit rating on Kinder Morgan Inc. (NYSE: KMI). The outlook is stable. As of Sept. 30, 2015, KMI had reported balance-sheet debt of $42.8 billion.

"The rating action reflects our view that KMI's dividend adjustment is credit positive and a prudent and necessary action taken by management in light of very challenging capital market conditions," said Standard & Poor's credit analyst Michael Grande. The move eliminates nearly all of the company's funding risk headed into 2016 and positions KMI more favorably from a liquidity and balance sheet perspective. We believe KMI will use the approximately $3.8 billion of annual retained cash flow toward funding its ambitious, multi-year organic growth program in addition to reducing debt funding needs. In our view, KMI's core operations remain intact and, while the company could be locked out of the equity markets for an extended period of time, operating cash flow should support the majority of funding needs over the next few years. Pro forma for the move, we now expect net debt to EBITDA to be around 5.5x through 2018 and dividend coverage to be comfortably above 2x.

Our assessment of KMI's "excellent" business risk profile and "highly leveraged" financial risk profile is unchanged. We base the business risk profile assessment on KMI's geographically diverse asset base that generates primarily fee-based, stable EBITDA, and has a strong competitive position in most of the markets it serves. KMI is one of the largest energy companies in North America, and is significantly larger (in terms of scale and cash flow) than its U.S. and Canadian midstream energy peers. Somewhat tempering these benefits to creditors is the company's high financial leverage and several large organic growth projects in the near term that will require strong execution to ensure that the cash flows are realized with minimal delays.

We assess KMI's consolidated financial risk profile to be "highly leveraged". Our revised forecast assumes that KMI achieves an adjusted debt to EBITDA ratio of 5.5x through most of 2018, before slowly declining to the lower part of its stated range of 5x to 5.5x thereafter. We forecast EBITDA interest coverage to be about 3.5x in 2016. In general, our revised forecast assumes that KMI will be free cash flow (operating cash flow minus capital spending) positive by about $1 billion, and have modestly negative discretionary cash flow between $100 million and $300 million after paying dividends of about $1.1 billion compared to dividends of more than $4 billion previously. We further expect the company to maintain a dividend coverage ratio with a more substantial cushion of 2.5x compared to a ratio of 1.05x to 1.1x.

The stable rating outlook on KMI reflects our expectation that the company will be able to address its financing needs for the next few years as it executes on a large organic spending program, and adjusted financial leverage will be around 5.5x through 2018, which is better than our original expectations when the company executed its consolidation transaction. We believe KMI's financial leverage could improve to the low-5x area by the end of 2019, as project cash flows are realized.

We could lower the rating if the company's financial risk profile weakened such that adjusted net debt to EBITDA approached 5.75x and the company was unable fund its growth initiatives with available discretionary cash flow. Poor execution on large capital projects could also lead to a downgrade if cash flow delays or unprotected cost overruns pressure KMI's credit measures and the company was not able to remediate the problem with excess cash flow. In terms of business risk, acquisitions that add significant commodity risk to consolidated EBITDA or would change our current assessment of KMI's
"excellent" business risk profile could lead to a lower rating.

Higher ratings are possible over time, if KMI maintains a notably more conservative financial policy that would result in net debt to EBITDA of no more than 5x, while continuing to use a large portion of discretionary cash flow to fund future organic growth opportunities and acquisitions.

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