Approximately $14 billion of debt affected
New York, February 22, 2011 -- Moody's Investors Service changed the rating outlook for Kinder
Morgan Energy Partners, L.P. (KMP), Kinder Morgan
Kansas, Inc. (KMI, formerly Kinder Morgan, Inc)
and their associated entities (KN Capital Trust I, KN Capital Trust
III, Kinder Morgan Finance Company, ULC, and Kinder
Morgan, G.P., Inc.) to stable from negative.
Moody's upgraded KMP's short-term rating to Prime-2
Other affirmed ratings include KMI's Ba1 senior secured and Ba3
junior subordinated ratings, the Ba3 ratings for KN Capital Trust
I and KN Capital Trust III, and the Ba1 rating for Kinder Morgan,
"Although Kinder Morgan's consolidated leverage remains on
the high end for the rating, Moody's believes its leverage
has peaked and should improve over the next year," said Ken
Austin, Moody's Vice President. "With the bulge
of large capital projects behind the company and its forward cash flows
reflecting the impact of those recently completed projects and acquisitions,
Kinder Morgan's leverage should remain in-line with its rating."
When factoring in KMI's debt, which is standard for how we
evaluate other Master Limited Partnerships (MLPs), leverage is over
5.5x, which is very high for the ratings. However,
KMP's leverage as measured by adjusted stand-alone debt/EBITDA
at year-end 2010 was 4.5x, which is still higher than
most of its similar rated peers, but in-line with the ratings.
This higher leverage primarily reflects a number of lumpy projects and
acquisitions that resulted in increased debt levels. However,
this leverage does not fully incorporate the forward earnings and cash
flows from the recently completed Fayetteville Express Pipeline and only
a partial year of acquisitions made during 2010, including the KinderHawk
gathering system in the Haynesville basin. On a run-rate
basis, Moody's estimates adjusted debt/EBITDA is between 4.0x
and 4.5x, which is still on the high end for the rating,
but is lower than peak levels in 2010 and is partially offset by a strong
KMP possesses one of the strongest business profiles among the rated MLP
peer group. Aside from being one of the largest in terms of assets,
it has a balanced and well diversified asset base with approximately 75%
of the cash flows generated from durable sources that do not have direct
commodity price exposure.
However, KMP's CO2 oil production operations carry a significant
amount of commodity price and volume exposure. This sub-segment
represents more than 20% of the company's cash flows and
has seen some volume declines. KMP hedges the majority of its production
with mostly fixed price swaps to mitigate commodity price volatility.
However, the risk of falling production volumes and rising sector
costs remain a challenge to the business.
In addition, the CO2 oil production sub-segment is very capital
intensive compared to the rest of KMP's businesses primarily due
to the SACROC field. Moody's estimates that the capital required
to sustain production, or at least slow the production decline is
much higher than KMP includes in its maintenance capex figures.
As a result, KMP's cash flow coverage of its distributions
after maintenance capex is comparatively weaker than most of its peers,
but still acceptable for the rating. As long as this sub-segment
is expected to continue to contribute more than 20% of consolidated
cash flows, it will serve as a ratings restraint.
KMI is highly reliant on cash distributions from KMP to service its own
debt and make distributions to its shareholders. Although KMI has
a 20% equity interest in the NGPL Pipeline (Ba1, stable)
that is not part of KMP, approximately 95% of KMI's
cash flows are generated from KMP. As a result, we calculate
leverage for KMI fully consolidating KMP and a 20% proportionate
share of NGPL. On this basis, we estimate that KMI's
leverage is approximately 5.5x, which is also high relative
to the MLP peer group.
This consolidated view is reflected in KMI's Ba1 senior secured
rating. Although the debt at KMP is non-recourse to KMI,
we consider the fact that KMI relies almost entirely on cash flow from
that entity and therefore, view the debt at KMI as subordinate to
KMP. This structural subordination combined with the substantial
amount of debt at KMP drives a two notch rating difference for KMI's
debt relative to KMP. Although the debt at KMI is deemed to be
secured, it is secured by equity interests in subsidiaries and not
backed by hard, cash flow generating assets.
KMP's Prime-2 rating is supported by its overall good liquidity
position underpinned by a $2.0 billion senior unsecured
credit facility that matures in June 2013. This facility backstops
KMP's commercial paper program that had approximately $522
million outstanding as of December 31, 2010. This rating
also assumes that the company's financial polices remain consistent
with current expectations.
In order for KMP to be considered for an upgrade, stand-alone
leverage would need to trend below 4.0x on a sustained basis while
maintaining its strong business profile. In addition, the
CO2 production sub-segment needs to establish a clearly stable
trend in terms of production, reserve replacement, and costs
in order for it to no longer weigh on the capital needs of the company's
more durable businesses. Conversely, KMP's ratings
would face downward pressure if leverage increases and stays above 5.0x
on a stand-alone basis, KMI's consolidated leverage
rises above 6x, or the business profile weakens and commodity price/volume
exposure approaches 40%.
Since KMI's ratings are directly tied to KMP's, an upgrade
at KMI would be driven by an upgrade at KMP. KMI's notching
could narrow relative to KMP's if the proportion of debt at KMP
to KMI is reduced closer to 2.0x versus the near 4.0x level
today, thereby reducing the deep subordination.
KMI's ratings could face a downgrade if KMP's ratings are
downgraded or if KMI's debt levels increase, causing consolidated
leverage to approach 6.0x and thus putting more pressure and reliance
on KMP's cash flows.
The last rating action for KMP and KMI was on May 6, 2009 when we
changed the outlook to negative for Kinder Morgan Energy Partners,
L.P., Kinder Morgan, Inc. and affiliated
The principal methodology used in this rating was Global Midstream Energy
rating methodology published in December 2010.
Kinder Morgan Energy Partners, L.P. and Kinder Morgan,
Inc. are headquartered in Houston, Texas.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's moves Kinder Morgan's outlook to stable from negative
250 Greenwich Street
New York, NY 10007