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Could Kinder Morgan Raise Dividends Soon?

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KMI’s leverage

In 2Q16, Kinder Morgan’s (KMI) analyst-adjusted net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio fell to 8.8x after rising for six consecutive quarters. Though it is still high, it has started moving in the right direction.

The above graph shows KMI’s quarterly debt-to-equity and net debt-to-EBITDA ratios over the last four years.

“We are pleased to have taken substantial steps towards achieving our stated goals of strengthening our balance sheet and positioning the company for long-term value creation. Driven by the joint ventures with Southern Company on our SNG system and Riverstone on our Utopia pipeline project, we expect to end the year at a leverage ratio of 5.3 times net debt-to-Adjusted EBITDA, down from our previous guidance of 5.5 times,” said Richard D. Kinder, KMI’s executive chairman, in the company’s 2Q16 earnings release.

In regards to a dividend increase, Kinder said, “We are now closer to reaching our targeted leverage level, which will position us to return substantial value to shareholders through some combination of dividend increases, share repurchases, attractive growth projects or further debt reduction.”

Debt-to-EBITDA ratios are commonly used by credit rating agencies to determine a company’s credit rating. A lower ratio is considered better.

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KMI’s debt-to-equity ratio

Kinder Morgan’s debt-to-equity ratio at the end of 2Q16 stood at ~1.2x. The ratio has been relatively stable at this level for the past few quarters, as shown in the graph above.

The company expects to generate excess cash sufficient to fund its growth capital needs for 2016 and does not plan to access capital markets. In the next part, we’ll compare Kinder Morgan’s valuation with peers’.

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