News Column

Fitch Places Kinder Morgan Inc. on Rating Watch Positive; Select Subs on Rating Watch Negative

August 11, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has placed Kinder Morgan Inc.'s Issuer Default Rating (IDR) of 'BB+' on Rating Watch Positive following the announcement that it will acquire all of the outstanding equity securities of Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR) and El Paso Pipeline Partners, L.P. (EPB). Fitch has also placed KMP and select Fitch-rated pipeline operating subsidiaries of KMP and EPB on Rating Watch Negative. Fitch has not taken any action on its ratings for El Paso Pipeline Partners Operating Company (EPO; IDR: 'BBB-'/Stable Outlook). Fitch expects to consolidate ratings of KMI and its affiliates at a 'BBB-' IDR. A full list of ratings for KMI and its subsidiaries follows at the end of this release.

Under the proposed acquisition KMP unitholders will receive 2.1931 KMI shares and $10.77 in cash for each KMP unit. KMR shareholders will receive 2.4849 KMI shares for each share of KMR. EPB unitholders will receive .9451 KMI shares and $4.65 in cash for each EPB unit. Both KMP and EPB unitholders will be able to elect cash or KMI stock consideration subject to proration. KMI has secured committed financing for the cash portion of the transaction. The deal is valued at roughly $70 billion inclusive of $27 billion in assumed debt at the operating subsidiaries.

Importantly, the Kinder Morgan companies will put in place cross guarantees among and between the Kinder Morgan entities (with limited exceptions) to be effective on closing of the transaction in order to create a single creditor class and eliminate structural subordination. The cross guarantees are expected to be absolute and unconditional between the entities and any refinancing of maturing notes would be done at the KMI level over time (excepting some pipeline debt which would remain at the pipelines for rate-making purposes but stay cross guaranteed). With the cross guarantees expected to extend from and to every majority owned, rated issuing entity within the Kinder Morgan family Fitch expects to consolidated ratings at the 'BBB-' level given the elevated leverage that the combined entities are targeting as a go forward run rate. Additionally, Fitch also expects to assign a 'F3' short-term IDR and commercial paper rating to KMI. Fitch would notch all existing preferred and subordinated ratings accordingly two notches below the IDR at 'BB' consistent with current separation between IDR and subordinated notes/preferred shares.

The KMI Rating Watch Positive reflects the expected uplift associated with the removal of the structural subordination as well as the strong cash flow and operating diversity of its asset base. KMI's size and scale should continue to provide economies of scale and favorable capital market access. At the subsidiary levels, the Rating Watch Negative is reflective of the cross guarantees coupled with the high leverage reflecting what in most cases is a somewhat weaker credit profile than KMP and the majority of the pipelines are rated absent the explicit guarantees.

The mergers are subject to regulatory approvals and a shareholder vote. Fitch will resolve its rating watches at or near merger completion expected in the fourth quarter of 2014 (4Q'14).

KEY RATINGS DRIVERS

Simplified Structure: The roll-up of entities into one single creditor class simplifies the corporate structure and provides meaningful benefits to KMI's credit profile, in particular, by doing away with the structural subordination that limited KMI's ratings to a notching below its operating subsidiaries.

Strong Asset Profile: The combined entity will continue be one of the largest and most important energy companies in the U.S. with significant positions in 'must-run' assets that support national energy infrastructure. KMI as a combined entity is currently the largest transporter of petroleum products in the nation and the largest transporter of natural gas. Its asset base touches all of the major supply and demand areas for oil, oil products, NGLs and natural gas in the country. The combined entity is expected to have an enterprise value in excess of $130 billion and over $8 billion in EBITDA. Over 90% of consolidated cash flows are currently fee based or hedged and this will remain the case for the combined entity (82% fee based; 94% fee base + hedged for 2014) providing comfort around cash flow and earnings stability.

High Leverage: Leverage at the consolidated entity is to be high with a targeted range of between 5.0x to 5.5x debt/EBITDA on a sustained basis. Relative to 'BBB-' rated midstream entities, leverage in the 5.0x to 5.5x debt/EBITDA range and EBITDA interest coverage in the 3.0x to 4.0x is more consistent with a sub-investment grade rating. However, KMI's asset size, scale and cash flow profile is relatively unique and much more reflective of an investment grade profile offsetting concerns around the high leverage targets. Fitch expects that a combined KMI as the largest midstream company and third largest energy company in the country would have significant operational advantages and capital market access advantages and more than adequate liquidity.

Adequate Cash Flow Generation: KMI is expected to generate significant free cash flow before dividends and maintain a 1.1x dividend coverage ratio on average over the next six years even with a 10% growth rate on dividends paid out to shareholders. Fitch expects the combined entity to maintain adequate liquidity facilities and a growth capital funding policy consistent with the maintenance of leverage in the stated 5.0x to 5.5x range. Fitch recognizes that in the near term leverage metrics will be slightly above this range largely due to ongoing construction projects.

Guarantees Warrant Consolidated Approach: The cross guarantees are assumed to be absolute and unconditional between the entities and any refinancing of maturing notes would be done at the KMI level over time (excepting some pipeline debt which would remain at the pipelines for rate-making purposes but remain cross guaranteed). With the cross guarantees expected to extend from and to every significant EBITDA-generating rated issuing entity within the Kinder Morgan family Fitch expects its ultimate ratings will reflect a consolidated ratings approach which equalizes the outstanding ratings at the ratings level for KMI which is expected at 'BBB-/F3'.

Removal of Structural Subordination: All of the operating cash flow of the entities would be available to KMI to fund operations, reduce debt and or pay dividends; this helps to alleviate structural subordination at KMI. Dividends would be targeted at a 10% growth rate and company would be able to retain excess cash to help fund part of its growth capital program, which was not practically possible at its MLPs given the increasing pressure to meet incentive distributions particularly at KMP which has long been in its 50/50 splits.

RATINGS SENSITIVITIES

Potential future triggers for additional rating action may include:

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

A meaningful reduction in leverage, with debt/adjusted EBITDA between 4.5x - 5.0x on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

A significant change in cash flow stability profile or current hedging practices. A move away from current significant majority of assets being fee based or hedged could lead to a negative ratings action.

Failure to manage leverage to the stated 5.0x to 5.5x on a sustained basis. Fitch notes that leverage in near term will be slightly above 5.5x as several large scale construction projects get built but metrics are expected to be below 6.0x and are expected to improve to the target range as projects are completed.

Fitch has placed the following Ratings on Rating Watch Positive:

Kinder Morgan, Inc. (KMI)

--IDR at 'BB+';

--Unsecured notes and debentures at 'BB+';

--Unsecured revolving credit facility at 'BB+';

--Term loan facility at 'BB+'.

Kinder Morgan Finance Company, LLC

--Unsecured notes at 'BB+'.

KN Capital Trust I

--Trust preferred at 'BB-'.

KN Capital Trust III

--Trust preferred at 'BB-'

Fitch has placed the following Ratings on Rating Watch Negative:

Kinder Morgan Energy Partners, L.P. (KMP)

--IDR at 'BBB';

--Unsecured debt at 'BBB'

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Tennessee Gas Pipeline Company, LLC

--IDR at 'BBB+';

--Senior unsecured debt at 'BBB+'.

El Paso Natural Gas Company, LLC

--IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

Colorado Interstate Gas Company, LLC

--IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

Southern Natural Gas Company, LLC

--IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

Fitch has not taken any Rating action on the following ratings:

El Paso Pipeline Partners Operating Co., LLC

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Liquidity Review: Pipelines, Midstream and MLPs' (July 2014);

--'Pipelines, Midstream and MLP Stats Quarterly - First Quarter 2014' (June 2014);

--'U.S. Midstream Dashboard' (June 2014);

--'Non-Traditional MLP Assets (Changing Mix, Changing Risk)' (May 2014);

--'MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)' (March 2014);

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);

--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).

Applicable Criteria and Related Research:

Liquidity Review: Pipelines, Midstream and MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752807

Pipelines, Midstream and MLP Stats Quarterly -- First-Quarter 2014 (First-Quarter Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750842

U.S. Midstream Dashboard

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751223

Non-Traditional MLP Assets (Changing Mix, Changing Risk)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747370

MLP Parity Act (Renewables Have Potential to Provide Growth Once Shale Ramps Down)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738615

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating Pipelines, Midstream and MLPs - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=848816

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Peter Molica, +1 212-908-0288

Senior Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Ralph Pellecchia, +1 212-908-0586

Senior Director

or

Committee Chairperson

Mark C. Sadeghian, CFA, +1 312-368-2090

Senior Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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