DBRS Downgrades Kinder Morgan, Inc. and Confirms Kinder Morgan Energy Partners, L.P.; Trends Stable

DBRS has today downgraded the Senior Notes and Debentures rating of Kinder Morgan, Inc. (KMI) to BB with a Stable trend from BBB (low), Under Review Negative. The rating action reflects a significant weakening of KMI’s non-consolidated credit metrics following the closing of the acquisition of El Paso Corporation (EP) (Acquisition). Concurrently, DBRS has confirmed the BBB (high) Medium-Term Notes & Unsecured Debentures rating of Kinder Morgan Energy Partners, L.P. (KMP), with a Stable trend. The ratings of KMI (previously BBB (low)) and KMP were placed Under Review with Negative Implications on October 17, 2011, when KMI entered into an agreement to acquire 100% of EP’s common shares for approximately $38 billion, including the assumption of then-approximately $16.7 billion of consolidated debt at EP. KMI directly and indirectly owns an effective 13% interest (and a 50% economic interest) in KMP. Pursuant to DBRS’s leveraged finance rating methodology, DBRS has assigned a recovery rating of RR4 to KMI’s Senior Notes and Debentures and an Issuer Rating of BB with a Stable trend.

EP owned assets in two core segments: natural gas transmission systems (The Pipelines) and Exploration and Production (E&P). (1) The Pipelines include eight wholly or partially owned pipeline systems and equity interests in three transmission systems, with approximately 44,200 miles of pipe connecting U.S. principal natural gas supply regions to five major consuming regions (the Gulf Coast, California, the northeast, the southwest and the southeast). The Pipelines also include three underground storage facilities and two LNG receiving terminals. (2) E&P includes oil and gas exploration and production operations (mostly natural gas), which are mainly located in the central, western and southern United States. These assets were sold for $7.15 billion in conjunction with the closing of the Acquisition. The proceeds are expected to be used to pay the bank revolver at the EP parent level ($0.90 billion) and the balance to reduce the Acquisition debt ($6.25 billion). The Acquisition was immediately cash flow accretive to KMI and is expected to result in $400 million per year in cost savings.

RATIONALE FOR RATING ACTION ON KMI
DBRS is of the opinion that, following the E&P asset divestiture, the Acquisition will have a modestly positive impact on KMI’s business risk profile, reflecting the fact that a substantial portion of EP’s non-E&P earnings is generated from either the regulated pipeline businesses or long-term contracts. DBRS believes that cash distributions to KMI from its investments should rise following the Acquisition and increase KMI’s investment base with respect to size and diversification. In addition, the Acquisition has created the largest midstream energy company in North America, with the following major businesses:

(1) The largest natural gas transporter and storage operator in the U.S., with more than 62,000 miles of pipe, reaching deep into the Gulf Coast supply areas, the Rockies supply basins, the Eagle Ford, the Haynesville, the Barnett and the Marcellus.

(2) The largest independent transporter of petroleum products in the U.S., transporting gasoline, jet fuel, diesel, natural gas liquids and crude oil through more than 10,000 miles of pipeline.

(3) The largest transporter of carbon dioxide (CO2) in the U.S., with the most CO2 being used in enhanced oil recovery projects in the Permian Basin of Texas (also the largest oil producer in Texas).

(4) The largest independent terminal owner/operator in the U.S. Terminals store refined petroleum products, chemicals and ethanol and include dry bulk terminals for coal, petroleum coke and steel.

(5) The Trans Mountain pipeline system in Canada, transporting crude oil from Alberta to British Columbia and Washington State.

Despite the modest impact on its business risk profile, the impact of the Acquisition on KMI’s non-consolidated financial profile was significant and, along with the aggressive nature of KMI’s ongoing growth strategy, was the main reason for the two-notch downgrade. KMI’s non-consolidated credit metrics weakened substantially following the Acquisition, which was financed on a 57% debt/43% equity basis. While KMI’s total non-consolidated debt increased to approximately $15.0 billion from $3.2 billion at December 31, 2011, the incremental dividends from the EP’s pipeline operations are expected to be insufficient to maintain pre-Acquisition non-consolidated credit metrics. As a result, while KMI’s non-consolidated debt-to-capital ratio remains almost unchanged following the Acquisition, non-consolidated cash flow-interest coverage and non-consolidated cash flow-to-debt ratios drop to levels that are no longer commensurate with the BBB (low) rating (Note that non-consolidated financial ratios were estimated by DBRS, based on publicly available information). Although DBRS expects that KMI will continue to reduce debt at the parent level, the timing and the magnitude for such asset dropdowns remain uncertain.

RATIONALE FOR RATING ACTION ON KMP
In DBRS’s press release on October 17, 2011, part of the reason DBRS placed KMP Under Review with Negative Implications was that uncertainties were associated with the asset dropdown to KMP from EP.

In light of recent developments, it has now become more certain that KMI is expected to drop down to KMP 100% of Tennessee Gas Pipeline and a portion of El Paso Natural Gas, contemporaneously with the closing of KMP’s divestiture of Trailblazer Pipeline Company, its Casper-Douglas natural gas processing and West Frenchie Draw treating facilities, as well as its 50% interest in the Rockies Express Pipeline, as required by the Federal Trade Commission. Based on its review of the potential asset dropdowns to KMP and KMP’s asset divestitures, DBRS believes that the net impact of these transactions on KMP’s credit risk profile is neutral, which forms the basis for DBRS’s confirmation of its rating. The impact on KMP’s business risk is expected to be neutral as the dropdown and divestiture assets have similar business risk profiles. Financially, cash flow losses from the asset divestitures are expected to be well replaced by cash flow from asset dropdowns. In addition, should asset dropdown transactions involve cash payments, DBRS expects KMP to remain committed to its 50% debt/50% equity financing strategy, maintaining its stable credit metrics.

As a result, KMP’s consolidated debt leverage is not expected to change materially. For the year ended December 31, 2011, KMP’s financial profile remained stable (compared to 2010) and solid for the BBB (high) rating, with the debt-to-capital ratio of 63%, cash flow-to-debt of 23% and EBITDA-interest coverage of 6.07x.

Notes:

All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating North American Pipeline and Diversified Companies, which can be found on our website under Methodologies.