DBRS Comments on Kinder Morgan Energy Partners, L.P.’s Proposed Asset Acquisition

DBRS notes that Kinder Morgan Energy Partners, L.P. (KMP) has today announced that it will acquire 100% of Tennessee Gas Pipeline (TGP) and a 50% interest in El Paso Natural Gas (EPNG) pipeline from Kinder Morgan, Inc. (KMI) for approximately $6.22 billion (approximately 8.0 times 2012 EBITDA), including $1.8 billion in assumed debt at TGP and approximately $560 million in proportional debt at EPNG. The proposed asset acquisition is expected to close this month.

The proposed transaction would have no impact on the current ratings of KMP (rated BBB (high), Stable trend) and KMI (rated BB, Stable trend), as the proposed acquisition had been incorporated into DBRS’s rating actions on May 29, 2012.

From a business risk perspective, the imminent asset dropdowns from KMI to KMP, combined with required asset divestiture at KMP, would have no material impact on KMP, reflecting the following factors.

-- Following the transaction, incremental cash flow from TGP and EPNG to KMP is expected to more than offset the loss of cash flow as a result of asset divestiture required by the U.S. Federal Trade Commission, which is expected to be completed in Q3 2012.

-- TGP is a 13,900-mile natural gas pipeline system with capacity of about 7.5 billion cubic feet (Bcf) per day. It transports natural gas from Louisiana, the Gulf of Mexico and south Texas to the northeastern United States.

-- EPNG is a 10,200-mile natural gas pipeline system with capacity of approximately 5.6 Bcf/day. This system transports natural gas from the San Juan, Permian and Anadarko basins to California and other western states, as well as Texas and northern Mexico.

-- TGP and EPNG have more than 160 Bcf of working natural gas storage facilities.

-- The business risk profiles of TGP and EPNG are similar to KMP’s current business risk profile.

From a financial risk perspective, DBRS views the transaction as modestly positive to KMI and as neutral to KMP, reflecting the following factors:

-- DBRS expects that proceeds from the transaction will be used by KMI to repay outstanding credit facility debt, reducing debt levels at KMI. As a result, the financial profile of KMI would improve considerably.

-- KMP intends to finance 10% of the transaction value, net of debt assumed, with KMP units to be issued to KMI. The remainder is expected to be financed with a mix of debt and equity.

-- DBRS expects that KMP will commit to its financing strategy in its 2012 budget, which is to maintain a financing plan with 50% debt and 50% equity.

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.