DBRS Comments on Kinder Morgan Energy Partners, L.P.’s Proposed Acquisition of Copano Energy, L.L.C.

DBRS notes that Kinder Morgan Energy Partners, L.P. (KMP; rated BBB (high) with a Stable trend), has announced a definitive agreement whereby KMP will acquire all the outstanding units of Copano Energy, L.L.C. (Copano) for a total purchase price of approximately $5 billion, including the assumption of $1 billion in debt (the Transaction). The Transaction will be a unit for unit exchange, with an exchange ratio of 0.4563 KMP units per one Copano unit, representing a 23.5% premium to Copano’s closing price on January 29, 2013. The Transaction, which has been approved by the boards of directors of both companies, is expected to close in Q3 2013, subject to regulatory approvals and the approval of the Copano unit holders.

Copano is a midstream company, providing services to natural gas producers. Operations include gathering, transportation and processing of natural gas, fractionation and transportation of natural gas liquids (NGL) and other related services. Copano’s assets are located in Texas, Oklahoma and Wyoming, including approximately 6,900 miles of natural gas gathering and intra-state transmission pipelines, 380 miles of NGL pipelines, and ten natural gas processing plants with over one billion cubic feet of combined processing capacity.

The Transaction would have no material impact on the credit profile of KMP, as it would have a slightly negative impact on KMP’s business risk profile and a neutral impact on its financial risk profile.

From the business risk perspective, the Transaction would have a modestly negative impact on KMP, reflecting the following factors:

(1) Almost half of Copano’s 2012 gross margin was derived from contracts with terms that are commodity price sensitive. Should there be an adverse movement of the prices at which Copano buys natural gas and the prices at which it sells NGLs and condensate, its profitability could be significantly affected. Incremental cash flow from the proposed acquisition, therefore, is expected to be more volatile than KMP’s current cash flow profile. However, this risk is mitigated by the relatively small size of Copano’s cash flow ($140 million in Q3 2012) compared with KMP’s cash flow in the corresponding period ($2.2 billion).

(2) The Transaction will modestly increase the size of KMP’s operations, enabling it to increase its presence in new production areas such as Oklahoma. In addition, Copano’s assets in Texas are close to KMP’s Eagle Ford Gathering LLC joint venture, providing an opportunity for the combined company to improve operational efficiency.

From a financial risk perspective, DBRS believes that the Transaction is neutral to KMP’s financial profile, reflecting the following factors:

(1) The Transaction will be a unit for unit exchange.

(2) KMP will be assuming approximately $1 billion in debt from Copano. However, this would account for only 6% of KMP’s total debt ($17.9 billion at September 30, 2012).

(3) Based on DBRS’s pro forma analysis of the combined entity for the nine-month period ending September 30, 2012, the cash flow-to-total debt ratio of the combined entity is 16.8%, which is consistent with KMP’s actual cash flow-to-debt ratio of 16.4%.

On another note, based on KMP 2012 earnings results announced in its 2013 budget today, DBRS does not expect any material change in KMP’s credit profile since our last report published on September 4, 2012. However, DBRS notes that KMP has significant challenges with respect to its current and proposed project developments. Total capex budgeted for 2013 is expected to be $3.0 billion, including sustaining capex ($339 million) and excluding acquisitions. This is a modest increase over 2012 capex ($2.0 billion, excluding acquisitions). In addition, over $12 billion in capex is expected to be invested over the next five years, largely on natural gas pipeline, product pipelines and Kinder Morgan Canada ($5.4 billion). DBRS expects KMP to continue to finance its future capex with 50% debt and 50% equity to maintain the current capital structure.

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.