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Rating Action:

Moody's rates post-merger Kinder Morgan Inc. Baa3

21 Nov 2014

Approximately $34 billion of debt affected

New York, November 21, 2014 -- Moody's Investors Service has completed its review of Kinder Morgan Inc.'s (KMI) ratings and has upgraded the senior unsecured rating to Baa3 to reflect the contemplated merger of KMI with Kinder Morgan Energy Partners, L.P. (KMP) and El Paso Pipeline Partners Operating Company LP (EPBO). Contemporaneously, Moody's downgraded the rating of KMP to Baa3 and upgraded the rating of EPBO to Baa3. All three companies were assigned a stable outlook. The equalization of the ratings reflects the cross-guarantee of debt among the three issuers. Additional upgrades and downgrades were made to subsidiaries of KMI to reflect the impact of the widespread cross-guarantee of debt and elimination of structural subordination. A complete list of Moody's rating actions is as follows:

Rating Actions:

Kinder Morgan Inc. (part of cross-guarantee group)

Corporate Family Rating - withdrawn

Probability of Default Rating - withdrawn

Speculative Grade Liquidity Rating - withdrawn

Senior Unsecured Rating - assigned Baa3, previously Senior Secured at Ba2 (LGD3)

Senior Shelf -- assigned (P)Baa3

Commercial Paper Rating -- assigned Prime-3

Outlook -- stable

Kinder Morgan Finance Company, LLC (fka ULC) (part of cross-guarantee group)

Senior Unsecured - assigned Baa3, previously Senior Secured at Ba2 (LGD3)

Outlook -- stable

Kinder Morgan Kansas Inc. (previously merged into KMI) (part of cross-guarantee group)

Backed Senior Unsecured Rating -- assigned Baa3, previously Senior Secured at Ba2 (LGD3)

Backed Junior Subordinated Rating -- upgraded to Ba1 from B1 (LGD6)

Outlook -- stable

KN Capital Trust I (not part of cross-guarantee group)

Backed Preferred Stock - upgraded to Ba1 from B1 (LGD6)

Outlook -- stable

KN Capital Trust III (not part of cross-guarantee group)

Backed Preferred Stock - upgraded to Ba1 from B1 (LGD6)

Outlook -- stable

Kinder Morgan G.P., Inc. (not part of cross-guarantee group)

...Preferred Stock - confirmed at Ba2

Outlook -- stable

Kinder Morgan Energy Partners, L.P. (part of cross-guarantee group)

Senior Unsecured Rating -- downgraded to Baa3 from Baa2

Senior Unsecured Shelf -- downgraded to (P)Baa3 from (P)Baa2

Backed Senior Unsecured Shelf -- downgraded to (P)Baa3 from (P)Baa2

Backed Subordinated Shelf -- downgraded to (P)Ba1 from (P)Baa3

Commercial Paper Rating -- withdrawn

Outlook -- stable

El Paso Natural Gas Company (part of cross-guarantee group)

Senior Unsecured Rating -- downgraded to Baa3 from Baa1

Outlook -- stable

El Paso Tennessee Pipeline Co. (part of cross-guarantee group)

Senior Unsecured Rating -- downgraded to Baa3 from Baa2

Outlook -- stable

Tennessee Gas Pipeline Company (part of cross-guarantee group)

Senior Unsecured Rating -- downgraded to Baa3 from Baa1

Outlook -- stable

Copano Energy, LLC. (previously merged into KMP)(part of cross-guarantee group)

Senior Unsecured Rating -- downgraded to Baa3 from Baa2

Outlook -- stable

El Paso Holdco LLC (previously merged into KMI) (part of cross-guarantee group)

...Senior Unsecured Rating - upgraded to Baa3 from Ba2 (LGD3)

Backed Senior Unsecured Rating -- assigned Baa3, previously Senior Secured at Ba2 (LGD3)

Backed Subordinate Rating -- upgraded to Ba1 from B1 (LGD6)

El Paso Energy Capital Trust I (not part of cross-guarantee group)

...Backed Preferred Stock - upgraded to Ba1 from B1 (LGD6)

Outlook -- stable

El Paso Pipeline Partners Operating Company (part of cross-guarantee group)

Corporate Family Rating - withdrawn

Probability of Default Rating - withdrawn

Speculative Grade Liquidity Rating - withdrawn

Backed Senior Unsecured Shelf -- withdrawn

Backed Senior Unsecured -- Upgraded to Baa3 from Ba1 (LGD4)

Outlook -- stable

Southern Natural Gas Company (part of cross-guarantee group)

Backed Senior Unsecured Rating -- confirmed at Baa3

Outlook -- stable

El Paso CGP Company (debt assumed by KMI) (not part of cross-guarantee group)

Senior Unsecured Rating -- assigned Baa3, previously Senior Secured at Ba2 (LGD3)

Outlook -- stable

Colorado Interstate Gas Company (part of cross-guarantee group)

Senior Unsecured Rating -- confirmed at Baa3

Outlook -- stable

Sonat Inc. (merged into KMI) (part of cross-guarantee group)

Backed Senior Unsecured Rating -- assigned Baa3, previously Senior Secured at Ba2 (LGD3)

Outlook -- stable

"KMI's combined set of assets generates high quality, mostly fee-based cash flow that could support a strong Baa rating," said Stuart Miller, Moody's Vice President and Senior Credit Officer. "However, KMI's aggressive financial policy that includes relatively high leverage and a very high dividend payout ratio position the rating as a weak Baa3."

RATINGS RATIONALE

The combination of KMI, KMP, and EPBO creates one of the largest energy companies in the US capable of generating stable cashflow through a portfolio of midstream energy assets. The combination also significantly reduces the structural complexity of the organization. Through cross-guarantees, creditors will have pari passu, unsecured claims against most of the organization's assets and cash flow, removing nearly all of the structural subordination that existed under the previous organizational structure with two publicly traded master limited partnerships (MLP). The elimination of the two MLPs is a credit-positive development as MLPs are contractually obligated to distribute their cash flow to unit holders. While KMI plans to maintain an aggressive dividend policy going forward, Moody's believes the dividend program is marginally better than the MLP contractual distribution obligation.

In 2015, KMI projects the ratio of debt to EBITDA will be 5.6x, but intends to manage leverage between 5.0x and 5.5x going forward. Moody's projections arrive at the same 5.6x leverage but include adjustments for operating leases ($750 million of debt and increased EBITDA by $125 million), unfunded pension liabilities ($230 million of debt), consolidation of Kinder's share of joint venture debt and EBITDA, and a $400 million reduction to EBITDA to reflect the amount of investment that Moody's believes is necessary to offset natural production decline rates in the CO2 business. With debt to EBITDA of 5.6x and the ratio of funds from operations minus dividends to debt of less than 5%, KMI will be more leveraged than most, if not all, of its investment grade peers. The proposed dividend payout of $2.00 per share in 2015 with 10% annual growth for the next five years will also position KMI with one of the lowest dividend coverage ratios in the industry. For these reasons, Moody's believes that the re-structured company is weakly positioned within the Baa3 rating category despite its industry-leading scale. According to the company, a part of the rationale for the merger of the three companies is to make its equity shares a more attractive currency to be used in future business acquisitions. Our Baa3 rating contemplates that leverage will be reduced to the 5.0x to 5.5x range in the next few years through a combination of internal growth projects and acquisitions, although no specific acquisitions have been identified.

The ratings for all of KMI's subsidiaries subject to the cross-guarantee were revised to Baa3. The convertible subordinate ratings, junior subordinate ratings and subordinate shelf were changed to Ba1. KN Capital Trust I, KN Capital Trust III, and Paso Energy Capital Trust I had their unguaranteed preferred stock ratings revised to Ba1 to reflect the subordinated debt that structurally backstops these obligations. The rating of Kinder Morgan GP, Inc.'s preferred stock was confirmed at Ba2 as its obligations are not guaranteed and are contractually subordinated to KMI's subordinated debt obligations.

Post closing, KMI's liquidity is considered to be adequate. Operating cashflow will be mostly distributed to shareholders in the form of dividends leaving little available to reinvest in the business to fund intended growth. This will create a high degree of reliance on external sources of funding. The company has a $4 billion committed revolving line of credit which is available for general corporate purposes and serves as back up to a similarly-sized commercial paper program. The credit facility matures in November 2019 and includes a debt to EBITDA maintenance covenant that starts at 6.5x leverage with step downs to 6.0x in 2019. At the end of November 2014, we expect KMI will have more than $2.5 billion of availability under the credit facility. The new credit facility is unsecured, therefore KMI will have the ability to sell assets to generate liquidity.

The outlook is stable, however Moody's considers the company weakly positioned in its Baa3 rating level. A large increase in leverage or a debt funded share buyback could lead to a down grade. Leverage maintained above 6.0x would trigger a hard look at the company's de-leveraging plans. An upgrade is very unlikely in the near term although if the company's debt to EBITDA is sustained below 5.0x or if the ratio of funds from operations minus dividends to debt moves above 5%, it could signal a moderation in KMI's historically aggressive financial policy that could lead to an upgrade.

The methodologies used in these ratings were Global Midstream Energy published in December 2010, and Natural Gas Pipelines published in November 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Kinder Morgan Inc. is one of the largest midstream energy companies in the US. Kinder Morgan Inc. operates product pipelines, natural gas pipelines, liquids and bulk terminals, and CO2, oil, and natural gas production and transportation assets. The company is headquartered in Houston, Texas.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stuart Miller
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates post-merger Kinder Morgan Inc. Baa3
No Related Data.
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