TEXT-S&P affirms Kinder Morgan, El Paso Corp ratings
May 24 - Overview -- U.S. midstream energy company Kinder Morgan Inc. (KMI) closed its purchase of El Paso Corp. for $38 billion. The combination creates the fourth-largest energy company in North America, with the largest natural gas pipeline network by a significant margin. -- We are affirming KMI's 'BB' corporate credit rating, Kinder Morgan Energy Partners L.P.'s 'BBB' corporate credit rating, and El Paso's 'BB' corporate credit rating. The outlooks are stable. -- We are raising El Paso's unsecured rating to 'BB' from 'BB-' and are removing it from CreditWatch with developing implications. The ratings upgrade of El Paso's unsecured debt reflects the retirement of its secured debt. The outlook is stable. -- We are raising El Paso Pipeline Partners L.P.'s (EPB) corporate credit rating to 'BBB-' from 'BB' and removing it from CreditWatch with positive implications. The ratings upgrade stems from EPB's growing size and asset diversity and our expectation its parent will manage it more as a stand-alone master limited partnership. The outlook is stable. Rating Action On May 24, 2012, Standard & Poor's Ratings Services affirmed its 'BB' corporate credit rating on U.S. midstream energy company Kinder Morgan Inc. (KMI) and maintained its stable outlook on the rating after the company completed its purchase of El Paso Corp. for $38 billion. We affirmed El Paso's 'BB' corporate credit rating. Other rating actions associated with the announcement include: -- We affirmed our ratings, including the 'BBB' corporate rating, on KMI's master limited partnership (MLP), Kinder Morgan Energy Partners L.P. (KMP). The outlook is stable. -- We raised El Paso's unsecured rating to 'BB' from 'BB-' and removed it from CreditWatch with developing implications, where we placed it on Oct. 17, 2011. -- We raised El Paso Pipeline Partners L.P.'s (EPB) corporate credit rating to 'BBB-' from 'BB' and removed it from CreditWatch with positive implications, where we placed it on Oct. 17, 2011. -- We raised the corporate credit ratings on Colorado Interstate Gas Co. (CIG) and Southern Natural Gas Co. (SNG) to 'BBB-' from 'BB', which is in line with EPB, and removed them from CreditWatch with positive implications, where we placed them on Oct. 17, 2011. EPB wholly owns SNG and CIG. Rationale We base our affirmation of KMI's corporate credit rating on our view that following the El Paso purchase it will have a "satisfactory" business risk profile balanced by worsening financial measures that will result from the transaction. We affirmed our ratings on KMI when it announced the deal in October 2011 and all events thus far have been in line with our expectations. The combination will create the fourth-largest energy company in North America, with the largest natural gas pipeline network by a significant margin. The ratings upgrade of El Paso's unsecured debt reflects its higher recovery rating due to the retirement of its secured debt. El Paso's unsecured debt is structurally senior to the secured debt at KMI in terms of the value at El Paso (including El Paso Natural Gas Co. and the value relating to its ownership interests in EPB and Ruby Pipeline LLC) because El Paso does not guarantee KMI's debt. We expect El Paso to continue to drop down assets to EPB and KMP, which could affect its debt and recovery ratings although associated debt repayments from these drop-downs could offset the impact. EPB's ratings upgrade stems from its improved stand-alone credit profile due to its growing size, a diverse set of assets that provides stable, fee-based cash flows under long-term contracts, higher outside limited partnership unit ownership, and our expectation that it will be managed more as a stand-alone MLP. As with KMP, we believe management will generally be motivated to preserve the public market valuation of EPB and not place undue financial stress on the partnership under most scenarios in which KMI undergoes stress. Unlike KMP, however, EPB does not have any structural separateness features (e.g., independent directors whose votes are required for a bankruptcy filing, nonconsolidation opinions, etc.). We expect EPB's debt to EBITDA to be about 4x. While the new organization will have impressive scale and cash flow stability, KMI will incur about $5.4 billion of new debt (adjusting for proceeds from the sale of El Paso's oil and gas exploration and production (E&P) unit for $7.15 billion and any drop-downs to KMP and EPB), causing credit ratios to deteriorate significantly. Through asset sales and drop-downs, we expect ratios to improve, but to remain somewhat elevated in 2012 and 2013. KMI used proceeds from the E&P sale to repay the El Paso E&P unit's secured revolver ($900 million) and limit borrowings on its $6.8 billion acquisition bridge facility to about $375 million. The following factors form the basis for our aggressive financial risk assessment: -- KMI's credit metrics, both stand-alone and consolidated, will materially weaken when the transaction closes. We expect KMI's stand-alone and consolidated debt to EBITDA to increase to about 3.25x and 5.75x, respectively, by year-end 2012. This compares with our expectations before the deal was announced of about 2.5x and 5x to 5.5x. -- KMP and El Paso partially own several joint ventures with substantial debt leverage. In our ratios, we include the upstream dividends as EBITDA, but do not include the joint-venture debt. The ratios would not differ materially if we proportionately consolidated the joint ventures' debt and EBITDA. -- We expect acquisition debt will go down and debt leverage metrics will improve based on proceeds from selling El Paso's E&P business, planned asset drop-downs to the two MLPs, KMP and EPB (which we presume KMP will fund with 50% debt and 50% equity), and savings from cost synergies. -- We generally regard the company's deleveraging plan to be credible and as generally performing on-track, but the potential for adverse market conditions could cause timing to slip. . We could change our forecast of the 2012 debt-to-EBITDA ratio by about 0.25x-0.50x in either direction depending on the timing and funding of the asset dropdowns and the extent of synergies realized. We base our assumption that the satisfactory business risk profile will improve on the following: -- The combined enterprise's massive size, with an extensive geographic footprint and asset diversity, correlates to an impressive competitive position, and should support KMI's, KMP's, and EPB's ability to raise external capital. The last downturn demonstrated that large, well-known MLPs maintained superior market access during poor economic times. -- KMI will get roughly 70% of consolidated EBITDA from the natural gas and petroleum products pipelines (its lowest-risk assets), up from current levels of about 50%. In addition, KMI will get slightly more than 15% of consolidated EBITDA from its high-risk carbon dioxide business, down from current levels of nearly 30%. -- KMI's cash flow diversity will improve. Within the first year of the acquisition, we estimate KMP will contribute about 70% of KMI's total consolidated EBITDA, with El Paso contributing the vast majority of the remainder. (KMI subsidiary NGPL PipeCo. LLC will contribute a minimal 1%.) On a stand-alone basis, roughly two-thirds of KMI's cash flow will consist of KMP distributions, with one-third from El Paso. Currently, KMP distributions constitute nearly all of KMI's stand-alone EBITDA. -- The mix of general partner (GP) and limited partner (LP) distributions that KMI receives will improve. The near-term pro forma split is about three-quarters GP distributions and one-quarter LP distributions, although we expect that GP distributions will return to more than 80% with time. Because of their incentive distribution rights, GP distributions essentially represent a leveraged cash flow stream because they increase disproportionately as MLPs increase their distribution levels. Conversely, if the MLPs were to cut distributions, the cash flow KMI receives would also decline disproportionately. Liquidity KMI's liquidity is "adequate" for the rating. For the coming 12 months, we expect liquidity sources to exceed uses by at least 1.2x (which is the minimum ratio required for an adequate liquidity descriptor). KMI's pro forma sources over uses ratio will likely be higher (typically it has been above 1.5x), although the effect of the transaction on the company's liquidity position is fluid as it just closed on the El Paso transaction, the E&P sale, and some asset dropdowns (with additional asset dropdowns to KMP planned in the near term). We project KMI's cash sources will consist of a $1.75 billion revolving credit facility and projected distributions from KMP (expected at about $1.6 billion in 2012 before any dropdowns) and El Paso to broadly total $2.5 billion. Cash uses will consist of projected interest and general expenses of roughly $800 million to $900 million and dividends of the vast majority of the remaining $1.6 billion to $1.7 billion. KMI has debt maturities in 2012 of about $839 million. As of Dec. 31, 2011, KMI's financial leverage was 2.6x as defined under its financial covenant, compared with the maximum allowable 6x. The company has ample cushion to withstand a material decline in EBITDA or increase in debt to maintain an adequate liquidity position. The key short-term credit factor for KMI is the reliability of distributions from KMP, EPB, and El Paso (less so El Paso as it drops down assets). Any potential material decline in general partnership distributions would be a key credit concern. Outlook Kinder Morgan Inc. Our outlook on KMI's ratings is stable. KMI's pro forma size and improved cash flow profile balance the material amount of acquisition debt and degradation in credit metrics. Execution on KMI's deleveraging plan may ultimately lead to a higher rating, although we would not expect a positive ratings action for at least 12 months. The likelihood of a downgrade is low because we believe that the 'BB' rating appropriately captures the risk of a somewhat delayed deleveraging plan. El Paso Corp. Our outlook on El Paso's rating is stable. The company will be a wholly owned subsidiary of KMI, and its corporate credit rating will be in line with KMI's. KMI's management will exert significant control over El Paso, especially regarding its financial policies and growth projects. El Paso Pipeline Partners The stable outlook on EPB reflects its high level of cash flow stability and expected debt to EBITDA of about 4x. We could raise ratings as it establishes a longer track record underneath KMI, provided it continues to grow scale and diversity, while maintaining similar leverage metrics. We could lower ratings if the company sustains debt to EBITDA at more than 4.5x or if we lowered our ratings on KMI, given the linkage between the two entities. Kinder Morgan Energy Partners The stable rating outlook reflects our expectations for a slightly improving near-term financial profile, a well-managed capital spending program, and stand-alone debt to EBITDA in the low-4x area. We could lower the ratings if debt to EBITDA surpassed 4.5x. We are unlikely to raise ratings unless the partnership embraces a more conservative financial policy and shows less willingness to use debt to fund growth-related capital spending. We also consider KMI's systemwide leverage in our ratings on KMP. If we downgraded KMI, our ratings on KMP would likely be affected due to the linkages between the two entities. We would not anticipate the ratings differential between KMP and KMI to exceed three notches. However, we would not likely raise our ratings on KMP if we raised our ratings on KMI. Related Criteria And Research Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 Ratings List Ratings Affirmed Kinder Morgan Inc. Corporate Credit Rating BB/Stable/-- Senior Secured BB Recovery Rating 4 Preferred Stock B Kinder Morgan Energy Partners L.P. Corporate Credit Rating Foreign Currency BBB/Stable/-- Local Currency BBB/Stable/A-2 Senior Unsecured BBB Commercial Paper A-2 KN Capital Trust III K N Capital Trust I Preferred Stock B Kinder Morgan Finance Co ULC Senior Secured BB Recovery Rating 4 Kinder Morgan G.P. Inc. Preferred Stock BB+ El Paso Corp. Corporate Credit Rating BB/Stable/-- El Paso Exploration & Production Co. Corporate Credit Rating BB/Stable/-- El Paso Natural Gas Co. Corporate Credit Rating BB/Stable/-- Senior Unsecured BB Recovery Rating 3 El Paso Energy Capital Trust I Preferred Stock B Southern Natural Issuing Corp. Senior Unsecured BBB- Tennessee Gas Pipeline Co. Corporate Credit Rating BB/Watch Pos/-- Senior Unsecured BB/Watch Pos Recovery Rating 3 Ratings Raised; Off CreditWatch To From El Paso Pipeline Partners L.P. Corporate Credit Rating BBB-/Stable/-- BB/Watch Pos/-- Senior Unsecured BBB- BB/Watch Pos Southern Natural Gas Co. Corporate Credit Rating BBB-/Stable/-- BB/Watch Pos/-- Senior Unsecured BBB- BB/Watch Pos El Paso Corp. Senior Unsecured BB BB-/Watch Dev Recovery Rating 3 5 Colorado Interstate Gas Co. Corporate Credit Rating BBB-/Stable/-- BB/Watch Pos/-- Senior Unsecured BBB- BB/Watch Pos Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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