August 28, 2006 at 11:40 AM EDT
Fitch: Kinder Morgan Remains on Watch Negative After Formal LBO Offer

Kinder Morgan, Inc. (KMI, Issuer Default Rating (IDR) 'BBB') and Kinder Morgan Energy Partners, L.P. (KMP, 'BBB+' IDR and long-term debt) remain on Rating Watch Negative by Fitch Ratings following the company's acceptance of a definitive management-led leveraged buyout (LBO) offer.

The Negative Rating Watch primarily reflects the additional leverage to be incurred to fund the buyout. The short-term and commercial paper (CP) rating ('F2') of KMP are not on Watch and had been previously affirmed. KMI is the general partner of KMP, a master limited partnership (MLP). Approximately $12 billion in long-term debt is outstanding. While KMP is not directly involved in this transaction, KMP remains an important contributor to KMI's total cash flows. Therefore, KMI's increased debt service burden has indirect consequences for KMP including its investment and distribution policies (please see 'Master Limited Partnerships: Evaluating Sponsor Leverage published on October 5, 2005, available on the Fitch Ratings web site www.fitchratings.com). For a complete list of KMI and KMP ratings, see below.

Under the definitive merger agreement, a management led buyout group will acquire KMI at a cash price of $107.50 per share in a transaction with an enterprise value of approximately $22 billion. The price is modestly above the $100 per share originally proposed on May 28, 2006, but other terms and conditions remain consistent with Fitch's original analysis performed at that time. In addition to the assumption of approximately $7 billion in debt, KMI management will rollover their existing equity interests (approximately $3 billion) into the new buyout company. External financing will be provided by the private investment partners (approximately $5 billion in equity) and new debt issuances (approximately $7 billion). Management expects to consummate the transaction in early 2007, following receipt of requisite shareholder and certain regulatory approvals.

With a pro-forma debt component of approximately $14 to $15 billion, the resultant capital structure of KMI is inconsistent with investment grade credit ratings. The management-led buyout coincides with a rather aggressive acquisition pace and new investment initiatives. The largest of these include the purchase of Terasen Inc. on Nov. 30, 2005 and the 51% interest in the new Rockies Express Pipeline with an estimated total construction and development price of $4.4 billion. Still, KMI and KMP's underlying cash flows are considered to be of high quality largely derived from a well-situated diversified and integrated portfolio of North American energy infrastructure assets across transportation, storage, and distribution sectors.

In addition to the acquisitions and new investments, KMI and KMP continue to reconfigure their business mix through the sale of certain non-strategic assets and more recently, the announcement to sell parts of its regulated gas distribution businesses for $710 million. Such transactions are expected to continue and provide modest offset to the incremental leverage to be created from the management-led buyout.

Fitch will finalize KMI and KMP's ratings after receipt of requisite approvals and ahead of the actual close of the transaction expected in early 2007. While KMI and KMP share many of the same rating considerations, for KMI, a critical component of Fitch's analysis will be the cash flow stability of the underlying energy infrastructure assets, expected cash flows from new investments, particularly the Rockies Express Pipeline project, the pace of asset sales and any potential deleveraging, and overall distribution policies. The strong and stable asset values likely to be derived from the diversified portfolio of energy infrastructure assets will be influential in ultimate rating assignments and Fitch expects that most of the debt to be issued, as well as the existing debt outstanding at KMI, will likely fall in the mid to upper range of the 'BB' rating category. The IDR, which is primarily a measure of the probability of default, will likely be one to two notches lower as it does not benefit to the same degree from the asset values inherent in the energy infrastructure portfolio. Under Fitch's rating methodology, distinct ratings are assigned to reflect the probability of default (IDR) and loss given default (long-term debt ratings). Fitch views KMP as a standalone credit, but the potential burden of higher distribution levels will likely lead to a one notch downgrade of its IDR and senior unsecured debt.

Ratings previously affirmed:

Kinder Morgan Energy Partners, L.P.

-- Commercial Paper 'F2'

The following ratings remain on Rating Watch Negative by Fitch:

Kinder Morgan, Inc.

-- Issuer Default Rating (IDR) 'BBB';

-- Notes, debentures, and debt shelf registration 'BBB';

-- Capital trust securities (KN Capital Trust I, KN Capital Trust II, KN Capital Trust III) 'BBB-';

-- Commercial Paper 'F2'.

Kinder Morgan Energy Partners, L.P.

-- Issuer Default Rating (IDR) 'BBB+';

-- Senior unsecured debt 'BBB+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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