Corporate Credit Profile October 2014

Transcription

1 Corporate Credit Profile October 2014 Kinder Morgan Inc. (KMI) KMI (Holdco) Moody s: Ba2/Review for upgrade to Baa3 S&P: BB/Review for upgrade to BBB- KMP (MLP) Moody s: Baa2/Review for downgrade to Baa3 S&P: BBB/Review for downgrade to BBB- EPB (MLP) Moody s: Baa2/Review for downgrade to Baa3 S&P: BBB/Review for downgrade to BBB- Business Profile Kinder Morgan is one of the largest and most diversified midstream energy companies in the U.S. The holding company, Kinder Morgan Inc. (KMI), controls a diversified group of North American infrastructure assets through joint venture investments and two master limited partnerships (MLPs), Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). In early August, KMI announced a major restructuring in which it plans to consolidate its three subordinate equity vehicles it controls, including 11%- owned KMP, and 41%-owned EPB into one company. Post restructuring, all assets will be held at KMI. The combination of all entities is expected to increase the fee-based business to ~82% pro forma (~94% including hedges) from prior guidance of ~78%. Post the merger s close at year end, KMP will comprise 82% of KMI s 2015 EBITDA. Natural gas pipelines will be the largest segment contributor at 54% of EBITDA of $8 billion projected by management for The CO2 operations will comprise ~20%, product pipelines 12%, Terminals 12%, and Kinder Morgan Canada ~2%. Refer to Annex 2 & 3 for details on KMI s operating segments. Current & Pro forma structure Source: Company Reports Note: KMI owns a 2% GP interest along with an 11% interest in KMP, and a 2% GP interest with a 41% LP interest in EPB. 1 First Principles Capital Management, LLC KMI Credit Profile

2 Recent Events After it engineered KMP as one of the first energy MLPs back in 1997, KMI announced in August 2014 that it will abolish the franchise s MLP structure by acquiring all outstanding equities of KMP, KMR, and EPB in a $73 billion stock and cash transaction. The deal is expected to close by Thanksgiving pending board approvals (regulatory approvals have already been obtained). The consolidation of the Kinder Morgan entities into a simplified KMI entity was perceived as a solution to the company s current challenges, most notably KMP s high cost of equity, and the resulting drag it had on the KMP s growth rate (KMI s primary growth vehicle), as well as no excess cash coverage to weather any headwinds. Transaction details KMI, the GP/c-corp holdco parent of MLPs KMP and EPB, agreed to acquire each of their outstanding public equity units and those of KMR for a combined $44 billion ($40 billion equity, $4 billion cash). Assumed debt is ~$27 billion, implying an enterprise value of ~$71 billion and combined enterprise value of ~$140 billion. The bulk of the financing ($40 billion) will be from KMI issued stock to KMP/KMR/EPB unit holders. The $4 billion of cash is backstopped by a commitment letter for the full amount and a bridge loan to be taken out with a new bond issue up to $5 billion (expected around Thanksgiving). Current Structure KMP and EPB 1 KMP 9/30/14 EBITDA by Segment CO2 Oil Production, 17% CO2 S&T, 7% EBP 9/30/14 EBITDA by Segment Terminals, 15% Kinder Morgan Canada, 3% Products Pipelines, 15% Natural Gas Pipelines, 43% Natural Gas Pipeline, 100% Source: Company Reports 1 An MLP s distributions are paid through its distributable cash flow (DCF) which is simply defined as ongoing net income + DD&A maintenance capital. The ratio of DCF relative to actual distributions paid is referred to as an MLP s coverage or coverage ratio. 2 First Principles Capital Management, LLC KMI Credit Profile

3 Pro Forma Structure Consolidated KMI Products Pipelines, 12% PF Consolidated KMI LTM 9/14 EBITDA Terminals, CO2 Oil 12% Production, 14% Kinder Morgan Canada, 2% CO2 - S&T (*), 6% 82% of cash flows are fee-based; 94% are fee-based (incl.hedges) for FY14 Source: Company Reports. (*) CO2 S&T shipping and transportation As part of the transaction, KMI intends to provide cross-guarantees for all of the organization s debt. As a result, creditors will have pari passu claims against essentially all of the organization s assets and cash flow, removing the significant structural subordination that existed under the previous corporate structure. Cross-guarantees are being used instead of merging KMP or refinancing existing KMP and EPB debt due to potential tax considerations, JV right of first refusals, uneconomic and make-whole provisions. Going forward, all incremental debt is expected to be issued at the KMI level. Rating Implications Natural Gas Pipelines, 54% KMI is currently rated by S&P and Moody s three notches below KMP s rating to reflect its structural subordination to the significant amount of debt at KMP and EPB and its reliance on distributions from KMP and EPB. After the announcement of Kinder s consolidation into one company in August 2014, S&P and Moody s placed KMI s BB/Ba2 rating on watch for an upgrade, and both agencies indicated their expectation of a corporate credit rating for the combined KMI of BBB-/Baa3. In addition, KMP and EPB s BBB/Baa2 ratings were placed on watch for a downgrade by both agencies, with the intent to align ratings of all Kinder entities to BBB-/Baa3. 3 First Principles Capital Management, LLC KMI Credit Profile

4 Industry Update Debt and Leverage levels for MLPs Total debt for the seven large cap MLPs that existed in 2005 (EEP, EPD, ETP, KMP, MMP, OKS, and PAA) has quadrupled since then while leverage for the group has always managed to remain in the 4.0x range. Over this timeframe, we have experienced a credit crisis, a $ price range on oil, and $2-13 price range on natural gas. Per CreditSights, the leverage spike to 4.5x in 2009 was not caused by commodity prices but instead from a capex surge similar to the one is expected next year. However, once these projects entered service and the contracts kicked in, leverage came back down to 4.0x (hence one would expect leverage to hold again once the current wave of capex comes online). Interestingly, while some of the capex projects that came online in connected dry gas basins and the pipes are now almost entirely empty, leverage fell owing to the take-or-pay nature of the pipelines (this is the case for the Boardwalk Lateral pipeline in Arkansas, Energy Transfer s Texas pipelines, Midcontinent Express and others). $80 $70 $60 $50 $40 $30 $20 $10 $0 MLPs Debt [$Bn] and Debt/EBITDA Q'14 4Q'05 4Q'06 4Q'07 4Q'08 4Q'09 4Q'10 4Q'11 4Q'12 4Q'13 2Q' x 4.60x 4.10x 3.60x 3.10x 2.60x 2.10x 1.60x 1.10x 0.60x 0.10x Over this timeframe: Credit Crisis, Oil prices: $30-$150/bbl, Nat Gas Prices: $2-13/mcf Total Debt [LHS] Debt/EBITDA [RHS] Source: CreditSights. Note: MLP sample above includes 7 large cap MLPs: EEP, EPD, ETP, KMP, MMP, OKS, PAA Industry Capex Oil, NGL, and LNG infrastructure building continues at a fast pace, as evidenced by MLPs sizeable capex budgets. IHS expects $641 billion of investment in the midstream energy infrastructure needed through 2035, implying $29 billion per year of annual spend compared to ~$18 billion annual spend by MLPs over the past five years. This is mainly driven by the unprecedented growth in shale gas production. 4 First Principles Capital Management, LLC KMI Credit Profile

5 Industry Update U.S. Domestic Shale Monthly Rig Count versus Production High Grade [$mm] 2013 EBITDA 2014 Capex Capex/EBITDA High Yield [$mm] 2013 EBITDA 2014 Capex Capex/EBITDA Williams Partners $2,193 $3, x Oneok Partners $1,437 $2, x Spectra Partners $1,480 $2, x Enbridge Parntners $1,279 $1, x Enterprise Products $4,985 $4, x Plains All America $2,154 $1, x Kinder Morgan EP $5,660 $4, x Magellan Midstream $1,026 $ x Markwest $705 $2, x Regency Partners $838 $1, x Access Midstream $993 $1, x Targa Resources $829 $ x Boardwalk Pipeline $689 $ x Total HY $4,054 $5, x Source: CreditSights Energy Transfer Partners $4,306 $2, x Total IG $24,520 $22, x The Marcellus basin (where KMP has a strategic position with its 14k mile Tennessee Gas pipeline transporting natural gas from Louisina, the Gulf of Mexico and south Texas to the northeast of the U.S.) is the largest growth basin, with production currently at 17 bcf/day (about a quarter of the U.S. gas supply) from essentially zero ten years ago. In the Spring of 2012, natural gas prices dropped to $2/mcf for a few months and had virtually no impact on production. Industry forecasts point to production in the Marcellus basin to grow to 22bcf/day. Source: Wells Fargo Research 5 First Principles Capital Management, LLC KMI Credit Profile

6 Driven by increased production in the Marcellus, gas production in shale plays is expected to represent nearly 50% of all natural gas produced in 2015 from only 10% in The favorable economics of producing in the Marcellus and Utica basins is driving production in those areas and supporting overall shale gas production. A record amount of new pipeline capacity is being signed by producers to move natural gas from the Marcellus and Utica to the Gulf Coast, and KMP has several projects in the works to address the Northeast gas glut and move gas out of the Marcellus/Utica region. These projects fall under the Tennessee Gas Pipeline Co. (TPG) and Natural Gas Pipeline Company of America (NGPL). Natural Gas and Oil Prices Update Current 1 Week 1 Month 1 Year % Change Avg. Price KMI Ownership 10/24/2014 Ago Ago Ago 1/1/ Week Ago 1 Month Ago 1 Year Ago YTD 1 Month Ago 1 Year Ago YTD Natural Gas ($/MMBtu) Henry Hub Spot $3.53 $3.72 $3.84 $3.65 $4.34-5% -8% -3% -19% $3.79 $4.51 $4.40 Henry Hub 1-month fwd $3.32 $3.47 $3.67 $3.38 $ % -9.7% -2.0% -7.6% $3.55 $4.02 $3.90 Crude Oil ($/bbl) Brent $86.21 $86.17 $97.05 $ $ % -11.2% -19.5% -22.3% $89.85 $ $ WTI $81.26 $82.75 $94.00 $96.71 $ % -13.6% -16.0% -17.4% $86.92 $98.39 $97.97 Source: Wells Fargo U.S. Natural Gas Supply & Demand [Bcf/d] Demand LNG exports Mexican net exports Power Industrial Other Total U.S. Demand Supply Canadian net imports Marcellus/Ohio Utica Other production Total U.S. Supply Source: Wood Mackenzie 1H14 6 First Principles Capital Management, LLC KMI Credit Profile

7 LTM 9/30/14 Results Revenues [$mm] and EBITDA KMP YTD 9/13 YTD 9/14 LTM 9/14 Revenue 8,211 8,543 12,530 9,059 11,162 14,633 % Total Growth 1.7% 4.0% 46.7% 23.2% 16.8% EBITDA 3,417 4,087 5,080 3,697 4,277 5,660 EBITDA growth 11% 20% 24% 16% 11% EBITDA margin 41.6% 47.8% 40.5% 40.8% 38.3% 38.7% Net Income 1,258 1,352 3,281 2,472 2,370 3,179 Revenues [$mm] and EBITDA KMI (Consolidated) YTD 9/13 YTD 9/14 LTM 9/14 Revenue 8,265 9,972 14,070 10,198 12,275 16,147 % Total Growth 0.9% 20.7% 41.1% 20.4% 14.8% EBITDA 2,631 4,045 5,697 4,157 5,010 6,550 EBITDA growth 11% 54% 41% 21% 15% EBITDA margin 31.8% 40.6% 40.5% 40.8% 40.8% 40.6% Net Income ,138 Source: Company Reports The natural gas pipeline segment (54% of pro forma EBITDA) continues to fuel KMP s earnings primarily driven by acquisitions (El Paso in May 2012 and Copano in May 2013) and transportation volume as some expansion projects entered service this year. In particular, management noted that its Tennessee Gas Pipeline experienced strong demand for its services in the Marcellus and Utica shale play. As a result, gas pipeline volumes increased a strong 10% yoy. Management continues to foresee new opportunities for the segment, including exports to Mexico, additional capacity requirements in the Northeast and increased demand for gas-fired power generation. Since December 2013, the company has signed 2.8 bcfpd of long-term contracts with shippers, indicating strong demand for its network. The terminals segment (12% of pro forma EBITDA) also posted impressive growth partly due to organic growth combined with the recent acquisition of American Petroleum Tankers in January The CO2 business (20% of consolidated EBITDA) is showing modest increases in production but is expected to be on budget for FY14. 7 First Principles Capital Management, LLC KMI Credit Profile

8 LTM 9/30/14 Results KMI Segment Revenue [$mm] 2013 LTM 6/14 YTD 9/13 YTD 9/14 Natural Gas Pipelines 7,108 8,703 5,088 6,683 CO2 1,857 1,957 1,345 1,445 Product Pipelines 1,853 2,060 1,371 1,578 Terminals 1,410 1,620 1,035 1,245 KM Canada (Trans Mountain) EPB/Other 1,540 1,516 1,139 1,115 Total KMI Revenue 14,070 16,147 10,199 12,276 Revenue Growth (%) 41.1% 14.8% 20.4% Source: Company Reports KMP posted good 3Q14 results. EBITDA increased 13% yoy and 5% sequentially to $1.44 billion. Robust performance at the terminal segment, coupled with continued strong support from the products pipelines and natural gas pipeline segment, primarily fueled the positive results during the quarter. However, unfavorable oil and NGL pricing environment partially offset the results. $14,500 $12,500 $10,500 $8,500 $6,500 $4,500 $2,500 KMI Revenue by Segment [$mm] $ LTM 6/14 Natural Gas Pipelines CO2 Product Pipelines Terminals Source: Company Reports 8 First Principles Capital Management, LLC KMI Credit Profile

9 Capital Structure and Liquidity KMP Capitalization [$mm] LTM 9/14 Debt/LTM EBITDA $2.7 billion Revolving Credit Facility due Commercial Paper % % Sr notes due , % % Sr notes due , % % Sr notes due , % Sr notes due Other debt 97 Total Debt 20, x Cash 268 Net Total Debt 20, x LTM 9/30/14 EBITDA 5,660 S4 KMI Consolidated Capitalization [$mm] LTM 9/14 Debt/LTM EBITDA Est. Pro Forma PF Debt/LTM EBITDA KMP Total Debt 20,947 EPB Total Debt 4,791 KMI Total Debt 9,333 Total Consolidated Debt (KMI, KMP, EPB) 35, x 39, x Cash - KMP and EPB 313 Cash - KMI 50 Total Consolidated Cash 363 Net Consolidated Total Debt 34, x LTM 9/30/14 KMI Consolidated EBITDA 6,550 6,550 Note: KM I consolidated floating debt outstanding represented ~5% of total consolidated debt as of 9/30/14 M anagement indicated that 100bps change in floating rates would translate into ~$55 million increase in interest expense at KM P $25,000 $20,000 KMI Consolidated (KMI, KMP, RPB) Debt Maturity Schedule [$mm] $15,000 $10,000 $5,000 KMI EPB KMP $ > 2018 Source: Company financials 9 First Principles Capital Management, LLC KMI Credit Profile

10 EPD BPL MMP GEL EQM TCP PSXP BBEP TEP RRMS ACMP BWP NS SEP WES DPM NGLS EPB OKS WPZ PAA ETP KMP KMI Standalone Distributable Cash Flow Analysis KMI Distribution analysis [$mm] FY14E Summary Income Statement KMP/KMR distributions 1,380 1,647 1,986 2,203 EPB distributions NGPL distributions n/a n/a SG&A expense (9) (35) (28) (42) Standalone KMI "EBITDA" 1,371 1,887 2,416 2,644 Distributable Cash Flow Standalone KMI "EBITDA" 1,371 1,887 2,416 2,644 Interest Expense (167) (181) (132) (183) Cash Taxes (368) (419) (516) (558) Other (55) (80) Distributable Cash Flow 866 1,411 1,713 1,823 Metrics Weighted Average number of shares Distributable Cash Flow Per Share Dividend Declared Per Share % Growth Declared Dividend Distribution Coverage Standalone KMI Debt Standalone KMI Debt / EBITDA Source: Company financials ,040 1, % 14.3% 8.7% 1.2x 1.1x 1.0x 1.0x 10,046 9, x 3.5x MLP industry LP/GP Share of Distributions [%] 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LP Share GP Share Source: Deutsche Bank Research, Data as of Dec First Principles Capital Management, LLC KMI Credit Profile

11 Capital Structure and Liquidity Stable Cash Flow - KMI s portfolio of assets generates a relatively stable source of cash flow that is used to fund distributions to the unit holders of EPB and KMP, as well as dividends to KMI shareholders. The cash flow, along with the issuance of debt and equity in the capital markets, is also used to fund a small portion of the company s growth capex. In addition, any distributions from the MLPs must be shared with public unit holders. Under the new corporate structure, the company expects well over $2 billion+ in cumulative excess distributable cash flow (i.e. excess cash flow post dividend distributions) through Significant Capex With essentially all operating cash flow paid as dividend, KMI like its MLPs has a high degree of reliance on capital market access. In 2014, the MLPs have budgeted to spend over $4.7 billion on capex (32% of combined KMI revenue) with the entire amount expected to be financed through debt and equity issuance. Consolidated Capex Budget FY14 YTD 6/ Remaining Total Capex FY14E KMP EPB KMI Total Maintenance Capex Discretionary Capex 1,513 2,638 4,151 Total Capex 1,722 2,981 4,703 Source: Company financials Adequate Liquidity As previously indicated, KMI heavily relies on distributions from KMP and EPB to service its debt and to pay dividends to its shareholders. For day to day liquidity, KMI s primary source of liquidity is its $1.75 billion unsecured bank credit facility that matures in May As of 9/30/14, KMI, KMP and EPB had combined liquidity of $4 billion, with manageable near-term debt maturities. Credit facilities [$mm] Facility Size Available Borrowing Capacity KMI $1.75bn RCL due May , KMP $2.7bn RCL due May ,700 1,807 EPB $1bn RCL due May ,000 1,000 Total Cash 363 Total Liquidity 4,042 Source: Company financials 11 First Principles Capital Management, LLC KMI Credit Profile

12 Capital Structure and Liquidity Significant Leverage Once the merger is completed, consolidated leverage is expected to increase to ~6.0x, trending back down to x according to management s guidance. KMI and its MLPs have historically been aggressively leveraged compared to many of their peers. However, the higher leverage is offset by the scale and the quality of the assets. The acquisition of El Paso (natural gas pipelines) in 2012 added new high-quality assets to KMI s portfolio, but also increased KMI s leverage significantly. Of note, KMP has managed to maintain its leverage below 4.0x since inception. 4.5x 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x KMP Net Debt/EBITDA E Source: Company financials Tax Savings - For tax purposes, the c-corp structure of KMI will be the surviving entity. KMI has already been paying taxes on more than half of the distributions it has been receiving historically from KMP and EPB. Management also estimated ~$20 billion in tax savings over the next fourteen years as a result of the merger. Dividend distributions - Post acquisition, KMI estimates it can grow the dividend by 16% in 2015 ($2/share), and sustain a 10% annual dividend growth through 2020 (versus expected dividend growth of 7-8%). The 10% dividend CAGR places KMI in line with its peers (SE 9%, OKE 10%, and WMB 15%). 12 First Principles Capital Management, LLC KMI Credit Profile

13 Strengths & Opportunities Simplification of capital structure. The combination of KMI, KMP and EPB will significantly reduce the structural complexity of the organization which is positive for the credit. The roll-up of the two MLPs effectively terminates the contractual obligation to distribute their cash flow to the LP unit holders and the GP. However, ultimately we expect KMI to remain managed as an MLP, as KMI plans to maintain an aggressive dividend policy post merger. The new dividend program is viewed as marginally better than the MLP s contractual obligation to make distributions. Lower cost of capital. The reversing of KMI s 2 current MLP structure will eliminate the high incentive distribution rights (IDRs) burden which has been lingering at KMP and resulted in its high cost of capital (see Annex 5), ultimately impacting growth. Indeed, investors have been concerned about the slowing growth mainly at KMP. This is largely a function of the MLP s cost of capital, and how much money it directs to its General Partner, given it has been in the 50% IDR bracket (highest GP distribution tier for mature MLPs) for well over a decade. Since inception (1997), KMP total distributions to LPs and GP have increased at a 36% CAGR, which has become difficult to maintain. In addition, the debt component will transition from a pre-tax cost at KMP (being an MLP) to after-tax at KMI, further helping lower the cost of capital. IG rating for the consolidated entity. Clearly, a fundamental requirement of the transaction was the ability to maintain an investment grade rating by all three agencies at the newly consolidated KMI (currently rated BB/Ba2). That said, the company was able to utilize its size, very diverse asset base and service offering, 85%-plus stable fee-based revenue stream and cross-guarantees among all its wholly owned operating subsidiaries to maintain what we view as a weak investment grade rating, as long as it maintains a 5.0x-5.5x debt to EBITDA ratio. This compares to the ~4.5x level considered as the upper limit by the rating agencies to maintain an investment grade rating for MLPs. Tax benefits. In addition to achieving an investment grade balance sheet and lowering its cost of capital, KMI will benefit from lower cash tax rate from substantial income tax savings (management estimated ~$20 billion over the next fourteen years). The depreciable asset base of KMP and EPB for tax purposes is being stepped up by a combined $55 billion in total, and based on a 14-year DD&A life, this amounts to $3.9 billion in annual tax shield, or $20 billion in after-tax cash flow savings over the life. IDRs 2 entitle GPs to receive an increasing percentage of total distributable cash flows as the distribution surpasses certain thresholds, so that over time cash distributions to the GP grow at a faster rate than cash distributions to LP unit holders. 13 First Principles Capital Management, LLC KMI Credit Profile

14 In addition, there are ~$1 billion in net operating losses still on the books from the El Paso acquisition in May Large, well-diversified underlying asset base. Post merger, KMI will be the largest pipeline company and fourth largest energy company in North America (by enterprise value), behind ExxonMobil, Chevron, and Schlumberger. The company benefits from the most extensive, coast-to-coast pan-continental footprint stretching from Mexico to Canada, predominantly fee-based, providing cash flow stability. Stable cash flows from fee-based contracts. Nearly 90% of KMI s pro forma cash flow is generated from stable businesses that include natural gas transmission, petroleum product transportation, and the storage and handling of petroleum liquids and drybulk products. Most of these businesses earn fee-based revenue with little commodity price exposure. There is little cash flow volatility because capacity is contracted under multiple year contracts. Moreover, the pipelines are regulated, and as such, their business profiles and capital structures are expected to be relatively stable. Outside of the ~54% contribution from the fee-based natural gas pipelines segment, no business unit accounts for more than 12% of 2014 expected EBITDA. Sizeable backlog ($18 billion) provides long-term growth visibility. The company continues to increase its backlog impressively and to be well positioned for the increased natural gas demand that is driven by new LNG facilities, increased utility and industrial demand and continued growth exports to Mexico. Currently the company is executing a backlog of $18 billion of contracted or highly probably projects (see Annex 4). In 3Q14, Kinder secured another 1.1 bcf/d of pipeline capacity commitments; the company s shipments now equal one third of the gas consumed domestically. Beyond the official project backlog, the company is evaluating an additional $18 billion of natural gas projects, with $4 billion+ possible on the liquids pipelines side. In assessing the $18 billion backlog, clearly the single most material project is the $5.4 billion TransMountain expansion in Canada. While it is expected that the project succeeds, it faces substantial local opposition at the terminus, and has already experienced one regulatory delay of six months. Even so, the estimated inservice date is 2H2018, which makes the project critical to support cash flow in 2019, but not necessarily so for the near to medium term, through First Principles Capital Management, LLC KMI Credit Profile

15 Weaknesses & Threats Elevated pro forma leverage. At 6.0x leverage, KMI will be more leveraged than all of its immediate peers (average leverage for investment grade MLPs is ~4.5x). Despite a long-term goal of 5.0x-5.5x, we view KMI s leverage as elevated for an investment grade rating, resulting in little balance sheet cushion under stress scenarios. The proposed dividend payout of $2.0 per share in 2015 with 10% growth will also position KMI with one of the weakest dividend coverage ratios (i.e. distributable cash flow divided by distributions to LPs) in the industry. Nonetheless, the company in its current form has been paying out effectively 100% of its distributable cash flow, and management is now expecting significant excess cash coverage. After accounting for its higher targeted 10% dividend CAGR from 2015 through 2020, the company still expects to have well over $2 billion of cumulative excess cash coverage, averaging 1.10x over the period. Aggressive M&A growth. It is unlikely that a new simplified C-corp structure will change management behavior, and in our view management will continue to run the company like an MLP, pursuing constant asset growth (organic and M&A) to achieve a maximum dividend payout and equity value. We expect that the company will continue to rely on the debt and equity capital markets to fund future growth. However, the ability to hold excess cash flow coverage (a departure from its prior modus operandi as an MLP) should lessen its reliance on the equity capital markets. Kinder has historically been active in M&A, and based on management s public commentary, we expect KMI to be aggressive in the M&A market. The unit holders and shareholders of KMI s public entities expect continuous growth in distributions and dividends. For this reason, KMI is constantly looking for additional assets to add to its portfolio to maintain its growth in distributable cash flow. While the FTC should eliminate any consideration of the major pipeline players, the potential purchase slate could include any midstream asset operating in North America and/or regions where KMI does not have a presence, such as Canada. Deal risk. In our view, there is a low probability that the deal does not close. The only major regulatory approval required was antitrust (HSR), which was received in August. The only risk is the expected shareholder vote by all four entities KMI, KMP, KMR, and EPB scheduled for November 20th, with an expected close shortly thereafter. 15 First Principles Capital Management, LLC KMI Credit Profile

16 Weaknesses & Threats EPB is 41% owned by KMI so approval should not be an issue. For KMP, whose longtime unit holders face a notable taxable event (as the transaction is structured as a purchase of KMP and EPB), management views the 30% institutional ownership of KMP, along with Rich Kinder and management s 10% ownership of KMP as largely sufficient to get over the 51% shareholder approval hurdle. If the surge in KMI s stock price since the announcement on August 10 th is any indication (+18% from August 7 th to August 20 th ), we view the likelihood of completing the merger as quite high. The elimination of the general partner s incentive distribution, lower cash taxes across the Kinder Morgan entities, along with a stronger dividend growth and increase in excess dividend coverage (1.1x from 1.0x currently) should serve as an incentive for shareholders to vote favorably to the new deal. Complexity. While we like Kinder s business segment diversity, we recognize it also adds layers of complexity to the credit. Despite the simplification of the business to a c-corp, KMI effectively remains an MLPstructure. Exposure to commodity market volatility. Commodity sensitivity comes primarily from oil production in KMP s CO2 segment. Pro forma for the merger, commodityexposed EBITDA will be manageable at 14%. With Kinder s backlog mostly comprising gas projects, the commodity exposed EBITDA should decline over time. Moreover, as the second-largest oil producer in Texas, the company maintains an active hedging program (see Annex 4) which helps mute the impact of commodity fluctuations. Management indicated that every $1/bbl change in annual oil prices translates into ~$7mn change in distributable cash flow. In addition, KMP s Permian Basin operations are among the lowest-cost fields in the U.S., providing some cushion in case WTI prices remain in the low $80 s. Given Kinder s current average hedge price of $96, and assuming long-term prices of $80 WTI, along with management s expectation of $8 billion of EBITDA for FY15, we estimate distributable cash flow of $4.67 billion ($8 billion EBITDA minus $3 billion of interest, and $327 million of capex for oil operations, similar to last year). Hence, a sustained WTI price of $80/bbl would result in $112 million of lower distributable cash flow (2.4% impact). Substantial reliance on capital markets. With essentially all operating cash flow paid as dividend, KMI and its MLPs have a high reliance on equity and debt capital market access (KMP has accessed capital markets for ~$44 billion since inception). 16 First Principles Capital Management, LLC KMI Credit Profile

17 Outlook Management has projected $8 billion in consolidated pro forma EBITDA in 2015, with double-digit growth through Post acquisition, KMI estimates it can grow the dividend by 16% in 2015 ($2/share), and sustain a 10% annual dividend growth through 2020 (versus expected dividend growth of 7-8%), in line with peers. Projections KMI [$mm] KMP EBITDA 6,561 7,491 8,191 9,546 10,023 10,524 EPB EBITDA 1,240 1,249 1,441 1,499 1,574 1,653 KMI Standalone EBITDA Combined enterprise EBITDA 8,013 8,931 9,833 11,245 11,797 12,377 EBITDA Growth (%) 11.5% 10.1% 14.4% 4.9% 4.9% Credit View & Relative Value Capitalizing on both KMP and EBP s large scale and asset diversity, KMI has delivered an impressive record of growth, despite recent periods of extreme market instability. As the fourth largest U.S. energy company, we believe KMI s scale, diversification and leverage to the significant energy infrastructure build-out surrounding unconventional production are key positives to KMI s credit story. As the industry continues its infrastructure build, Kinder has the market access competitive market share and financial cost of capital advantage to keep layering on new projects and drive sustained cash flow growth. We like the company s diversified, largely defensive (~90% fee-based) stable cash flow stream and well hedged oil production. In our view, the simplified capital structure with one entity, removal of structural subordination, and elimination of the incentive distribution rights are credit positives. Contact Information: Sandy Jephson Senior Credit Analyst sjephson@fpcmllc.com First Principles Capital Management, LLC KMI Credit Profile

18 While these positives are tempered by an aggressive balance sheet (but still investment grade) and the need to tap the equity markets on a recurring basis to fund growth, we believe the positives more than offset the negatives. Also, we expect that Kinder Morgan will continue to be on the hunt for accretive acquisitions, given its active long-term track record. However, given KMI s already significant scale, and the fact that most MLP peers are leveraged well below KMI consolidated, it is unlikely that these acquisitions would materially impact its credit profile. Relative Value Ticker Cpn YTM (%) Maturity Date Source: Bloomberg Maturity Next Call Date Price YTW (%) OAS S&P Rating Moody Rtg Amt Outstanding Amount Issued G SPREAD KMI /15/2023 CALLABLE 8/15/ BB /*+ Ba2 /*+ 750,000, ,000, KMI /15/2021 CALLABLE 1/15/ BB /*+ Ba2 /*+ 750,000, ,000, KMI /5/2016 AT MATURITY BB /*+ Ba2 /* KMI /15/2018 AT MATURITY BB /*+ Ba2 /*+ 750,000, ,000, KMI /15/2020 AT MATURITY BB /*+ Ba2 /*+ 348,652, ,652, KMI /15/2017 AT MATURITY BB /*+ Ba2 /*+ 786,170, ,000, KMI /1/2018 AT MATURITY BB /*+ Ba2 /*+ 477,128, ,000, KMI /1/2015 AT MATURITY BB /*+ Ba2 /*+ 250,000, ,000, KMI /15/2016 AT MATURITY BB /*+ Ba2 /*+ 67,257, ,000, KMI /15/2023 CALLABLE 8/15/ BB /*+ Ba2 /*+ 750,000, ,000, KMI /15/2021 CALLABLE 1/15/ BB /*+ Ba2 /*+ 750,000, ,000, KMI /1/2018 AT MATURITY BB /*+ Ba2 /*+ 82,189, ,000, KMI /15/2018 AT MATURITY BB /*+ Ba2 /*+ 750,000, ,000, KMI /5/2016 AT MATURITY BB /*+ Ba2 /*+ 200, ,000, The combination of all Kinder Morgan entities should benefit KMI existing notes the most given the upcoming upgrade to investment grade. Given the expectation of the rating equalization of all the Kinder Morgan family debt resulting from the planned implementation of cross-guarantees, we would expect KMI/KMP/EPB debt to trade flat to each other. Hence, given the G-spread differential between KMP debt versus KMI debt (~50bps on the 20 s, and 57bps on the 18 s), we believe KMI should tighten to KMP level -- although given KMI s elevated pro forma leverage, we could envision that KMI spreads remain slightly below current IG MLP spreads initially, and progressively tighten as KMI s leverage moves closer to management s targeted x range. Of note, there are more KMP bonds in circulation versus KMI, so KMP could continue to trade tighter versus KMI due to its greater liquidity. KMP bonds are already priced as a low-bbb credit within the MLP space, with G- spreads in line in line with IG peers Energy Transfer Partners (ETP) and Buckeye Partners LP (BPL). 18 First Principles Capital Management, LLC KMI Credit Profile

19 Relative Value Moreover, we expect a significantly positive technical as high-yield funds who currently own the ~$9 billion of high-yield KMI bonds are likely to sell once the bonds are upgraded to IG, and spreads should concurrently widen. Lastly, the company has announced a new ~$4 billion bond issue to fund the cash portion of the transaction. Given the size of the issue, we expect spreads to be relatively wide at issuance. Ticker Cpn YTM (%) Maturity Date Source: Bloomberg Mty Type Next Call Date Bid Price YTW (%) OAS S&P Rating Moody Rtg Amt Outstanding Amount Issued G SPREAD KMP /1/2021 CALLABLE 1/1/ BBB /*- Baa2 /*- 750,000, ,000, KMP /1/2024 CALLABLE 11/1/ BBB /*- Baa2 /*- 650,000, ,000, KMP /1/2019 AT MATURITY BBB /*- Baa2 /*- 800,000, ,000, KMP /1/2019 PUTABLE BBB /*- Baa2 /*- 499,900, ,000, KMP /1/2022 CALLABLE 6/1/ BBB /*- Baa2 /*- 1,000,000,000 1,000,000, KMP /15/2018 AT MATURITY BBB /*- Baa2 /*- 975,000, ,000, KMP /15/2020 AT MATURITY BBB /*- Baa2 /*- 600,000, ,000, KMP /1/2016 AT MATURITY BBB /*- Baa2 /*- 500,000, ,000, KMP /1/2021 CALLABLE 4/1/ BBB /*- Baa2 /*- 331,500, ,000, KMP /1/2022 AT MATURITY BBB /*- Baa2 /*- 375,000, ,000, KMP /1/2017 AT MATURITY BBB /*- Baa2 /*- 600,000, ,000, KMP /15/2020 AT MATURITY BBB /*- Baa2 /*- 700,000, ,000, KMP /15/2014 AT MATURITY BBB /*- Baa2 /*- 500,000, ,000, KMP /15/2015 AT MATURITY BBB /*- Baa2 /*- 300,000, ,000, KMP /15/2017 AT MATURITY BBB- Baa1 /*- 354,150, ,150, KMP /1/2016 AT MATURITY BBB /*- Baa1 /*- 249,357, ,357, KMP /1/2021 AT MATURITY BBB /*- Baa2 /*- 400,000, ,000, KMP /15/2022 AT MATURITY BBB- Baa1 /*- 260,000, ,000, Pipeli Cpn YTM (%) Maturity Mty Type Next Call Bid Price YTW (%) OAS S&P Moody Amt Outstanding Amount Issued G SPREAD ne Date Date Rating Rtg ETP /1/2020 CALLABLE 8/1/ BBB-/St Baa3/St 700,000, ,000, ETP /1/2018 AT MATURITY n/a BBB-/St Baa3/St 600,000, ,000, BPL /15/2018 CALLABLE 10/15/ BBB-/Neg Baa3/St 400,000, ,000, First Principles Capital Management, LLC KMI Credit Profile

20 Data Annex 1 Valuation Peer Analysis [$mm] Description Ticker S&P Rating Market Cap Source: Yahoo Finance Enterprise Value Current Div. Yield Sales EBITDA EBITDA Margin Debt Debt/EBITDA Ent. Value/EBITDA Kinder Morgan Inc. Diversified MLP KMI BB/Positive 39,770 77, % 16,147 6, % 35, x 11.8x Enterprise Products Partners Diversified MLP EPD BBB+/Stable 69,130 87, % 50,630 4, % 18, x 18.6x El Paso Pipeline Partners Natural Gas MLP EPB BBB/Watch Neg 9,390 14, % 1,480 1, % 4, x 13.2x Spectra Energy Corp Natural Gas MLP SE BBB/Stable 26,250 40, % 5,800 2, % 14, x 15.5x Williams Partners Natural Gas MLP WPZ BBB/Stable 22,640 22, % 6,550 1, % n/a n/a 11.6x Average 33,436 48, % 16,121 3,374 39% 18, x 14.1x Note: Data as of 10/31/14 Stock Performance KMI Share Price [$] Price $37.46 (as of 11/4/14) YTD Change +9% Source: Bloomberg 20 First Principles Capital Management, LLC KMI Credit Profile

21 Data Annex 2 Kinder Morgan Asset Portfolio Source: Company report KMP: Natural Gas Pipelines (43% of KMP EBITDA) KMP sells, transports, processes, treats, stores, and gathers natural gas and NGL. CO2 (24% of KMP EBITDA) KMP produces, sells and transports of crude oil from fields in the Permian Basin of West Texas and the produces, transports and markets CO2 used as a flooding medium for recovering crude oil from mature oil fields. Products Pipelines (15% of KMP EBITDA) KMP transports refined petroleum products (including gasoline, diesel fuel and jet fuel) NGL, crude and condensate, and bio-fuels. Terminals (15% of KMP EBITDA) KMP transloads and stores refined petroleum products and dry and liquid bulk products, including coal, petroleum coke, cement, alumina, salt and other bulk chemicals. 21 First Principles Capital Management, LLC KMI Credit Profile

22 Data Annex 3 Kinder Morgan Canada (3% of KMP EBITDA) KMP transports crude oil from Alberta, Canada to marketing terminals and refineries in British Columbia and the state of Washington. EPB: Obtained from the May 2012 acquisition of El Paso Corp, EPB has extremely high-quality stable cash flows with low minimal commodity exposure from its natural gas pipeline systems and LNG terminals with locations in the U.S. Rockies and Southeast U.S.. However, it is expected to have very little growth over the immediate future, with distribution guidance pointing to a flat outlook until its LNG investments begin generating incremental cash flows in 2016/2017. Management projected EPB to generate ~$1.2 billion in EBITDA in FY15, or 15% of KMI s projected 2015 EBITDA. Summary of KMI business segments, largely fee-based Source: Company report 22 First Principles Capital Management, LLC KMI Credit Profile

23 Data Annex 4 Summary of KMI consolidated 5-year Project Backlog Projected Capex Backlog [$Bn] 4Q Total Natural Gas Pipelines Products pipelines Terminals CO2-E&P CO2-Shipping & Transportation KM Canada Total $1.0 $2.5 $1.8 $12.6 $17.9 Source: Company report Significant demand for long-term natural gas capacity across all KM entities: Since 12/13, 4.7 Bcf/d of new take-or-pay contracts secured at attractive rates (~15% of the total capacity of underlying pipelines) Very long-term commitments with an average contract tenor of 17 years New capacity demand represents $2.1 billion of growth capital investment 1.1 Bcf/d in-service in 2014, 1.3 Bcf/d in 2015 amd 2.3 Bcf/d thereafter Detail of Kinder s Hedging Program (Crude prices) Hedging Program Price 64% hedged for 2015 $90.53/bbl 46% hedged for 2016 $85.86/bbl 33% hedged for 2017 $83.14/bbl Source: Company report 23 First Principles Capital Management, LLC KMI Credit Profile

24 Data Annex 5 MLP Weighted Average Cost of Capital MLP WACC Cost of Equity Cost of Debt Cost of Capital MMP 6.8% 3.0% 5.3% PSXP 6.8% 3.0% 5.4% EPD 7.1% 3.4% 6.0% BPL 8.3% 3.5% 6.4% SEP 7.6% 3.0% 6.5% RRMS 9.1% 3.1% 6.8% GEL 8.1% 5.0% 6.9% EQM 9.3% 3.0% 6.9% ACMP 8.9% 3.6% 7.0% BWP 9.1% 3.5% 7.3% WES 8.6% 4.1% 7.6% OKS 7.9% 3.0% 7.8% EEP 8.6% 3.6% 7.8% TCP 9.9% 4.3% 7.8% TEP 10.2% 3.9% 7.8% PAA 7.7% 3.0% 8.1% DPM 8.8% 3.4% 8.2% NS 10.6% 3.5% 8.7% EPB 9.1% 5.0% 9.2% ETP 9.2% 4.1% 9.6% NGLS 10.1% 5.0% 9.8% BBEP 12.6% 5.3% 9.8% WPZ 10.1% 3.3% 9.9% KMP 8.6% 3.6% 10.9% Overall Avg. 7.7% Source: Company report; Deutsche Bank Research 24 First Principles Capital Management, LLC KMI Credit Profile

25 Disclosure Additional information is available upon request. Information has been obtained from sources believed to be reliable but First Principles Capital Management, LLC or its affiliates (collectively FPCM ) do not warrant its completeness or accuracy except with respect to any disclosures relative to FPCM and the analyst's involvement with the company that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Copyright FPCM First Principles Capital Management, LLC KMI Credit Profile