Kinder Morgan announces Q2 2014 results

Kinder Morgan Energy Partners, L.P. (KMP) today increased its quarterly cash distribution per common unit to US$ 1.39 (US$ 5.56 annualised) payable on 14 August 2014, to unitholders of record as of 31 July 2014. This represents a 5% increase over Q2 2013 cash distribution per unit of US$ 1.32 (US$ 5.28 annualised) and is up from US$ 1.38 per unit (US$ 5.52 annualised) for Q1 2014.

Chairman and CEO Richard D. Kinder said: “KMP had a strong second quarter and increased the distribution for the 52nd time since current management took over in February of 1997. Our five business segments produced US$ 1.478 billion in segment earnings before DD&A and certain items, an 11% increase over Q2 2013. Growth was led by outstanding results at Tennessee Gas Pipeline (TGP), contributions from the Copano Energy acquisition, increased oil production at SACROC and strong results from both our Products Pipelines and Terminals businesses. In our Natural Gas Pipelines segment, since 1 December 2013, KMP has entered into new long-term, firm transport capacity commitments totaling 3.1 billion ft³/d. Further, we have another approximately 1.7 billion ft³/d of pending transactions, the majority of which are related to third-party LNG facilities, all of which are credible LNG export projects. These LNG commitments, combined with an additional approximately 300 million ft³/d of other pending contracts, would bring the total long-term firm transport capacity signed up across KMP’s gas pipelines to approximately 4.8 billion ft³/d since the beginning of December (approximately 6.5% of the current daily natural gas demand in the United States). We continue to see exceptional growth opportunities across all of our business segments. Since our April earnings release, we have increased our project backlog of expansion and joint venture investments at KMP to US$ 15.4 billion from US$ 14.9 billion. These are projects that have a high certainty of completion and will drive future growth at the company. The approximately US$ 500 million net increase in the backlog includes US$ 1.2 billion of new projects and approximately US$ 700 million of projects that were placed in service and removed from the backlog.”

KMP reported Q2 2014 distributable cash flow before certain items of US$ 561 million, up 11% from US$ 505 million for the comparable period in 2013. Distributable cash flow per unit before certain items was US$ 1.23 compared to US$ 1.22 for Q2 2013. Second quarter net income before certain items was US$ 698 million compared to US$ 627 million for the same period in 2013. Net income was US$ 669 million compared to US$ 1.01 billion for Q2 2013, reflecting a large gain from certain items in the second quarter last year primarily related to re-measurement of KMP’s original 50% interest in the Eagle Ford Gathering joint venture to fair market value as a result of the Copano acquisition. Certain items for the second quarter totalled a net loss of US$ 29 million versus a net gain of US$ 383 million for the same period last year.

For the first six months of the year, KMP reported distributable cash flow before certain items of US$ 1.254 billion, up from US$ 1.055 billion for the comparable period in 2013. Distributable cash flow per unit before certain items was US$ 2.77 compared to US$ 2.67 for the same period last year. Net income before certain items was US$ 1.486 billion compared to US$ 1.282 billion for the first two quarters of 2013. Net income was US$ 1.423 billion compared to US$ 1.802 billion for the same period last year. Certain items for the first six months of the year totalled a net loss of US$ 63 million versus a net gain of US$ 520 million for the same period last year, again, reflecting the fair market value adjustment noted above.

Overview of Business Segments

Natural Gas Pipelines

The Natural Gas Pipelines business produced second quarter segment earnings before DD&A and certain items of US$ 642 million, up 13% from US$ 566 million for the same period last year. Natural Gas Pipelines expects to exceed its published annual budget of 14% growth.

“This segment produced strong results and the increase in earnings compared to the second quarter last year was led by outstanding performance at TGP and contributions from the May 2013 Copano acquisition,” Kinder said. “TGP’s services continue to be in high demand due primarily to ongoing growth in the Marcellus and Utica shale plays. Earnings were boosted by a number of TGP expansion projects that came online last November, along with the approximately $175 million Utica Backhaul project which began service in April.”

Additional second quarter highlights included higher throughput on El Paso Natural Gas (EPNG) compared to the same period last year due to an increase in natural gas exports to Mexico and capturing a larger percentage of the Southwest market. The Texas intrastate pipelines also saw an increase in throughput compared to Q2 2013.

Market conditions continue to support the view that natural gas is the future play for America’s energy needs, with certain industry experts projecting gas demand increases of about 35% over the next 10 years from approximately 74 to 100 billion ft³/d. “This increase in natural gas supply and demand is driving the need for transport capacity from the Marcellus and Utica shale plays to growing demand centres on the Gulf Coast,” Kinder explained. “Additional opportunities include the need for more capacity in the Northeast, demand for gas-fired power generation, LNG exports and exports to Mexico. KMP currently has a backlog of natural gas growth projects of more than US$ 3 billion.”

CO₂

The CO₂ business produced second quarter segment earnings before DD&A and certain items of US$ 360 million, up 3% from US$ 351 million for the same period in 2013. The CO₂ business is expected to meet its published annual budget of 8% growth.

“Growth in this segment compared to Q2 2013 was led by another strong performance at our large SACROC Unit, which reported a 7% increase in oil production and a 3% increase in NGL sales volumes,” Kinder said. “Higher CO₂ sales and transport volumes, improved production at our Katz Field compared to Q2 2013, production from the Goldsmith Unit that we acquired in June of 2013, and higher NGL prices also contributed to the earnings increase.” These positives were offset somewhat by the Midland to Cushing price differential and an increase in power costs. The latter was due primarily to increased production at SACROC and higher power prices.

Combined gross oil production volumes averaged 56 900 bbls/d for the second quarter, up 6% versus the same period last year (up 5% without Goldsmith). SACROC produced 32 200 bbls/d versus 30 000 bbls/d for Q2 2013. The average West Texas Intermediate (WTI) crude oil price for the second quarter was US$ 102.99 compared to the company’s second quarter WTI budget of US$ 97.08. However, net prices were actually down US$ 6.86 per barrel versus the second quarter budget due to the impact of the Midland to Cushing differential noted above.

Record quarterly CO₂ production in southwest Colorado of approximately 1.3 billion ft³/d represented an 8% increase versus the second quarter last year, primarily due to the Doe Canyon CO₂ source field expansion which was completed in November of 2013. This segment also benefited from record volumes on the expanded Wink Pipeline, which transports crude from KMP’s West Texas oil fields to a refinery in El Paso. Wink set a quarterly volume record of 13 100 bbls/d for the second quarter.

Products Pipelines

The Products Pipelines business produced second quarter segment earnings before DD&A and certain items of US$ 209 million, up 17% from US$ 179 million for the comparable period in 2013. Products Pipelines is expected to be slightly below its published annual budget of 18% growth.

“Products Pipelines had a very good quarter,” Kinder said. “The increase in earnings compared to the second quarter of 2013 was driven by higher volumes on the KMCC pipeline, as we saw a significant ramp up of Eagle Ford condensate volumes on KMCC in May and June, and higher volumes on our Pacific system and in our transmix business.” Segment earnings were impacted by a decline in Cochin volumes as a result of the Cochin Reversal project, which converted the line to northbound condensate service to serve oilsands producers’ needs in western Canada. The approximately US$ 310 million project began initial service 1 July.

Total refined products volumes for the second quarter were up 6.5% compared to the same period last year (up 4.4% without Parkway). Volumes on Plantation and Parkway increased by almost 19% versus the second quarter last year, as demand in the Southeast and Mid-Atlantic for refined products from the Gulf Coast increased, and as a result of Parkway’s startup in September 2013. Segment gasoline volumes (including transported ethanol on the Central Florida Pipeline), diesel volumes and jet fuel volumes were all up nicely from the second quarter last year. While NGL volumes declined due to the Cochin Reversal project, condensate volumes increased substantially on the KMCC and Double Eagle pipelines.

Products Pipelines handled over 11 million bbls of biofuels (ethanol and biodiesel) in the second quarter, up 7% from the same period a year ago. The increase was driven by volume growth at our Tampa ethanol receipt facility and biodiesel blending projects coming online this year on the West Coast. This segment continues to make investments in assets across its operations to accommodate more biofuels.

Terminals

The Terminals business produced second quarter segment earnings before DD&A and certain items of US$ 227 million, up 19% from US$ 191 million for the same period in 2013. The Terminals segment is on track to exceed its published annual budget of 21% annual growth due to the acquisition of American Petroleum Tankers (APT) in January, which is engaged in the marine transportation of crude oil, condensate and refined products in the United States.

“Approximately 60% of the growth in this segment versus Q2 2013 was organic, with the remainder coming from acquisitions,” Kinder said. “The increase in earnings was driven by strong performance at our liquids facilities, predominantly driven by expansions at the Edmonton Terminal and our Houston Ship Channel facilities (BOSTCO and Galena Park), and the APT acquisition.” Strong petcoke volumes, including the impact of the BP Whiting expansion, and improved steel volumes also contributed to this segment’s earnings increase. Export coal tonnage declined by 8% and domestic coal volumes remained weak compared to the second quarter last year. However, there was little impact on segment earnings because of the long-term minimum tonnage commitments the company has with many of its customers.

For the second quarter, Terminals handled 18.6 million bbls of ethanol, up significantly from 15.6 million bbls for the same period last year. Combined, the Terminals and Products Pipelines business segments handled 29 million bbls of ethanol, up 15% from 25.3 million bbls for Q2 2013. KMP currently handles approximately 33% of the ethanol used in the United States.

Kinder Morgan Canada

Kinder Morgan Canada produced second quarter segment earnings before DD&A and certain items of US$ 40 million versus the US$ 50 million it reported for the same period in 2013. Demand remained high for the Trans Mountain Pipeline in the second quarter, with higher mainline throughput into Washington state and strong activity at the Westridge Terminal. Earnings were impacted primarily by unfavorable foreign exchange rates. This segment’s 2014 annual budget calls for a 4% decline in segment earnings before DD&A versus 2013 due to the sale of the Express-Platte pipeline system. Overall, however, the sale of Express-Platte was modestly accretive to KMP.

2014 Outlook

KMP expects to declare cash distributions of US$ 5.58 per unit for 2014. KMP expects to exceed its distributable cash flow per unit target primarily as a result of the positive impact of its APT acquisition, TGP’s strong performance including a north to south firm transportation expansion (which began service in April 2014) and additional long-term contracts on its EPNG pipeline system. KMP’s US$ 5.58 distributable cash flow per unit target for its 2014 budget, which would be a 5% increase over the US$ 5.33 per unit it declared for 2013, was announced in December 2013. (Kinder Morgan Management, LLC (KMR) also expects to declare distributions of at least US$ 5.58 per share for 2014, and the distribution to KMR shareholders will be paid in the form of additional KMR shares.)

KMP’s expectations assume an average WTI crude oil price of approximately US$ 96.15 per barrel in 2014, which approximated the forward curve at the time the budget was prepared. The cash generated by KMP’s assets is predominantly fee-based and is not sensitive to commodity prices. In its CO₂ segment, the company hedges the majority of its oil production, but does have exposure to unhedged volumes, a significant portion of which are natural gas liquids. For 2014, the company expects that every US$ 1 change in the average WTI crude oil price per barrel will impact the CO₂ segment by approximately US$ 7 million, or approximately 0.125% of KMP’s combined business segments’ anticipated segment earnings before DD&A.

Adapted from press release by Rosalie Starling

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