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KMP Saw 'Rocky' 4Q, Eyes 2009 Pipe Start-Ups

Weathering a financially topsy-turvy 2008, Kinder Morgan Energy Partners LP (KMP) posted full-year 2008 net income of $1.3 billion, up 124% from $590.3 million in 2007, thanks in large part to the start-up of Rockies Express-West Pipeline (REX-West). However, due to some general economic factors, lower realized energy prices and "lost business" due to hurricanes, the North American pipeline transportation and energy storage company recorded 4Q2008 net income of $284.6 million, which was down 2.9% from the $293.3 million during 4Q2007.

"KMP had a very good year, as we achieved our financial target for 2008 of $4.02 in cash distributions per unit," CEO Richard D. Kinder said. "When you consider the tumultuous market conditions experienced during the past year, I'm very proud of KMP's accomplishments. Our diversified portfolio of stable assets generated strong cash flow with total 2008 segment earnings before DD&A [depletion, depreciation and amortization] and certain items of $2.8 billion, up 24% from $2.2 billion in 2007. We generated $4.15 per unit in distributable cash flow for the year, which gives us excess coverage of distributable cash flow before certain items above distributions of $33 million, almost triple our published annual budget."

Kinder added that the company was able to achieve full-year goals despite a rocky fourth quarter. "We beat our annual targets despite fourth quarter results that were impacted by some timing-related and unusual items, such as the back-end loading of sustaining capital expenditures and lost business due to hurricanes, and by some general economic factors, such as lower crude oil prices and a weakened Canadian dollar. In the past five weeks, we demonstrated that we have the ability to access capital even in difficult times, raising over $1 billion by issuing debt, equity and unwinding interest rate swaps. We also continue to execute our multi-billion dollar capital investment program, and we have made tremendous progress on various projects (some of which will come on line in 2009) that will drive the company's future growth."

The chief executive singled out the company's natural gas pipeline segment for what he called an outstanding fourth quarter and full year. "The performance was really lead of course by Rockies Express-West, which began service in January of '08 and reached full operations in May and by the Texas Intrastate Group," Kinder said during an earnings conference call last week. "I know I sound like a broken record there because it seems like every quarter and every year the Texas Intrastate has managed to accumulate a really good record."

He added that the strong performance at Texas Intrastate for the full year was due to increased transportation storage revenue from long-term contracts that the company entered into; higher sales margins; and greater processing volumes and margins during the year.

Addressing the company's total gas pipe segment, Kinder said, "If you look at the full year overall segment transport volumes were up 26% compared to 2007...of course that's primarily due to REX-West being operational."

Looking at 2009, Kinder said the real growth driver is the continuation of KMP's substantial capital investment program, which includes expansions of existing assets along with new projects. Noting that natural gas pipelines are "where the majority of our construction dollars are being spent," Kinder said on the conference call that KMP has three major natural gas projects scheduled to begin at various points during 2009 and one that is set to kick off in late 2010, early 2011.

He said Rockies Express-East Pipeline (REX-East), which will traverse approximately 638 miles from Audrain County, MO, to Monroe County, OH, is continuing with construction and is subject to a last batch of regulatory approvals, almost all of which have already been received. KMP expects initial service on the pipeline to commence in April with capacity of 1.6 Bcf/d. Service to Lebanon, OH, is expected to commence in mid-June and service of a fully powered REX-East pipeline is expected for November. Kinder said the current estimate of total construction costs for the project have increased from about $6 billion to $6.2 billion. "We obviously are 50% owners," Kinder said, "but that's an overall increase of around 3% from the prior period." Sempra Pipelines & Storage and ConocoPhillips own the remaining shares of the project.

Kinder said KMP also eagerly awaits the start-up of Midcontinent Express (MEP), where the budget remains $1.9 billion and the capacity is fully subscribed. Interim service on the first portion of that pipeline, which runs through eastern Louisiana, is expected to be in service in early April, and the second phase, which takes it to the Transco interconnect at the Alabama-Mississippi border, is expected to be available by August.

The Kinder Morgan Louisiana pipeline is still under construction as well and the budget has been revised downward to approximately $950 million from $1 billion, Kinder said. The capacity is also fully subscribed and the pipeline is expected to be fully operational during the third quarter of 2009.

Looking into 2010, Kinder said that KMP's Fayetteville Express Pipeline project joint venture with Energy Transfer Partners, which is a 42-inch diameter, 200-mile pipeline that begins in Conway County AR, and ends in Panola County, MS, is expected to be in service by late 2010 or early 2011. Kinder said the cost estimate of that project has been reduced by about $50 million to $1.2 billion. He noted that KMP has secured 10-year binding commitments on 1.85 Bcf/d of the pipe's initial 2 Bcf/d in capacity, "so the great bulk is already subscribed before we put pipe in the ground."

KMP President C. Park Shaper added during the conference call that the natural gas pipeline segment had a very strong year, "up about $20 million in the quarter versus '07, up $146 million for the year versus '07, above budget." He noted that the performance versus 2007 was largely driven by the addition of REX and the growth at the Texas Intrastate.

Overall for 2009, Kinder said he is sticking with the company's previously announced estimate that it expect to declare a cash distribution of $4.20 per unit for 2009, which would be a 4.5% increase over the $4.02 that was declared in 2008. "We think we are well-positioned for future growth," Kinder said. "We expect that our business segments will generate over $3 billion in earnings before DD&A during 2009."

The chief executive promised "a lot more detail" at this week's KMP investor conference to be held at 9 a.m. EST Thursday (Jan. 29). Information on the conference is available on KMP's website www.kindermorgan.com.

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