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Kinder: Basis Is On the Move

The Rockies Express Pipeline (REX) has been credited (or blamed) for squeezing North American basis differentials, but they're not going away, Kinder Morgan Energy Partners LP (KMP) CEO Richard D. Kinder told financial analysts last Wednesday.

"I think you're going to see a lot of [pipeline] bottlenecks out there," Kinder said during a third quarter earnings conference call. "I think you're going to see basis differentials move around based on where those bottlenecks are...But I think it's going to take some time for all of this to shake out. We're going to have to wait and see where it shakes out and what the supply is coming out of some of these new shale plays...I think it's just too early to tell. You will see basis differentials because you will have bottlenecks."

However, as Kinder expected, REX served to wipe out its share of bottlenecks and collapse basis (see NGI, Sept. 21; Aug. 31). That's why KMP, a partner in REX, doesn't believe in the "build it and they will come" maxim, he told analysts. "If you haven't signed up throughput [on your pipeline project] in advance, you're in trouble," he said.

Take REX, for instance; virtually all of its 1.8 Bcf/d is fully subscribed. However, "there's a small sliver" of capacity still available on top of the 1.8 Bcf/d, Kinder said. "...[A]s basis differentials have gone down, what we expected to get for that excess [capacity] is not as great as we thought it would be." Likewise, capacity available on Midcontinent Express that KMP had the ability to sell before contracted customers were obligated to take it didn't go for as much as the company expected, Kinder said.

KMP reported third quarter distributable cash flow before certain items of $320 million, up 14% from $281.9 million for the year-ago period. Distributable cash flow per unit before certain items was $1.12 versus $1.09 for the third quarter of 2008. Net income before certain items was $351.1 million compared to $345 million for the year-ago period. Including certain items, net income was $359.5 million versus $329.8 million for the third quarter of 2008. Certain items resulted in a net gain of almost $9 million for the quarter.

"KMP had a very strong third quarter despite the ongoing impact from lingering economic headwinds that we have been experiencing all year," Kinder said. "We generated distributable cash flow of $1.12/unit, substantially higher than our budget for the quarter, which resulted in excess coverage over our quarterly distribution of approximately $19 million. All of our business segments outperformed their 2008 third quarter results with the exception of our CO2 [carbon dioxide] business, which fell about 2% short of its third quarter results from last year due to significantly lower crude oil prices.

"Our stable, cash producing assets, combined with reduced internal costs and lower interest rates, helped offset the economic headwinds which resulted in lower refined products transportation volumes, decreased steel handling at our bulk terminals, lower crude oil prices and a difficult business environment for our Texas intrastate pipelines. We remain confident that we will achieve our budget of $4.20/unit in cash distributions for the year, which would represent 4.5% growth over the 2008 distribution. We also continue to make good progress in executing our multi-billion-dollar capital investment program that will drive future growth at KMP."

The gas pipelines business produced third quarter segment earnings before depletion, depreciation and amortization (DD&A) and certain items of $194.8 million, up 10% from $177.2 million for the same period last year. This segment is expected to outperform its 2008 results but come in below its published annual budget of 11% growth, the company said.

"Growth in this segment's earnings versus the third quarter of 2008 was attributable to contributions from new pipeline projects that were brought online -- Rockies Express-East to Lebanon, OH, and all of Midcontinent Express and Kinder Morgan Louisiana," Kinder said. Segment transportation volumes increased by 24% compared to the third quarter of 2008, reflecting these new pipeline operations and the conversion of some sales business on the Texas intrastate system to transport service. The Texas intrastates contributed more than 40% of the gas pipelines segment earnings before DD&A but continued to be impacted by difficult market conditions, which resulted in reduced sales margins and lower processing margins.

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