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KMP's Kinder Bullish on 2010 'And Beyond'

Richard Kinder, the CEO of midstream giant Kinder Morgan Energy Partners LP (KMP), told financial analysts last week that "no matter how you cut the candy, you're going to have natural gas as the fossil fuel of choice in the United States."

Kinder made his remarks during a conference call on Wednesday to discuss the partnership's 4Q2009 and full-year 2009 earnings. KMP's net income in the final three months of 2009 reached $367 million, compared with $281 million in 4Q2008. For full-year 2009 net income was $1.29 billion, versus $1.31 billion a year earlier.

"We're certainly not back to the volumes that we experienced during better times in 2007 and most of 2008," Kinder told analysts. The partnership impacted by, among other things, "shrinking margins and volumes on the Texas intrastate pipelines and delays in the start-up of two of our major natural gas pipeline projects..." including a force majeure that remains on a 60-mile portion of the Rockies Express Pipeline (REX).

"More strategically and I guess looking out a little bit even beyond 2010, I think you have to say that for our segment times are pretty uncertain," but KMP is "pretty bullish about 2010 and beyond," he added.

"We have the potential of cap-and-trade legislation," Kinder said. "We have a lot of other tornadoes swirling around our particular sector so I think its probably appropriate to look at the long-term strategic position of players in our particular midstream field and there are pretty high marks. I think we're pretty well positioned."

On a "going forward basis...no matter how you cut the candy you're going to have natural gas as the fossil fuel of choice in the United States, and I think our extensive system where we connect to most of the new shale plays will give us a competitive advantage there," said the CEO. "Not that we're the only party, but I think we are well connected and have the ability to continue to move more and more natural gas as we use more and more natural gas in this country.

"Secondly I think regardless of your views of the subject, renewable fuels will be very important, particularly given the government mandates that increase dramatically in the future. We handled in 2009 about 55 million barrels of ethanol and biodiesel, most of it was ethanol and we expect to handle at least 80 million barrels in 2010..."

Another factor strategically important to KMP is "if the clean coal movement with CO2 [carbon dioxide] sequestration gets legs under it, I think we're very well positioned" because KMP is the largest marketer and transporter of CO2 in the country, said Kinder.

In KMP's Natural Gas Pipelines segment, earnings in 4Q2009 before certain items was $226 million, up 14% from $199 million in 4Q2008. Profits for full-year 2009 rose 5% over 2008, but earnings were below the company's projected annual budget growth of 11%. Full-year segment earnings before certain items totaled $788 million, compared with $747 million in 2008.

Segment transport volumes in the gas pipeline segment rose 17% in 4Q2009 and were up 14% for the year, versus previous comparable periods in 2009. However, sales volumes on the Texas intrastate pipes fell 7% in the quarter and were down 8% for the year.

"Growth in 2009 versus 2008 was driven by the completion of three large natural gas pipeline projects," REX, Midcontinent Express Pipeline (MEP) and Kinder Morgan Louisiana, as well as "strong performance from the Kinder Morgan Interstate Gas Transmission system and contributions from our newly acquired treating operations in the fourth quarter," said Kinder. Conversely, we fell short of our annual target due to in-service delays on the REX and MEP projects and ongoing weak economic conditions, which created a difficult business environment for our Texas intrastate pipelines."

The remainder of REX-East came online in November, but a subsequent girth weld failure downstream of the Chandlersville, OH, compressor station resulted in 60 miles of the pipeline being shut down (see Daily GPI, Nov. 23, 2009). The failure has been repaired, said KMP, and REX is coordinating with the Department of Transportation's Pipeline and Hazardous Materials Safety Administration on a return to service plan, which is expected to be completed before the end of the month.

The REX force majeure's impact on earnings in 4Q2009 was $16 million, which was partially offset by a "good" performance from recently acquired natural gas treating assets, KMP said.

The second leg of a compression expansion on the Entrega portion of REX from Wamsutter, WY, to the Cheyenne Hub in Colorado is on track for completion in July, KMP said. Including expansions, the current estimate of total construction costs on the entire REX project is $6.8 billion.

The Fayetteville Express Pipeline (FEP), which received a Federal Energy Regulatory Commission certificate, is set to begin construction by the end of March. FEP, which is a joint venture with Energy Transfer Partners, would be a 42-inch, 187-mile pipeline from Conway County, AR, to Panola County, MS. Pending regulatory approvals, service is to begin late this year or in early 2011. The joint venture's cost estimate remains at $1.2 billion, KMP said.

KMP in 2009 spent about $3.3 billion on new infrastructure projects, organic expansions and acquisitions to position the company for future growth, Kinder said. This year KMP plans to invest around $1.5 billion in 2010 for expansions and "small" acquisitions. About $400 million of the equity required is to be funded by Kinder Morgan Management LLC dividends.

The company is assuming 2010 average West Texas Intermediate crude oil prices will be $84/bbl. KMP did not provide natural gas price estimates but said "the overwhelming majority of cash generated by KMP's assets is fee based and is not sensitive to commodity prices."

KMP has scheduled its annual analyst meeting for Thursday (Jan. 28), where it plans to discuss the 2010 budget in detail.

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