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Dry-to-Liquids Shift Felt by Kinder Morgan

Increased power generation demand for natural gas lifted Kinder Morgan Energy Partners (KMP) gas volumes during the second quarter, but the company is feeling the effects of the abandonment of dry gas drilling by producers and lumpiness in liquids-focused Eagle Ford Shale development, CEO Rich Kinder said during a second quarter earnings conference call Wednesday.

"...[N]atural gas transport volumes were up 6% compared to the quarter a year ago," Kinder said. "Natural gas sales volumes, virtually all in Texas, were up 12% compared to the second quarter of 2011. And the big drivers for that 12% increase were increased power demand and increased exports to Mexico. But as we look across all of our pipelines, the power demand is very high. We're setting records both for the month and year to date in terms of gas delivery to the power demand on both Tennessee [Gas Pipeline] and on the Southern Natural Gas systems."

Kinder said KMP has "multiple growth opportunities across all of our businesses related to the natural gas shale plays, growing CO2 [carbon dioxide] needs in West Texas for enhanced oil recovery, increasing demand for export coal, and additional infrastructure requirements to transport products from the Canadian oilsands and to move and store natural gas liquids."

The CEO also pointed to the "growth opportunities" expected to be realized from Kinder Morgan Inc.'s (KMI) acquisition of El Paso Corp., which closed in the second quarter. "With our large footprint of assets in North America, KMP is well positioned for future growth."

While shales offer opportunity, some of the development has been lumpy, particularly in the Eagle Ford of South Texas, Kinder said. Producers there are experiencing delays in bringing production online and into KMP pipes, he said. "I think this is the inability of producers to get equipment delivered on a timely basis," he said. "And just the sheer volume of activity there, I think, is creating some bottlenecks. But volumes are certainly there...[T]he ramp-up is going more slowly in terms of getting the volumes to us than we would have anticipated it would be."

Where the gas volumes are not, at least for now during the ongoing period of low gas prices, is in the Haynesville Shale where producers have laid down rigs for better profits elsewhere. In the middle of last year Kinder bought the half of the Haynesville-focus KinderHawk midstream assets it didn't already own from Petrohawk. While volumes in the play are currently below what was budgeted, earnings are above what was budgeted in the acquisition model, the CEO said.

KMP reported second quarter distributable cash flow before special items of $366 million, up 13% from $324 million for the year-ago period. Distributable cash flow per unit before special items was $1.07 compared to $1.01 for the second quarter last year. Net income before special items was $467 million compared to $393 million for the same period in 2011. Including special items, net income was $159 million compared to $232 million for the second quarter last year. Special items for the second quarter totaled a net loss of $308 million versus a net loss of $161 million for the same period last year.

As previously announced, KMI has offered to drop down all of Tennessee Gas Pipeline and 50% of the El Paso Natural Gas pipeline to KMP to replace assets divested at the behest of the Federal Trade Commission in order to secure approval of the El Paso acquisition (see NGI, May 28). The company expects the divestitures and the drop downs to close in the third quarter.

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