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KMI Weathers Commodity Downturn as CEO Change Approaches

Kinder Morgan Inc.'s (KMI) largely fee-based businesses continued to weather the storm of lower commodity prices during the fourth quarter, CEO Rich Kinder said Wednesday during an analyst briefing in which he announced that he will be leaving the CEO post June 1.

"While we experienced some headwinds in the fourth quarter due primarily to commodity pricing, Kinder Morgan demonstrated once again that our large diversified portfolio of mostly fee-based assets can produce good results even in tumultuous market conditions," Kinder said.

KMI President and COO Steve Kean is to become CEO on June 1, the same date that Kinder will become KMI's executive chairman. "This will be a seamless transition, and we will continue to operate the company with the same philosophy and in the same manner," Kinder said. "...I'm not going anywhere and will remain involved in all major company decisions, including acquisitions and capital projects. As the largest shareholder of KMI, I remain very enthusiastic about the future of the company. I have never sold a share of stock and don't intend to now."

During the fourth quarter, earnings in KMI's natural gas pipeline segment were up 5% from the year-ago period, with the segment turning in nearly $1.06 billion of earnings before depreciation, depletion and amortization. For the year, earnings from the gas pipeline business were up 9%.

"This segment's strong results and the increase in earnings compared to the fourth quarter last year were attributable to strong performances at Tennessee Gas Pipeline (TGP), El Paso Natural Gas (EPNG) and South Texas Copano midstream assets," Kinder said. "TGP's services continue to be in high demand due primarily to ongoing production growth in the Marcellus and Utica shale plays."

TGP expansion projects that came online helped to lift gas pipeline earnings. TGP saw throughput increase 16% for the full year compared with 2013. EPNG throughput was up 10% from 2013 due to increased deliveries to California for storage refill and volumes on firm transportation contracts related to increased demand in Mexico. The South Texas Copano midstream assets benefited from higher gathering volumes from the Eagle Ford Shale. "These positives more than offset the impact of previously announced rate case settlements that resulted in lower rates on the Southern Natural Gas and Wyoming Interstate Co. pipelines," Kinder said.

The contribution from the products pipelines segment was up 11% for the quarter and 10% for the year. "Fourth quarter growth in this segment compared to the same period last year was driven by higher volumes on the Kinder Morgan Crude and Condensate Pipeline, which continued to ramp up, and higher volumes and margins on our Pacific system, offset somewhat by lower transmix results due to unfavorable inventory pricing," Kinder said. "For the full year, growth was driven by an increase in crude and condensate volumes to over 100,000 b/d compared to approximately 35,000 b/d in 2013, and a 6% increase in overall refined products volumes."

KMI's CO2 business got dinged by lower commodity prices, the CEO said, turning in 2% earnings growth for the year instead of the projected 8%. Nevertheless, some operational records were set, the CEO said.

"The overwhelming majority of cash generated by KMI's assets is fee-based and is not sensitive to commodity prices," Kinder said. "KMI does have some commodity price sensitivity, primarily in its CO2 segment, and hedges the majority of its next 12 months of oil production to minimize this sensitivity.

"For 2015, the company estimates that every $1/bbl change in the average WTI [West Texas Intermediate] crude oil price impacts distributable cash flow by approximately $10 million (budget assumes WTI price of $70/bbl), and each 10 cent/MMBtu change in the price of natural gas impacts distributable cash flow by approximately $3 million (budget assumes natural gas price of $3.80/MMBtu)." Those figures assume that KMI does not add hedges during the year.

"Even adjusting for current commodity prices, the company expects to have significant excess coverage in 2015 and expects to increase its dividends by 10 percent each year from 2016 through 2020," Kinder said.

KMI reported fourth quarter distributable cash flow before certain items of $1.278 billion versus $482 million for the comparable period in 2013. The increase over the fourth quarter 2013 is in part attributable to the KMI merger transactions, which resulted in the payment of a single dividend to all KMI shareholders in lieu of distributions to the former limited partners in Kinder Morgan Energy Partners and El Paso Pipeline Partners.

Distributable cash flow per share before certain items was 60 cents compared to 46 cents for the year-ago quarter. Fourth quarter net income before certain items was $664 million compared to $640 million for the same period in 2013. Net income was $566 million compared to $704 million for the year-ago quarter.

Besides the earnings announcement on Wednesday, KMI also announced a $3 billion deal to acquire pipeline and other assets in the Bakken Shale, marking its entry into the oil play (see Shale Daily, Jan. 21). "We think we can do in the Bakken the kind of expansion that we did on our Kinder Morgan Crude and Condensate system down here in the Eagle Ford, which has grown from less than 50,000 b/d throughput to having virtually all of its 300,000 b/d capacity contracted for in future deliveries," the CEO said. "So think of what we're doing as building a spider web that we intend to expand over the coming months and years."

There are likely to be more acquisitions to come as KMI stretches its wings as a c-corp.

"I think that if there is a silver lining in these clouds of low commodity prices, it’s going to be the ability to make some extremely good acquisitions over the next six to 12 months," Kinder told analysts. "Now we're not the only player here that's going to be looking at the same thing; there are other well capitalized midstream companies, but I think you're going to see consolidation opportunities and everything I said last August [see Daily GPI, Aug. 11, 2014] I think is even more true today than it was then, given the decline in prices."

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