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Kinder Morgan: More Marcellus/Utica Opportunities to Come

The way that production has been climbing in Marcellus-Utica Shale country, there could be enough to support two pipeline projects to carry natural gas liquids (NGL) from the region to the Gulf Coast, a Kinder Morgan executive allowed during an earnings conference call Wednesday. And the company is weighing other projects to move the region's output into the Northeast.

Even though Kinder Morgan and its partner were the second to propose such a project, they intend to be the first in operation. Steven Kean, COO of Kinder Morgan GP Inc., told an analyst who follows the company that it is "possible" that there could be room for the two competing projects, "but we can't look at it that way, and we won't look at it that way. We're going to get out there and compete and see if we can get the first project.

"The thing you have to keep in mind is it's not just the first pipe that goes into the ground. There are expansion capabilities and things like that. And so there's definitely an advantage to being the one, the first one, that gets built of these two. And so we're just looking at it as it's one or the other that is going to win the day."

Kean added that producer production targets and contracts with customers to move product are two different things, "and so what it comes down to is whether people will put ink on paper to sign up for the capacity."

This summer, Kinder Morgan Energy Partners LP and MarkWest Utica EMG LLC proposed a $2 billion y-grade NGL processing and transportation combo project to compete with the Bluegrass Pipeline, which is backed by Boardwalk Pipeline Partners LP and Williams (see Shale DailyAug. 9April 30March 7).

Despite the drive to beat Bluegrass, Kinder Morgan isn't counting its competing solution among backlog projects, yet, Kean said. During the third quarter, that backlog grew to about $14.4 billion from $14 billion last quarter and $12.6 billion in January, CEO Rich Kinder said, and it stretches across Kinder Morgan's five business segments. The Marcellus-Utica NGL project is among many that are promising but haven't made it to the backlog roster, Kinder said.

"We remain very bullish on the future of natural gas as the fuel of choice in the U.S. for decades to come," Kinder said. "We see increased demand coming from increased use for electric generation; downstream industrial use, particularly along the Gulf Coast; LNG [liquefied natural gas] liquefaction for export; and exports to Mexico. All in all, we expect demand for natural gas in the U.S., including the exports of LNG and to Mexico, to increase from a level of about 70 Bcf/d today to something approaching 90 Bcf/d over the next 10 years."

In the natural gas segment, the project backlog total has grown to $2.9 billion from $2.7 billion in the previous quarter; most of it associated with additional pipeline capacity, LNG liquefaction on the Southern Natural Gas and Elba Island assets, and is mainly in El Paso Pipeline Partners LP, Kean said.

As for the Marcellus-Utica NGL project, it needs to be viewed in two parts, Kean said. The "first part is the processing part," he said. "There appears to be a lot of demand for additional processing capacity, and we expect there will be even more as the producers get a handle on the composition of their Utica volumes as it starts coming out of the ground."

The other component is the y-grade NGL pipeline, which could end either in southwest Louisiana or at Mont Belvieu, TX. Kinder Morgan and MarkWest are in talks with producers about their preferences, including their desire for additional fractionation capacity, Kean said. CEO Kinder said Mont Belvieu so far has drawn a bit more interest from producers based upon the liquidity offered there.

The CEO was asked about the potential for future projects out of the Marcellus region, and he hinted at more to come.

"...[W]e believe that in the long term, there needs to be a significant additional capacity built into New England, Kinder said. "And we obviously, in Tennessee [Gas Pipeline], have the pipe to do that or the base to do that. That depends again on shipper commitments. We'll just see where that comes out. But we think there's additional volumes to go to into Canada. And as I said before, our belief is that eventually, virtually all of Eastern Canada will be served out of the Marcellus and the Utica. Again, our pipeline network lends itself very well to that. I think we'll have some announcements pretty shortly on that."

Kinder Morgan Energy Partners reported third quarter distributable cash flow before certain items of $554 million, up 22% from $455 million from a year ago. Third quarter net income before certain items was $664 million compared to $574 million a year ago. Including certain items, net income was $697 million compared to $408 million a year ago. Certain items for the third quarter totaled a net gain of $33 million versus a net loss of $166 million for the same period last year. Certain items principally reflected a gain on the sale of an offshore Tennessee Gas Pipeline system.

El Paso Pipeline Partners LP reported third quarter distributable cash flow before certain items of $127 million, down from $149 million from a year ago. Third quarter net income before certain items was $141 million compared to $154 million a year ago. Including certain items, net income was $141 million versus $151 million a year ago.

 Kinder Morgan Inc. reported third quarter cash available to pay dividends of $424 million, up 17% from $362 million from a year ago.

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