Kinder Morgan Inc. (KMI), whose management in May made an ambitious bid to take the company private (see NGI, June 5), reported 2Q2006 income from continuing operations rose 11% from a year ago to $141.7 million ($1.05/share) from $117.3 million ($0.95), before special items. Kinder Morgan Energy Partners LP (KMP), the master limited partnership owned by KMI, also reported strong quarterly growth, up 8% to $242.2 million ($0.50/unit), ahead of $224.8 million ($0.51) reported a year ago.

KMI’s income from continuing operations, including the special items, rose to $157.3 million ($1.17/share), ahead of $121.6 million ($0.99) in 2Q2005. Special items in the second quarter included a substantial gain from a decrease in deferred tax liability and a modest loss in KMI’s retail unit related to balance sheet adjustments. Including special items, KMP’s net income for the quarter was $247.1 million ($0.53/unit), compared with $221.8 million ($0.50) in 2Q2005.

CEO Rich Kinder, who led a conference call with financial analysts to discuss the quarterly results, could not discuss management’s plan to take the company private beyond what has been disclosed. However, the CEO sounded pleased with the quarterly results, calling KMI’s performance “excellent,” and detailing how KMP’s numerous projects remained on budget and on time.

Merrill Lynch analyst Gabriel Moreen said in a research note to clients that “much higher than expected” general and administrative (G&A) expenses “masked what was a fairly solid quarter at KMP’s various businesses, in our view… In aggregate, KMP’s operating segments actually performed better than we expected. The shortfall relative to our expectations resulted from G&A expense of $63 million versus our estimate of $47 million. KMP’s natural gas pipelines and terminals segments beat our estimates on strength in contract renewals at the Texas intrastate pipelines, higher than expected natural gas storage activity and greater than expected utilization rates at KMP’s terminals.”

“In the long term, the most significant projects are on goal for KMP,” said Kinder. “Most important of all of our projects is the Rockies Express,” KMP’s and Sempra Energy’s ambitious natural gas pipeline project that will carry gas out of the Rocky Mountains to eastern markets (see related story). “We are marching forward on all aspects of that, and we continue to expect to complete it on schedule and on budget.”

All four of KMP’s business segments produced higher earnings in the quarter, said Kinder, “with exceptionally strong performances from our Natural Gas Pipelines and Terminals business. We also continued to make good progress on a number of major expansion projects, including the Rockies Express Pipeline, which are expected to result in strong future growth for KMP.”

KMP’s Natural Gas Pipelines segment delivered an increase of 14% in the quarter to almost $131 million versus $115 million in 2Q2005.

“Growth for the quarter was driven by another outstanding performance from the Texas Intrastate Pipeline Group, as we continued to see strong demand for our services,” Kinder said. “The intrastates’ results increased significantly compared to the same period last year due to higher sales margins on renewal and incremental contracts and higher value from storage activities. This segment also benefited from strong gas gathering operations at Red Cedar and Casper-Douglas and good results from the TransColorado pipeline.” Transport volumes for the segment increased by 13% compared with a year ago.

KMI’s Natural Gas Pipeline Company of America (NGPL) segment also performed above expectations, with net earnings of $119.9 million, up 21% from $99.4 million a year earlier. Kinder said the segment is expected to exceed its 2006 forecast of 7% growth. During the quarter, NGPL placed three infrastructure expansion projects totaling $63 million in capital investment in service and announced binding customer commitments on two new pipeline projects for an additional $82 million in estimated capital investment. Throughput volumes increased by 6% over a year earlier, led by shippers moving significant amounts of natural gas within Texas on NGPL’s Gulf Coast Pipeline.

KMI’s Terasen Gas, which serves nearly 900,000 natural gas customers in British Columbia, delivered quarterly earnings of US$57 million. In June, the British Columbia Utilities Commission approved an application for Terasen to build a 50-kilometer natural gas pipeline in British Columbia from Squamish to Whistler. The estimated US$37 million project, which is subject to securing “acceptable construction arrangements,” would replace an aging propane system. Pending final approvals, Terasen is planning to begin construction on the project this year, with full service available to Whistler by November 2008.

One of the few declines was in KMI’s Retail segment, which reported quarterly income fell from a year ago to $100,000, well below the $4.9 million in 2Q2006. Kinder blamed the earnings decline on a “timing issue related to a change in the revenue accrual process. We still expect Retail to meet its 2006 published annual budget of approximately $58 million.”

In June, Retail filed a request with the Nebraska Public Service Commission to increase the nongas component of its rates to offset increases in the costs associated with providing natural gas service to its 94,000 customers in the state. The new rates will go into effect on an interim basis Sept. 1, subject to refund following the regulatory process, which is expected to be completed in 4Q2006. Additionally, three pipeline expansion projects totaling almost $11 million are being completed in the Roaring Fork Valley of Colorado this summer.

KMI’s Power produced segment earnings of $4.5 million, flat compared with a year ago. Power is expected to generate only about 1% of KMI’s total annual budget this year.

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