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Kinder Morgan Energy Partners Distributes $4.98 Per Unit For 2012 – Meets Annual Budget

Stocks in this article: EPBKMIKMPKMR

In 2013, KMP expects to:

  • Generate over $5.4 billion in business segment earnings before DD&A (adding back KMP’s share of joint venture DD&A), an increase of about $0.9 billion over 2012.
  • Distribute over $2 billion to its limited partners.
  • Produce excess cash flow of more than $30 million above the distribution target of $5.28 per unit.
  • Invest approximately $2.9 billion in expansions (including contributions to joint ventures) and small acquisitions (excluding the dropdowns from KMI). Over $625 million of the equity required for this investment program is expected to be funded by KMR dividends.

KMP’s expectations assume an average WTI crude oil price of approximately $91.68 per barrel in 2013, which approximated the forward curve at the time this budget was prepared. The overwhelming majority of cash generated by KMP’s assets is fee based and is not sensitive to commodity prices. In its CO 2 segment, the company hedges the majority of its oil production, but does have exposure to unhedged volumes, a significant portion of which are natural gas liquids. For 2013, the company expects that every $1 change in the average WTI crude oil price per barrel will impact the CO 2 segment by approximately $6 million, or approximately 0.1 percent of KMP’s combined business segments’ anticipated segment earnings before DD&A.

The boards of directors of the Kinder Morgan companies approved the 2013 budgets at the January board meeting and the budgets will be discussed in detail during the company’s annual analyst conference on Jan. 30, 2013, in Houston. The conference begins at 8 a.m. CT and will be webcast live.

Other News

Products Pipelines

  • KMP completed a $77 million expansion at its Carson Terminal in California by placing the final two storage tanks of the project in service in the fourth quarter. In total, KMP constructed seven new tanks for an incremental 560,000 barrels of refined petroleum products storage capacity at the facility. All of the tanks are leased under long-term agreements with large U.S. oil refiners. The project was finished on budget and ahead of schedule. Also in the fourth quarter, KMP completed facility modifications to provide for receipt, storage and blending of biodiesel at the company’s Las Vegas, Nev., Phoenix, Ariz., and Fresno, Calif., terminals. The company expects to begin blending at these facilities by the end of January 2013.
  • KMP is nearing completion on the Lake Pontchartrain portion of the approximately $220 million Parkway Pipeline and initial construction activities continue on land in Louisiana and Mississippi. The 141-mile, 16-inch pipeline, a joint venture with Valero, will transport gasoline and diesel from a refinery in Norco, La., to an existing petroleum transportation hub in Collins, Miss., which is owned by Plantation Pipe Line Company. The pipeline will have an initial capacity of 110,000 barrels per day (bpd) with the capability to expand to over 200,000 bpd, and is supported by a long-term throughput agreement with a major refiner. The project is on schedule to be in service in September 2013.
  • Construction is underway on an approximately $90 million project to build a 27-mile, 12-inch diameter lateral pipeline with associated receipt facilities for the Kinder Morgan Crude Condensate pipeline to Phillips 66’s Sweeny Refinery in Brazoria County, Texas. KMP will provide Phillips 66 with a significant portion of the lateral pipeline’s initial 30,000 bpd of capacity, which is expandable to 100,000 bpd. KMP is also constructing a five-bay truck offloading facility and three new storage tanks with approximately 360,000 barrels of crude/condensate capacity at stations in DeWitt and Wharton counties in Texas. KMP anticipates initial deliveries to begin at the beginning of the fourth quarter of 2013 and the entire system to be operational by year end.
  • KMP continues design and pre-construction activities for its approximately $200 million petroleum condensate processing facility located near the company’s Galena Park terminal on the Houston Ship Channel. The facility, which is supported by a fee-based contract with BP North America, has an anticipated throughput capacity of about 50,000 bpd and can be expanded to process 100,000 bpd. Kinder Morgan expects the facility to be in service in the first quarter of 2014. In light of the growth of Eagle Ford shale NGL production and the associated need for additional condensate processing capacity, KMP expects to obtain additional customer commitments to underwrite an expansion at this facility.
  • KMP is in the final permitting stage for its Cochin Pipeline Reversal Project which will allow the company to offer a new service to move light condensate from Kankakee County, Ill., to existing terminal facilities near Fort Saskatchewan, Alberta. The company received more than 100,000 bpd of binding commitments for a minimum 10-year term during a successful open season earlier this year. Pending obtaining a final permit for the approximately $260 million project, modifications to the western leg of the Cochin Pipeline to Fort Saskatchewan will begin. In addition to the pipeline modifications, Cochin will build a tank farm with 1 million barrels of storage and associated piping where Cochin will interconnect with Explorer Pipeline Company’s pipeline in Kankakee County. KMP expects light condensate shipments to begin as early as July 1, 2014.

Natural Gas Pipelines

Kinder Morgan currently has announced approximately $2.7 billion of major projects across all of its natural gas pipeline assets, about half of which is at KMP. This includes projects that were either placed in service during the fourth quarter of 2012 or are planned to be placed in service during 2013 or later.

  • TGP placed the approximately $55 million Northeast Supply Diversification Project in service Nov. 1, 2012, on time and under budget. The project, which is fully subscribed, creates an additional 250,000 dekatherms per day of firm service capacity from the prolific Marcellus shale region along TGP’s system and serves existing markets in New England and the Niagara Falls area of New York.
  • In December 2012, the Federal Energy Regulatory Commission (FERC) issued a notice to proceed with TGP’s MPP project in Pennsylvania. Selective tree clearing is anticipated to begin this month, followed by construction of pipeline and compression this spring. The approximately $86 million project, which is fully subscribed, will provide about 240,000 dekatherms per day of additional firm Marcellus transportation capacity. The project includes nearly 8 miles of 30-inch diameter pipeline looping, system modifications and upgrades to allow bi-directional flow at four existing compressor stations in Pennsylvania. Construction is anticipated to occur primarily this summer and the project is expected to be in service in November of 2013.
  • Also in December, TGP’s Northeast Upgrade Project received FERC notice to proceed with construction of compressor stations, pipeyards or tree clearing in certain counties in Pennsylvania and New Jersey. Last week FERC issued an order denying rehearing of the certificate order and denying requests for stay of the construction. Additional approvals covering planned work in Pennsylvania and New Jersey are pending. Construction of the mainline pipeline and compression is anticipated to begin this spring. The approximately $450 million, FERC-certificated project will boost system capacity on TGP’s system by approximately 636 million cubic feet per day (MMcf/d) via five segment loops and system upgrades and provide additional takeaway capacity from the Marcellus shale area. The project, which is fully subscribed, has a targeted in-service date of November 2013.
  • In the fourth quarter, EPNG, owned by KMP and KMI, entered into a 25-year precedent agreement in connection with plans to build a new pipeline to serve customers in Mexico. Terms call for EPNG, acting through its affiliate Sierrita Gas Pipeline (formerly Sasabe Pipeline), to initially provide approximately 200 MMcf/d of firm transportation capacity via a new, 60-mile, 36-inch diameter lateral pipeline that would extend from EPNG’s existing south mainlines, near Tucson, Ariz., to the U.S.-Mexico border, terminating at Sasabe, Ariz. The proposed $200 million Sierrita Gas Pipeline would interconnect via a new international border crossing with a 36-inch diameter natural gas pipeline to be built in Mexico. Subject to regulatory approvals, construction of the pipeline would begin in the first quarter of 2014, with anticipated in service in the fall of 2014.
  • KMP closed its previously announced transaction with Tallgrass Energy Partners in November 2012 to sell Kinder Morgan Interstate Gas Transmission (KMIGT), Trailblazer Pipeline Company, the Casper-Douglas natural gas processing and West Frenchie Draw treating facilities in Wyoming, and the company’s 50 percent interest in the Rockies Express Pipeline (REX). KMP received approximately $1.8 billion in cash from the transaction. Including the proportionate amount of REX debt, this amount is equivalent to a value of $3.3 billion.

CO 2

  • Construction continues on both primary and booster compression for KMP’s $255 million expansion on its Doe Canyon Unit CO 2 source field in southwestern Colorado. The company is making good progress on the project, which will increase capacity from 105 MMcf/d to 170 MMcf/d, and is on schedule and on budget. The primary compression is expected to be in service in the fourth quarter of 2013 and the booster compression in the second quarter of 2014.
  • KMP is increasing the capacity on its Wink Pipeline System that moves crude from the company’s West Texas oil fields to Western Refining Company’s facility in El Paso, Texas. Wink had record volumes in 2012 and KMP is expanding the pipeline’s capacity from 132,000 bpd to 145,000 bpd to meet expected higher future refinery throughput requirements at Western’s refinery. The expansion project is progressing and should be completed in the third quarter this year.

Terminals

KMP currently has more than $1.4 billion of approved major projects in this segment. The company is experiencing strong demand in particular for liquids storage capacity and coal exports in its terminals business.

  • KMP recently announced an expansion project and acquisition that will provide additional infrastructure to help meet growing demand for liquids storage and dock services along the Gulf Coast. The combined investment of approximately $170 million will include the purchase of 42 acres, construction of a new ship dock to handle ocean going vessels and building 1.2 million barrels of liquids storage tanks. The company entered into a letter of intent with a major ship channel refiner to develop six 150,000-barrel tanks and four 75,000-barrel tanks with connectivity to its Galena Park Terminal and to the refiner’s location. The project will alleviate existing dock congestion at Kinder Morgan’s Houston Ship Channel terminals and provide additional export capacity value.
  • Construction continues on the approximately $430 million Battleground Oil Specialty Terminal (BOSTCO) located on the Houston Ship Channel. The first phase of the project includes construction of 52 storage tanks that will have a capacity of 6.5 million barrels for handling residual fuels and other black oil terminal services. Terminal service agreements or letters of intent have been executed with customers for almost all of the capacity. Commercial operations are expected to begin in the third quarter of 2013. KMP now owns 55 percent of BOSTCO following Transmontaigne’s purchase of an interest in BOSTCO in December 2012.
  • Construction also continues on the Edmonton terminal expansion in Strathcona County, Alberta. The approximately $310 million project entails building 3.6 million barrels of new merchant and system tank storage, and is expected to be fully completed in December 2013. The project is supported by long-term commercial contracts with major Canadian producers. In addition, Kinder Morgan is now finalizing agreements to support the construction of an additional 1.2 million barrels of merchant storage with anticipated completion in the fourth quarter of 2014. This second phase of expansion would cost approximately $112 million. When completed, total storage capacity at the Edmonton facility will be 9.4 million barrels, including the existing Trans Mountain system facility and the North 40 merchant terminal.
  • Deeprock Development, a joint venture between KMP, Deeprock Energy Resources and Mercuria Energy, executed a long-term terminal lease and operating agreement with Pony Express Pipeline (now owned by Tallgrass Energy Partners) to handle up to 350,000 barrels per day of crude oil from Pony Express. Deeprock Development is expanding its Cushing, Okla., terminal which will be the pipeline staging area and provide connectivity to up to six destinations. As part of the expansion, three to six new 250,000-barrel tanks and at least one 24-inch pipeline to south Cushing will be constructed. KMP will have a 51 percent equity interest in the project and will invest between $16 million and $26 million depending on the number of tanks built. Deeprock Development is targeting a start-up date of June 30, 2014.
  • KMP is investing approximately $29 million to expand its Pier IX Terminal in Newport News, Va., and has entered into a long-term agreement with a major U.S. coal producer to utilize Pier IX for exporting coal.

Kinder Morgan Canada

  • As recently announced, KMP has updated the binding commercial support for its proposed expansion of the Trans Mountain pipeline system following completion of a supplemental open season. Thirteen companies in the Canadian producing and oil marketing business signed firm contracts bringing the total volume of committed shippers to approximately 700,000 bpd. These additional commitments will result in an increase in the proposed expansion capacity from 750,000 bpd to 890,000 bpd and increase the capital investment in the project from $4.1 billion to $5.4 billion. The expansion will complete the twinning of the existing Trans Mountain pipeline system from Strathcona County, Alberta, to Burnaby, British Columbia. Trans Mountain expects to file a Facilities Application with the National Energy Board (NEB) in late 2013 for authorization to build and operate the necessary facilities for the proposed expansion. The application will include the environmental, socio-economic, Aboriginal engagement, landowner and public consultation, and engineering components, and initiate a comprehensive regulatory and public review process. If approvals are received as planned, the expansion is expected to be operational in 2017.
  • As previously announced, KMP entered into a definitive agreement in December 2012 to sell its one-third interest in the Express-Platte pipeline system to Spectra Energy Corp for approximately $380 million. KMP’s joint venture partners in Canada (Ontario Teachers’ Pension Plan Board and Borealis Infrastructure, the infrastructure investment arm of the OMERS pension plan) are also selling their interests in the pipeline system, as Spectra Energy Corp is purchasing 100 percent of Express-Platte. The transaction is subject to customary consents and regulatory approvals, and is expected to close in the second quarter of 2013. Express-Platte is a 1,700-mile oil pipeline system connecting Canadian and U.S. producers to refineries in the Rocky Mountain and Midwest regions of the United States.

Financings

  • KMP sold common units valued at approximately $151 million under its at-the-market program during the fourth quarter, bringing the total to almost $550 million for the year.
  • KMP conducted a secondary offering in December which issued 4.5 million shares and raised approximately $348 million. The funds were used to repay commercial paper debt.

Upcoming Organizational Changes

With the final distribution of KMI shares from the sponsor investors to management in December 2012 (which wrapped up the KMI management-led buyout), Richard D. Kinder will continue as chairman and CEO of Kinder Morgan, but certain members of our corporate and business unit management have indicated their intention to retire or take a different role in the organization. In each case, the position will be filled by a long-time Kinder Morgan employee. The transition will be largely complete by the end of the first quarter of 2013, and each person who is retiring has indicated his willingness to work beyond the first quarter as necessary to ensure a smooth transition. The key changes are as follows:

  • Park Shaper, president of Kinder Morgan, will be retiring as president of Kinder Morgan, but will remain a member of the KMI board. He will resign from the boards of directors of KMR and the general partners of EPB and KMP effective March 31, 2013. “Park has been with Kinder Morgan since the early days and has contributed an extraordinary amount to our success over the years,” Kinder said. “I am delighted that he will continue to be involved as a member of the KMI board.” Shaper stated, “My 13 years at Kinder Morgan have been an incredible opportunity for me, and I have truly enjoyed and benefited from working alongside Rich, Steve Kean and all of the remarkable Kinder Morgan employees. The time is right for me to spend more time with my family, and I look forward to continuing to serve on the KMI board.”
  • Steve Kean, currently executive vice president and COO and a member of the boards of directors of KMI and the general partner of EPB, will become president and COO of Kinder Morgan effective March 31, 2013. Kean has also been elected to the boards of directors of KMR and the general partner of KMP effective March 31, 2013. Kean has been with Kinder Morgan for 11 years, the last six as COO. He has also served as president of the Texas Intrastate Pipeline Group and as president of Natural Gas Pipelines. Kinder and Kean will comprise the Office of the Chairman of Kinder Morgan.
  • Jeff Armstrong, president of Kinder Morgan Terminals, will become vice president of corporate strategy for Kinder Morgan. “We are seeing an unprecedented number of opportunities in North American energy that cut across business unit lines,” Kinder said. “Jeff is ideally suited to help us identify ways to coordinate our efforts across Kinder Morgan and look for opportunities to extend our business model to new, related lines of business.” Armstrong will be succeeded as president of the Terminals business segment by John Schlosser. Schlosser is currently vice president of business development for Terminals and has been with Kinder Morgan (including his time with a predecessor company) since 1999.
  • Tom Bannigan, president of Products Pipelines, is retiring and will be succeeded by Ron McClain, currently vice president of operations and engineering for the Products Pipelines group. McClain has been with Kinder Morgan (or predecessor companies) for more than 30 years and has headed operations and engineering for Products Pipelines since 2005. He previously was vice president of engineering for Natural Gas Pipelines.
  • Tim Bradley, president of Kinder Morgan CO 2, is retiring and will be succeeded by Jim Wuerth, who is currently vice president of finance and accounting for the CO 2 segment. Wuerth has been with Kinder Morgan (including his time with a predecessor company) for more than 30 years.
  • Joe Listengart, vice president and general counsel, will be stepping down from his current position and will be succeeded by Dave DeVeau, currently vice president and deputy general counsel. DeVeau has been with Kinder Morgan since 2001 and has been deputy general counsel since 2006. Listengart will continue working for the company, assisting as needed on significant transactions and other matters. Adam Forman, vice president and deputy general counsel, will assume the additional role of corporate secretary for the Kinder Morgan entities, reporting to DeVeau.
  • David Kinder, vice president of Corporate Development and treasurer, will be retiring and will be succeeded by Dax Sanders as vice president of Corporate Development. Sanders has been with the company in a variety of senior commercial and financial roles over the last 12 years (including Corporate Development), with the exception of a two-year period while he earned his MBA at Harvard Business School.
  • Kim Dang, vice president and CFO, will continue as CFO and will also assume responsibility for treasury and investor relations. Dang has been with the company for 11 years, the last six as CFO, and has served in senior roles in finance, accounting and investor relations. David Michels, currently vice president of finance, will become vice president of finance and investor relations for Kinder Morgan and CFO of EPB, reporting to Dang. Also reporting to Dang will be Anthony Ashley. Currently director of finance, Ashley will become vice president and treasurer for Kinder Morgan.
  • In addition to Rich Kinder, Kean, Dang and Armstrong, the other members of the senior management team that are staying with Kinder Morgan include Tom Martin, president of Natural Gas Pipelines, along with his entire senior commercial management team; Ian Anderson, president of Kinder Morgan Canada; and Jim Street, vice president of Human Resources and Administration.

Rich Kinder stated, “I am grateful for the tremendous contributions over the years from Park, Tom, Tim, Joe and David, and I sincerely appreciate their commitment to ensure a smooth transition. Though it is always difficult to see talented people leave the organization, I am pleased that all of those who are being promoted are very capable, have long tenures with Kinder Morgan and are enthusiastic about their new roles. I am very optimistic about the future of Kinder Morgan, especially considering the approximately $12 billion in growth projects we have identified, and believe this team will continue to deliver value to our unitholders and shareholders.”

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