Kinder Morgan Energy Partners, L.P. ( KMP )

Q2 2010 Earnings Call Transcript

July 21, 2010 4:30 pm ET


Rich Kinder – CEO

Park Shaper – President

Kim Dang – VP and CFO

Tim Bradley – President, CO2


Steve Maresca – Morgan Stanley

Jeremy Tonet – UBS

Ted Durbin – Goldman Sachs

Emily Wang – Raymond James

Brian Zarahn – Barclays Capital
Noah Lerner – Hertz Capital

John Edwards – Morgan Keegan



Welcome and I would like to thank you all for holding today’s quarterly earnings conference call. (Operator instructions) Now, I would like to turn it over to Rich Kinder, the Chairman and CEO of Kinder Morgan. Sir you may begin.

Rich Kinder

Thank you, Ed, and welcome to our analyst call. Let me start by saying that as usual we’ll be making statements within the meaning of Securities Act of 1933 and the Securities Exchange Act of 1934. Also as usual, I’ll give an overview of the quarter, then Park Shaper, our President will go through the financial information in very detail and then we’ll take any and all questions that you might have.

I guess in a general way there are three main things to mention at the start of this call. First, we raised the quarterly distribution to $1.09, which is $4.36 annualized. I believe that’s about the 37th time since we took over Kinder Morgan in 1997 that we’ve raised the quarterly distribution.

Secondly, we expect to meet our budget target of $4.40 of distributions per unit for the four quarters of 2010 that’s just a little short of 5% above the distributions we’ve made for the four quarters of 2009.

And finally and maybe most importantly, when you look at the fundamentals of Kinder Morgan, all five of our business segments were above 2009 in terms of earnings before DD&A that bodes for the second quarter and year-to-date. In fact all had double-digit increases year-to-date and all but the Canadian operations had double-digit increases for the second quarter. And we expect all five of our business segments to beat their 2009 results for the full-year 2010.

With that, let me look at the individual segments and take you through at a little more detail of what’s going on. Starting with our Products Pipelines segment, our refined products volumes adjusted for the January 1, 2010 mandated ethanol blended change in California, which is you probably know that the mandated ethanol percentage from 7 – from 5.7% to 10% and if you adjust for that, I think that’s a right way to look at the volumes.

Our refined products volumes in the quarter were actually up five-tenths of a percent versus the second quarter of 2009. Now that’s the first year-over-year quarterly increase since the third quarter of 2007. Our diesel volumes were particularly strong. They were up almost 5% and especially strong in the State of California.

Now whether all of this is a trend I’m sure and we’re taking a cautious outlook toward this volume growth but I will say that it looks like we will turnout positive in July also on a month-to-month comparison.

Our ethanol volumes in this segment were also strong. They were up 38% over the second quarter of 2009 and that’s largely a result of the same California mandate increase that I appropriately referred to you earlier. If you look at our Natural Gas Pipelines, they had a good quarter driven by several things. First of all, we had two pipelines that are now fully in service that came on in the second quarter of last year mainly our Midcontinent Express line and Kinder Morgan Louisiana. We also had contributions from the treating assets that we acquired from Crosstex back in the fall of 2009. Our Texas Intrastates performed well, their volumes were actually up about 3% for the quarter. And Rockies Express was also above its 2009 results. We also got modest help from our new KinderHawk joint venture that we closed in late May this year.

Turning to the CO2 segment, they had the significant growth over 2009 that was driven by higher oil and NGL prices on the unhedged volumes and by a 5% increase in NGL volumes versus 2009 and a slight increase in CO2 delivery volumes versus the second quarter of 2009. The oil production at SACROC declined for the second quarter versus 2009 second quarter but it was about flat to our plan year-to-date. The Yates oil volume decreased more than we expected in the second quarter and we’re working on strategies to improve that. It appears that we’ve had a pending at the oil column there so we’re doing some things to counter that, we’ll be deepening some wells and deeper into the oil column hope to get better drainage from gas cap. We’re drilling some infield wells elsewhere on the facility and we’re using surfactants to try to float oil up from below, but that is a negative that volumes at Yates have turned down somewhat although we expect to be able to correct this.

As we’re looking for the full year at our CO2 operations, we expect to be on plan except for the impact of prices. I’ll put another way we’re offsetting any downturn in crude oil volumes with reduced expenses in other enhancements that go through the bottom line. And right now to remind you, we have a sensitivity of little less than $6 million per$1 change in the WTI price and that WTI price is between $5.50 to $6 below of what we had expected it to be at the time we gave our budget which was simply the forward curve at that time. So it’s an issue but certainly not an (inaudible) issue for us and as I said we still expect to be able to meet our full distributions.

In our Terminals segment, we’d number of factors contributed to what was a good quarter there. First of all, we had an increased capacity and throughput on our Houston ship channel facilities as we’ve got more capacities online. We had higher steel volumes across our system and I think these numbers are pretty interesting. If you compare to a year ago, we had an increase in revenue from our steel throughput of about $24 million, which is significant. Another way of looking at is just to look at the steel-making capacity utilization across the country. It’s running about 74% right now. That contrast with about 45% in the second quarter a year ago, it’s still not back to the high modern mark in the 2002 to 2008 time period where the capacity utilization got as high as between 82 and 87%. Now that said it certainly a nice increase since the second quarter a year ago.

We’ve also been able to increase our bulk exports particularly of coal from our Gulf Coast and West Coast terminals. We’ve got benefits from the acquisition of US Development and Slay Terminals which we made in the first quarter of 2010. Overall, on the bulk side, our total bulk tonnage was up by 27% versus the second quarter a year ago. The gasoline imports and blending volumes over on the liquid side were down somewhat from the second quarter last year although had been they have in particular strong impact on the revenue line because most of our liquids revenue is results – results from long-term contracts on the storage and handling capacity that we have.

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