Kinder Morgan Energy Partners (NYSE:KMP), one of North America’s largest midstream energy companies, reported its Q1 2014 results on April 16. The company’s earnings were driven by strong shipment volumes and recent acquisitions in its natural gas pipelines segment, as well as by higher oil production in its CO2 business. While quarterly revenues grew by around 37% year-over-year to around $3.65 billion, net income before certain items rose by around 20% to $788 million.  KMP does not break down the financial results of its acquisitions in its press release. The distributed cash flow before certain items, a key metric for master limited partnerships, was up by around 26% year-over-year to around $693 million. In this note, we take a look at some of the key factors that drove the performance of the natural gas pipeline business, which accounts for over half of the company’s revenues.
Trefis has an $82 price estimate for KMP, which is slightly above the current market price.
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Natural Gas Pipelines Transportation Volumes Growth: KMP’s natural gas pipelines division saw its earnings before depreciation, depletion, amortization and certain items rise by around 46% year-over-year, to about $723 million. While the earnings growth was primarily driven by the effects of the Copano Energy acquisition, which closed in May 2013, the company’s overall natural gas transportation volumes also saw significant growth. Overall natural gas transport volumes through Q1 rose by around 5% year-over-year to around 17,938 Bbtu per day (including Copano volumes for both periods) . This growth mirrors the higher natural gas demand in the United States through Q1, when colder weather and heavy snowfall boosted consumption for heating purposes.
Tennessee Gas Pipeline System: KMP’s Tennessee Gas Pipeline system operates multiple-line natural gas pipelines, which extend from the natural gas producing regions of Louisiana, the Gulf of Mexico, South Texas to the North Eastern United States. The pipeline also has access to the Marcellus and Utica shale plays. During Q1, the system saw its volumes rise on the back of higher volumes from the Marcellus and Utica Shale plays as well as the effect of several expansion projects that began service late last year. While the pipeline has largely been northbound, Kinder Morgan has been undertaking some reversal projects for the pipeline, to add more south bound capacity to move gas from the Marcellus and Utica shales to the Southeast and the Gulf Coast.  The company also indicated that it had added new long-term contracts, with an average life of about 15 years to transport about 1.4 Bcf a day on the Tennessee system.
EPNG and Mexico Opportunities: The El Paso Natural Gas (EPNG) system, in which KMP owns a 50% stake, saw volumes rise through Q1 aided by higher gas export volumes to Mexico. The company also said that it has been loading a southbound line, which was previously underutilized, with gas to export to Mexico. The rise in U.S. natural gas exports to Mexico could provide a significant growth opportunity for KMP. Over the last five years, pipeline based natural gas exports from the United States to Mexico have rise by around 80%.  This has been largely due strong demand (brought about by the fact that Mexican gas prices are pegged to U.S. Henry hub prices plus transportation costs), weak domestic production and high costs of LNG imports to the country.
Increasing Growth Project Backlogs: According to consulting firm Wood Mackenzie, natural gas demand in the United States will rise from around 71.5 billion cubic feet (bcf) per day in 2014 to around 94.5 bcf a day by 2024. KMP could see its transportation volumes rise in tandem or possibly even faster than the national average, since it has exposure to key shale basins as well as the Mexican market. The company has a backlog of about $2.6 billion worth of expansion projects for the natural gas pipelines division, which is an increase of about $1.3 billion since its Q4 earnings release.Notes: