Kinder Morgan Energy Partners LP Earnings Call Insights: CO2 Business and Freedom Side

Kinder Morgan Energy Partners(NYSE:KMP) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

CO2 Business

Darren Horowitz – Raymond James: I’ve got a question actually two questions about the CO2 business and this goes back to some of the comments that you made with regard to expanding the source fields in Southwest Colorado. But as you’re talking with these Permian producers you guys obviously have a pretty good sense of the timing of CO2 production as that ramps concurrent with the expectations for crude production growth and it seems like that could drive a lot of incremental volume commitments on the Freedom line. So, from a source field perspective, is the right way to think about those compression additions that you referenced at Doe Canyon and McElmo Dome still track at about $500 million in total costs for both and a target in terms of volume ramp, maybe around the second and the fourth quarter of 2014 respectively?

Steven J. Kean – President and COO: Yeah, the costs are right on budget. I think with both those together it’s about $500 million. We should have expanded Doe. We should be getting most of that expansion done in the volumes by the end of this year, in fact, in the fourth quarter and then towards the end of 2014 for the Yellow Jacket Facility.

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Darren Horowitz – Raymond James: And then taking that one step further that new source field on the Arizona, New Mexico border, I assume you’re talking about expanding St. Johns and I recognize you’re still in the assessment phase there. But is the right way to continue to think about roughly a $2 billion project cost that could possibly get to $650 MMcf a day throughput and that would basically feed the Cortez line? Am I thinking about that the right way?

Steven J. Kean – President and COO: We’ve reduced the cost quite a bit and looking at a $200 million case and that will start with that, and I think those numbers are around $600 million. Yes, we would hit into the Cortez pipeline, just south of Albuquerque.

Freedom Side

Theodore Durbin – Goldman Sachs: Just on the Freedom side here, you’ve got this number, the 277,000 barrels a day. I guess I’m wondering, it seems like a pretty precise number, how did you get to that number? Is that what you need to get to a sort of certain hurdle rate or a kind of return that you’d need and then maybe you can talk about the kind of tariff you’d need to get to the economics you want on that pipeline.

Richard D. Kinder – Chairman and CEO: Well, the 277,000 is just what the engineering studies showed; would be the resulting capacity from the way we intend to build it. That’s not the number of barrels we would need. We would need fewer barrels than that. I think we’ve said publicly we need around 200,000 barrels a day to make the (thing hunt) economically. As far as the tariff, Tom Martin is here, Tom?

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Tom Martin – President, Natural Gas Pipelines: Yeah, it’s in the neighborhood of about $5. It’s kind of what we’ve been (pitching to the mark.)

Richard D. Kinder – Chairman and CEO: It’s around $5. And so, again, as I said, we have an open season underway now and if we get the kind of commitments that we hope to get, this will be a go project; if we don’t, we’ll obviously reassess. We’re not building it for our health; we’re building it only if we can make money on it. So, that’s where we stand on it and we’re just in the middle of the open season. I’ve had good conversations, but we’ll see how that translate into volumes. As I’ve said before, you know, it would seem to be a marriage made in heaven; you’ve got certainly trend line towards increasing the excess production at Permian and you’ve got the West Coast refiners that are spending hellacious amounts of money on crude supply, and you would think that they have reasonable amount of money to bridge those two. Sourcing the demand would make sense, but again, that’s up to our customers….

Theodore Durbin – Goldman Sachs: The next one from me is just on the Terminals here. It looks like kind of flat year-over-year results. You’re now seeing probably below budget. I guess I’m trying to understand, is that just kind of continuation of the trends we saw in the first quarter with the weak coal volumes, petcoke volumes, or kind of how do you see that shaping up through the rest of the year?

Richard D. Kinder – Chairman and CEO: Well, first of all, we had a 12% growth in the Terminals for the year and we’ll get very close to that. So, when we say slightly below budget, we’re still for the year going to have very nice growth. We have some things coming on line later in the year. So, certainly, it’s not going to be flat to 2012. We’re going to have growth. We’re just not going to have quite chin-the-bar at that 12% growth that we have in the budget. John Schlosser; you want to add?

John W. Schlosser – President, Terminals: The other thing I’d add is that petcoke volume our earnings were off $2.3 million and that was associated with four outages at major refineries here on the Gulf Coast and we don’t expect that to recur in the out quarters.

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Theodore Durbin – Goldman Sachs: And then just a small one I think it’s a small one for you, but I want to make sure this of this RIN noise, the renewable credits, I guess is that anything that we should think about as being an impact to you, an opportunity, or a cost? Just how do we think about the RINS for you?

Richard D. Kinder – Chairman and CEO: Well, it’s a positive for us, because we generate excess RINS at our transmix facilities, and then how much of upside for us is depends on the price of the RINS. We’re pretty definite on how many RINS we’re going to excess RINS we’re going to generate and it’s about 700,000 gallons a month. And so, today those prices are running $0.65, $0.70. So, you can multiply that out and that’s how much per month we could make from it. But they were as low as $0.10 a few months ago. They have been as high as, I think $1.08, or $1.10 at one point. So, we are just we are selling them on a monthly basis to customer who wants to take all that we have. And so, we’ll just see what it results in. So, it will be upside. The question is, how much? And that we don’t know. We just play it month-by-month and that’s not in any of the projection that Kim is talking about which she says Products is going to slightly exceed its plan for the year. We haven’t counted anything on additional RIN sales, although we recognize about 1.9 million, I think, (round) of sales in the first quarter.

A Closer Look: Kinder Morgan Energy Earnings Cheat Sheet>>