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Kinder Morgan takes $1B hit on natural gas assets amid production shift

Lower natural gas production in Oklahoma and north Texas — along with expiring contracts on a Wyoming-to-Oregon pipeline — prompted Kinder Morgan Inc. to take more than $1 billion in impairments on its assets.

The Houston-headquartered midstream giant took a $650 million impairment on its investment in the Ruby Pipeline LLC and approximately $364 million on gathering and processing assets, CFO David Michels said on the company's fourth-quarter 2019 earnings conference call. A shift in natural gas supplies was behind the devaluations, which were partially offset by gains of more than 10% in natural gas transportation volumes. Ruby, which connects the Opal, Wyo., hub with the U.S. West Coast at Malin, Ore., is a "challenged" asset, CEO Steven Kean said.

Ruby is "coming from the Rockies, the Rockies is over-piped in terms of export capacity basis," Kean said on the Jan. 22 call. "That's been the case for a while now, and there are alternative sources from Canada, for example, to serve the market in the Northwest. So that's just that challenged asset."

Producers of dry gas from stand-alone wells, instead of those who produce gas as a byproduct of oil production, are under strain. That means western producers outside the booming Permian and Bakken shale formations are taking a more cautious approach to managing their finances, Kean said.

"They're being very careful and thoughtful about how they are managing their business, and those folks are our customers, and we're in good contact with them," Kean said. "Those are not discussions about growth ... but they're more discussions about making sure that we continue to have adequate credit support and that we're being constructive where we can be."

Getting on the Permian Highway

Kinder Morgan has responded to the shift in production patterns by boosting investment in the Permian Basin in West Texas. The company is working with partners to construct the $2 billion Permian Highway Pipeline and on Jan. 22 received Federal Energy Regulatory Commission approval for an extension of an existing network that would increase takeaway capacity from the Waha Hub in the region. Kean said that while permitting on the Permian Highway project has been slower than expected, the company plans to have the 2.1 Bcf/d conduit in service by early 2021.

"We have now acquired 99%-plus of our right of way; this is a significant milestone," Kean said. "We are well along in the construction of western spread. We believe that we are close to getting our federal permit so we can begin construction on the eastern spread."

Fourth-quarter earnings for the company included the first full quarter of income from the 2-Bcf/d Gulf Coast Express pipeline out of the Permian Basin and three of 10 units at the Kinder Morgan-operated Elba Island LNG project. The company recently started a fourth unit at Elba and expects to have all 10 in service by mid-year, Kean said.

Separately on Jan. 22 the company reported adjusted EBITDA of $2.02 billion for the fourth quarter of 2019, up from adjusted EBITDA of $1.96 billion in the fourth quarter of 2018. The S&P Global Market Intelligence consensus estimate for adjusted EBITDA for the fourth quarter of 2019 was $1.95 billion.