Kinder Cancels Gas Pipeline, Demands Collateral on Slump

  • Company reduced future projects backlog by $4.1 billion
  • 2016 capital budget reduced for second time in four months

Kinder Morgan Inc. canceled a controversial New England natural gas pipeline and demanded some customers post collateral to ensure bills get paid as collapsing energy markets stunted demand for its fossil-fuel hauling and storage services.

North America’s biggest oil pipeline operator canceled the $3.1 billion Northeast Direct pipeline that had been scheduled to start shipping gas to Boston in 2018, the largest planned investment in Kinder’s portfolio, according to a statement released on Wednesday. The company also reduced its 2016 capital budget for the second time in four months after posting the steepest first-quarter profit decline in four years.

With a debt load that more than doubled in the past five years to more than $41 billion, Kinder has been hit as stagnant or falling demand prompted drillers, coal miners and oil refiners to cancel orders for new capacity that the company was counting on to support growth.

“That New England project going offline is concerning,” Charlie Smith, chief investment officer at Fort Pitt Capital Group, said in a telephone interview. “All they’ve talked about is the huge arbitrage between Marcellus Shale gas as some of the cheapest in the world and Northeast electricity being some of the most expensive. Unless I’m missing something, this should’ve worked.”

Customer Collateral

Stung by bankruptcies among U.S. coal miners and credit downgrades for shale gas drillers, Kinder is requiring some customers to post “a lot” of collateral, Chief Executive Officer Steve Kean said during a conference call on Wednesday.

First-quarter net income dropped 27 percent to $315 million, or 12 cents a share, from $429 million, or 20 cents, a year earlier. The per-share result was seven cents below the average estimate of 17 analysts in a Bloomberg survey.

Kinder’s backlog of projects it plans to bring into service within five years fell to $14.1 billion, according to the statement, down from $21.3 billion as recently as September. Repeated cuts to the capital budget and future projects followed on the heels of a 75 percent reduction in quarterly dividend payouts to investors announced in December.

The Northeast Direct project died because of tepid demand for shipping capacity from power producers, Kean said. In Georgia, the $551 million Palmetto pipeline development was dropped by the company after state lawmakers imposed a moratorium on new permits, he said.

“I have opposed Kinder Morgan’s proposed pipeline through Massachusetts and New England because of concerns that it could have led to the export of American natural gas to foreign countries, the impact it would have had on local communities in Massachusetts, and its potential to worsen climate change,” U.S. Senator Ed Markey, a Massachusetts Democrat, said in a statement.

Kinder also postponed the planned start-up of a $447 million expansion of its Tennessee Gas Pipeline by seven months to June 2018, according to the statement.

A rebound of more than 60 percent in benchmark U.S. oil prices from a 12-year low in February has brought some respite to the industry, though prices remain at less than half their 2014 peak. Gas prices have recovered some of their losses since early March.

Kinder shares fell 2.5 percent to $18.53 at 10:15 a.m. in New York. The shares have 10 buy ratings from analysts, 12 holds and zero sells.

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