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KMI buys remaining 49% of joint venture with Shell

Kinder Morgan (ticker: KMI) announced today that it has reached an agreement with Royal Dutch Shell (ticker: RDSA) to purchase the remaining equity interest in Elba Liquefaction Company (ELC), a liquefied natural gas (LNG) joint venture between the two companies, for $630 million. Previously, KMI held 51% interest in the project.

The purchase of Shell’s 49% interest in the project brings Kinder Morgan’s total investment in the liquefaction and terminal facilities at Elba Island to approximately $2.1 billion.

Permitting continues for the ELC LNG project, which consists of 10 small-scale liquefaction units to be purchased from Shell, which will retain its 100% subscription to the project’s LNG capacity under a 20-year contract. The next step in the regulatory approval process is for the Federal Energy Regulatory Commission (FERC) to issue a draft environmental assessment. Subject to the regulatory approvals, construction could begin in Q4’15, with initial production expected to occur in late 2017, according to a press release from Kinder Morgan.

“We are very pleased to purchase Shell’s equity interest in the joint venture and advance the project with Shell’s continued support and subscription to 100% of the capacity of … our Elba Island terminal,” said Kinder Morgan East Region Natural Gas Pipelines President Kimberly S. Watson. “We look forward to this additional investment opportunity that provides attractive returns and that serves a high-credit quality customer in Shell.”

In 2012, the project was authorized to export to Free Trade Agreement (FTA) countries by the U.S. Department of Energy (DOE). Kinder Morgan’s application to export to non-FTA countries is still pending. The project is expected to have a total capacity of 2.5 million tons per annum of LNG for export, or approximately 350,000 Mcf/d of natural gas.

“The main benefits that we are getting here are, of course, the opportunity to invest $2.1 billion at an attractive return; and secondly, we get control of the project and with that control, we still expect a late 2017 in-service date,” said Kinder Morgan President Steven Kean during the company’s Q2’15 earnings call. “Shell benefits from secured cost reductions on the total project, which we expect to achieve, and still earn an attractive return on the all-in investment.”

When asked why Kinder Morgan decided to purchase Shell’s interest in the project, Kean said that the outlook on the LNG market had changed, as had the project’s scope. “I’m not going to speak for Shell at all,” Kean said during the call, “but you don’t need to be a rocket scientist to see that they bought BG. The market outlook on LNG has changed a bit. They wanted to restructure the contract. We were certainly willing to restructure it on the terms that we got here.”

Kinder Morgan increase distributions to $0.49 per share

In addition to the announcement that Kinder Morgan would purchase 100% interest in the Elba Island LNG project, KMI also announced today that it would be increasing its quarterly distribution to $0.49 ($1.96 annualized), according to a separate press release. The distribution raise represents a 14% increase. Additionally, Kinder Morgan increased its project backlog of expansion and joint venture investments to $22.0 billion, an increase of approximately $3.7 billion from the first quarter.

For the second quarter, KMI had steady results and increased its dividend to $0.49 per share,” said Executive Chairman Richard D. Kinder. “We remain on track to meet our full-year dividend target of $2.00 per share.”

Kinder Morgan reported second quarter distributable cash flow before certain items of $1.095 billion versus $332 million for the comparable period in 2014. Distributable cash flow per share increased $0.18 per share to $0.50 compared to $0.32 per share in the second quarter of 2014.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.