Pulling Back the Curtain on Kinder Morgan’s Capital Expenditure Backlog

The LawIQ platform is a valuable source on the estimated and final costs for major projects (generally those costing more than about $30 million), including specific line item details, such as labor, materials, and engineering costs, undertaken by natural gas pipelines. But pipelines have capital needs beyond those projects that require the filing of an application under Section 7 of the Natural Gas Act. Also, project sponsors do not typically announce revisions to project costs as the project progresses. But, by using data pipelines must file annually with FERC, it is possible to pull back the curtain a bit on both of these areas.

Today, we use Kinder Morgan and its pipelines as a case study for how one can use data in the LawIQ platform to gain an understanding of: (1) whether the costs of a major project are changing; (2) other types of projects that pipelines have undertaken in the past that required capital expenditures; and (3) how much capital the pipelines intend to spend in the near term. In the annual report pipelines are required to file with FERC in April of each year, the pipelines are required to identify by name every capital project (from greenfield projects to cathodic protection) that is expected to cost more than $1 million and which is not yet in-service. Not only do pipelines report the costs incurred to date on each project, but the pipelines must also report what they expect to spend to complete the project. They also report capital projects costing less than $1 million as a group and provide the same data for these smaller projects in the aggregate. We examine this data for the following pipelines owned by Kinder Morgan on an aggregate basis to assess past trends and anticipate future capital needs.

• Cheyenne Plains Gas Pipeline
• Colorado Interstate Gas
• Elba Express
• El Paso Natural Gas
• Kinder Morgan Louisiana Pipeline
• Midcontinent Express Pipeline
• Mojave Pipeline 
• Natural Gas Pipeline Company of America
• Sierrita Gas Pipeline
• Southern LNG 
• Southern Natural Gas
• Tennessee Gas Pipeline 
• TransColorado Gas Transmission
• Wyoming Interstate

Major Project Cost Changes

At the time an application is filed under Section 7 of the Natural Gas Act, the applicant is required to provide an estimated cost for the project. Most applicants provide no update on that estimate until they file the final cost report six months after the project goes into service. Using our data on comparable projects, it is possible to model whether the estimated costs are likely to increase or decrease. However, many of these larger projects extend over several years and the annual reports show not only the total cost expended to date, but also the expected remaining costs. By combining these two data points, it is possible to determine if the pipeline itself has had a change in its view of the project costs. A few good examples of this methodology include the following Kinder Morgan Projects: Southern LNG’s Elba Liquefaction Project , Tennessee Gas’s Broad Run Project, Lone Star Expansion Project , and the recently filed Natural Gas Pipeline’s Gulf Coast Southbound Expansion Project.

Elba Liquefaction

When the Elba Liquefaction project was filed on March 10, 2014, the estimated cost for the project was $395,218,792. Given that it filed its annual report for 2014 just one month later in April 2014, it is not surprising that Southern LNG reflected in that report that it had spent $11,699,671 and expected to spend an additional $383,519,121, which combined to be precisely equal to the application’s cost estimate. However, over the years since that original filing, the expended and estimated costs have changed.

As can be seen over the course of the years the project has been under construction, the estimated total cost of the project rose substantially to a maximum of $554 million, but has since trended back down, so that by the time Southern LNG filed its report in April of this year, it was projecting only a 10% cost overrun.

Broad Run Expansion

When Tennessee filed its application for Broad Run on January 30, 2015, it estimated that the cost of the project would be $406,342,415, which is the same number it reported in April of 2015 when the expended and expected costs are combined. However, by the time it filed its 2016 annual report in April 2016, the estimated costs had grown to almost $450 million, where it stayed for 2017 and 2018. This estimate was very consistent with the final cost report filed in April 2019 which showed a total cost of $462 million, but was available 2 years earlier than that final report.

Lone Star Expansion and Gulf Coast Southbound Expansion

These last two projects have a slightly different pattern in that, by the time they filed their first annual report following the filing of application, the total expected costs were already higher than the estimated costs in the application. Lone Star filed its application in August 2016, but by April 2017, the projected cost had increased by about $3 million to $134 million. However, by the time it filed its annual report in April 2018, the total costs had increased to almost $150 million. The Gulf Coast Southbound Expansion was filed on February 28, 2019 with an estimated cost of $145 million; by the time Gulf Coast filed its first annual report reflecting this project in April 2019, the total expected costs had already grown to $228 million.

Northeast Energy Direct

The annual reports even include information about projects that end up being withdrawn like Kinder Morgan’s Northeast Energy Direct. In the annual report filed in April 2016, Tennessee Gas Pipeline noted that it had already spent $117,793,821 on that project, for which it officially withdrew its application on May 23, 2016.

Other Capital Projects

While the capital costs for the known projects are helpful in understanding how these major projects are progressing from a cost perspective, by eliminating them from the data, it is possible to understand the backlog of smaller projects that a company may have.

As can be seen from the graphic above, even these somewhat smaller projects have an ebb and flow, with the peak backlog of projects occurring in 2015. However, even at the lowest point in 2019, it is worth noting that these smaller projects, together, end up being the equivalent of a substantial project worth over $150 million. Recent projects appear to fall into a few major categories:

• Lateral pipelines
• Compressor station enhancements, overhauls and replacements
• Pipeline replacements to make them piggable
• Cathodic protection projects
• Pipeline replacements for age or because of class changes
• Small expansions

While there is no guarantee all of these projects will be completed within a year, the information provides a key insight into which projects the company is working on, including more specific data on progress and cost expectations.

Looking to the Future

By comparing the costs expended to the costs expected, it is possible to gain some insight into the stage of each project. Some projects show that less than 10% of the total expected costs have been expended, which would indicate a project is in its early stages. But for other projects, the reports show that 100% of the total expected costs have already been spent. By looking at the Kinder Morgan companies’ filings made in 2019, it is possible to isolate those projects where the remaining costs exceed 90% of the project’s total expected costs. These would be the projects on which contractors may want to focus. By using this filter, we came up with the following projects for 2019 within the Kinder Morgan family:

While we performed this review for the Kinder Morgan family, a similar analysis is possible for a single pipeline or any family group. Please let us know if that would be of interest to you.

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