KGS Research Summary
[source: U]

2Q09 On Track; Drop Down on Horizon

Earnings per unit (EPU) meet expectations

KGS reported diluted 2Q09 EPU of $0.27, compared to $0.23 in 2Q08, in line with both UBS’ and consensus’ EPU estimate. Increased revenue/Mcf gathered ($0.728 vs $0.516 in 2Q08), 18% YoY growth in gathered volumes, and fee-based revenues offset weak processing results and increased total opex (though on an MMcf basis, operating costs were down YoY).

Interest in the Alliance JV
Mgmt indicated its interest in a potential drop down of the Alliance midstream assets from Quicksilver Resources (KWK, KGS’ GP), which could total $70-90mm. The project is still being developed and currently processes 50 MMcf/d

which is planned to grow to 250 MMcf/d in the next four years. If the drop-down were to occur, we would not be surprised to see it in two stages while some assets are still being developed.

Distribution run-rate flat vs 1Q09

KGS’ $1.48 run-rate represents a ~6% increase over the 2Q08 run-rate of $1.40 and is flat vs 1Q09. While KGS’ strong coverage ratio (2009E at ~1.5x) provides the capacity for growth, we anticipate the partnership will maintain its distribution at current levels while it continues to enhance its liquidity and pursue drop-down opportunities.

Valuation: Maintaining 12-month price target of $16

Our DDM-derived price target implies a 9.8% yield on our 2Q10 target distribution run-rate of $1.56/unit, versus the peer target median of 10.1%.