Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Kinder Morgan Energy Partners LP (NYSE:KMP)

Q2 2013 Earnings Call

July 17, 2013 4:30 p.m. ET


Rich Kinder - Chairman and CEO

Kim Dang - Chief Financial Officer

Steve Kean - President

John Schlosser - President Elect, Terminals


Brad Olsen - Tudor Pickering

Darren Horowitz - Raymond James

John Edwards - Credit Suisse


Welcome to the Quarterly Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer portion of today’s call. (Operator Instructions) This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn today’s call over to your host Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Rich Kinder

Okay. Thank you, Irene. And welcome to the Kinder Morgan quarterly investor call. As usual, we'll be making statements that may fall within the Securities Act of 1933 and the Securities Exchange Act of 1934.

As usual, I'll give an overview of the quarter. Kim Dang, our Chief Financial Officer will follow with the financial details and then Steve Kean, our Chief Operating Officer, Kim and I and together with the rest of the executive team will answer any questions that you may have.

The second quarter was good for the Kinder Morgan companies, all three companies increased their distributions or dividends and all are on track for successful full year 2013 and beyond. Let me start with KMI. We increased the dividend to $0.40 a share, that’s up 14% from the second quarter of 2012 when we distributed $0.35. Cash available for dividends actually in this quarter is down compared to the second quarter of 2012 and that’s a result of the timing of the cash tax payments this year versus last year which Kim will go into detail.

But we remain on target to meet or exceed our goal of $1.60 declared dividends for our full year 2013 and that compares with $1.40 in 2012 and with our original ’13 budget of $1.57. The $1.60 equals a 14% increase in dividends declared comparing full year ’13 to full year ’12 and an 18% increase in cash applicable for dividends year-over-year. I think we are also well-positioned for future growth. We have about $14 billion now in expansion and JV investments that we are pursuing the building up across the Kinder Morgan companies.

Now turning to KMP, we raised the distribution there to $1.32 a quarter, that’s 5.28 annualized, that’s up 7% from the second-quarter of 2012. We had segment earnings before DD&A of $1.337 billion, that’s up 39% from a year ago. We had distributable cash flow of $505 million, that’s up 38% from a year ago. And we had distributable cash flow per unit of $1.22 that’s up from $1.07 in the second quarter of 2012 or a 14% increase.

The growth at KMP was driven by drop downs associated with the KMI’s 2012 acquisition of the El Paso companies, by assets acquired in the Copano acquisition which closed on May 1 of this year, by strong oil production in our CO2 segment and by good results in our products pipeline segment. Now in our certain items, net income you will see some big numbers and let me just focus on that for a minute and Kim will go into more detail.

You'll see that we totaled a gain of $383 million principally related to two items. The first is a gain of $558 million related to the re-measurement of KMP’s original 50% interest in the Eagle Ford joint venture that we had with Copano before we bought Copano. Let me just be very clear in my judgment that’s meaningless from a cash flow basis or from a substantial subsidy standpoint but it’s there and that’s one of those places where accounting sort of departs from reality. But that is a big gain that is in the income from certain items there.

The second is more realistic I think and that's a $162 million loss related to additional legal reserves primarily attributable to a California appeals court decision upholding the previously announced CPUC ruling denying an income tax allowance for our California intra-state products pipeline. The decision is disappointing to us, it contrasts with federal rulings permitting an income tax allowance -- permitting an income tax allowance for MLPs but we don’t anticipate that reparations we would pay will have an impact on distributions to our limited partners.

Now let me turn to the segments, starting with natural gas. This segment more than doubled the segment earnings before DD&A and we expect it to exceed its plan for the year. The growth was driven by the drop down at Tennessee gas pipeline and El Paso natural gas and by the Copano acquisition closed on May 1. Both GGP and EPNG continued to outperform our acquisition model when we did the El Paso acquisition and the Copano assets particularly those in South Texas appear to be off to a good start.

Segment transport volumes were down 5%, that's primarily attributable to lower power plant gas demand as gas prices are significantly higher than they were in the second-quarter of 2012. With that said, our Texas intra-state sales volumes were actually up 2% as we continued to connect more customers in the Texas market. Obviously we are very bullish on the future of natural gas in America. You heard me say this before, it has so many advantages, it’s domestic, it’s clean, it’s abundant, and it’s reasonably priced and we see additional medium and long-term increase in use for natural gas for a number of purposes, domestic industrial use, power generation exports from Mexico and volumes to be used in LNG export facilities.

And with our enormous footprint we think that will put us in a great position to grow dramatically in this segment over the coming years. Now I mentioned earlier that across the Kinder Morgan companies we now have a project backlog of about $14 billion. The backlog in this natural gas segment is about $2.8 billion that's at both KMP and EPB and we expect that backlog to continue to add projects as we go throughout the rest of 2013 and beyond. We detailed about 10 of those ongoing projects in the other news section of our earnings release at KMP and I won’t go through them all, but I just mention that our Northeast upgrade project on TGP is on target 9/1/13 start-up and among several projects along additional exports to Mexico, during this quarter we signed new long-term contracts with three customers in Mexico for in excess of 200 million cubic feet a day of capacity on our Kinder Morgan Texas and Monroe pipeline systems.

The cost of accommodating that additional throughput will be about $150 million and we’ve already received amended presidential permit to increase the border crossing capacity at that particular point on the Texas Mexico border to 700 million a day from about 425 million a day. During the quarter we averaged almost 1.8 billion cubic feet a day of gas export into Mexico across all of our Kinder Morgan systems and in fact, last week were actually over 1.9 Bcf a day. That’s significant at the present time and we think will get even bigger as we bring these various expansions into fruition over the coming months and years.

Also in our natural gas segment, on TGP we executed proceeding agreement for our proposed Cameron expansion, that’s about $140 million project and would provide 900,000 decatherms a day of additional capacity to LNG export customers in Louisiana.

Turning to CO2 segment, we had a very good quarter in that segment and we expect it to be slightly above its plan for the full year of ’13. Oil production continued to increase compared to a year ago, it was up about 2600 barrels a day on a gross basis. Our SACROC gross production was up 6%, 16,00 barrels a day to 30,000 barrels per day of production and CATs increased from 1800 barrels a day to 2500 barrel a day.

Our NGL production was also strong despite a maintenance turnaround at our Snyder gas plant in May. Now on the negative side that we continue to be impacted by lower NGL prices which are down about 11% when you compare the prices in the second-quarter of ‘13 to the equivalent period a year ago. Looking forward we have a backlog in the CO2 segment projects which total about $2.7 billion, and that's an area where I think that we probably understated what our real opportunities are and I will get to that in just a minute.

We had two important developments in the segment during the second quarter. The first is that we acquired Goldsmith Landreth San Andres unit from Legado Resources for about $285 million, that’s presently producing about 1250 barrels a day of oil. We expect that production to increase to a peak of over 10,000 barrels per day within the next 10 years. It would be a long ramp up with a lot of increased production.

In addition in that transaction we obtained a long-term CO2 supply contract that will potentially benefit not just this asset but all of our oil production activities in the future. Secondly, in the segment we continue to see very robust demand for CO2 from our customers in the Permian basin and the expansion opportunities we see are increasingly obvious. Right now we believe that could lead to capital expenditure opportunities on an 8-days basis of well over $2 billion over the next few years and would result in increasing our CO2 sales and transport volumes by about 800 million cubic feet a day by 2017, taking them up from around 1.2 a day moving to the Permian basin to about 2 Bcf a day. That's an increase from our earlier estimate we talked in the past of spending between $1 billion and $1.5 billion to get about 400 million cubic feet a day of additional capacity. So we think we will have the opportunity to spend more now at very good returns and to provide more CO2 for the use of our customers. Right now we are still prorating the system that’s how strong the demand is. We provided details of our current operations that are underway to increase our CO2 production in our southwest Colorado, McElmo Dome and Doe Canyo sites and those who detailed in our earnings release.

Turning to our products pipeline segment, they’re having a good year, we expect that segment to slightly see their plan for the full year 2013 even after reduction in revenue as result of the current year’s impact from this California court of appeals decision on the income tax allowance that I referred to earlier. Even after that is taken into account, we expect it’s going to be slightly above their plan for the year.

Refined products volumes were up pretty nicely for the quarter, they were up 3.5% across our system versus the second-quarter of 2012. That compares to the EIA national numbers which were up 0.7% or little less than 1% across the nation for the same period of time. Gasoline demand on our system is especially strong. It was up about 5.9%, while jet fuel was down by 3.8% largely as a result of reduced military flight activity in California and Nevada on our SFPP system and we think that's caused probably by the sequestration efforts now in effect.

NGL volumes were up 12% and biofuels in this segment were up 26%. We have a number of important new projects underway in our products pipeline segment and we detail the number of those in our earnings release. Those listed in the release totaled over $900 million net to KMP and the total backlog in this segment is actually just north of $1 billion, again all part of the $14 billion that we've been talking about. In particular we continue to expand our Kinder Morgan crude and condensate line deeper into the Eagle Ford play in Texas and we're now beginning construction on both our Cochin reversal project and our 100,000 barrel per day petroleum condensate processing facility located on the Houston Ship Channel. In addition, our refined products pipeline project is expected to come online on September 1 consistent with our original target.

Turning to our terminal segment it continues to show growth over 2012, but we expect it to be slightly below budget for the full year 2013, which calls for 12% growth. Our liquid terminals are performing well and this reflects new and restructured contracts with higher rates but on the bulk side, both coal and steel volumes declined for the second quarter compared to the second-quarter a year ago. Although coal volumes and revenue should pick up over the next several quarters as our expanded coal export facilities come online and those of course are underpinned by long-term take or pay agreements with our customers.

This segment has a backlog of projects totaling about $2.1 billion several of which are described in our earnings release. Especially noteworthy I think of is the additional tank capacity expansion at our BOSTCO facility. Now this is a facility hospital that won't even be the first place, won’t even be completed until this fall and we’re already in the process of expanding it and expansion will come online in the fall of 2014. With the expanded tankage the terminal when completed will now consist of 7.1 million barrels of tanks fully subscribed under long-term contracts.

We’re also expanding our Edmonton terminal in Alberta to 9.4 million barrels of capacity and we’re building significant new facilities adjacent to our Pasadena and Galena Park terminals on the Houston Ship Channel. All these projects are supported by long-term contracts with creditworthy customers, truly examples of our toll load philosophy.

In addition, we now have four crude by rail terminals in operation, two more where we have that the board has approved was signed agreements with our customers and two more under development with customer agreements backstopping the initial capital costs.

Turning to Kinder Morgan Canada, this segment is running slightly below the results of the second-quarter 2012 and we expect it to come in for the full year slightly below the budget because of our sale earlier this year of the Express Platte Pipeline. In that sale you may recall we received approximate $400 million of gross proceeds for our interest which delivered a little less than $20 million a year to us. So if you look at the impact of the sale on the overall KMP bottom line the sales is expected to be modestly accretive for the year but in the segment it is a negative.

We continue to see strong throughput on Trans Mountain and very importantly in this quarter, in the second-quarter we crossed a significant threshold when the National Energy Board of Canada approved the commercial terms on our $5.4 billion Trans Mountain expansion and we expect, as we previously said, to file our facilities application with the NEB later this year.

Now turning to El Paso Pipeline Partners, PEB, we increased the distribution per unit there to $0.63, that’s 2.52 annualized, that’s a 15% increase over the second quarter of 2012. Bcf and Bcf per unit were above 2012 year-to-date but slightly below as we expected for the second-quarter. We expect to declare a distribution of 2.55 per unit for the full year 2013 and that will be a 13% increase over the full year 2012. We've entered into an agreement with our customers to settle the WIC section 5 proceeding and the SNG rate case and the latter settlement was approved by the FERC last week without modification. Both settlements have been taken into account in our ‘13 distribution guidance. We have a number of projects underway at EPB and we’ve detailed them in the earnings release. The most significant is the joint venture with Shell to build a natural gas liquefaction facility at our terminal near Savannah, Georgia. Phase one is not conditional on any non-FTA approval and we already have our FTA approval. So this is a go project and only the FERC’s certificate to build. EPB’s investment in the project, including the ancillary facilities to service this new liquefaction facility is about $850 million and we expect to be in service in late ‘16 or early ’17.

So to sum up, the Kinder Morgan companies are performing well this year. To put it in perspective we've said that when asked that, our long-term growth rate at KMI is 9% to 10% a year and at KMP it’s 5% to 6% a year. We’re on target this year to substantially see those targets, 14% growth at KMI and 7% growth at KMP. On top of that, we have an enormous backlog of future projects already nailed, and we have an expectation of continuing to better serve our customers and increase our cash flow by exploiting our extensive asset base of 82,000 miles of pipeline and 180 terminals.

So that’s the overview. With that I will turn to Kim.

Kim Dang

Okay, thanks Rich. I am going to start on the KMP numbers, I will do EPB second and then KMI last. The first page of the KMP numbers is the GAAP income statement, as we said many, many quarters we don’t find that overly meaningful but I see that the press has already picked up that our profit multiplied seven fold and as you can see our income is up 658% in the quarter.

So let’s turn to the second page and so let me tell you what great things happened in the quarter and this is our look at distributable cash flow. Distributable cash flow per unit for the quarter was a $1.22, up 14% in the quarter, year to date it’s $2.67, up 9%. Year to date we are ahead of our original budget and we expect to be ahead of our original budget for the full year on Bcf per unit as a result of the Copano acquisition and all this is consistent with our revised guidance that we put out in May at the time we closed Copano $5.33 in distributions per unit for the year.

In the quarter, the $1.22 of Bcf versus $1.32 distribution we had negative coverage of a little over $40 million, that was consistent with what we told you at the time of the budget and consistent with what we told you on the first quarter call that we expect KMP to have positive coverage in the first quarter and the fourth quarter and negative coverage in the second and the third with coverage for the full year.

The Bcf, the total number of Bcf 505 million, up 139 million, 38% for the quarter, for the six months $1.055, up $227 million. Look at where the 139 million in the quarter and the $227 million in growth is coming, if you look at the segments, segment earnings before DD&A for the quarter up 378 million and for the six months up 625 million. Now just a little under 90% of that, about 87% of that both in the quarter and the year is coming from natural gas, natural gas is up $328 million in the quarter and $546 million year to date and Rich went over the reasons for that.

Year to date natural gas is above its budget and we expect them to end the year above their budget, largely as a result of the Copano acquisition. When you look at the full year for natural gas, absent the Copano acquisition they would be slightly below their budget primarily because of lower than expected performance on some of our trading assets, a little bit slower sales there. CO2 in the quarter up 31 million, year to date, up 34 million, we are on budgets year to date and for the full year as Rich said, we expect to slightly exceed, that’s a function of two things. One, the Goldsmith acquisition that we completed in June and two, price. Now price is not as much of a benefit as you expect for the full year, we typically tell you that for every dollar increase in WTI equates to about $6 million in Bcf but that metric is – we are doing – the price is having a little bit less impact benefit than that primarily because NGL prices are going to be -- right now we’re projecting to be about 6% below our budget.

Products pipelines up $13 million in the quarter, up $37 million year to date. Year to date products pipelines are on their budgets for the full year, we expect them to slightly exceed and that’s outperformance on TransMix and Cochin and that’s going to be somewhat offset by the impact of the California court of appeals decision and the lower rates on our California intrastate system.

Terminals in the quarter, up $8 million, up $8 million year to date, they are below their budget year to date. We expect them to end the year about 2% below their budget and that’s a function of the weaker bulk business primarily on the coal and steel side as well as a little bit on ethanol.

Kinder Morgan Canada is relatively flat both in the quarter and year to date. For the full year, as Rich mentioned, we expect to be below our budget probably about 5% due to the express sale, again the express sale is a benefit to KMP overall but the benefits show up in reduced interest and reduced equity issuance.

G&A in the quarter up $33 million, year to date it’s up $48 million and that is all a function of the drop downs in the Copano acquisition versus our budget year to date we are about 4% over our budgets year to date on G&A. We expect to end the year pretty close to budget probably within about 1% maybe – or less than 1%, maybe be slightly over on G&A.

On interest, interest is up $76 million in the quarter, up $124 million year to date but it’s largely a function of balance although we do have some impact of rates and that’s our average rate is up both in the quarter and year to date. The function of the debt that we assumed on the drop-down assets that had a higher average rate than the existing KMP portfolio. Year to date interest is very close to our budget, for the full year we expect it to be over budget as a function of the Copano acquisition although some of that impact is being mitigated by the lower interest as a result of acquiring Express proceeds to reduce our debt.

Sustaining CapEx were about $18 million over 2012 and the current quarter $22 million year to date. Year to date versus our budgets would actually have a benefit but for the full year we expect to be over our budget on sustaining CapEx largely as a result of the Copano acquisition. Absent the Copano acquisition, we’d expect to be slightly under on sustaining CapEx.

Turning to the certain items, as Rich mentioned, they totaled a gain of $383 million in the quarter, $558 million gain on the re-measurement of our initial 50% interest in the Eagle Ford JV and we had to basically remeasure this asset to the amount of the $5 billion Copano purchase price that we allocated to their 50%. And that’s what generates the gain. That’s offset by the $162 million increase in reserves that we took related to the California court of appeals decision. Now what you see in the certain items is the prior years. So the prior years’ reserves is impacting the certain item. The current year impact of the lower rates and the reserve that we are taking there is reflected in the segment.

The other two certain items of any significant are the acquisition costs on Copano of about 28 million and then the gain on insurance, which as we received about $60 million in insurance proceeds during the quarter related to damage we incurred during the hurricane Sandy. So that is it on KMP this year.

On KMP’s balance sheet, we look at our total debt, we ended the quarter at $18.6 billion, that translates into debt to EBITDA of about 3.9 times. We expect to end the year between 3.8 and 3.9 times, that’s up from what I mentioned in the first quarter call and also up from our budget which were both 3.7 times and that’s due to the Copano acquisition where we only have a partial year benefit from those earnings.

The change in debt for the quarter was 1.4 billion, year-to-date it’s $3.2 billion. In the quarter we spent about $6 billion on acquisitions, expansions and contributions to equity investments with the largest piece of that being $5 billion that we spent on the Copano acquisition and we spent about $650 million on expansion CapEx which is the second largest piece of the $6 million. And we issued equity of a little under $4.5 billion, 3.7 of that was issued in the Copano transaction. We issued $522 million and that’s actually the proceeds that we received in the quarter. I think we read the press release, the number is 585, there are some of those sales that closed after the quarter end. $522 million in proceeds under the ATM, the KMR dividends generated $158 million in cash and in the GP contributions composed the balance.

And then we had about $150 million in other items with the largest of that being a little under hundred million dollars we received on the swap unwinding. Year-to-date that is up $3.2 billion, cash out the door on acquisitions, expansions and contributions to equity investments $8.75 billion, acquisitions are $7.5 billion year to date and that is primarily the $1.655 billion drop down and $5 billion on the Copano acquisition and then in addition it reflects the $558 million of debt that we assumed associated with the first half of El Paso that came on to our book when we bought in the second half. So we started consolidating net debt, that when we originally only owned 50% with note on our balance sheet.

Expansion CapEx was 1.1 billion in the quarter and we contribute about $140 million to equity investments. We issued $5.1 billion year-to-date, again 3.7 billion of that was associated with Copano, we received $400 million of proceeds from the sale of Express and then we have $17 million in other items the largest piece is the swap unwind and then we had working capital outflows associated with the timing on accounts receivable, accounts payable and inventory. So that’s KMP.

I will now move to EPB. EPB again, first page of the income statement which we don’t think is overly useful for investors. The second page is the DCF – DCF per unit in the quarter $0.60, that’s down $0.08 versus a year ago. As we discussed at the time of the budget for the full year we expect DCF at EPB to be down and that's largely caused by the increase in the distribution. And just to give you an example of that if in the quarter we kept the distribution flat, at the prior year distribution of $0.55, then DCF per unit would've been up 3% in the quarter. Year-to-date DCF at $1.38 which is up 2%.

The coverage in the quarter, the $0.60 of DCF versus $0.53 of distribution results in negative coverage of about $7 million similar to KMP and what we told you in the first quarter and also at the time of the budget we expect a negative coverage in the second and third quarter, excess coverage in the first and the fourth quarter. Year-to-date we actually have positive coverage of over $25 million

DCF in total was down $6 million in the quarter, it was up $20 million or 7% in the year or year-to-date and so I am going to reconcile the 6 million down and the $20 million up. For the quarter the assets generated about $10 million in incremental earnings. That’s primarily due to Cheyenne Plains acquisition and the other express pipeline expansion project, which came online on April 1 of this year. G&A is a benefit in the quarter, meaning it’s lower than a year ago primarily due to the cost savings that we implemented after the merger. Interest expense was an increase of $5 million in the quarter largely as a function of rate we turned out from debt that was on the revolver as well as from Cheyenne Plains debt, so floating-rate debt moved to fixed rate debt at a him higher rate.

Sustaining CapEx was a $2 million increase in the quarter and then the GP incentive was about a $90 million increase associated with the increase in the distribution. That gets you the $6 million for the quarter, year-to-date up $20 million. The assets generated about $52 million in incremental earnings, that’s a $44 million that you see an increase in earnings before the DD&A. And in addition, because EPB has acquired partial interest in assets, you see part of that benefit down below and reduced non-controlling interest expense, that gives you the other 8 to get to the $52 million. That’s associated – the $52 million is associated with the acquisition of the drop-down and it’s associated with the expansions on Southern Natural Gas and also the [Albert] Express Pipeline expansions.

G&A is down $19 million in the quarter, so decreased expense which is a benefit $19 million versus year-to-date last year. Interest is up $11 million for the same reasons as I mentioned in the quarter and then the GP incentive is up about $43 million largely related to the increased distribution, which gets you to about $20 million increase.

Last two points on this page, if you look at the certain items for EPB they totaled about $8 million in the quarter, $2 million in tax reserve which is non-cash and related to capital projects, $3 million is amortization but for regulatory purposes gets captured in other income as opposed to DD&A, and then a small amount of offshore repair costs. As Rich said, we still expect at EPB to declare $2.55 per unit in distributions for the full year.

EPB’s balance sheet, we ended the quartered at $4.1 billion in debt, that translates into debt to EBITDA about 3.6 times. Debt is down $15 million for the quarter and down $108 million year-to-date. In the quarter we spent $22 million on expansion projects, we raised $65 million in equity under the ATM and we had $28 million in other items which primarily relates to the timing on accrued interest. Year to date, we spent $43 million on expansions. We’ve raised $87 million in EPB’s ATM and then we have positive coverage of about 28 million and then also a benefit on working capital of about 36 million related to timing on APNR in accrued interest.

Now looking at KMI, KMI, we declared the dividend of $0.40 in the quarter. We generated cash available to pay the dividend of about $0.28. So similar to KMP and EPB and consistent with what we told you at the budget in last quarter we had negative coverage in the second quarter and as we said, we expect negative coverage in the second quarter and third quarter and excess coverage in the first and the four.

Cash available to pay dividends in the quarter, 294 million, that was down $13 million versus a year ago and that’s primarily related to timing on cash taxes which I will take you through in just a second. So looking how you get to the $13 million change, the distribution from KMP generated – and that goes to the – from the GP interest and LP interest generated $95 in additional cash, largely associated with the 7% increase in KMP’s distribution. The distribution that we received from EPB, an incremental $26 million. So the MLPs delivered an incremental 120 – little bit over $120 million of incremental cash flow.

G&A and interest was up about $9 million and the cash taxes were up $69 million in the quarter. And a lot of that is timing on the full year -- timing related versus 2012. For the full year we expect cash taxes to be up as we said you in our budget about little under $100 million and so what you are seeing is about 70% of the full year variance hitting in the second quarter and so that’s what Rich and I mean when we talk about the timing on the cash taxes.

Cash from available from other assets id down about $56 million and that’s a function of the drop-down. So the drop-down, we close the income from those assets that were previously at KMI, you pick up a benefit, the benefit that you pick up, shares up and there is a distributions coming from the MLPs and it also shows up in decreased interest expense on what you can say that in the quarter we have lower acquisition that interest expense and we also paid down some of the debt that is up to KMI with these proceeds and so when we get through the year to date numbers you will see a benefit there as well.

In the six months cash available to pay dividends is up 197 million. If you look at the cash coming from the MLPs that generated $320 million of incremental cash. On G&A and interest expense is actually a benefit of $6 million, cash taxes are up 61 million a year to date and the cash available on other assets is down 68 million largely as a function of the drop-down. Year to date, on cash available pay dividends we are above our originally published budget as a result of Copano, for the full year. We also expect to be ahead of our budget, and we expect that the cash available to pay dividends will be up about 18% versus 16% in our original budget and all that is consistent with the increase in guidance to declare our $1.60 per share in dividends that we gave at the time of the Copano acquisition.

Looking at KMI’s balance sheet, KMI ended the quarter with $9.5 billion in debt. We still expect KMI to end the full year I around five times on a fully consolidated basis. That is up little over $111 million from last quarter and it’s down $1.9 billion at the end of last year. In the week we spent $51 million on warrant more repurchase, $48 were contributions to the two MLPs for KMP, I can maintain its ownership percentage is 2% ownership. And then had negative coverage of 121 million and then we had non-cash inflows of about $110 million associated with other items. The most significant of these back -- cash taxes that we use and the metrics are higher than the cash taxes that we actually pay. And that’s because we are utilizing more of the NOL than we assume that we can use in the Matrix we assume that we can utilize $300 million of the NOL and we’re actually utilizing more than that.

Year-to-date again, decrease in debt 1.9 billion, we received $2.2 billion on asset sales between the -- $2.2 billion proceeds plus debt, that’s moved, or same thing in conjunction with the acquisition by KMP and so that's a reduction in debt of 2.2 billion. Warrant repurchase was a 131 million year to date, we made pension contributions of $50 million, we made about $55 million contribution to the MLP, $50 million in contributions to other equity investments and then we had other items that 25 million below significant was the benefit that talked about on cash taxes. We have that a similar scenario in the year-to-date and then that slightly off in the year-to-date numbers by distributing on distributions from equity investments. So with that, these are the numbers.

Rich Kinder

Thank you, Kim. Before we go to the questions, I will also mentioned are I am neglected to do this in the opening comments, our board at KMI approved the share and warrant repurchase program authorizing us to repurchase in the aggregate up to $350 of either common stock or warrants. And that’s you – there is no minimum repurchase watch, that's the maximum that we can do. But the board has granted the certain discretions, so we will be looking at buying back either warrants or shares in the future.

And with that, I will turn it back to Irene and we will take any questions you may have.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James

I have got two quick questions, the first, Rich, in your references, your thoughts around ramping Eagle Ford condensate volumes and more specifically the opportunities like – I mean you scale up your investments accommodate in the second quarter, your storage capacity is going to be over seven times, the current speeding capability, just from a throughput perspective, how big of an issue do you think that, that’s going to be on the Gulf Coast? And specifically do you guys have a view as to when Canada might hit a blend wall for condensate to be used as diluent and maybe that impacts volumes on Cochin or Southern lines.

Rich Kinder

Well, let me start with the – if I understood your question on the condensate, first of all, I think it’s obvious every quarter we’re expanding our reach in the Eagle Ford. And the ability to handle more and more condensate and N crew coming out of the Eagle Ford and of course, post the Copano acquisition we can move that either across our Kinder Morgan crude and compensate line in the Houston Ship Channel, or down to double Eagle line which is a joint venture with Magellan, down to Corpus Christi. So we're giving people Conoco, Anadarko, and others. So our volumes are ratcheting up but we will be ratcheting up on these facilities, and that’s a very good thing.

Obviously as you look at the what happens downstream lighter on the natural gas side, the tendency is that you move the bottlenecks downstream and then print the price being what it is, that bottleneck get solved. So I think there will be additional export of products and certainly we’re looking at that partially in conjunction with this BOSTCO facility. That’s not the original purpose of it but we certainly have land down there that we will be able to participate in export facilities.

As far as the blend wall and the diluent I really don't know. As you know we’re reversing Cochin, that project is now underway, it’s about a $260 million project, and we’re fully subscribed except for the portion that we have to leave open for spot-buys but everything else is taken up under long-term contracts there. To us that’s the big indicator that people are very interested in the ability to move diluent across our line or across other lines. So I think you are going to see a continued interest in doing all that. Beyond what they are shipping on the us I really don't know what the future holds but we are very happy that we are locked in on our investment, on reversing Cochin.


Next, we have Bradley Olsen with Tudor Pickering.

Brad Olsen - Tudor Pickering

A quick question on the announcement you made earlier this quarter about potentially acquiring coal royalty assets. Just wanted to hear your thoughts on why you make that announcement where or not there are specific assets that you have your eye on or whether you're just kind of telegraphing to the market that this is an area that you might get involved in the future?

Rich Kinder

Well, let me just say a couple sentences and then I will turn it over to John Schlosser who runs our terminals group and he can talk in lot more detail about our thoughts. But basically as you know Kinder Morgan is hugely optimistic about the role of natural gas in the future in this country and to a large extent it will displace coal and electric generation. That said, coal is always going to be an important fossil fuel both in the US and around the world for the foreseeable future, by that I mean decades and decades. So whether it's 40% of electric burn in the United States or 30%, there’s still going to be a lot of coal to be handled. And if you look at internationally it’s now I think 43% of the total fossil fuel use around the world. So there is still opportunities there. What happened is that the most of the coal producers are needing cash infusions looking for sources of cash and we think this is a good time to be able to assure those customers and with that I will turn over to John to talk about – we are going to be very conservative about how we do this and now I will turn it over to John.

John Schlosser

I will tell you what’s not – you open a big color window with the sign saying bring us your reserves, we are looking strategic investments where there's low mine cost reserves that are highly competitive, whether there’s high-quality reserves that are uniquely positioned and a more versatile better, it can go export and domestic or it could be tied to a Kinder Morgan terminal the better. We’re going to use the same disciplined approach that we do with all of our chem investments. We are looking at guaranteed minimum returns on each of these project and we’re not taking product to market risk.

Brad Olsen - Tudor Pickering

So would it be safe to interpret the comments as indicating that you don’t only look for something with a long term fixed price takeaway agreement?

John Schlosser

That’s a good analysis.

Steve Kean

Also I think John was getting at this too but we are not taking mine operating risks on these investments.

Brad Olsen - Tudor Pickering

So are you looking specifically at one base or another, is it something that would you be looking to develop a diversified portfolio in the coming years?

Rich Kinder

We brought on board our next CEO with 35 years or whatever experience in the industry to lead this team because we are going to look very carefully, and I will say that post our announcement we have had a lot of discussions already with people who have come forward and we continue to look at what makes sense for us and if it doesn’t make sense we won’t do it. So we’re looking very carefully, and we’re going to construct if we are successful on it, we are going to construct a very conservative portfolio.

Unidentified Participant

I think the interest rate, this could be a great platform to look at our other 1000 semi products we handle. Right now we’re initially going to focus on just coal but we hope to get into some of the other commodities that we touched today, some of the other customers we touched.

Brad Olsen - Tudor Pickering

And a follow up around Freedom pipeline, apparently refineries in California expressed a preference for rail but given the recent incidents that we have seen in the news where I’d say the safety of crude by rail has been maybe brought into renewed scrutiny. Does that as well as the fact that the Brent WTI spread is seeming to be more favorable to pipeline projects at least what it is today than it would be the rail, do you think that this brings pipeline project that maybe had been discarded in favor of rail back into the mine?

Rich Kinder

Well, I think it’s too early to opine on that Brad. What I will say is that quarterly as I said earlier on a previous call that Freedom pipeline did not get sufficient customer backstopping to do at this time when on our Trans Mountain expansion in Canada we went out twice with open seasons over the years and didn’t get sufficient throughput to build it, the third time we get 700 and 8000 barrels of throughput commitments. So a lot just depends on all bunch of factors all of which you mentioned are important. But we've got it on the shelf, but we know what it costs both from the standpoint of [Tera] and from the standpoint of what our returns would be based on the construction costs and conversion cost. And if the California refiners and/or the Permian producers demonstrate they want to go forward the project we’re certainly there to accommodate them.


Next, we have John Edwards with Credit Suisse.

John Edwards - Credit Suisse

Just a couple real quick ones. You gave a backlog number on natural gas, I think it was for KMP and EPB combined, I think you said 2.7 billion or thereabouts –

Rich Kinder

2.8 – round to 2.8 yeah.

John Edwards - Credit Suisse

What’s the breakout between KMP and EPB on that?

Rich Kinder

Well, it’s about 1.8, 1.9 at KMP and about a billion at EPB, the biggest at EPB is the joint venture with Shell, as I said it’s about 850 million.

John Edwards - Credit Suisse

And then just real quick, could you remind us that number of warrants outstanding at KMI?

Kim Dang


Rich Kinder

441 million roughly.

Kim Dang

Oh, it’s 414, sorry.


Next we have [Brian Zarahn] with Barclays.

Unidentified Analyst

I guess following up on the warrant, the buyback just to clarify that $350 million in the authorization and replace in the position $250 million, it seems like you guys completed.

Kim Dang

Right. The 250 million is complete.

Unidentified Analyst

And then looks like this authorization includes buying back stock and talk a little bit about the – looking at stock versus the warrants?

Kim Dang

Right, and so we are going to look at the prices of the relative securities and given what our view is on future stock price decide which one is more economic for KMI to buy.

Unidentified Analyst

And then on your long term 9 to 10% dividend growth guidance at KMI then to confirm that includes the impact of the warrants?

Kim Dang

It includes the impact of the original 250.

Rich Kinder

Yeah, to the extent we buy back more warrants, that would tend to make our growth a little higher.

Kim Dang

And then the 350 is not included.

Unidentified Analyst

But it includes eventual conversion of these warrants in that?

Kim Dang

It does.

Unidentified Analyst

And then I guess on drop downs any additional color as to completing the process in 2014?

Rich Kinder

Yeah, we think we’re still on target to do that and really nothing new on that now.

Unidentified Analyst

Is it reasonable to assume the next drop would -- the KMP would probably not be next year?

Kim Dang

We have to look at it.

Rich Kinder

We just have to look at it as we go along. But certainly we anticipate it will be done by next year.

Kim Dang

We didn’t budget anything addition for this year. But that doesn't mean that we wouldn't do something later in the year, we just have to look at it.


And we have no further questions in queue sir.

Rich Kinder

Okay. Well, Irene, thank you very much and thanks to all of you for calling in. And have a good evening and again we are happy with the quarter we had and look forward to a very strong 2013. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

This Transcript
All Transcripts