Kinder Morgan Energy Partners L.P. Q4 2009 Earnings Call Transcript

| About: Kinder Morgan (KMP)

Kinder Morgan Energy Partners L.P. (NYSE:KMP)

Q4 2009 Earnings Call

January 20, 2010 4:30 pm ET


Richard Kinder – CEO

Park Shaper – President

Steve Kean – COO

Kimberly Allen Dang – VP & CFO

Tim Bradley – President, C02

Tom Martin – President, Natural Gas Pipelines


Noah Lerner – Unspecified Company

Stephen Maresca - Morgan Stanley

Darren Horowitz - Raymond James

John Edwards - Morgan Keegan

Ted Durbin - Goldman Sachs

[Brian Zerhan] – Barclays Capital



Welcome to today's Kinder Morgan quarterly earnings conference call. (Operator Instructions) I'd now like to turn over to Richard Kinder; sir, you may begin.

Richard Kinder

Welcome to the fourth quarter investor call at Kinder Morgan. As usual, we'll be making statements that are likely within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Also as usual, I'll give an overview of the quarter and the year and then turn it over to our President, Park Shaper, who will talk in detail about the numbers and then we will answer any and all questions that you may have.

We had a strong fourth quarter at KMP. Our distributable cash flow which we think is the best way to measure our performance was up 62% compared to the fourth quarter of 2008. Even more relevantly I think the distributable cash flow per unit was up 44% from a year ago; $1.17 for the fourth quarter versus $0.81 a year ago.

If you look at the year as a whole, we’re also happy with our performance there. For example our earnings before DD&A was up a little bit over $200 million for full year 2009 versus full year 2008; about $2.96 billion versus about $2.758 billion for the full year 2008.

I think the accomplishment is pretty good given that our view is that the economy is still pretty weak and we’re seeing that in some of our segments. We distributed $1.05 or we will distribute $1.05 for the fourth quarter. That brings our distributions for calendar year 2009 to $4.20. That’s a 4.5% increase to the distributions for 2008.

Equally importantly we fully covered that distribution, that $4.20, with $14 million of excess coverage which means that we actually produced $4.25 of distributable cash flow per unit for the full year. That’s right on our 2009 original plan which as you may remember assumed a $68.00 pricing for WTI. It actually came in at about $61.80.

So I thought maybe the most helpful thing would be to sort of look at some of the headwinds that we’ve talked about all year and what they’re final impact on us was and then how we overcame those headwinds.

Oil and NGL pricing in our CO2 unit amounted to a shortfall of about $80 million in earnings before DD&A for the full year 2009. The steel volumes in our terminals group came in substantially below what we had assumed in our plan. We’ve been talking about that all year. And that indicated a shortfall, or ended up in a shortfall of about $40 million in earnings before DD&A on an after-tax basis.

We had lower volumes in our refined products segment, on our products pipelines. Actually if you include leap year, factor that in, our volumes overall were down about 2.5%. Actually gasoline was positive barely by 0.4% for the full year and that’s including ethanol volumes and there are not a lot of ethanol volumes on our pipeline but we did think that’s the way to do it, apples to apples.

The real weakness was in the distillate sector where diesel was down 9% and jet fuel down approximately 5%. If you compare those numbers to the EIA, at least the ones I’ve seen, as recently as yesterday, EIA is pretty consistent. EIA was showing for the whole country down 4.2% on all liquids volumes. Gasoline up 0.1% and distillates down, that distillate definition would include both diesel and jet fuel, down 8.3% for the year. So pretty consistent with what we’re seeing which is an indication that it was bottomed out and begun to creep back a little bit.

But we’re certainly not back to the volumes that we experienced during better times in 2007 and most of 2008. The fourth issue that we confronted was shrinking margins and volumes on our Texas Intrastate pipelines and then finally we did incur delays in the start up of two of our major natural gas pipeline projects including a $16 million detriment in the fourth quarter, earnings before DD&A because of the force majeure on REX that we declared in November after the project was completed and started up due to a girth weld problem.

This forced us to shut down or declare force majeure on about 60 miles of pipe. We corrected the issue on the girth weld pretty quickly but we had to go through regulatory approvals to restart. We now have received approval from [Fimsa] of our return to service plan and we expect to return to service within the month of January.

So those were some of the issues that we faced. How did we overcome those, and still have this very nice increase in 2008 and again right on our plan for 2009. The first thing was that as we’ve experienced all year, we had higher SACROC volumes than we anticipated and also substantially higher than in 2008.

The comparison year to year for full year was plus 8% 2009 versus 2008 and well above our plan, about 1500 barrels above our plan. We had good control on our expenses both at the business segment level and at the corporate level. We had lower interest costs than we expected on our floating rate debt.

We had higher volumes that moved across the dock at Vancouver, British Columbia, at the termination of our Transmountain System in Canada. And we had higher revenues across both our products pipeline and terminal segments from handling renewables primarily ethanol.

If you look at the whole year all five of our business segments were above 2008 results in terms of earnings before DD&A and the products pipeline in Canada operations were above the 2009 plan. CO2 was right on their plan for 2009. They were slightly below it in terms of earnings before DD&A but their sustaining CapEx came in a few million dollars below plan so in terms of distributable cash flow for that segment, they were actually just a hair above their plan for the year which was a tremendous accomplishment considering the shortfall on pricing that they faced.

The other two segments, natural gas and terminals, were below their plan and Park will give you detail on all five of those segments. But I think if you look at the year at least the way we view it, we believe our [toll road] model performed pretty well in very difficult economic conditions. Or put another way I believe that the diversity both within our business segments and among our business segments turned out to be a pretty big plus for us.

We also were able to accomplish this and maintain a very solid balance sheet that we ended the year at 3.8 debt to EBITDA. We expect that to improve over the course of 2010. We also continued pretty much unfettered access to both the debt and equity markets. On the equity side we put out $1.2 billion of equity to the public and on top of that realized about $340 million in terms of the KMR distributions as dividends over the course of the year.

Also importantly at least to our investors I think the total return for KMP was about 45% for the year and KMR was about 50%. So that’s sort of an overview of what the way we see the calendar year 2009. Now looking ahead, I think we’re pretty well positioned because we completed $3.3 billion in capital expenditure projects and acquisitions during 2009.

If you look at some of those acquisitions we acquired the treating assets from [Crossdex] for just short of $270 million late in 2009. We’ve got about three months under our belt there. So far that’s looking like a very solid acquisition. And then we just announced yesterday the fact that we closed on an acquisition of three rather large ethanol terminals from US development for a total of $195 million and included in that was a substantial amount of equity that the sellers took in that particular deal.

As we look ahead we have some other mid size to small acquisitions we expect to complete within the first quarter and then also of course we and our partner ETP will be completing the Fayetteville Express project over the course of 2010. We would expect that to start up at the beginning of 2011.

We’ve previously said that we expect to distribute $4.40 for 2010 and that’s a 4.8% increase over our distribution in 2009 and on our analyst conference next week we will take you through those numbers in detail for the 2010 year. More strategically and I guess looking out a little bit even beyond 2010 I think you have to say that for our segment times are pretty uncertain.

We have the potential of cap in trade legislation. We have a lot of other tornados swirling around our particular sector so I think its probably appropriate to look at the long-term strategic position of players in our particular midstream field and there [inaudible] is pretty high marks. I think we’re pretty well positioned.

I just mentioned three or four factors that I think should be considered as we talk about our strategic position on a going forward basis. First of all in my judgment no matter how you cut the candy you’re going to have natural gas as the fossil fuel of choice in the United States and I think our extensive system where we connect to most of the new shale plays will give us a competitive advantage there. Not that we’re the only party but I think we are well connected and have the ability to continue to move more and more natural gas as we use more and more natural gas in this country.

Secondly I think regardless of your views of the subject, renewable fuels will be very important particularly given the government mandates that increase dramatically in the future. We handled in 2009 about 55 million barrels of ethanol and bio diesel, most of it was ethanol and we expect to handle at least 80 million barrels in 2010 post the USD acquisition.

Now to kind of put that in context for you, the RFS mandate for 2010 is roughly 10.5 billion gallons which works out to about 250 million barrels. If we handle 80 million and I expect we’ll do a little better than that, we’re handling close to a third of all the ethanol produced in the United States and we’re handling virtually all of it on a fee basis. We are not involved in producing ethanol but we are handling a great deal of it primarily to our various terminals in California and elsewhere on behalf of the people who produce and transport the ethanol.

We’re first pipeline also as most of you know to actually move ethanol on a batch basis in a major pipeline system. We’re doing that on our central Florida pipeline and have been since earlier in 2009. Another factor that I think is important strategically if, and I would emphasis the word if, if the clean coal movement with C02 sequestration gets legs under it, I think we’re very well positioned.

We’re the largest transporter and marketer of C02 in the country and we have a lot of expertise in C02 injection technology. And finally I guess I would say that no matter again how you cut the candy the domestic oil produced in the United States will continue to be very important under any scenario at least that I can conceive and I think its important to remember that in our C02 segment we control fields that have enormous quantities of original oil in place.

For example the SACROC field has over 2.5 billion barrels of original oil in place and [Yates] had over five billion barrels of original oil in place. We don’t access all of that and the percentage that we will take out of the remaining oil in place in those two reservoirs is relatively small but it still equates to millions of barrels of oil to be produced in addition to what’s already been produced in both of those fields.

And I think as we look forward we have captured and will continue to capture these meaningful percentages of that original oil in place and our belief is that as technology improves we hope and expect to produce even more on a percentage basis from those individual fields.

So for all those reasons we’re pretty bullish about 2010 and beyond. We think we had a very solid 2009 particularly given the economic situation and we invite all of you to come in person or listen in by webcast on our investor conference which is next Thursday here in Houston and with that I’ll turn it over to Park.

Park Shaper

Thanks Richard and as usual I’ll be going through the numbers hopefully those of you listening on the phone have seen the earnings release and I will start at the first income statement page that follows the text of the earnings release.

On that page down towards the bottom you will see the declared distribution per unit, the Board declared $1.05 today and that takes the full year to $4.20 and that is consistent with out budget. Its up 4.5% for the year and as Richard mentioned in this environment and with the headwinds that we were facing all year we are very happy with the performance or employees and our assets delivered to get us right on budget.

With that I’ll actually go to the second page and talk about the DCF per unit before certain items and again Richard went over these numbers but you’ll see at the second line from the bottom above the notes DCF per unit of $1.17 for the quarter, up from about $0.81, about a 45% increase for the quarter. In the year at $4.25, that is up from $4.15 a year ago and the excess coverage in the quarter was $35 million and with that $35 million we ended up with excess coverage of $14 million for the year which is almost exactly on our budget.

We expected to be just a hair under $14 million so again in a very challenging environment ended up right on our expectations. The $4.25 again, that’s exactly where our budget was as well. Stepping up from that the DCF before certain items and so this is in total dollars $342 million, up about $131 million from where it was in the fourth quarter of 2008, that’s the 62% increase that Richard mentioned earlier.

Just a hair under $1.2 billion for the full year and that’s up from about a $1.70 billion for the full year 2008, that’s up about 12% for the full year so very nice growth for the year, and that’s actually about $7 million above our budget so ended up in terms of total DCF just a little bit above our budget.

And then just tying DCF back to net income like I usually do, I’ll just move up the page from DCF but again all we’re doing here is reconciling that DCF to the net income number, you’ll see immediately above the distributable cash flow the sustaining capital expenditures, about $60 million in the quarter, right about where we were a year ago. That’s actually a little bit above our budget for the quarter but when you look at the year, $172 million compared to about $181 million a year ago, the $172 million is actually right where we thought we’d be at the end of the third quarter so we’re consistent with our expectations from then.

It is about $30 million under our budget and so sustaining CapEx was under budget for the year and the reason for that is really multiple. One is some pipeline relocations that either did not have to be relocated or that we got reimbursed for it. In addition some cost savings, we actually realized a fair amount of cost savings on sustaining CapEx side.

We also had some amounts and we have this every year, primarily on the integrity side in maintaining our pipelines that shifted to expense as opposed to sustaining capital and so we have some dollars that moved to expense and then there were some projects that we deferred until future years.

So again ending up at $172 million of sustaining CapEx. Immediately above that and you see a line called express and endeavor contributions, really what this is is the excess of cash distributions from these two equity investments above their equity earnings. What shows in the segment and endeavor is a new acquisition that’s in the natural gas pipeline segment, we own 40% of that entity and then express is one of the lines coming out of Alberta actually runs into the Rocky Mountains and then over to Wood River and we own a third of that entity.

That shows up in the Kinder Morgan Canada segment but what show up in the segments are equity earnings. In both of these investments we actually earned more or received more cash than we recognized in equity earnings and so what we do down here in DCF is we show the difference. We show the excess of cash distributions above those equity earnings and so that’s the $2.4 million for the quarter and a little over $6 million for the year.

And then similarly on book (cash) taxes directly above that, what we’re showing there is the difference between the cash taxes what we actually pay in cash, and the book taxes that are recognized in that income and actually show up in the segment for the most part. You’ll see that cash taxes were less than book taxes by about $11 million for the quarter and by about $42 million for the year.

That compares or contrasts with a year ago when cash taxes exceeded book taxes by about $8 million for the quarter and by almost $19 million for the year. That actually was favorable to budget. The $42 million for the year was favorable to budget by about $19 million so we had another pick up to the budget in the form of cash taxes being lower than what we expected.

And then above that you have DD&A, you’ll see DD&A is up about $49 million for the quarter. Its up almost $200 million year to date. Looking at the $200 million a little over $100 million of that was higher C02 DD&A and then there were a few other pieces in the segment, the natural gas pipelines were up about $25 million.

And then there is the increase in DD&A associated with Rockies Express and Midcontinent Express which is increase year over year and shows up on this line. Those amounts do not show up in the segment because we account for those investments under the equity method and what shows up in the segment is just equity and earnings but we add back the DD&A down here because the cash that we get from those investments is essentially equivalent to net income plus DD&A.

So again we’re adding the DD&A back down here just like we do with our other DD&A because that gets us back to what we receive in cash. And then above that again you have the limited partners net income, the general partner share and the total net income. Again just reconciling, taking that net income down to our distributable cash flow which we believe is the most meaningful measure because that represents the cash that we have available to distribute to our limited partners.

Now moving up from that to talk about the segments, products pipelines for the quarter up above 2008 by about $11 million for the year above 2008 by about $64 million, as Richard mentioned above its budget for the year. It exceeded budget by about $6 million, generated about $635 million of earning before DD&A.

Every one of our assets in this segment was above 2008 for the full year. All but one were above 2008 for the fourth quarter, the only one that wasn’t was the Cochin pipeline and the only reason it wasn’t was because we had an unusual tax benefit in the fourth quarter of 2008 and so absent taxes Cochin was actually above fourth quarter 2008 as well.

For the full year Pacific was just a hair under its plan. Our West Coast terminals were nicely above their plan. Our Transmix operations were nicely above their plans. Our central  Florida pipeline was a little bit above its plan and then Cochin was a little bit under its plan. Now Cochin ended up only $3 million short of plan and some of you may remember back from the first quarter earnings call, Cochin had a really rough first quarter and we thought that Cochin may be significantly under its plan for the year.

It actually was able to fight back and almost achieve its plan for the year. But again a very strong performance in the product pipeline especially in the face of the volumes that Richard went over a few minutes ago that were lower than our expectations in terms of budget and we were able to overcome that one through the ethanol blending volumes at our terminals, two, through just higher throughput through our terminals, and three, through reduced costs at those operations.

On our natural gas pipeline side, up about $27 million from 2008 in the quarter, up about $41 million for the full year. Now its actually below the $788 million of segment earnings before DD&A for the year, is below its budget by about $40 million. The underperformance there was driven by as Richard mentioned delays in getting certain projects on line, some weakness in margins at the Texas Intrastate, and then overall basis differentials across some of our pipelines, especially some of the new pipelines coming on line for which we were selling, intended to sell in our budget and did sell some interim service that was not the contracts kick in once the pipeline comes in service.

If we have some capacity on line prior to it being in service we try to sell that. We were not able to sell it at rates that were as high as what we had in the budget because the basis differentials were a little bit tighter. And so those things really drove again the $40 million underperformance at the natural gas pipelines relative to budget and again if you just look at the pieces of the components of the segment the Intrastates were under planned, REX and MEP were under planned. The Louisiana pipeline and the Fayetteville Express pipeline were above planned, largely a function of [AFUDC] and then we did acquire the treating assets in the fourth quarter, and that was a pick up to planned as well.

Next line and C02, C02 was above 2008 for the quarter by $87 million and year to date above 2008 by $36 million. As Richard mentioned just slightly under its budget in terms of earnings before DD&A, the $796 million compares to a budget of about $800 million. So just $4 million under its budget but when you look at it in terms of distributable cash flow meaning you count in sustaining CapEx then that segment, C02 segment was directly on its budget, just slightly above.

And that’s in the face of an impact from price of $80 million and so price impacted this segment negatively by $80 million. The way that they were able to overcome that through higher volumes at SACROC our budget calling for volumes of about 28.6 [thousand] barrels a day we actually realized volumes of about 30.1 thousand barrels a day so as Richard mentioned outperformance by about 1500 barrels a day. And then also by cost savings. And so they did a very nice job reducing costs at the C02 segment during the year.

And that’s why actually not only in terms of segment earnings before DD&A but we saw it on the expansion capital side as well. Terminals, you’ll see up about $15 million for the quarter, up about $37 million for the year to $576 million but actually about $40 million under its budget. And that $40 million can actually all be explained by the lower steel volumes. That impacted us by approximately $40 million on its own.

There were other things that went up and down. We did have good performance in our liquid terminals for the most part throughout the year and in some other bulk products were a little bit weaker but again ended up $40 million under its plan and the steel impact was almost exactly that amount.

Kinder Morgan Canada up about $3 million compared to the fourth quarter 2008, up about $25 million for the full year 2008 above its budget by about $12 million. We did benefit from changes in FX rates and so a stronger Canadian dollar helped us out there but again very nice performance from that asset. If you back out the impact of FX and a change in book taxes that was a function of an accounting change back in the first quarter and we discussed it at that time, this segment independent of those two items was dead on its budget.

Total segment earnings before DD&A, $2.96 billion up from about $2.76 billion so an increase of $200 million during the year, a little bit under our budget, under by about $65 million and just to refresh your memory natural gas pipelines and terminals were under their budget, products pipelines and Canada were over their budget and C02 was essentially dead on.

With that I will jump down to G&A costs and so this is under the DD&A and then under the segment earnings contribution you’ll see general and administrative, an increase in costs of about $15 million for the quarter, an increase of about $30 million year to date but actually under our budget by $5 million for the entire year and that’s a function of the cost saving measures that we put in play back in the first quarter of 2009.

We realized savings throughout the year from that. It was offset by some other increases primarily on the benefit side but I’ll also point out not all of the savings that we generated from the actions that we took show up in G&A. Some of them actually show up in the segments.

And then interest right below that, an increase in interest expense of about $11 million in the quarter and about $27 million for the year. that’s driven by higher balance, average balance was up about $1.8 billion and that’s rough and then rates though was a little bit favorable, interest rate was a little bit lower than our budget by about 60 basis points. But when you look at the full year of about $430 million that was favorable to our budget by $32 million.

So interest did come in under our budget. If you add those up, segments a little bit under performing, G&A favorable to budget, interest favorable to budget, we had a pick up on cash taxes and a pick up in sustaining CapEx that’s really what gets you to, there are a couple of other moving parts, what gets you to total DCF, again the $1.2 billion being about $7 million above our budget.

I’ll talk briefly about the certain items, a lot of these are items that we see every quarter such as the interest expense, that computed interest on the Cochin transaction when we bought that from BT, allocated noncash long-term compensation, again that’s an item that we have to reflect on KMP’s income statement but an item that KMP will never have to pay a penny for, not in the form of equity or in the form of cash, it just shows up here as an accounting entry.

Acquisition costs again just breaking those out. The big changes in certain items for the quarter relate to the environmental reserves and the legal reserves both increases there. The mark to market of certain hedges and that’s gotten a little bit bigger because of some inefficiency that we’re recognizing on really ineffectiveness that we’re recognizing on the C02 hedges.

We began that last quarter. It doesn’t change what ultimately shows up in the segment. All this is is timing. It shows up down here but the ultimate impact what we really realized shows up in the C02 segment in the exact same way as it has historically. Again these items will just move in and out of the certain items amount.

And then you see a positive in the line titled hurricanes and fires, its really primarily insurance reimbursements. And so that’s recoveries from insurance as we rebuild certain assets that were damaged in hurricanes and fires. And when you look at it for the full year really those are the major items that totaled to the $23 million negative certain items for the quarter. If you look at it for the full year its $34 million negative.

You did have a nice positive again from the hurricanes and fires again the insurance recoveries, you had a similar negatives around the legal reserves and the mark to market on the hedges and you had one additional large item for the year which is the line titled Kinder Morgan Canada noncash adjustments and again that goes back to the first quarter when there was an accounting change with respect to Kinder Morgan Canada that led to these one time noncash accounting entries.

That’s really it for the income statement, the only thing I want to point out if you go back to the first financial page you will see big changes in revenues for the year, revenue is down about $4.7 billion. We’ve consistently said that we don’t consider revenues to be an overly meaningful measure, in truth if you look at the line right below that, operating expenses, you’ll see that its down $4.8 billion. And again what you have here is in Texas Intrastate business where we back to back some gas purchase and gas sales contracts.

The revenue flows through but then the operating or the cost of goods sold flows through as well and then the value of those contracts will fluctuate with the price of gas and as you have a decline in the overall price of gas from 2008 to 2009 you have a reduction in revenue and corresponding reduction in operating expenses.

The third page is the volumes pages, Richard really touched on a lot of this and I touched on it a little bit but I’ll skip over that and just go to the balance sheet, should be the last page in the press release, cash and cash equivalents is up a little bit. A large part of that is cash that’s actually held in Canada a fair amount of that was repatriated this month and so that balance has come down.

Other current assets declined by about $84 million during the year. That was largely a reduction in accounts receivable. PP&E you’ll see is up about $900 million that’s a function of CapEx and we’ll go over that in a minute but expansion CapEx was north of a billion dollars yet sustaining CapEx was $172 million and then of course acquisitions and then that’s offset by accumulated depreciation, really the entire balance is offset by accumulated depreciation. The change for the year is reduced by depreciation expense for the year.

On the investment side, up about $1.9 billion, that is contributions to our joint ventures for the most part Rockies Express and Midcontinent Express contributions and then the acquisition of 40% of the endeavor pipeline system that’s treated as an equity investment and it shows up here. Deferred charges and other assets down about $400 million, that’s really flowing through mark to market on the hedges again under hedge accounting you do still mark to market on the balance sheet as opposed to the income statement.

The total assets, $20.3 billion, up from a little less than $18 billion at the beginning of the year. Notes payable and current maturities of long-term debt that is $600 million, that is a maturity in November of this year of about $250 million and then what was outstanding on our bank facilities at the end of the year of about $300 million and then a few other smaller maturities in that mix.

Other current liabilities down about $65 million that’s largely a reduction in accounts payable offset by mark to market on the hedges which brings it back a little bit. Long-term debt I’ll talk about in a minute. The value of the interest rate swaps, again that just fluctuates with the forward interest rate curve. Other liabilities, is down almost $400 million, that’s largely the mark to market on the hedges.

Accumulated other comprehensive loss, again the balance of the mark to market of the hedges flows through here. It is offset by foreign exchange associated with the balance sheet comes in here as well and is going the other way from the hedge accounting. Other partners capital is up about $730 million. Here it goes up by net income and by equity issuances and then gets reduced by distributions and the net of those three result in that $730 million change.

Noncontrolling interest, really unchanged. Looking at the total debt $10.4 billion, that’s net of cash where we ended the quarter, that’s up about $1.95 billion from the beginning of the year. Its up a little over $200 million from the end of the third quarter, we were at about $10.2 billion. You look at our debt to EBITDA, as Richard mentioned we ended the year about 3.8. We did expect debt to EBITDA to go up this year largely as a function of completing the expansion projects primarily the major joint ventures Rockies Express and MEP and then also the Louisiana pipeline.

Recognize that what we’re looking at in terms of EBITDA here is last 12 months and so it does not reflect a full 12 months of operations of those pipelines that came in service and so that’s part of what is impacting this measure and so we expect as we go forward that that number will come down and we’ll give you a little bit more detail on that next week when we go through the budget.

It has come down from the third quarter again that 3.8 is lower than the 3.9 that we reported in the third quarter that’s consistent with our expectation. Real quick on the change in debt as I said that went up about $200 million, a little over that in the fourth quarter. It went up about $1.95 billion in 2009.

Looking at our investments we invested about $3.3 billion in 2009, that was over a billion dollars of expansion CapEx, about $1.95 billion of contributions to joint ventures and about $330 million of acquisitions. That’s for the year, for the quarter we invested about $850 million, that’s about $200 million a little bit over it of expansion CapEx, a little under $340 million contributed to joint ventures in the quarter and acquisitions of about $300 million in the quarter.

You see most of our acquisitions actually came in the fourth quarter and the biggest of course was the treating acquisition which closed right at the beginning of the fourth quarter. So that’s the investing again about $3.3 billion for the year, about $850 million for the quarter. Where did we raise the cash for that other than the change in debt, we had equity issuances in the quarter of about $340 million and for the year of about $1.16 billion, that is net of issuance costs.

We had KMR distributions which resulted in a source of cash of almost $90 million in the quarter about $340 million for the year. We had a swap unwind and a customer contract that in the first quarter resulted in a source of cash of almost $260 million. We did have some contributions from the general partner as a function of raising equity, it was about $4 million in the quarter, about $15 million for the year.

And then working capital and other items were a source of cash in the quarter of about $135 million a use of cash for the year of a little over $200 million. And then we also had some variance in our capital expenditure accounts, this constitutes both CapEx accruals which is primarily at the end of 2008 and we accrued for CapEx where the work had already been done, we owed the contractors the money and we considered it CapEx already spent but we might not have paid the contractors yet and those things happen every year, probably a little bit larger at the end of 2008 because we were in the middle of completing the Louisiana pipeline and so both those accruals and then some recoveries, we have some CapEx where we have paid it out but we expect to recover it either from contractors or from other entities.

And those things fluctuate from year to year. If you look at that that was probably a source of cash in the quarter of a little less than $70 million but a use of cash those items for the year of almost $170 million. So again that totals up to when you sum that and reduce it from the investments that we made of $850 million in the quarter and a little over $3.3 billion for the year you get to the change in debt of $200 million for the quarter and about $1.95 billion for the year.

On the working capital and other items, as I said, a source of cash of a little over $135 for the quarter that’s largely coming from current assets versus current liabilities, not AR AP but other current assets and liabilities. And then for the year a use of cash of over $200 million that is AR AP is a big use of cash for the year and then other current assets and current liabilities was also a use of cash for the year.

I talked about expansion capital being over a billion dollars for the year and then contributions to JV’s being over $1.9 billion for the year, products was about $146 million for the year. We’re adding tanks at Carson, we are adding ethanol capabilities at our South East terminals, added tanks at [Colton], our CFPL central Florida ethanol project was completed. We’re continuing work on the [Travis] Air Force Base pipeline and so it’s a whole variety of smaller projects that added up to that almost $150 million.

Natural gas for the year over $325 million, a lot of that was the Louisiana pipeline. In addition to that a number of storage expansions going on at Markham, our Dayton facility and our [Huntsman] facility and then we finished up the Hill Country pipeline expansion in 2009. C02 was similarly about $325 million for the year, largely at SACROC, a little bit at [Yates]. Terminals was about $250 million for the year, a lot of expansion going on at Vancouver, continued expansion of our facilities in the Houston channel and Pasadena and [Delana] Park. Some expansions at [Cora] and Pier 9 and a number of smaller projects.

Kinder Morgan Canada relatively small, about $15 million of expansion CapEx for the year and then again the contributions to JV’s, I mentioned this, to Rockies Express it was north of $1.2 billion for the year and then for MEP it was more than $6601 million in contribution to Midcontinent Express for the year and then again that gets to the north of $1.9 billion contributions to JV’s for the year.

In 2010 as Richard mentioned we released in December we expect to distribute $4.40. We’ll be going over that in detail next Thursday. We expect to see many of you at the investor conference and then of course if you won’t be there, it will be webcast and so you can listen in that way. And with that I’ll hand it back to Richard.

Richard Kinder

And now we’ll take any questions that you have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Noah Lerner – Hartz Capital

Noah Lerner – Unspecified Company

On the announced ethanol acquisition I was wondering if you can provide a little color around how the joint venture is supposed to work. It seems like we bought assets and then contributing those and other of our assets but in the press release it seemed like the person we acquired the assets from is going to be a partner with us, I’m not sure what they’re putting in and how the operation is going to work.

Richard Kinder

I’m sorry if the press release was confusing but the way it works is this, we paid $195 million again roughly just a little less than half of that in units and we acquired those three terminals. The joint venture that we referred to is that they have certain schedules and IT capabilities of scheduling these unit trains in and out and working with the ethanol producers and shippers that we will joint venture with them.

We actually already have our people in their IT infrastructure working with them but that’s what we meant by joint venture and also the fact that we also have a call, but they don’t have a put, that we have a call on certain future projects that they would develop elsewhere in the United States and they are looking at some other projects that we think would make sense for us.

And if they do develop those we have a call on those assets. So that’s what we meant by the joint venture. And we have spent overall something on the order of approaching $0.50 billion on ethanol and bio fuels around the country. Now a lot of that is in places like California where we of course have now invested additional money to move from the 5.7% ethanol content to 10% that became effective on January 1 of this year so I apologize for the confusion.

We did buy the terminals out right and the partnership is again on two basis, first in how the IT scheduling is handled and secondly in terms of future projects that US development may bring down the pike and we hope and think they will.

Noah Lerner – Unspecified Company

And then one second question is when I was looking at the numbers in the C02 to recovery operations in Yates and SACROC it looks like the fourth quarter volumes were below the annual average and I’m just wondering if there’s opportunities to bring those volumes back up or if we are now on the slow completion of the reservoirs.

Richard Kinder

No there were some specific instances that led to the modest decline at SACROC versus the year average. We had some shut ins and a couple of things related to power that impacted that, but actually and I hate to draw any conclusions from the first 19 days of the new year, the quarter actually for the first 19 days of the year we’re at 30,500 barrels so we’re back up well above the full year average for 2009 and certainly above the fourth quarter average.


Your next question comes from the line of Stephen Maresca - Morgan Stanley

Stephen Maresca - Morgan Stanley

On the Texas Intrastate business you talked about that its been one of the headwinds for you, I want to know if you could just expand on how that’s changed maybe over the past several months in terms of the demand outlook and also what you think in terms of basic differentials in the area and how that may or may not impact you going forward.

Steve Kean

The demand actually, demand levels have returned to kind of where they were pre recession on the end use side. I think basis started coming in in the middle of the year last year and has stayed I think pretty tight and pretty stable since then. But storage has remained pretty strong and so that’s been a bit of a bright spot.

Also I think processing margins were a good upside in 2009 at least, certainly from our budgeted levels so I think that’s kind of the big picture again, transport basis has stayed has come in and it stayed there and storage values continue to be strong.

Stephen Maresca - Morgan Stanley

And what percent of that business for you is fee.

Steve Kean

Well there’s about 75% of our business is under term contract arrangements, now a part of that is our purchase and sales business under longer term contracts and the differential, they’re both priced, they’re priced on the purchase end and on the sales end with reference to the same index so if you look at the difference between those prices, they’re effectively, that’s a locked in transport margin if you will so the 75% we referred to is really more kind of what the long-term is and in terms of it being fee based there’s transport that’s fee based, there’s storage that’s fee based and then the purchase and sales business is a species of fee based because of the way its priced with reference to an index.

Stephen Maresca - Morgan Stanley

Just another follow-up on you benefited last year certainly from you mentioned the interest rate environment being low, I was wondering if you could talk about you do have some floating exposure, what is your exposure if say rates rise this year by 50 or 100 basis points and how are you factoring that in.

Richard Kinder

First of all we’ll discuss this in detail at next week’s investor conference and I’m going to turn it to Kim in just a minute or David, but basically the first thing to remember is that in our 2010 plan we have the forward curve which obviously has a built in increase over the course of the year.

So we have accounted for what the forward curve is at the time we did the budget a few weeks ago. And Kim as far as sensitivities beyond that—

Kimberly Allen Dang

I think the easy way to calculate it is just to look at the debt on our balance sheet and add back the cash and so we have about $10.6 of total debt. Take half of that as floating and so whatever, that’s about $5.3 billion in floating rate debt and then put whatever movement in interest rates you want to put on it.

Now in the budget one of the things that we did was we did take the budget and we’ll talk about this next week, we took it to the forward curve but we let some of that benefit flow through to coverage so that we did have some cushion there and we’ll go into that next week at the investor conference.


Your next question comes from the line of Darren Horowitz - Raymond James

Darren Horowitz - Raymond James

Following on to Noah’s questions for the C02 segment you mentioned 30.5 as the current rate for SACROC and if we assume about 26.5 for Yates can you really use that as a platform here for the first quarter.

Richard Kinder

Tim Bradley who runs our C02 operation, I never want to commit to anything without him signing off on it.

Tim Bradley

Are you asking what we expect the volumes to be for the first quarter.

Darren Horowitz - Raymond James


Park Shaper

I’d say a couple of things, one we’ll get into details on the assumptions around 2010 budget next week and I don’t mind answering questions but we could be here for hours if everybody wants to dig into those details tonight.

Richard Kinder

But the 34 and 35 is nicely above what our plan is for the quarter and the quarter.

Tim Bradley

And the only thing I would add is that SACROC is a little bit ahead at the present time and Yates is a little bit behind and they tend to fluctuate depending upon weld and pattern performance. We can go into more detail next week.

Darren Horowitz - Raymond James

Bigger picture, as I’m trying to get my arms around the return on the $1.5 billion of capital that you’re going to invest this year can you give me a sense as you’re looking at it what the current cost of capital is. Obviously factoring in the cost of equity to be inflated over time and more importantly a little bit more color from a strategic standpoint on the acquisition landscape, you’re looking at these small to mid type acquisitions, geography would help, maybe any specific sub segment opportunities in terminals or otherwise.

Park Shaper

Yes absolutely, on capital and again we’ll go over this some next week, as we look at it over the long-term we think our cost of capital is somewhere around 9%. At times based upon what’s going on in the capital markets it will be higher. At times it’ll be lower and again we’ll show that like we have the last couple of years, we’ll show what it was at each analyst conference so you can see how it moves up and down a little bit but you can see that 9% is a very reasonable number for our cost of capital.

Now like we talked about in the past we typically don’t make investments that return our cost of capital. We require a nice cushion between our cost of capital and the expected return on those investments. That’s true of the $1.5 billion that we expect to invest next year. We expect we’ll earn nicely in excess of our cost of capital. And that’s key because that’s what allows us to grow the distributions.

In terms of acquisitions very interested in acquiring assets as we have been consistently throughout Kinder Morgan’s life. Sometimes smaller deals are easier to do than big deals at least in terms of getting them done. There’s no question competition for assets has increased. If you look at it over the last five to seven years. Now over the last couple of years its probably been a little bit more favorable because there have been some people who probably didn’t have the ability, couldn’t raise the capital or were too busy correcting their own operations to focus on acquisitions.

We’ll see what happens going forward. In terms of size or geography or which segment, we’re interested in all sizes and all geographies as long as its domestic US and we get the tax benefit and in any segment as long as its consistent with our [inaudible] based conservative approach in terms of the assets that we want to own.

And so I don’t mean to be flippant but there isn’t really a focus there. What we do is look at every asset that we come across and any asset that we can dig up that we might be able to acquire for a reasonable price as long as we’re comfortable with the stability of the cash flows.

Richard Kinder

I think I’d add to that the fact that as we’ve said before the breadth of our footprint across North America I think gives us a lot of opportunities to make acquisitions both large and small that connect to our pipeline and terminals networks. I think that’s a real plus we have because you do have savings in terms of scale and an ability to put new assets together with your old assets.


Your next question comes from the line of John Edwards - Morgan Keegan

John Edwards - Morgan Keegan

Just on your G&A expense what’s a reasonable run rate going forward.

Park Shaper

G&A will go up next year. it’s a function of a couple of things, one, acquisitions, as we add in USD that we just acquired as we add in treating, and have a full year of treating, that will increase G&A. additionally benefits costs continue to increase on us and so I would expect and you’ll see it in detail next week, but you’ll see a G&A number for 2010 that’s higher than it is for 2009.


Your next question is a follow-up from the line of Stephen Maresca - Morgan Stanley

Stephen Maresca - Morgan Stanley

Can you update on what is the status on that after market program that you do for KMP in terms of equity like how much is left in availability for you.

Kimberly Allen Dang

Sure we refreshed that program in October of last year. We increased it about $300 million at that time. I think we had roughly $20 left on the old program so there’s roughly $320 million available on that program. Beyond that we can’t really comment on that program.

Stephen Maresca - Morgan Stanley

Is there an expiration to the program.

Kimberly Allen Dang

There is not, it’s a shelf.


Your next question comes from the line of Ted Durbin - Goldman Sachs

Ted Durbin - Goldman Sachs

Can you give us a little bit of a sense of the timing of this outage that you had on the REX east pipeline and what it will take to get it back in service.

Richard Kinder

We had this weld failure on November 14 I believe was the date, just a couple days after we put that segment in service and what it involved was that we shut 61 miles of the pipeline at the eastern end, east of Lebanon, Ohio over to Clarington. We shut that end. The repair was fairly simple to do and we did that repair. But we then before we returned it to service we certainly wanted to be sure that there were not recurring problems of that kind, as did the regulator.

And so we went through a process of examining that whole spread and looking to make sure there were no other problems and making certain that we were doing everything we could to return to service. Part of that was that we needed to come up with what’s called a return to service plan and get that approved by the regulator.

They have now approved that plan and under that plan we would expect to return to service between now and the end of January, so the next 10 days or so.


Your next question comes from the line of [Brian Zerhan] – Barclays Capital

[Brian Zerhan] – Barclays Capital

You have exposure to many of the shale plays and you announced I guess late last year a JV with [Copanoe] and [Eagleford], can you give us a little color on that and an update on the pipeline you’re building.

Tom Martin

We’re moving forward with that joint venture with [Copanoe], we’re talking to many of the producers out on the Eagleford shale as we speak, have several proposals out in front of them and our expectation is to start bringing some of those deals to closure soon and start moving forward on laying pipe. Its about 20, 21 miles of pipe and our best expectation at this point is that we would start bringing some of that gas into our system later I guess third quarter or so 2010. Maybe one other point on that is that on that system there is some, this is a pipeline extension off of the existing system. There is some available capacity on that system as well as in [Copanoe] processing facility so there’s a good early installment and then of course opportunity to expand from there if things work out well.

[Brian Zerhan] – Barclays Capital

You certainly ramped up your activity the past few months but most of the smaller companies given the majors announced plans to sell lots of assets, how should we think about that opportunity.

Richard Kinder

Well I think you are correct that the flavor of the day now is for the majors to be selling at least some assets. We are looking at some of those assets and it would be foolhardy to predict what we will or won’t get in the process. But I think it is modestly encouraging that there are several companies that have announced they are going to be divesting themselves of the kind of assets that we like to acquire.

But again it all depends on the terms of sale and certainly most importantly on the price that they can get. But we are working and I think again our footprint will give us some advantages particularly in the terminals area and to a lesser extent the pipeline area to make some acquisitions from majors because we’re simply pretty much all over the country.

Park Shaper

The only thing I’ll add to that is and I clearly understand why this is the case, but really what you see are the deals that get done not the deals that we look at and the deals that we look at range from really small to really big and we only end up doing the deals where we can buy assets that we like at an attractive price and it doesn’t mean that we’re not looking at big deals, it doesn’t mean that we haven’t looked at big deals over the last few years, it doesn’t mean that we won’t look at big deals going forward.

Who knows what will get done. Lots of times deals don’t get done because somebody’s willing to pay a higher price than we are. Sometimes deals don’t get done period. But I think the truth is we’ll continue to look at any deals that we find attractive and hopefully we can make some of those work because once we get them we’re usually very happy with them.

[Brian Zerhan] – Barclays Capital

And finally on your crude oil hedges, is there an update since your last presentation in December on your production for 20101 and so forth.

Park Shaper

I think the easiest way is to wait until next week because we’ll have that on the slides and we’ll be able to give you the full detail of that.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Richard Kinder

We thank you very much for your time and attention and we’ll see many of you next week at our investor conference. Thank you.

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