Kinder Morgan's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Jan.18.12 | About: Kinder Morgan, (KMI)

Kinder Morgan, Inc.(NYSE:KMI)

Q4 2011 Earnings Call

January 18, 2012 04:30 pm


Rich Kinder - Chairman and CEO

Kim Dang - VP & CFO

Tim Bradley - President, CO2


Gabe Moreen - Bank of America-Merrill Lynch

Brian Zarahn - Barclays Capital

Darren Horowitz - Raymond James

Bradley Olsen - Tudor Pickering


Welcome to the quarterly earnings conference call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session during today's call. (Operator Instructions). Today's call is being recorded. If you have any objections you may disconnect at this time. I will now turn today's call over to your host Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Rich Kinder

Thank you Erin and welcome to the Kinder Morgan conference call. As usual we will be talking about Kinder Morgan Energy Partners which is one of the largest MLPs in America and about Kinder Morgan Inc., which I will refer to as KMI which is the general partner of KMP.

Also as usual we will be making statements within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934. I will give an overview of the results and accomplishments for 2011 and for the fourth quarter and an outlook for 2012 and Kim Dang, our Chief Financial Officer will give you the financial details for 2011. Then we will open it up for questions and Park Shaper, our President; Steve Kean and I will be available to answer any and all questions that you might have.

Let me just start with KMI. It’s a simple and very positive story. Back when we did the IPO, we anticipated that we would have cash available to pay dividends for the year 2011 of $820 million and that we would use that to pay $1.16 in dividends. As a point of fact on a paid basis, we had $835 million in cash available for dividends and we paid $1.18.

Now if you move to the declared basis, we are declaring for this quarter $0.31, that means that actually our declared basis for 2011 we will have paid a $1.20, net $0.31 is obviously a penny increase since last quarter and is up 7% from the dividend that we declared that we anticipated when we did the IPO back in February of 2011.

As usual the results at KMI are driven by KMP and we’ve already previously stated that for 2012 on a declared basis we expect KMI to pay dividends, to declare dividends of a $1.35 a share, that’s a 13% increase over the 2011 declared dividend of a $1.20. And note that while we previously have presented dividends on a paid basis, from now forward they are going to be on a declared basis. If you look at it on a paid basis, our anticipated dividend for 2012 would be a $1.30 which is 12% above the 2011 budgeted amount. If that doesn’t confuse you, I don’t know what will. But at any rate, a very positive story and exceeded what we promised you in the IPO about 10 months ago or 11 months ago.

So obviously let me turn now to Kinder Morgan Energy Partners, which is the driving force in the Kinder Morgan story. As you know about 98% to 99% of the cash generated at KMI comes as a result of distributions that come up from KMP. And at KMP, really the story has been, is, always will be about just two things. The first thing is the current cash that we generate which determines the current dividends and secondly it’s about the future growth of the operations which leads to increased cash flow in future years and therefore increased dividends.

So I think it’s the right way to look at 2011 is to look at it through those two perspectives and if you do that I think anyway you cut it, 2011 was a very good year. 2012 looks like it’s going to be an even better year.

Let me start from the vantage point of the current performance and Kim will give you a lot more details, but we will have distributed $4.61 for 2011 at KMP. That’s up almost 5% from the $4.40 we distributed for 2010. All five of our business segments produced earnings before DD&A in excess of what they produced in 2010 and our total segment earnings before DD&A was up 10% for the full year of 2011 when compared to full year 2010.

In terms of distributable cash flow before certain items, we were up 16% in the fourth quarter and 12% for the full year and if you look at it on per unit basis, distributable cash flow per unit which we think is the best way to judge our performance, we were at $4.68 for 2011 versus $4.43 in 2010. That’s an increase of 5.6%.

Another way of looking at it, of course markets are what they are, but we had very good returns for our unit holders and shareholders in 2011. KMP produced at an all end return of 29%, KMR 26% and KMI 11% on an annualized basis. So that’s looking at it from a current performance perspective. If you look at it from a future of growth perspective, during 2011 we put $2.6 billion into expansion, JVs and acquisitions. And this is the life blood for growing the company in the future.

I think we have tremendous opportunities for future growth in our set of businesses and that opportunity is really pretty diverse in nature. It relates to the continued emergence of natural gas shale plays, together with their associated liquids production. It relates to growth in CO2 demand in the Permian Basin. I’ll talk about that later. We’ve seen an acceleration of that demand over the last several quarters.

It relates to the increasing demand for export coal in our Terminals group. And the further mandates for the use of renewable fuels in both our Terminals and Products group. It also results from the opportunity to serve customers who want to export refined products, primarily diesel on the Gulf Coast, from US refineries on the Gulf Coast and to import gasoline into the Northeastern United States as we’ve had a closure of several refineries in that area as all of you know. In fact, I would say that this is the most diverse set of opportunities at any time in Kinder Morgan’s 15-year history.

Now let me talk about each business segment and again, looking at it through this twin perspectives of both present performance and future growth. In our Products Pipeline segment for full year 2011, we had good results on our Cochin pipeline and on Plantation and on our West Coast terminals. This was offset somewhat by lower volumes and revenues on our Pacific System and on Central Florida and our CALNEV pipelines.

To put that in perspective, for the fourth quarter, refined product volumes were down 2.5% compared to fourth quarter of 2010. For the full year 2011, the volumes were relatively flat for 2010. We always like to compare that with the EIA numbers on a national basis and those EIA members showed a decline of 1.6% in the fourth quarter and 1.3% for the full year. So getting to the point, our pipelines were a little worse than the EIA average in the fourth quarter, a little bit better for the full year.

If you look at the full year on our pipelines and break it out by commodity, diesel was actually up 0.4%. Jet fuel was up 4.1%, a pretty positive year and gasoline was off 1.4%. Now still in the Product segment, if you look ahead through the perspective of future growth, we have got a number of important projects in this segment.

One of the most important is our new Eagle Ford crude condensate line which will connect the Eagle Ford shale play with the Houston Ship Channel, that’s about a $220 million project. We are under construction. We expect to be in service by July of this year. Connected to that project, we have now announced a $130 million project to build a condensate processing facility or a splitter at our Galena Park facility on the Eastern Ship channel which will be connected to this new Eagle Ford Condensate line.

We already have 25,000 barrels per day of capacity being supported by contract with a major oil customer. The operation is expandable to a 100,000 barrels. We are actually now filing for the environmental permits at the 50,000 barrel level which we think is very doable from a demand standpoint and that would turn this $130 million project into roughly a $160 million project and ultimately as I said, the whole thing is expandable to a 100,000 barrels per day. We respect this project to be in service around June of 2014.

We also have a new pipeline also costing about $220 million and that's the Parkway pipeline. This is a 136 miles of 16 inch pipe and it will run from Norco, Louisiana up to Collins, Mississippi to connect to a storage drum on our plantation system. We do own 50% of that; Bolero owns the other 50%. The initial capacity is 110,000 barrels per day and again it’s also expandable. In this case up to 200,000 barrels per day and we expect to be in service in mid 2013.

Another project that hasn't received a lot of attention but which is imminent is our Cochin EP project. We are spending about $30 million to upgrade existing pipelines in order to facilitate the transportation of EP mix from Conway Sarnia, Ontario and this is providing service to our customer Nova. We expect to be in service on April 1 of this year.

And then we have two projects on the West Coast that are fairly significant. One is our Carson-7 project. That's a $77 million project building seven new tanks at our Carson, California terminal. That’s on schedule and budget. We brought the first two tanks online, the remaining five tanks will come online late in 2012 and early 2013.

And then our final project is our private Air Force Base storage and pipeline projects, a little short of $50 million in terms of CapEx and we expect to finish that project this quarter, the first quarter of 2012. So that's it on our products’ pipeline segment.

In our Natural Gas Pipelines segment of course 2011 was a good year for us; our transportation volumes were up 13%. That’s largely result of our pay will Fayetteville Express project coming online and strong volumes from the Eagle Ford on our Texas Intrastate. Our sales volumes were up 1% for the year. We had strong performance as a result of the KinderHawk and EagleHawk acquisitions and as a result of FEP and Eagle together and the processing spreads on our Casper-Douglas facility in Wyoming and we also had increased volumes on Red Cedar. Those positive results were offset in part by weaker performance on our Kinder Morgan Intrastate Gas Transmission and Trailblazers systems.

Now when you look at the future of natural gas and let me just say that all the projects I am talking about today and all the numbers we’re talking about today do not account for any impact from the El Paso acquisition at all. And obviously that’s very relevant for the natural gas segment because when we complete the El Paso acquisition that segment will increase dramatically in size. But without any impact of El Paso and looking at the future at our natural gas facilities we have a number of important projects.

First of all our Eagle Ford gathering joint venture with Copano continues to perform very well, we’re starting new contracts. We are increasing deliveries as Eagle Ford for production ramps up. Including our 50% equity interest in this Eagle Ford gathering joint venture and our 25% interest in EagleHawk Field services but excluding the crude and condensate line I referred to earlier, this segment, our natural gas segment has committed approximately $400 million to expansion projects in the Eagle Ford alone.

In the Haynesville, on our gathering system mirror, we have signed a new third party contract and we have added new interconnects and trading services, we ended the year averaging about a Bcf a day as we anticipated we would for 2011.

The third important project during the quarter in the year we closed one acquisition SouthTex Treaters for $155 million on November 30. SouthTex designs and manufactures natural gas treating plants. They have removed both CO2 and H2S from the gas system. That’s now part of our Kinder Morgan treating operations and that would allow us to offer our customers the option of owning or leasing this equipment. We think that broadens our earnings capability and broadens a service we can provide to our customers.

Turning to our CO2 operations for 2011, we had a record year. We were right on plan for earnings before DD&A and slightly above plan, if you look at it on the DCF basis. Now we benefited from higher oil and NGL prices. They ran about $6.00 higher than we had in our plan. And we also benefited from growing production at the Katz field and from some pretty successful effort to manage and reduce our cost across all of our operations. That management effort, they reduced cost more than offset an overall decline in SACROC and Yates production.

We also set annual production record just barely in our CO2 source fields in south west Colorado. The major disappointment was that Katz volumes did not live up to what we predicted. That’s our new field which we began flooding at early 2011.

To put that in perspective for you, for the full-year 2011, we averaged about 500 barrels a day. For the fourth quarter, we averaged about 1000 barrels a day and so far this quarter we are running at about 1,300 barrels per day. So what we believe is that our response was delayed by about 8 to 12 months beyond what we thought we would get when we originally projected our 2011 budget. But it is now behaving on a ramped up basis as we thought. It’s just coming on later. And when you come to our investor conference later this month, you will see that we’re projecting around 2,300 barrels to little over 2,300 barrels of production on average per day for 2012.

So we intend to see or expect to see a nice ramp up during 2012. The big opportunity though in CO2 for the future is satisfying. What’s really turning out to be a very strong demand from our customers in the Permian Basin for more CO2? Now, on previous calls I’ve talked about an opportunity size that would involve adding 200 to 300 million cubic feet a day of production from the source fields that would involve investing, I had said, $1 billion to $1.3 billion of additional capital at good returns.

We now think the opportunity is probably a little bigger than that and maybe as much as 400 to 600 million cubic feet a day of additional need for CO2 in the Permian Basin. That would translate an opportunity into opportunities to spend anywhere from $1 billion on the low side of this to $2 billion on the upside in accessing more production from our source fields and in moving that to market in the Permian Basin.

Now as we always say at Kinder Morgan, we are only going to do this if we are backed, if that demand is backed by solid contracts from creditworthy companies over extended periods of time and right now that’s looking very good. Tim Bradley will have more to say about that at our investor conference next week but today our board did approve in part an important first step in generating this additional CO2. We approved $255 million project in our Doe Canyon field in Southwest Colorado, which will take production there up from a 105 million cubic feet a day today to a 170 million cubic feet a day.

That $255 million will be spent over the next several years and will involve both in pricing and additional wealth. So a lot of opportunity here for real growth at very attractive returns backed by long-term contracts.

Turning to our terminal operation, in 2011 we continued to generate strong earnings before DD&A and DCF. I think it is important to note about 70% of that growth or about $40 million was attributable to organic sources as supposed to acquisitions and I know when we talk about that, we think 2% may be a little better in growth from organic sources in Kinder Morgan. People wonder well, where does that come from; 2% of the 2011 numbers would be 60 to 70 million and here we had $40 million of growth in the terminals group alone, from organic sources.

Now, where did that growth come from? We had strong growth in coal volume channels. We have been talking about that export coal story now for several quarter, we were up 33% in terms of coal volumes handled in the fourth quarter. More importantly for the full year we were up 20% versus 2010. And our Pier IX facility in Newport News, Virginia set a record; in that one terminal we handled almost 13 million tons of coal.

Our steel volumes were also positive for the year, up 18% in the fourth quarter, up 10% for the year. On the liquids terminal side, we had good performance at both our enormous Pasadena terminal here on the Houston Ship Channel and in our Carteret facility in New York Harbor.

We also handled 16 million barrels of ethanol in the fourth quarter. That was up 17% from the fourth quarter of 2010. For the full year, our ethanol volumes were up 5%. If you look at Kinder Morgan including the products segment, we still are handling about 30% of all the ethanol used in the United States.

Now in our Terminals Group, we had an unusually large number of new commercial contracts signed which will lead over the next few years to some pretty important new projects. Our capital budget there for expansion CapEx is over $400 million for 2012 and in fact we have, based on commercial contracts signed specifically in 2011, we now have budgeted over $850 million in CapEx in the terminals projects over the next couple of years ’12 and ’13 and the first quarter of ’14 to be specific on projects that were locked in for certain contracts that we’re done during 2011.

So coming back to this perspective of looking at what did we accomplished from a future growth standpoint? The terminals had a tremendous year in 2011. First of all, the BOSTCO project, which probably the largest single project that we entered into. In December, we purchased TransMontaigne’s 50% interest, so we now own 98% of this $430 million project on the Houston Ship Channel.

And now let me remind you that as we previously said, and TransMontaigne has previously said, we have made that purchase; they do have certain rights to repurchase for a one year period; so between now and January of next year. But right now, we own 98% of the project. This first phase of that project will involve 52 storage tanks with the capacity of 6.6 million barrels; we’re handling residual fuel, distillates and other black oils. We have terminal service contracts or LOIs for all of that capacity.

Eventually, we see this terminal because of its location and the draft adjacent to this terminal. We see this as an important cog in the ability of Houston Ship Channel refiners to export refined products given the advantageous location and depth of water. The construction on this project started in December of 2011.

Another major project that we announced during 2011 was the Edmonton South Terminal. This is roughly a $210 million project at Edmonton Alberta. It involves building 2.4 million barrels of capacity for storage of crude oil and condensate. And our Trans Mountain Terminal has access right into our Trans Mountain Pipeline that runs across the Rockies and down into Vancouver and Washington State.

We’ll start construction on this in early this year and we expect to have it in service late in 2013. Now this is another project that anticipate will be scaled up over the next few years. We will eventually on that site build up to 6 million barrels in two additional phases. What this does for our customers, who are primarily oil sands producers and marketers, is it gives them additional optionality to use the oil sands production as that production expands and as crude oil pricing and differentials continue to remain extremely volatile as they have over the past several months.

We also will continue to expand our capacity for export coal at both IMT on Mississippi River, in Houston and eventually on some of our terminals on the East Coast; so a lot of opportunities for upside in our Terminals Group over the next few years.

In Kinder Morgan Canada, we had a good year in 2011 as refiners in Washington State wanted access to cheap oil sands production and the oil sands producers wanted to move more barrels over our dock in Vancouver, British Columbia. We expect that demand growth to continue; for that reason we are in the midst of an open season on an expansion to Trans Mountain. At the customer’s request, we extended that open season until mid-February and again we will proceed only if we have adequate binding commitments from customers to go forward. But we do see this as a tremendous opportunity in the future.

So all-in-all, we think we had a very good 2011 and we’ve build tremendous opportunities for 2012 and beyond. We expect to declare $4.98 in distribution for 2012 and to have excess coverage on top of that of about $70 million.

In addition, I’ll remind you that we said before the El Paso merger was announced, that we thought for the next several years, we could grow KMP at 5% which would lead to 10% growth at KMI. Post El Paso, we believe that we can grow at 7% at KMP and about 12% at KMI. But it’s important to note that all the numbers I’ve given to you again are pre-El Paso and we’ve well exceeded the 5% and 10% growth numbers that we talked about previously for growth at KMP and KMI respectively.

So we have good strong cash flow, very good growth opportunities for the future. And with that, I’ll turn it over to Kim.

Kim Dang

Okay. If you turn to the first page, its numbers entitles the consolidated statement of income. I am not going to spend much time on this page, but just looking down, about 80% down the page, there is declared distribution per unit. We are declaring a distribution today at KMP of $1.16 per unit. That compares to a $1.13 last year and that’s up $0.03 quarter-to-quarter or about 3% growth. For the year, we have declared $4.61. That compares to 2010 of $4.40. That’s $0.21 per unit increase or almost a 5% increase. The $4.61 is also a $0.01 above our 2011 budget.

With that, I’ll turn to the second page of numbers called the contribution by business segments. Looking four lines from the bottom, the DCF before certain items for the fourth quarter in 2011 $425 million of DCF before certain items that compares to 2010 of $366 million, $59 million increase or about 16%. For the year, 1.5 billion to 5 billion; that compares to 1.36 billion in 2010; that’s a $165 million increase or about 12% versus our budget, the 1.5 billion to 5 billion. We are up about $11 million versus our budget.

If you look at what that translates into in terms of DCF per unit, that’s a $1.27 per unit which is about 8.5% growth versus last year for the quarter and for the year $4.68 per unit which is growth of almost 6%.

Our coverage, that was in excess coverage for the quarter of about $37 million. For the year, about $21 million and versus our budget we’re about $70 million below our budget with respect to coverage. But let me just give you an overall view versus our budget.

The segments ended up largely inline with their budget; interest was favorable about a little over $25 million; sustaining CapEx was positive versus our budget about $13 million. The total DCF available for distribution to our Limited Partners and our General Partners were up about $38 million versus our budget.

Our GP; we paid our GP about $27 million more than we budgeted. That was a function of incremental units that we issued during the year; about $5 million primarily associated with KinderHawk and the $0.01 that we increased the distribution.

So that leaves us with LC DCF versus our budget, about $11 million above our budget; then we also paid our Limited Partners about $26 million more, again because we increased the distribution above our budget and also because we had incremental units outstanding. And so that leaves us at about $16 million of lower coverage than what we budgeted.

Now if you adjust for Canadian tax refund that we expected to receive in 2011 that we did not receive in 2011, but we received notification that we will receive in 2012 and it is not included in our 2012 budget that we will go through next week. You add back that $6 million and you adjust for the incremental penny that was not in our budget, that's another roughly $6 million and you are within a few million dollars of our budget on coverage.

With that looking back up at the lines above the DCF before certain items, you look at book cash taxes, net $7.9 million in the quarter, $5 million last year, up $2.9 million. For the year $27 million versus $26 million last year, so up about a $1 million. For the year versus our budget, down about $10.9 million, but I think the key here is and what's important is really the cash taxes because all we are doing is adding back the book taxes. So the book taxes have no impact and then subtracting out the cash taxes. Absent the Canadian tax refunds, the cash taxes were on budget for the year.

Express, Endeavor and Eagle Ford contributions, these are adjustments that we make for investments that we have where the cash that we received doesn't track net income plus JV DD&A less our share sustaining CapEx, $7 million in the quarter, $2 million last year up $5 million, for the 12 months $15 million versus $5 million last year. So up $10 million and up about $8 million over our budget. We received incremental distributions from all three of these investments versus our budget.

Looking at sustaining CapEx, $72 million for the quarter, $58 million in the fourth quarter of last year, that's about $14 million increase in sustaining CapEx, $212 million for the year, that compares to $179 million last year, so up about $33 million versus last year, but actually about $13 million positive versus our budget. The $13 million versus our budget really breaks down into two pieces. Five is really lower capitalized overheads, basically our capitalized overhead rate is based on our total spending, our total expansion and sustaining capital. Our expansion capital increased significantly, so that rate came down but our sustaining capital was flat. So a lot of it is a function of capitalized overhead versus any changes in the segment spending.

$8 million is associated with the segment spending and that’s really at CO2, about half of that we didn’t have to do a power plant, overhaul the turbine for the flat power plant in CO2. And the other half is some non-safety, non-integrity deferrals. Now looking up at the segments and seeing what drove the growth, products pipeline, a $161 million in the quarter versus a $171 million last year or about $10 million down this year.

That compares to $694 million for the full year versus $688 million last year, that’s up about $7 million. Products came in about $36 million lower than its budget or about 5% and if you cut through it all, it is primarily SFPP. We had some ups and down on you know the different assets within the segment. And SFPP was largely associated with three things. With deferred rate case, rate cases and the lower rates that we implemented there with an adverse decision with respect to [UPR] right away cost, so increased right away cost and then lower volumes than what we budgeted.

Natural gas, in the fourth quarter $290 million versus $243 million a year ago, that’s up $47 million or 19%. For the 12 months, $951 million versus $836 million a year ago, up a $115 million or 14%. Natural gas was about 5% above this budget and that is largely a function of the KinderHawk acquisition, actually the KinderHawk acquisition contributes more than what they were above their budget and then we have some offsets primarily with some higher integrity spending on the Texas intrastate and lower fuel charges or collections on KMI and Trailblazer. Upstream was also up nicely for the year from higher processing margins and higher gathering volumes.

CO2 in the quarter, $281 million versus $242 million a year ago, up $39 million or 16% for the year, $1.093 billion, that compares to $960 million a year ago or up $133 million or 14%. CO2 was really on its budget. In reality it was slightly below its budget on earnings before DD&A and slightly above its budget on a DCF basis. That primarily was driven by, SACROC was above its budget as a result of higher price and lower OpEx and that was offset somewhat by lower volumes than what we budgeted. And then Katz and Eastern Shelf had lower volumes than what we budgeted. Yates & S&T were on their budget.

Terminal Segment, a $184 million in the third quarter, on the fourth quarter, a $173 million a year ago, up $12 million or 7%. For the year, $701 million versus $647 million a year ago, up $55 million or 8%. Terminal was about 2% below its budget. That was a function of higher fuel costs, timing on acquisitions versus our budget. Some of the acquisitions that we did happened later in the year than what we had originally thought. It is lower transload volumes, primarily ethanol in our material handling business, primarily as it lost some market share to unit trains. And then we had a steel mill that we served that was down for an extended period of time.

Kinder Morgan Canada for the quarter, $51 million versus $49 million a year ago, up $2 million or 4%. For the year, a $199 million versus a $182 million a year-ago, up 17% or 9%. For the year, Kinder Morgan Canada was about 3% above its budget and that was a function of FX, the implementation of a neutral settlement and then higher domestic volumes on our Express Platte pipelines.

Dropping down, about half way down the page to the G&A which you will see below the segment earnings contribution. G&A for the quarter, $86 million versus $87 million a year ago, still about a $1 million decrease. For the year, $388 million versus $375 million a year ago, still up about $13 million versus a year ago. The full-year number is up versus last year primarily due to a higher benefit. But it is right on top of our budget.

Interest expense which is the next line, a $137 million in the quarter, a $132 million a year ago, that is increased expense of about $5 million year-to-year or quarter-to-quarter. For the year, it is up about $25 million and versus our budget as I mentioned earlier, it is about $28 million above our budget.

Now dropping down to the certain items, there are a couple that I will mention to you, most of them are relatively small this quarter, total certain items in the quarter, about $12.5 million, $3.8 million is associated with some higher environmental reserves that we took during the quarter. $5.2 million is associated with market-to-market on our CO2 hedges and then you can see in the footnotes down there, we continue to recognize those in the quarter as we settle those hedges and don’t mark them to market prior to that time up in the segment.

Insurance deductible casualty losses and reimbursement, that’s associated with a small fire that we had on our Total petcoke facility. For the year, certain items $491 million, the largest certain items, $82 million associated with allocated non-cash compensation. This is a $100 million pool that was paid by our shareholders, but GAAP requires us to allocate these cost to KMP. We have talked about this in our prior quarter.

KMP has not and will not pay anything associated with this (inaudible) program. Rate case reserves $235 million and we’ve discussed those in prior quarters and the KinderHawk asset write-off of a $167 million, that we have also discussed in prior quarters. So with that I will move to the balance sheet. Just two items to note on the balance sheet. You can see on cash and cash equivalent, we are up about $280 million from year end 2010 to year end 2011. A reasonable portion of that is associated with Dock premiums that we receive on our Canadian Westridge Dock and this is shipped on our Trans Mountain pipeline to pay a premium in order to get access to that Dock and then we actually refund those amounts over a three to five year timeframe.

The other thing I’d point out is on notes payable and current maturities of long-term debt. The $2.138 billion at 12/31/11 includes $500 million of 9% put bond. The timeframe with respect to the bondholder’s right to put those to us has expired and so only $50,000 worth of these bonds were put in our K. We will move the balance of that to long-term.

Looking down at the debt balance $12.4 billion at the end of the year that compares to about $11.4 billion at the end of last year, a $979 million increase for the year and about a $153 million increase in the quarter. For the quarter we had uses of a little over $600 million. That was about $290 million in CapEx, about $250 million in acquisitions. The largest acquisitions were SouthTex for $155 million, Watco for $50 million and then our purchase of Trans Mountain interest in the Bosco terminal for $30 million.

Contributions to equity investments was about $75 million, primarily associated with our joint venture in the Eagle Ford with Copano and with our 25% interest in the Eagle Ford with BHP. Equity issuance for the quarter was over $250 million and that was about 145 million through our KMP at-the-market program and than 109 on our KMR dividend.

Working capital was a little bit over 200 million during the quarter. The largest piece of it during the quarter is really accrued interest. We typically paid most of our interest payment comp in the first and the third quarter. The Dock premiums as I mentioned we’ve receive a fair amount of Dock premiums during the fourth quarter. AP and AR was a source of cash of $30 million. We also had excess coverage as I mentioned earlier of 37 million and uses offsetting that, was gas and storage and [cash flows over draft].

For the year the change in debt $979 million. The uses were just about 2.76 billion, was about 987 million in CapEx a billion to 1.24 billion and acquisitions. In addition to the one time mentioned in the quarter for the year. We also have the KinderHawk acquisition for 912 million, 371 million in contributions equity investment, the largest one was the contribution to FEP. Then we also paid off some $77 million of incremental debt when we brought KinderHawk on to our balance sheet. We paid $81 million in CPC and perk settlement. We issued about $1.42 billion in equity between KMP and KMR and then we settled an interest rate swap, which were a source of cash at $73 million.

We sold a small terminal on the Netherlands, which is a source of $16 million and the working capital and other items were a source of cash of $271 million. For the year the sources of working capital, primarily the Dock premiums, coverage. We also had distributions from equity investments in excess of what we reflect in our DCF and then we had a loan to plantation which they repaid.

That results in a DEBT to EBITDA for the end of the year up 3.6 times. On the third quarter call I had said that we would end the year at about 3.7 times. We did a little bit better than that given the incremental equity that we issued in November and December that we hadn’t contemplated at the end of the third quarter and then also some of the cash that we received associated with the dock premiums.

So, that’s KMP looking at KMI, but the first case of numbers in your package you’ll see excluding the interim capital transaction and that relates to a one-time item that we had in 2010. And so we provide this because this is what is going to appear in the 10-K. But we don’t think this is a real way to look at our business and we would be happy to if it shows 28% growth for the year but we think the more appropriate way to look at our business is to adjust for that one-time item in 2010. And so looking at the second page which excludes the ITT, this is what we are going to focus on.

Now with respect to the numbers presented on this page. This is represented on the page. And so what we are looking at for the fourth quarter is what KMI received from KMP in the fourth quarter, based on the dividend that KMP declared for the third quarter of last year. So, we’re looking at, that’s the cash generated and then we are comparing that to the dividend that KMI paid during the fourth quarter, which would be $0.30 and that is in contrast to the dividend that we’re declaring today of $0.31.

Going forward, we will switch to a declared basis in order to be consistent with KMP. But looking at cash available to pay dividends, $243 million in the quarter versus $233 million a year ago, up 20 million or 9%. For the year, 835 million versus 763 million a year ago or up $72 million or 9%.

The 835 million was the cash available. We also paid out 835 million, which is a $1.18 that was already paid. $1.18 as Rich mentioned earlier, compares to our budget of $1.16 and so we exceeded our budget by $0.02.

Today what we are declaring is $0.31 a share. So, another reason that we’re making the switch from paid basis to declared basis is so that people can see, so that we can present for people, the numbers that we are basing the dividend that we’re declaring on.

And so, just to switch 2011 to a declared basis, cash available to pay dividend, if you presented it on a declared basis, would be $866 million. Dividends paid and that includes obviously the $0.31 or dividends declared using the 31 [Technical Difficulty] of excess coverage for the year looking at 2011 on a declared basis and given the $0.31 that we are declaring today.

Now looking at what drove the growth in the year, if you look up about four lines from the top of the page, total KMP distribution were up $361 million in the quarter versus $315 million last year, $36 million increase or 11%. For the year $1.349 billion versus $1.202 billion a year ago, a $148 million increase or a 12% increase. That’s the $1.349 billion is about $19 million over our budget, primarily driven by the incremental amount that we received on the GP interest as a function of more units outstanding versus our budgets and the penny increase in the distribution.

NGPL, the next line item, NGPL cash available for distribution to us. You will see that we switched that from the prior quarter when we previously showed dividends paid to us given that we owed only 20% of this investment, we cannot control what they declare or what dividend out. But the cash is there. So what we are presenting is net income, actually pretax income plus DD&A, less cash taxes less sustaining cash balance. So we are presenting the cash that is actually generated by this entity given that we can’t control the difference, $7.6 million in the quarter versus zero last year up $10.6 million for the year, $30.3 million versus $34.7 million a year ago, down $4.4 million and down about $3 million versus our budget and that's just a function of lower transport margin and LPS on GPL.

G&A expense, basically up $3.5 million versus the fourth quarter last year, up $12.8 million versus for a year ago, versus a year ago and within about $2 million of our budget. Interest expense, $5.6 million in the quarter versus $5 million a year ago, basically flat, up slightly which has to do with slightly higher balance and for the year up $8.3 million and slightly positive versus our budget.

Cash taxes, $22.7 million, higher in the quarter versus a year ago and $49.7 million higher for the year right on top of our budget. They are higher versus a year ago due to the higher income.

So with that for KMI, I will turn to the balance sheet. Looking at KMI’s debt on the balance sheet, $3.236 billion as of 12/31 of ’11 versus $3.195 billion versus at 12/31 of ’10, so up about $41 million for the year, up $44 million for the quarter and let me just go through a quick reconciliation on that.

For the quarter, we had $243 million available to pay dividends. We paid dividends of $212 million. We also had a use of cash to pay El Paso financing fees of $56 million and then we had some items associated within GPL that were about $18 million. The metrics that we show versus the distributions that we actually received were about $9 million lower. And then NGPL actually reimbursed that from G&A in early January versus by the end of the year.

For the year, $41 million increase in debt; $835 million in cash available to pay dividends. $771 million in dividends paid. $64 million went out on a $100 million pool, when you add the $771 million of the dividends and the $64 million, that’s $835 million so that’s the $835 million that we referred to as paying in dividends, because our shareholders actually paid for the $100 million bonus pool.

The MBO settlement was a positive $29 million after-tax. KMR which we elected not to sell at the end of the year, you need to subtract $46 million, because we include that benefit in our metric; $56 million went out on the El Paso financing fees. We got about $69 million in tax refunds that were associated with one-time items and then $18 million that I mentioned on NGPL were the same for the year as they were in the quarter. That leaves us at 2.4 times on debt to distribution proceed; so a very strong balance sheet.

Rich Kinder

Alright. Okay, Kim thank you and Erin we’ll take any questions that our guests may have.

Question-and-Answer Session


(Operator Instructions) The first question comes from Gabe Moreen with Bank of America-Merrill Lynch.

Gabe Moreen - Bank of America-Merrill Lynch

Good. I look forward to seeing everyone next week so we can ask more questions there but two questions if I could. One, I don’t know if Kim touched on it, but just the REX tax settlement; I was wondering if that was material for the quarter if that’s more of just an ongoing thing?

Kim Dang

It’s about $8 million in the quarter and yes it will have a favorable impact on our 2012 budget as well.

Gabe Moreen - Bank of America-Merrill Lynch

And then not to purse first earnings press release is too much, but just in terms of volumes at KinderHawk and what they are doing sequentially. I guess maybe if you can talk a little bit about your outlook for volumes there; what they have been doing lately, maybe also where they stand relative to them, contractual minimum commitments and then just may be also how material that third-party commit to you got in KinderHawk to prove to?

Rich Kinder

Well, the third party commitment is important in the terms of third party volumes, obviously still the great bulk of volumes are coming from now BHP. We averaged around a Bcf a day for the year 2011 in our budget and we’ll discuss more of this next week in our budget for this coming year in 2012, Tom we expect about, average about 1.2. And that’s based on the latest intelligence we have from both our third party customers and BHP. So that kind of gives you an idea of what we did in 2011 and what we expect to do in 2012.


Next we have Brian Zarahn with Barclays Capital.

Brian Zarahn - Barclays Capital

A little bit on BOSTCO, can you talk a little about the potential scale of that terminal and also the competitive dynamics in the region?

Rich Kinder

Well, first of all, the way with the ship channel of course, this is absolutely prime location in terms of how far down the channel it is and the draft there. So we think it has inherent compelling advantages and I think that the real proof of that is that we’ve signed either terminal service agreements or we have LOIs for actually all of that capacity and a little more. And we think eventually, we will be available to expand that with a second dock and with additional tank and again eventually we think that would connect back to our Galena Park and Pasadena terminals and we will actually be able to move a variety of products down there.

Again, I think I’ve said this before, but I know I’ve said it earlier today that we believe that in the Gulf Coast, you have significant additional U.S. refining capacity being built. There will not be a demand for all of that production and we think that a good bit of it, particularly diesel will actually get exported particularly to South America, and if you believe that, Houston and Port Arthur and Beaumont are ideal areas to structure some facility to handle export volumes and that’s essentially what we’re doing.

On the other hand, we’ve got some major expansions on our Carteret facility, all subject to long-term contracts in New York Harbor. While that capacity is being utilized by our customers who are actually importing primarily gasoline into the U.S. Northeast to replace volumes that are no longer there because refineries in the Northeast were closed. So long-term, we think BOSTCO could become a much larger facility, I don’t think Jeff is in the room, but we have a lot of excess acreage here that allows us to build out significant additional storage beyond the 6.6 million barrels.

Brian Zarahn - Barclays Capital

In terms of the average contract life you talked a little bit about that what you expect of BOSTCO will be inline with your other liquids terminals?

Rich Kinder

Yeah I think so may be even just have along, inline with our other liquids terminals.

Brian Zarahn - Barclays Capital

And a final question from me, can you talk a little bit more about the rail opportunities you see in 2012?

Rich Kinder

I am sorry, the rail opportunities?

Brian Zarahn - Barclays Capital

Yes, Watco and other….

Rich Kinder

Yeah, we made another preferred investment with Watco which is part of our original arrangement with them and we think there are going to be additional opportunities. Now clearly the fact that pipeline capacity is being built out of Cushing down to the Gulf Coast I think makes rail opportunities out of Cushing more difficult to put together on any kind of termed up basis then was the case before that reversal was announced. But we continue to look at opportunities and again and directly through our preferred investment in this short line rail road Watco, we’re getting some of that exposure; but we don’t have anything further to say about new opportunities right now.


Next we have Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James

A couple of quick questions for you and on the CO2 side of business I realize Tim’s going to go through this next week, but just from a big picture perspective, aside from the CapEx that you outlined regarding the transport portion of CO2, from a production standpoint, how are guys thinking about the balance of maintenance versus growth CapEx for 2012? And what I am really trying to get a rough idea of is your returns on each incremental dollar that’s invested to grow 2012 production minus what you can do on the cost cutting line?

Rich Kinder

Tim, you want to answer that?

Tim Bradley

If I understand the question right, what’s the trade off between growing our distributable cash flow through investments versus cost cutting; and I think the profound leverage is on the investment side. With that investment, our production will ultimately decline and growing that production or at least stabilizing that production is a much bigger impact on what we can save by cutting costs. Is that what you are aiming at?

Darren Horowitz - Raymond James

Yeah, that’s exactly. Tim is it possible at this point to just put some rough numbers around it?

Tim Bradley

We are going to go over some details next week at the conference. I guess I can cover the cost cutting as well as the investment program at that point in time and probably answer more detailed questions there.

Darren Horowitz - Raymond James

Last question from me Rich, just kind of again a big picture question. As it relates to the Bakken, within product pipes how do you guys think about moving Bakken barrels either on Cochin or of course within KM Canada possibly converting a portion of Platte and accessing that point at Guernsey to take barrels down to Wood River?

Rich Kinder

Well, we continue to look at both those options. There is clearly a need for more transportation at the Bakken and of course our missing volumes on Platte are consistently running full. So we’re looking at a couple of different things and as you know we’ve talked about converting a part of KMI what we call the Pony Line to back to oil. We’ve had some good interest in that, not prepared yet to sale; that’s ease across nice and dotted and so there is a lot of different opportunities on Cochin or doing something by converting Pony I think would be the two most likely ways we would take advantage of it. But clearly, the demand there is a question of what’s the best way to solve it and that’s where we’re looking at right now.


And next we have Bradley Olsen with Tudor Pickering.

Bradley Olsen - Tudor Pickering

A couple of questions on the product pipeline side of things. The condensate processing project that you guys have announced; just trying to understand may be potential for growth in that project; is the market opportunity there really to basically find the best end use for condensate coming out of the Eagle Ford given that high complexity refineries on the Golf Coast may be can’t effectively use all that Eagle Ford crude?

Rich Kinder

Yeah, I think that’s a good summation and of course that’s why the nature of the commitment and in this case we already have 25,000 barrels a day committed is very important because that commitment will basically determine how we run it in terms of what products we produce.

As we’ve said further, just all kinds of opportunities there you know one that several people have talked about which is a possibilities sounds sort of strange from a geographic location standpoint, but the possibility that some of this could be converted of doing with and given the back that there is a not as much demand on some of this pipelines going from North to South to move it up, for example explore we can move it into Cochin or Southern lines or some place else and get it all the way back to Canada.

And there are actually now Canadian producers down here looking at that kind of opportunity and a lot of other opportunities. But you’re right; I mean the idea will be to maximize the diversity of the utilization of that condensate coming in from the Eagle Ford. So we think it’s and I think the time has come and again, we are actually applying this month for our environmental permits and we are doing at 50,000 barrels per day because we think that’s probably where we will end up and then we will have the expandability up to a 100,000 barrels a day. I think it’s kind of unlikely we will be at there, be at that point the startup that we will have, fairly cheap or fairly reasonable expandability up to 100,000 barrels a day.

Darren Horowitz - Raymond James

Okay, great. And when you, when that processing facility converts Eagle Ford crude into those very light end products, do those products that the processing facility will be creating, are those products subject to any kind of export restrictions the way that crude oil is off the Gulf Coast?

Tim Bradley

And you know it is condensate that we are sliding and not crude and my understanding is for the most part, no.

Darren Horowitz - Raymond James

Okay, great. And another question on the product pipeline side of things, the Cochin project to deliver ethane-propane mix to Sarnia. Any comments just on what the type of volumes that Sarnia can take down of that EP mix and I guess, kind of looking forward is there opportunities for growth as may be some heavy oil crackers in Sarnia convert to an EP feedstock.

Rich Kinder

Yeah, it’s a little beyond my knowledge base. We have a count as we like to do, we left somebody else to take those important issues. But we have a contract with Nova, it’s a three year contract for certain amount of volumes and that’s up to them and clearly as everybody knows some of that demand at Sarnia, a large portion of those is eventually going to be serviced from the Marcellus. But for the next three years anyway, Nova is interested in moving volumes up there and so, we will just see what happens after that.

Darren Horowitz - Raymond James

And those are going to be Marcellus sourced EP volumes?

Rich Kinder

No, they are going to use a Conway sourced volumes.

Darren Horowitz - Raymond James

Okay, Conway and just one final question. You mentioned turning the Pony line on KMI to potentially to oil service. And I guess, as you think towards the future and think towards the KMI pro forma for the El Paso acquisition. Is there any potential to move hypothetically of a pipeline were to be, I guess, if you were to be asked by the regulatory agencies to divest of a pipeline. Do you think it would be something that could be a possibility just to convert a gas pipeline to a crude oil or some other kind of hydrocarbon service in order to avoid anti-trust issues?

Rich Kinder

That just is a pure speculation. At this point we’re just engaged and the FDC now looking at alternatives. So, that’d be pretty mature to answer that.


There are no further questions in queue.

Rich Kinder

Okay, thank you very much Erin and thanks all of you for calling in and we’ll see most of you next week.


Thank you for your participation on today’s call. You may disconnect at this time.

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