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

| About: Kinder Morgan (KMP)
This article is now exclusive for PRO subscribers.

Kinder Morgan Energy Partners LP (NYSE:KMP) Q4 2011 Earnings Call January 18, 2012 4:30 PM ET


Kimberly A. Dang - Chief Financial Officer of Kinder Morgan G P Inc, Principal Accounting Officer of Kinder Morgan G P Inc and Vice President of Kinder Morgan G P Inc

Richard D. Kinder - Chairman of Kinder Morgan G P Inc and Chief Executive Officer of Kinder Morgan G P Inc

Richard Tim Bradley - President of CO2 Pipelines for Kinder Morgan G P Inc and Vice President of Kinder Morgan G P Inc

Thomas A. Martin - President of Natural Gas Pipelines for Kinder Morgan G P Inc and Vice President of Kinder Morgan GP Inc


Brian J. Zarahn - Barclays Capital, Research Division

Bradley Olsen

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Darren Horowitz - Raymond James & Associates, Inc., Research Division


Welcome to the quarterly earnings conference call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. I'll now turn today's call over to your host, Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Sir, you may begin.

Richard D. Kinder

Thank you, Erin, and welcome to the Kinder Morgan Conference Call. As usual, we'll be talking about Kinder Morgan Energy Partners, which is one of the largest MLPs in America; and about Kinder Morgan, Inc., which I'll refer to as KMI, which is the general partner of KMP. Also as usual, we'll be making statements within the meaning of the Securities Act of 1933, Securities Exchange Act of 1934.

I'll give an overview of the results and accomplishments for 2011 and for the fourth quarter and then outlook for 2012. Kim Dang, our Chief Financial Officer, will give you the financial details for 2011. Then we'll open it 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 then we would use that to pay $1.16 in dividends. When in 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 $1.20, and that $0.31 is obviously a $0.01 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 have already previously stated that for 2012, on a declared basis, we expect KMI to pay dividends -- to declare dividends of $1.35 a share. That's a 13% increase over the 2011 declared dividend of $1.20. And note that while we previously have presented dividends on a paid basis, from now forward they're going to be on a declared basis. If you look at it on a paid basis, our anticipated dividend for 2012 would be $1.30, which is 12% above the 2011 budgeted amount.

If that doesn't confuse you, I don't know what will. But in any rate, 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 2 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 '11 is to look at it through those 2 perspectives. And if you do that, I think any way 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 5 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 of 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 a 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 unitholders and shareholders in 2011. KMP produced an all-in 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 growth perspective, during 2011, we put $2.6 billion into expansion, JVs and acquisitions, and this is the lifeblood for growing the company in the future. I think we have tremendous opportunities for future growth in our set of businesses and that, 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 U.S. 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 these 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 pipeline.

To put that in perspective, for the fourth quarter, refined product volumes were down 2.5% compared to fourth quarter of '10. For the full year 2011, the volumes were relatively flat from 2010. We always like to compare that with the EIA numbers on a national basis, and those EIA numbers 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%, pretty positive year; and gasoline was off 1.4%.

Now still on the Products segment, if you look ahead through the perspective of future growth, we've got a number of important projects in this segment. One of the most important is our new Eagle Ford crude and condensate line, which will connect the Eagle Ford Shale play with the Houston Ship Channel. That's about a $220 million project. We're under construction. We expect to be in service by July of this year.

Connected to that project, we've now announced $130 million project to build a condensate processing facility, or a splitter, at our Galena Park facility on the Houston 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 100,000 barrels. We're 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 100,000 barrels a day. We expect 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 136 miles of 16-inch pipe, and it will run from Norco, Louisiana up to Collins, Mississippi to connect to a storage hub on our Plantation system. We'll own -- we do own 50% of that. Valero owns the other 50%. 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're spending about $30 million to upgrade existing pipelines in order to facilitate the transportation of EP mix from Conway to 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 2 projects on the West Coast that are fairly significant. One is our Carson 7 project. That's a $77 million project building 7 new tanks for -- at our Carson, California terminal. That's on schedule and budget. We brought the first 2 tanks online. The remaining 5 tanks will come online late in 2012 and early 2013. And then our final project is our Travis Air Force Base storage and pipeline project, a little short of $50 billion 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 Pipeline segment, of course, 2011 was a good year for us. Our transportation volumes were up 13%. That's largely a result of our Fayetteville Express project coming online and strong volumes from the Eagle Ford on our Texas Intrastates. 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 Ford Gathering and the processing spreads on our cash 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 Interstate Gas Transmission and Trailblazer systems.

Now when you look to the future of natural gas, and let me just say that all the projects I'm 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 to 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 to 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 signing new contracts. We're increasing deliveries as Eagle Ford production ramps up. Including our 50% equity interest in this Eagle Ford Gathering joint venture and our 25% interest in Eagle Hawk drill 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, our gathering system there, we signed a new third-party contract and we've added new interconnects and trading services. We ended the year averaging about 1 Bcf a day, as we anticipated we would, for 2011.

The third important project during the quarter and the year was we closed on an acquisition of SouthTex Treaters for $155 million on November 30. SouthTex designs and manufactures natural gas treating plants that remove both CO2 and H2S from the gas system. That's now part of our Kinder Morgan Treating operations, and that will allow us to offer our customers the offer -- the option of owning or leasing this equipment. We think that broadens our earnings capability and broadens the 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 a DCF basis. Now we benefited from higher oil and NGL prices. They ran about $6 higher than we had in our plan. And we also benefited from growing production to Katz Field and from some pretty successful efforts to manage and reduce our cost across all of our operations. And that management effort that reduced cost more than offset an overall decline in SACROC and Yates production.

We also set an annual production record just barely in our CO2 source fields in Southwest Colorado. Now the major disappointment was that our Katz volumes did not live up to what we predicted. That's our new field which we began flooding in early 2011.

To put that in perspective for you, for the full year 2011, we averaged about 500 barrels per day. For the fourth quarter, we averaged about 1,000 barrels a day. And so far this quarter, we're 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'll see that we're projecting around 2,300 barrels -- just a 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, on CO2 for the future is satisfying what's really turning out to be 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 million to 300 million cubic feet a day of production from the source fields that would involve investing, I've 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. It maybe as much as 400 million 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're 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 part -- an important first step in generating this additional CO2. We approved a $255 million project in our Doe Canyon field in Southwest Colorado, which will take production there up from 105 million cubic feet a day today to 170 million cubic feet a day. That $255 million will be spent over the next several years and will involve both compression and additional wells. So a lot of opportunity here for real growth at very attractive returns, backed by long-term contracts.

Turning to our Terminals operation. In 2011, we continued to generate strong earnings before DD&A and DCF. I think it's important to note that about 70% of that growth, or about $40 million, was attributable to organic sources as opposed to acquisitions. And I know when we talk about, "Gee, we think we've got 2%, maybe a little better, in growth from organic sources in Kinder Morgan," people wonder, "Well, where does that come from?" 2% off of 2011 numbers would be $60 million 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 volumes handled. We've been talking about that export coal story now for several quarters. 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 pursuant to contracts that were done during 2011. So coming back to this perspective of looking at what did we accomplish from a future growth standpoint, Terminals had a tremendous year in 2011.

First of all, the BOSTCO project was probably the largest single project that we entered into. In December, we purchased Trans Mountain's 50% interest, so we now own 90% -- 98% of this $430 million project on the Houston Ship Channel. And now let me remind you that as we previously said, and Trans Mountain has previously said, we have made that purchase. They do have certain rights to repurchase for a 1-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 a capacity of 6.6 million barrels for 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 in Edmonton, Alberta. It involves building 2.4 million barrels of capacity for storage of crude oil and condensate. It's at our Trans Mountain terminal, it 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 we anticipate will be scaled up over the next few years. We could eventually, on that site, build up to 6 million barrels in 2 additional phases.

What this does for our customers, who are primarily oilsands producers and marketers, is it gives them additional optionality to use the oilsands production, and 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 the Mississippi River in Houston and eventually at 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 oilsands production, and the oilsands producers wanted to move more barrels over our dock in Vancouver, British Columbia. We expect that demand growth to continue. For that reason, we're in the midst of an open season on an expansion of Trans Mountain. At the customers' 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. We built this set of tremendous opportunities for 2012 and beyond. And 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 you, again, are pre-El Paso, and we well exceeded the 5% and 10% growth numbers that we talked about previously for growth at KMP and KMI, respectively.

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

Kimberly A. Dang

If you turn to the first page of numbers, it's entitled the Consolidated Statement of Income. I'm not going to spend much time on this page, but just looking down, about 80% down the page is declared distribution per unit. We're declaring a distribution today at KMP of $1.16 per unit. That compares to $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 5% increase. The $4.61 is also $0.01 above our 2011 budget.

With that, I'll turn to the second page of numbers called the Contribution by Business Segment. Looking 4 lines from the bottom, the DCF before certain items for the fourth quarter of 2011, $425 million of DCF before certain items. That compares to 2010 of $366 million. That's a $59 million increase or about 16%. For the year, $1.525 billion. That compares to $1.36 billion in 2010. That's a $165 million increase or about 12%. Versus our budget, the $1.525 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 $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 results in excess coverage for the quarter of about $37 million; for the year, about $21 million. And versus our budget, we're about $17 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 in line with our budget. Interest was favorable, about a little over $25 million. Sustaining CapEx was positive versus our budget, about $13 million. But the total DCF available for distribution to our limited partners and our general partner 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 LP 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 a Canadian tax refund that we expected to receive in 2011 that we did not receive in 2011, but we've received notification that we will receive in 2012, and it's not included in our 2012 budget that we'll go through next week. You add back that $6 million and you adjust for the incremental $0.01 that was not in our budget, that's another roughly $6 million and you're within a few million dollars of our budget on coverage.

With that, looking back up at the lines above the DCF before certain items, if 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 $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're doing is adding back the booked taxes, so the booked taxes have no impact, and then subtracting out the cash taxes. Absent the Canadian tax refund, 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 receive doesn't track net income plus JV DD&A, less our share of 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 3 of these investments versus our budget.

Looking at sustaining CapEx, $72 million for the quarter, $58 million in the fourth quarter 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 2 pieces. $5 million is really lower capitalized overhead. 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 it's -- 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 of the turbines in the 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, $161 million in the quarter versus $171 million last year or about $10 million down this year. That compares to $160 million -- $694 million for the full year versus $688 million last year. That's up about $7 million. Products came in about $36 million low -- lower than its budget, or about 5%. And if you cut through it all, it is primarily SFPP. We had some ups and downs on the different assets within the segment. And SFPP was largely associated with 3 things: with deferred rate cases and the lower rates that we implemented there; with a adverse decision with respect to UTRR right-of-way cost, so increased right-of-way 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 $115 million or 14%. Natural gas was about 5% above its 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, $1,093,000,000. 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 and S&T were on their budget.

Terminals segment, $184 million in the third quarter -- on the fourth quarter; $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%. Terminals was about 2% below its budget. That was a function of higher fuel costs, timing on acquisition versus our budget on 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 and our Materials Handling business, primarily as it lost some market share to unit trains. And then we had a steel mill that we serve that was down for an extended period of time.

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

Dropping down about halfway down the page to the G&A, which you'll see below the segment Earnings Contribution, G&A for the quarter, $86 million versus $87 million a year ago, so about $1 million decrease. For the year, $388 million versus $375 million a year ago, so up about $13 million versus a year ago. The full year number is up versus last year, primarily due to higher benefit, but it is right on top of our budget.

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

Now dropping down with certain items, there are a couple that I'll 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 mark-to-market on our CO2 hedges. Again, as you can see on the footnote down there, we continue to recognize those in the quarter as we settled those hedges and don't mark them to market in the -- during the -- prior to that time, up in the segment. Insurance deductible, casualty losses and reimbursements, that's associated with a small fire that we had on our Total Petro facility.

For the year, certain items, $491 million. Three -- the largest certain items, $82 million associated with allocated noncash compensation. This is $100 million pool that was paid by our shareholders, but GAAP requires us to allocate these costs to KMP. We've talked about this in the prior quarter. KMP has not and will not pay anything associated with this bonus program. Rate case reserves, $235 million, and we've discussed those in prior quarters, and the KinderHawk mark-to-market -- or I'm sorry, asset writeoff of $167 million that we've also discussed in prior quarters.

So with that, I will move to the balance sheet. Just 2 items to note on the balance sheet. You can see on cash and cash equivalents, we're up about $280 million from year-end 2010 to year-end 2011. A reasonable portion of that is associated with dock premiums that we received on our Canadian Westridge Dock, and this is shippers 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 3- to 5-year time frame. The other thing I'll point out is on notes payable and current maturities of long-term debt, the $2.138 billion at 12/31 of '11, includes $500 million of 9% put bond. The time frame with respect to the bondholders' 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 that, the balance of that, to long term.

Looking down at the debt balance, $12.4 million at the end of the year. That compares to about $11.4 million at the end of last year. So $979 million increase for the year and about $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 in acquisitions. The largest acquisitions were SouthTex for $155 million; Watco for $50 million; and then our purchase of Trans Mountain's interest in the BOSTCO terminal, $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 about -- over $250 million, and that was about $145 million through our KMP aftermarket program and then $109 million 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 pay -- most of our interest payment come in the first and the third quarter. Dock premiums, as I mentioned, we received 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 then we used -- uses offsetting that was gas and storage and cash book overdrafts.

For the year, the change in debt, $979 million. Uses were about $2.76 billion, and about $987 million in CapEx, $1 billion to $1.244 billion in acquisitions. In addition to the ones I mentioned in the quarter, for the year, we also have the KinderHawk acquisition for $912 million; $371 million in contributions to equity investments, the largest one was the contribution to FEP. And we also paid off $77 million -- or assumed $77 million of incremental debt when we brought KinderHawk on to our balance sheet. We paid $81 million in CPUC and FERC settlements. We issued about $1.42 billion in equity between KMP and KMR, and then we settled interest rate swaps, which were a source of cash, at $73 million. We sold a small terminal in 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 investment in excess of what we reflect in our DCF, and then we had a loan to Plantation, which they repaid. That results in debt-to-EBITDA for the end of the year of 3.6x. On the third quarter call, I said that we would end the year at about 3.7x. We did a little bit better than that given the incremental equity that we issued in November and December that we had and 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, the first page of numbers in your package, you'll see including the interim capital transaction and that relates to a one-time item that we had in 2010. And so after -- we provide this because this is what's going to appear in the 10-K. But we don't think this is the real way to look at our business, and we'd be happy to, 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 ICT, this is what we're going to focus on.

Now with respect to the numbers presented on this page, this is -- these are presented on a paid basis. And so what we're 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're 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 paid basis in order to be consistent with -- I mean, to a declared basis, sorry, 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 the $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're declaring is $0.31 a share. So another reason that we are 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 are declaring on. And so just to switch 2011 to a declared basis, cash available to pay dividends, 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 30...

[Audio Gap]

...dollars 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 4 lines from the top of the page, total KMP distributions to us, $351 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, $148 million increase or 12% increase. That $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 budget and the $0.01 increase in the distribution.

NGPL, the next line item, NGPL cash available for distribution to us. You'll see that we switched that from the prior quarter when we previously showed dividends paid to us. Given that we owe only 20% of this investment, we can't control what they declare or what they dividend out. But we do -- but the cash is there. So what we're presenting is net income -- or actually pre-tax income plus DD&A, less cash taxes, less sustaining CapEx. So we're presenting the cash that is actually generated by this entity, given that we can't control the dividend; $10.6 million in the quarter versus 0 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 margins and LPs on NGPL.

G&A expense, basically up $3.5 million versus the fourth quarter last year, up $12.8 million 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. 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're higher versus the year ago due to the higher income.

So with that for KMI, I will turn to the balance sheet. Looking at KMI, the 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 dividend. 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 metric that we show versus the distributions that we actually received were about $9 million lower, and then in GPL actually reimbursed some G&A in early January versus by the end of the year.

For the year, a $41 million increase in debt, $835 million in cash available to pay dividends, $771 million in dividends paid, $64 million went out on $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 dividend 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 the $18 million that I mentioned on NGPL were the same for the year as they were in the quarter.

That leaves us at 2.4x on debt to distributions received, so a very strong balance sheet.

Richard D. Kinder

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, Bank of America Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Two questions, if I could. One, I don't know if Kim touched on it, but just the REX tax settlement. Was wondering if that was material for the quarter, or if that's more of just of an ongoing thing?

Kimberly A. Dang

It's about $8 million in the quarter. And yes, it will have an impact on our 2012 budget, a favorable impact on our 2012 budget as well.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Okay. And then not to parse earnings press releases too much, but just in terms of volumes at KinderHawk and what they're doing sequentially. I guess maybe if you can talk a little bit about your outlook for volumes there, what they've been doing lately, maybe also where they stand relative to them, contractual minimum commitments? And then just maybe also how much material that third party commitment you got at KinderHawk could prove to?

Richard D. Kinder

Well, the third-party commitment is important in the terms of third-party volumes. Obviously, still the great bulk of the volumes are coming from beating out BHP. We averaged around 1 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, 2012, Tom, we expect about...

Thomas A. Martin


Richard D. Kinder

To 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 J. Zarahn - Barclays Capital, Research Division

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

Richard D. Kinder

Well, first of all, if you're familiar with the ship channel, of course, this is an absolutely prime location in terms of how far down the channel it is and the draft there. So we think it has inherent competitive 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 able to expand that with a second dock and with additional tankage. And again, additionally, we -- eventually we think that will 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 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 done 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's 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 J. Zarahn - Barclays Capital, Research Division

In terms of the average contract life, can you talk a little bit about that, what you expect, that BOSTCO will be in line with your other liquids terminals?

Richard D. Kinder

Yes, I think so, maybe even just a hair longer. But yes, in line with our other liquids terminals.

Brian J. Zarahn - Barclays Capital, Research Division

Okay. And then final question for me. Can you talk a little bit more about the rail opportunities you see in 2012?

Richard D. Kinder

I'm sorry, the rail opportunities?

Brian J. Zarahn - Barclays Capital, Research Division

Yes, for Watco and other...

Richard D. Kinder

Yes, we made another preferred investment with Watco, which was part of our original arrangement with them, and we think there are going to be additional opportunities. Now clearly, the fact that, 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 than was the case before that reversal was announced. But we continue to look at opportunities. And again, indirectly through our preferred investment in the short-line railroad, 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 & Associates, Inc., Research Division

A couple of quick questions for you. And on the CO2 side of the 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 you guys thinking about the balance of maintenance versus growth CapEx for 2012? And what I'm 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?

Richard D. Kinder

Tim, you want to answer that?

Richard 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 than what we can save than cutting costs. Is that what you were aiming at?

Darren Horowitz - Raymond James & Associates, Inc., Research Division

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

Richard Tim Bradley

We're going to go over in some detail 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 then.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

That's fine. Last question for 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 in Guernsey to take barrels down to Wood River?

Richard D. Kinder

Well, we continue to look at both those options. There's clearly a need for more transportation out of the Bakken, and of course our domestic volumes on Platte are consistently running full. So we're looking at a couple of different things there. As you know, we've talked about converting 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 say all the Ts are crossed and Is are dotted. And so there's a lot of different opportunities on Cochin or doing something like converting Pony, I think would be the 2 most likely ways we would take advantage of it. But clearly, there's demand there and it's a question of what's the best way to solve it, and that's what we're looking at right now.


And next, we have Bradley Olsen with Tudor, Pickering.

Bradley Olsen

A couple of questions on the product pipeline side of things. The condensate processing project that you guys have announced, just trying to understand maybe 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 Gulf Coast maybe can't effectively use all of that Eagle Ford crude?

Richard D. Kinder

Yes, 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, there's just all kinds of opportunities there. One that several people have talked about, which is a possibility, it sounds sort of strange from a geographic location standpoint, but the possibility that some of this could be converted into diluent. And given the fact that there's not as much demand on some of these pipelines going from north to south, to move it up, for example, explore. We can move it into Cochin or Southern Lights or someplace 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 utilization of that condensate coming in from the Eagle Ford. So we think it's an idea whose time has come. And again, we're actually applying this month to our environmental permits and we're doing the 50,000 barrels per day because we think that's probably where we'll end up. And then we'll have the expandability up to 100,000 barrels a day. I think it's kind of unlikely we'll be at there -- be at that point at the startup, but we'll have fairly cheap or fairly reasonable expandability up to 100,000 barrels a day.

Bradley Olsen

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?

Richard Tim Bradley

And it's condensate that we're splitting and not crude, and my understanding is for the most part no.

Bradley Olsen

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 that EP -- I guess kind of looking forward, is there opportunities for growth as maybe some heavy oil crackers in Sarnia convert to an EP feedstock?

Richard D. Kinder

Yes, it gets a little beyond my knowledge base. We have a -- as we like to do, we let somebody else take those important issues. But we have a contract with NOVA. It's a 3-year contract for certain amount of volumes, and that's up to them. And clearly, as everybody knows, some of that demand at Sarnia is -- a large portion of it is eventually going to be serviced from the Marcellus. But over the next 3 years anyway, NOVA is interested in moving volumes up there, and so we'll just see what happens after that.

Bradley Olsen

And those are going to be Marcellus-sourced EP volumes?

Richard D. Kinder

No, these are Conway-sourced volumes.

Bradley Olsen

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 Kinder -- KMI pro forma for the El Paso acquisition, is there any potential to move, hypothetically, if a pipeline were to be -- I guess if you were to be asked by 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 crude oil or some other kind of hydrocarbon service in order to avoid antitrust issues?

Richard D. Kinder

That would just be pure speculation at this point. We're just engaged with the FTC now looking at alternatives. So it'd be premature to answer that.


There are no further questions in queue.

Richard D. 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.

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


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