Kinder Morgan, Inc. (KMI) Q2 2013 Earnings Report, Transcript and Summary

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

Okay, thank you, Erin, and welcome to the Kinder Morgan quarterly investor call. As usual, we'll be making statements that may fall within the Securities Act of 1933 and the Securities Exchange Act of 1934. As usual, I'll give an overview of the quarter. Kim Dang, our Chief Financial Officer, will follow with the financial details. And then Steve Kean, our Chief Operating Officer, Kim and I and together with the rest of the executive team will answer any questions that you may have. The second quarter was good for the Kinder Morgan companies, all 3 companies increased their distribution. So our dividends and all are on track for a successful full year 2013 and beyond. Let me start with KMI. We increased the dividend to $0.40 a share. That's up 14% from the second quarter of 2012 when we distributed $0.35. Cash available for dividends actually, in this quarter, is down compared to the second quarter of 2012 and that's a result of the timing of the cash tax payments this year versus last year, which will -- which Kim will go into in detail. But we remain on target to meet or exceed our goal of $1.60 declared dividends for full year 2013. And that compares with $1.40 in 2012 and with our original '13 budget of $1.57. The $1.60 equals a 14% increase in dividends declared comparing full year '13 to full year '12, and an 18% increase in cash available for dividends year-over-year. I think we're also well positioned for future growth. We have about $14 billion now in expansion and JV investments that we are pursuing the building of, across the Kinder Morgan companies. Now turning to KMP. We raised the distribution there to $1.32 a quarter. That's $5.28 annualized, that's up 7% from the…

Thanks, Rich. I'm going to start on the KMP numbers. I'll do EPB second, and then KMI, last. The first page of KMP numbers is the GAAP income statement. As we've said many, many quarters, we don't find that overly meaningful, but I see that the press has already picked up that our profit multiplied sevenfold. And as you can see, our income's up 658% in the quarter. So let's turn to the second page and so let me tell you what we really think happened in the quarter. And this is our look at distributable cash flow. Distributable cash flow per unit for the quarter was $1.22, up 14% in the quarter. Year-to-date, it's $2.67, up 9%. Year-to-date, we are ahead of our original budget and we expect to be ahead of our original budget for the full year on DCF per unit as a result of the Copano acquisition. And all this is consistent with our revised guidance that we put out in May at the time we closed Copano, $5.33 in distributions for the year. In the quarter, the $1.22 of DCF versus $1.32 distribution, we had negative coverage of a little over $40 million. That was consistent with what we told you at the time of the budget and consistent with what we told you on the first quarter call that we expect KMP to have positive coverage in the first quarter and the fourth quarter and negative coverage in the second and the third, with coverage for the full year. The DCF, the total number of DCF, $505 million, up $139 million or 38% for the quarter; for the 6 months, $1.055 billion, up $227 million. So let's look at where the $139 million in the quarter and the $227 million of growth is coming.…

Thank you, Kim, and before we go to questions, I'll also mention, I neglected to do this in the opening comments. Our board today at KMI also approved the share and warrant repurchase program authorizing us to repurchase in the aggregate up to $350 million of either common stock or warrants. And that's -- there's no minimum repurchase obligation. That's just a maximum that we can do. But the board has granted us that discretion. So we'll be looking at buying back either warrants or shares in the future. And with that, I'll turn it back to Erin and we'll take any and all questions you may have.

[Operator Instructions] Our first question comes from Darren Horowitz from Raymond James.

I've got 2 quick questions. The first, Rich, and you referenced this, your thoughts around ramping Eagle Ford condensate volumes and more specifically the opportunities for the export of the products like light naphtha. I mean, you scaled up your investment to accommodate the second splitter. Your storage capacity is going to be over 7x the current splitting capability just from a throughput perspective. So how big of an issue do you think that, that's going to be on the Gulf Coast? And specifically, do you guys have a view as to when Canada might hit a blend wall for condensate to be used as diluent and maybe that impacts volumes on Cochin or Southern Lights?

Well, let me start with, if I understood your question, on the Eagle Ford condensate. First of all, I think it's pretty obvious, every quarter, we are expanding our reach into the Eagle Ford and the ability to handle more and more condensate and crude coming out of Eagle Ford. And, of course, post the Copano acquisition, we can move that either across our Kinder Morgan Crude and Condensate line to the Houston Ship Channel or down the Double Eagle line, which is a joint venture with Magellan, down to Corpus Christi. So we're giving people like Conoco and Anadarko and others tremendous optionality. So our volumes are ratcheting up -- will be ratcheting up on these facilities and it's a very good thing. Obviously, as you look at the -- what happens downstream like on the natural gas side, the tendency is that you move the bottlenecks downstream and then free enterprise being what it is, that bottleneck gets solved. So I think there will be additional export of products. Certainly, we're looking at that partially in conjunction with this BOSTCO facility. That's not the original purpose of it, but we certainly have land down there that we will be able to participate in export facilities. As far as the blend wall and the diluent, I really don't know. As you know, we are reversing Cochin. That project is now underway. It's about a $260 million project and we're fully subscribed except for the portion that we have to leave open for spot buys. But everything else is taken up under long-term contracts there. To us, that's the big indicator that people are very interested in the ability to move diluent across our line or across Southern Lights. So I think you're going to see continued interest in doing all that. Beyond what they're shipping on us, I really don't know what the future holds, but we're very happy that we're locked in on our investment on reversing Cochin.

Next, we have Bradley Olsen with Tudor, Pickering.

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

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

I'll tell you what it's not, it's not that we opened up a big teller window with a sign saying, "Bring us your reserves." We're looking strategic investments where there's low mine cost reserves that are highly competitive, where there's high quality reserves that are uniquely positioned and the more versatile, the better. If it can go export and domestic or if it could be tied to a Kinder Morgan terminal, all the better. We're going to use the same disciplined approach that we do with all of our KM investments. We're looking at guaranteed minimum returns on each of these projects and we're not taking product or market risk.

So would it be safe to interpret those comments as indicating that you'd only look for something with a long-term, fixed-price takeaway agreement?

Yes, I think that's a good analysis.

Also, I think, John was getting at this too, but we're not taking mine operating risk on these investments either.

Got it. Okay. And so, are you looking specifically at one basin or another? Or is this something that where you'd be looking to develop a diversified portfolio in coming years?

There are some that are more preferable than others.

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

I think the interesting part, too, is this could be a great platform to look at our other 1,000-some-odd products we handle. Right now we're initially going to focus on just coal, but we hope to get into some of the other commodities that we touch today, some of the other customers we touch.

That's great color. And a follow-up around the Freedom Pipeline. Apparently, refiners in California expressed a preference for rail, but given the recent incidents that we've seen in the news where I'd say the safety of crude by rail has been -- maybe brought into renewed scrutiny. Does that -- as well as the fact that the Brent/WTI spread is seeming to be more favorable to pipeline projects, at least where it is today than it would be to rail. Do you think that this brings pipeline projects that maybe had been discarded in favor of rail back into the money?

Well, I think it's too early to opine on that, Brad. What I will say is that clearly, as I said earlier, on a previous call, the Freedom Pipeline did not get sufficient customer backstopping to do at this time. On our Trans Mountain expansion in Canada, we went out twice with open seasons over the years and didn't get sufficient throughput to build it. The third time, we get 708,000 barrels of throughput commitment. So a lot just depends on a whole bunch of factors, all of which you mentioned are important, but we've got it on the shelf, but we know what it costs both from a standpoint of tariff and from the standpoint of what our returns will be based on the construction cost and the conversion cost. And if the California refiners and/or the Permian producers demonstrate they want to go forward with the project, we're certainly there to accommodate them.

Next, we have John Edwards with Crédit Suisse.

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

$2.8 billion -- it rounds to $2.8 billion, yes.

$2.8 billion. What's the breakout between KMP and EPB on that?

Well, it's about $1.8 billion to $1.9 billion at KMP and about $1 billion at EPB. The biggest at EPB is the joint venture with Shell, that's, as I said, is about $850 million.

Okay. Great. And then just real quick, could you remind us the number of warrants outstanding at KMI?

400 and -- hang on a second, 441 million.

441 million, roughly.

Oh, it's 414 million, sorry. 4-1-4.

4-1-4. Okay.

From 5-0-5, starting...

Next we have Brian Zarahn with Barclays.

I guess following up on the warrants. The buyback, just to clarify, that $350 million in new authorization and replace in addition to the $250 million, it seems like you just completed?

Right. The $250 million is complete.

Okay. And then it looks like this authorization includes buying back stock, can you talk a little bit about the -- including looking at stock versus the warrants?

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

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

It includes the impact of the original $250 million.

Yes, to the extent we buyback more warrants, that would tend to make our growth a little higher.

The $350 million is not included.

Right.

But it includes eventual conversion of the warrants?

It does.

That's correct.

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

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

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

We just have to look at it.

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

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

And we have no further questions in queue sir.

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

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