Kinder Morgan Management LLC Management Discusses Q2 2012 Results - Earnings Call Transcript

Kinder Morgan Management LLC (KMR)

Q2 2012 Earnings Call

July 18, 2012 4:30 pm ET

Executives

Richard D. Kinder - Chairman and Chief Executive Officer

Kimberly Allen Dang - Chief Financial Officer, Principal Accounting Officer and Vice President

David D. Kinder - Vice President of Corporate Development and Treasurer

Richard Tim Bradley - President of Co2 Pipelines for Kinder Morgan GP Inc and Vice President of Kinder Morgan GP Inc

Analysts

Theodore Durbin - Goldman Sachs Group Inc., Research Division

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

Stephen J. Maresca - Morgan Stanley, Research Division

John Edwards - Crédit Suisse AG, Research Division

John K. Tysseland - Citigroup Inc, Research Division

Curt N. Launer - Deutsche Bank AG, Research Division

Harry Mateer - Barclays Capital, Research Division

Presentation

Operator

Welcome to the Quarterly Earnings Conference Call. [Operator Instructions] This call is also being recorded. If you have any objections, please disconnect now. I would now like to turn the conference over to your host, Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. You may begin, sir.

Richard D. Kinder

Okay. Thank you, Holly. This is the Kinder Morgan earnings call and, as usual, we'll be making statements that may fall within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Now that we have closed the El Paso merger, we'll be talking about 3 entities: KMI, Kinder Morgan, Inc.; KMP, Kinder Morgan Energy Partners; and EPB, Enron -- I mean, El Paso Pipeline Partners. In addition, of course, there's a fourth security, KMR, which is the equivalent of KMP, but is -- pays its dividends in FICC and is suitable for investors who do not want to hold an MLP.

Kim will take you through the financial details, and there's a good bit of noise there resulting from the El Paso merger and from the FTC mandated sale. But I think there's a strong fundamental story in most respects. For those of you new to this call, and to the Kinder Morgan philosophy, we're all about generating cash and paying out that cash to shareholders in distributions or dividends. So the real news here, I think, is that all 3 entities increased their dividends or distributions for the second quarter.

KMI increased its dividend to $0.35. Now that's up 17% since the second quarter of 2011, and we anticipate dividending $1.40 for the year 2012. KMP and KMR raised their distribution to $1.23 per quarter. That's up 7% from the second quarter of 2011, and we anticipate distributing $4.98 for the year at KMP and KMR. EPB increased its dividend to $0.55. That's up 15% from the second quarter of 2011, and we anticipate paying dividends of $2.25 for calendar year 2012.

Now let me talk about each of the 3 entities briefly, before I turn it over to Kim. At KMI, the cash available for dividends this quarter was $307 million. That's up 83% from the $168 million in the second quarter of 2011. If you look at it on the basis of cash available for dividends per share, it's $0.36 this quarter versus $0.24 in the second quarter of 2011. And I might add that for the full year 2012 at KMI, we expect to generate over $1.3 billion in cash available for dividends.

Obviously, the most important thing that occurred during the second quarter this year was the completion of the El Paso acquisition on May 24. As we promised, in conjunction with that acquisition, we sold off the E&P assets of El Paso for approximately $7.2 billion. We had originally targeted producing $350 million of cost savings per year. We now expect that number to be north of $400 million per year.

We said we would drop down significant assets to EPB, and we did that just prior to the close by dropping down the remaining 14% of Colorado Interstate and all of the Cheyenne Plains Pipeline. We expect to drop down 100% of Tennessee, TGP, and 50% of El Paso Natural Gas to KMP during this third quarter. And I might add that we really believe that TGP, obviously, has just a unique footprint in the Marcellus and Utica. We expect to complete the FTC mandated sales of certain KMP Rockies pipelines during the third quarter also.

It's early in the game. We've only had these assets for a little less than 2 months. But so far, the assimilation is going well. We're seeing real upside possibilities from the assets, and we think we've inherited, most importantly, a great number of really good people. There are some profound effects that this merger has and, just to give you a couple of them, it now makes gas pipelines and storage across all 3 of the entities about 60% of all the earnings before DD&A. So we've become much more of a gas pipeline company, obviously.

And then secondly, by putting all these companies together, if you look at enterprise value on a combined basis, at yesterday's close, the total enterprise value of these 3 entities is right at $100 billion. So this is quite a company we've assembled, with a footprint that I think is going to pay enormous dividends for years to come.

Now let me turn to KMP. There the distributable cash flow increased by 13% to $366 million. Of course, the key thing for us is distributable cash flow per unit, and that is up to $1.07 versus $1.01 in Q2 of 2011. All the segments were positive in comparison to the second quarter of 2011 in terms of earnings before DD&A prior to certain items, with the exception of the Products Pipeline segment, which was burdened by lower rates on SFPP as a result of FERC and CPUC decisions and settlements.

If you look at how the underlying business has performed, and I think sometimes we're kind of a microcosm of the economy, I can give you some interesting statistics. On the refined products volumes, we were off 0.9% in terms of throughput for the second quarter of 2012 compared to the same period a year ago. And coincidentally, that's exactly equal to the EIA numbers recently published for the second quarter.

In terms of NGL volumes, our performance was much better. We were up 27%, largely through increased volumes on our Cochin and Cypress systems. We increased our biofuels volumes, and we're still handling about 30% of all the ethanol consumed in the United States. If you look at some of our terminal activities, we continue to benefit from strong coal export volumes, offset somewhat by weaker domestic coal volumes. Overall, coal volumes in our Terminals group was up 12%.

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