Kinder Morgan Earnings Call Insights: Management Drop Downs and Differentials

Kinder Morgan Energy Partners LP (NYSE:KMP) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Management Drop Downs

Brian Zarahn – Barclays: Sorry to hear about some of the management changes, but I look forward to seeing you over in Houston. On the drop downs, can you talk a little bit about the thought process, obviously there was a lot more activity in 2012, when you were replacing some of the Rockies assets you were divesting, but can you talk a little bit about the thought process and you still expect the drops to be finished next year?

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Richard D. Kinder – Chairman and CEO: Yeah, as you recall, our original target was, we said when we did the deal in the El Paso acquisition, said that we would finish it sometime in ’15. We now believe we will wrap it up in ’14 and probably I would say in the first half of ’14. So, we are ahead of schedule, clearly as we look at the drop downs, we got a couple of that with the amount of capital expenditures that we have lined up at KMP and EPB, without the drop downs, absent the drops downs and look at how much we think we can put out into the market without disrupting the pricing or anything and that’s how we came to a decision. So, we will do these drop downs in 2013 and that will still leave Ruby, half of Florida Gas will be the two main assets still remaining and we will intend to do those in 2014, so we’re actually ahead of our game plan that we announced at the time we did the El Paso merger.

Brian Zarahn – Barclays: In terms of the multiple, would it be reasonable to assume similar multiple for the transactions in 2012?

Richard D. Kinder – Chairman and CEO: I think that’s a reasonable assumption. Now, that obviously has to be approved by both – independent directors of both Boards. We were just starting on the process, as we said and we expect to do the drop down in KMP in March, and we expect to drop down, and EPB we’ll do – will be done more in the August, early September timeframe.

Brian Zarahn – Barclays: Then on the EPNG potential conversion to take crude to the West Coast. Do you have any additional color on the project in terms of timing, when you think you may have a decision?

Richard D. Kinder – Chairman and CEO: Well, we, as I said, in my remarks, we are out working with both shippers in the Permian and refineries on the West Coast to ascertain their level of interest and I think we will know more by the end of this quarter certainly by the time we have the call for the next quarter in April I think we’ll be able to give you an update on it. So far response has been positive, but until you put horse on the ground put the saddle on you don’t get on the horse. So we’ll just see how it goes, but again if you just look at the basic economics if you look today out in West Texas that’s spread to the Midland Cushing spread was over $12. So you’ve got a big disconnect you have got a lot of new production coming on line out there and even once additional capacity from Cushing down to the Gulf Coast is built I still think you are going to have some depressed prices on the other hand of course the Southern California market a very expensive to buy crude out there. So it’s kind of marriage made in heaven, but again like all our other projects we won’t build it unless we have firm commitments for enough to show there is an adequate return path.

Brian Zarahn – Barclays: Last question for me is in terms of tax rates at KMI it was sort of lower than initially expected in 2012. What are your thoughts on tax rates going forward at KMI?

Kimberly Allen Dang – VP and CFO: Our effective tax rate is probably 36.5% you do see a benefit in the 2012 numbers for about $200 million use the NOL and so we are going to go into that more at the analyst conference in terms of outlining how much of the NOL that we would use against the performance metric.

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Differentials

Gabe Moreen – Bank of America: Afternoon Rich and everyone and congrats to those retiring and based on Kim’s new responsibilities I hope she has got attached to five-hour energy or something under her desk. So she can actually do it all. But anyhow, just I had a quick question. Rich, you just mentioned the Midland to Cushing differentials. In terms of the CO2 segment, I apologize this has been addressed in the previous Analyst Day on our previous call, your realizations at the CO2 segment looks alright, but did those differentials hurt you at all in terms of realizations and can you remind us in terms of capacity coming out of the basin if you are doing okay there, particularly given the SACROC products have been exceeding expectations?

Richard D. Kinder – Chairman and CEO: Yeah, we’re doing okay on getting it out. When you get it to Midland, the price is not as good as we would like and this has been a phenomenon really that started in December and has plugged over to January. Now, if you look at the markets out a little further, it looks like a lot of that goes away in March after Seaway comes online and some other projects. Another part of the problem has been some of the refineries out there have experienced significant downtime and that’s also cut into the issue. That’s where we are. But we are able to get all of our production out and it’s just a question of the pricing on it.

Gabe Moreen – Bank of America: I guess just as a follow-up to that. If you guys committed to any of the new projects coming online coming out of the basin or is it just not material enough for you guys?

R. Tim Bradley – President, CO2: We have not entered into long term (indiscernible) agreements. We are in negotiations for the purchaser that is associated with one of those pipeline projects and we expect to get that relationship firmed up during the first quarter. But to-date, if you ask 2012, we’ve had now problems dispatching our production.

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