Kinder Morgan, Inc. · NYSE:KMI
Kinder Morgan — Q4 2001 Earnings Presentation
68 slides from Kinder Morgan's earnings presentation, Jan 17, 2002
Slide 1: KMP Cash Distribution Math
KMP Cash Distribution Math Kimberly Allen Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and securities values of Kinder Morgan Inc. and Kinder Morgan Energy Partners, L.P. (collectively known as “Kinder Morgan”) ma
Slide 2: Overview
1 Overview MLPs required to distribute Available Cash Calculation of Available Cash: All Cash Receipts Minus: All Cash Disbursements Expect over $710 million Plus/Minus: Net Change in Reserves available in 2002 Cash from Operations – GP eligible for incentive distributions – Cumulative test with cus
Slide 3: Sources of Cash
2 Sources of Cash KMP/KMR Approximate Operating Income (a) $608 Add/Subtract: DD&A 176 Terminals Sustaining Capital (74) Products CO2 Distributable Cash before Promote $711 Natural Gas (a) 2002 operating income from segments less G&A, Interest, and Minority Interest
Slide 4: Sharing of Cash Flow - 2002
3 Sharing of Cash Flow - 2002 Distributable Cash Flow before Promote = $711 million =$3.97/unit General Partner Limited Partner =$281 or 40% =$430 or 60% =$2.40/unit
Slide 5: Sharing of Cash Flow - Historical
4 Sharing of Cash Flow - Historical 1999 % 2000 % 2001 % 2002E % Total $198.3 100% $333.3 100% $546.2 100% $711 100% Growth 68% 64% 30% Limited Partner: Total $139.9 71% $219.9 66% $339.6 62% $430 60% Growth 57% 54% 27% Per Unit $1.43 $1.71 $2.15 $2.40 General Partner: Total $58.4 29% $113.4 34% $20
Slide 6: Incentive Distribution Tiers
5 Incentive Distribution Tiers KMP Distribution General Partner Limited Partner Per LP Unit (a) Tier I $0.00 to $0.605 2% 98% Tier II $0.605 to $0.715 15% 85% Tier III $0.715 to $0.935 25% 75% Tier IV > $0.935 50% 50% (a) Annual calculation. Actual calculations are made quarterly at 25% of distribut
Slide 7: Example
6 Example Step 1: Calculate Distributable Cash Per Share Scenario 1 Scenario 2 Scenario 3 Current Total Distributable Cash ($mm) $102 $124 $155 $711 Units Outstanding 165 165 165 179 Total DCF/Unit $0.62 $0.75 $1.04 $3.97 Comments Meets first tier Meets first and Meets first, second, Based on 2002 c
Slide 8: Example
7 Example Step 2: Calculate General Partner share DCF/Unit $0.62 Tier I: $0.00 to $0.605 General Partner 2% $0.01 Limited Partner 98% $0.61 Tier II: $0.605 to $0.715 General Partner 15% Limited Partner 85% Tier III: $0.715 to $0.935 General Partner 25% Limited Partner 75% Tier IV: > $0.935 General P
Slide 9: Example
8 Example Step 2: Calculate General Partner share DCF/Unit $0.62 $0.75 Tier I: $0.00 to $0.605 General Partner 2% $0.01 $0.01 Limited Partner 98% $0.61 $0.61 Tier II: $0.605 to $0.715 General Partner 15% $0.02 Limited Partner 85% $0.11 Tier III: $0.715 to $0.935 General Partner 25% Limited Partner 7
Slide 10: Example
9 Example Step 2: Calculate General Partner share DCF/Unit $0.62 $0.75 $1.04 Tier I: $0.00 to $0.605 General Partner 2% $0.01 $0.01 $0.01 Limited Partner 98% $0.61 $0.61 $0.61 Tier II: $0.605 to $0.715 General Partner 15% $0.02 $0.02 Limited Partner 85% $0.11 $0.11 Tier III: $0.715 to $0.935 General
Slide 11: Example
10 Example Step 2: Calculate General Partner share DCF/Unit $0.62 $0.75 $1.04 $3.97 Tier I: $0.00 to $0.605 General Partner 2% $0.01 $0.01 $0.01 $0.01 Limited Partner 98% $0.61 $0.61 $0.61 $0.61 Tier II: $0.605 to $0.715 General Partner 15% $0.02 $0.02 $0.02 Limited Partner 85% $0.11 $0.11 $0.11 Tie
Slide 12: Other Assets
Other Assets Mike Morgan Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and securities values of Kinder Morgan Inc. and Kinder Morgan Energy Partners, L.P. (collectively known as “Kinder Morgan”) may differ material
Slide 13: Overview of Other Segments
12 Overview of Other Segments Power & Other Retail 6% 7% Terminals 18% Products CO2 Pipelines KMP Pipelines 38% 46% 11% Natural NGPL Gas 41% Pipelines 33% KMP/KMR KMI (a) 2002 segment earnings (KMI) and DCF (KMP/KMR) before allocation of G&A and interest.
Slide 14: Retail Division
13 WYOMING Retail Division Bunker Hill Kirk Ranch Storage Oil Springs NEBRASKA Huntsman LEGEND Wolf Creek Storage COLORADO Northern Gas Company Rocky Mountain Natural Gas Retail Distribution KMIGT Town served by NGC Town served by RMNG Town served by Retail Dist. Gas Storage
Slide 15: Retail Division
14 WYOMING Retail Division 29% of Meters 24% of Income Kirk Ranch Storage Bunker Hill Oil Springs NEBRASKA Huntsman 42% of Meters 37% of Income Wolf Creek Storage COLORADO Retail Totals 29% of Meters 239,136 Meters 39% of Income $60.3mm ’02 Plan Income
Slide 16: 2002 KMI Retail Segment Key Drivers
15 2002 KMI Retail Segment Key Drivers • Full year benefit of Citizens CO acquisition • CO meter growth • Hedging strategy minimizes weather-related margin fluctuations • Automated schedule/dispatch system full year benefit (MDSI) • Complete WY Choice Gas program to 66,000 customers
Slide 17: KMI Retail Segment Operating Forecast for 2001 and 2002
16 KMI Retail Segment Operating Forecast for 2001 and 2002 2000 2001 2002E Revenues $ 291.7 $ 402.9 $ 292.7 COS $ 191.0 $ 290.9 $ 169.9 Gross Margin $ 100.7 $ 112.0 $ 122.8 Ops Exp $ 39.2 $ 42.3 $ 48.8 EBITDA $ 61.5 $ 69.7 $ 74.1 DDA $ 11.8 $ 12.3 $ 13.8 Operating Income $ 49.7 $ 57.4 $ 60.3
Slide 18: Western Slope of CO Driving Internal Growth Over Next 3 Years
17 Western Slope of CO Driving Internal Growth Over Next 3 Years
Slide 19: Power & Other
18 Power & Other Strategy: Focused on fee based operations Fee-based developer of new plants (no new plants in 2002 budget) Power & Other 6% Retail 7% KMP 46% NGPL 41%
Slide 20: Overview of Colorado Operations
19 Overview of Colorado Operations WYOMING NEBRASKA Gas-fueled cogeneration COLORADO power plants Monfort Ft. Collins UNC Net plant capacity – Ft. Lupton – 136 of 272 MW Greeley Ft. Lupton – Monfort – 32 MW Ft. Lupton – UNC – 25 of 76 MW DIA Power purchase agreements Denver with Public Service Compa
Slide 21: Wrightsville, AR Project
20 Wrightsville, AR Project Percent completed – 82% Estimated COD – June 2002 Total cost – $330 million
Slide 22: Jackson, MI Project
21 Jackson, MI Project Percent completed – 70% Estimated COD – June 2002 Total cost – $360 million
Slide 23: Structure
22 Structure Wrightsville, AK Jackson, MI Common Equity Mirant CIT (Tyco) / Investors Preferred Equity KMI KMI Debt Mirant Citigroup / CIT / Pvt. Placement Gas Supply Obligation Mirant Williams Power Offtake Marketed by Mirant Williams 16 yr Toll Operator Mirant KMI KM Performance Heat Rate / Capaci
Slide 24: Power & Other Segment Income (millions)
23 Power & Other Segment Income (millions) $63.3 ($17.8) $8.8 $49.8 ($4.5) Lost Income From Sold Reduction Increase in Gathering In Plant Income From Assets / Development Operating Telecomm Fees Plants 2001 2002 Plan
Slide 25: Long Term Power Outlook
24 Long Term Power Outlook KMI power outlook impacted by industry downturn – Additional plants delayed until at least 2004 in service – Orion technology still attractive Will continue to evaluate opportunities consistent with our approach of minimizing commodity price risk GE turbines status: – 1 se
Slide 26: What is CO2 Flooding?
25 What is CO2 Flooding ? CO2 is injected into mature oil fields to increase production and reserves
Slide 27: Typical CO2 Flood Economics
26 Typical CO2 Flood Economics Cost/Bbl. Projected IRRs (CO2 Cost 60 cents Mcf) Capital 30% $0.80 25% CO2 Purchases $3.00 Operating 20% Expenses $2.60 15% 10% Subtotal: $6.40 EOR Tax Credit: (0.38) 5% Proj. 1 Total: $6.02 Proj. 2 0% – Projects typically have attractive IRRs with oil in the mid to hi
Slide 28: Kinder Morgan CO2 Company, L.P. Operations
27 Kinder Morgan CO2 Company, L.P. Operations CO2 Supply Assets McElmo Dome Utah Colorado Bravo Dome Kansas M cE lm o Dom e CO2 Transportation Assets B r a vo Dom e Cortez PL Arizona C or tez P ip elin e Oklahoma Bravo PL Br avo Dom e P ipeline New Mexico Central Basin PL SAC R O C CRC PL Texas Oil
Slide 29: CO2 Overview
28 CO2 Overview KMP Estimated breakout of CO2 2002 Distributable Cash 2002 Distributable Cash Plants & Other CO2 Pipelines 12% 44% MKM - Yates Terminals Unit 18% Products 5% CO2 Pipelines Pipelines 38% 11% Natural Gas Pipelines SACROC Unit 33% 32% CO2 Supply 7%
Slide 30: CO2 and MLP Attributes
29 CO2 and MLP Attributes CO2 Transport – typical MLP pipeline business CO2 Sales – long-term contracts CO2 Flooding Investment Characteristics: Asset Heavy - Pipelines, Compression Equipment, Wells Operating Cost Structure: Predictable – Driven by fluid handling, purchased power Revenue Stream: CO2
Slide 31: KMP Has Unique Opportunity to Develop SACROC
30 KMP Has Unique Opportunity to Develop SACROC KMP CO2 employees are the leading experts in the industry McElmo Dome is Industry’s lowest cost and most prolific source. SACROC Unit has many attractive features: 1. Reservoir thickness reduces well investment 2. Prolific reservoir permeability accele
Slide 32: SACROC Centerline CO2 Flood Response
31 SACROC Centerline CO2 Flood Response 10000 Oil Production, BOPD 1000 CO 2 Incremental Waterflood Decline 100 1990 1992 1994 1996 1998 2000
Slide 33: SACROC Growth Will Shift Mix Over Time
32 SACROC Growth Will Shift Mix Over Time Estimated ‘02 DCF = $110mm Targeted ‘03 DCF = $130+mm Plants & Other 12% Plants & Other 15% MKM - Yates Unit MKM - Yates CO2 Pipelines 5% CO2 Pipelines Unit 37% 44% 3% SACROC Unit 32% SACROC Unit CO2 Supply CO2 Supply 39% 6% 7%
Slide 34: Long-Term Outlook / Goals
33 Long-Term Outlook / Goals Domestic oil reserve replacement costs are increasing CO2 flooding provides an attractive cost and a proven track record to add new reserves Kinder Morgan will leverage infrastructure in Permian Basin Lowest cost supply, largest pipeline network and largest CO2 reserves
Slide 35: Corporate Development Update
Corporate Development Update Mike Morgan Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and securities values of Kinder Morgan Inc. and Kinder Morgan Energy Partners, L.P. (collectively known as “Kinder Morgan”) may
Slide 36: KMP Acquisition Strategy
35 KMP Acquisition Strategy Acquire fee-based pipelines and terminals in high growth markets Evaluate based on conservative assumptions – Long-term growth assumptions consistent with demographic and macroeconomic trends – Typically focus on overhead cost reductions vs. field operations Must create v
Slide 37: KMP's Cost of Capital
36 KMP’s Cost of Capital Debt Equity 50% Fixed 7.5% Current Yield 5.8% 50% Floating 4.5% GP Gross-Up (40%) 3.9% Pretax Avg. Debt Cost 6.0% Pretax Equity Cost 9.7% 40% 60% Average Pretax Cost of Capital = 8.2% - Several hundred basis point cost advantage vs. typical corporation - Targeted returns sig
Slide 38: Example Acquisition Economics
37 Example Acquisition Economics (a) ($ millions) KMP KMI Purchase Price $1,000.0 3.9% on New Equity $23.2 Pre-Tax Cash Flow @ 7X 142.9 GP Share of Excess 30.3 40% Debt @ 6% (24.0) $0.17 on 31 mm LP units 5.3 60% Equity @ 9.7% (58.2) Cost of Capital on 2% (1.0) Excess Cash 60.7 Pre-Tax Income 57.8 G
Slide 39: KMP Acquisition Advantages
38 KMP Acquisition Advantages Typical Corporate Typical MLP KMP Competitor Competitor Cost of Equity Capital 9-10% pretax 12-15% after-tax 6-10% pretax Debt Ratings A- / Baa1 mid BBB avg. mid BBB avg. Access to Institutional Yes Yes Limited Equity Ability to Complete $1+bn Yes Yes Limited Acquisitio
Slide 40: Optimistic Outlook Over Next 12-18 Months
39 Optimistic Outlook Over Next 12-18 Months Liquids Pipelines – Industry Consolidation – Upstream E&P Focus – Ordered Divestitures – Balance Sheet Sales Industry KM % Miles of Pipeline (thousands) 154.4 10.2 7% Throughput (annual bbls delivered) 14.4 .82 6% Revenues 7.5 .61 8% Source: AOPL, EAI, Oi
Slide 41: Optimistic Outlook Over Next 12-18 Months
40 Optimistic Outlook Over Next 12-18 Months Bulk Terminals – Leading player – Small percent of total market Liquids Terminals – Largest independent player – 16% of independent market share Greater opportunities in natural gas pipelines – Asset sales / restructuring by others in industry – Reduction
Slide 42: Financial Review
Financial Review Park Shaper Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and securities values of Kinder Morgan Inc. and Kinder Morgan Energy Partners, L.P. (collectively known as “Kinder Morgan”) may differ mate
Slide 43: Agenda
42 Agenda Real earnings, real cash 2002 Budget Balance Sheet Credit Issues KMR Update
Slide 44: Financial Overview
43 Financial Overview KMP – Total distributions grew more than 25% in 2001 – $2.15 distribution for 2001 vs. $1.71 for 2000 – Annual distribution rate now $2.20 – Project year-end rate of $2.50 – Earnings expected to be $1.83 – 40% debt to total capital target KMI – 52% growth in EPS in 2001 to $1.9
Slide 45: KMP Distributable Cash
44 KMP Distributable Cash Growth Rate 2000 2001 2002E 2001-2002 Net Income $278,348 $442,343 $601,917 DD&A 90,825 151,088 176,331 Sustaining Capex (35,051) (56,122) (73,838) Total Distributable Cash Flow 334,122 537,309 704,410 31% General Partner's Interest (109,470) (202,095) (276,183) Distributab
Slide 46: KMI Cash Per Share
45 KMI Cash Per Share Growth Rate 2000 2001 2002 2001-2002 Recurring Earnings $146,735 $237,232 $324,502 Diluted EPS $1.28 $1.96 $2.58 32% Add: DD&A 108,165 109,246 104,153 Less: Sustaining Capital Spending (85,654) (79,000) (85,000) Add: Book –Cash Taxes 88,115 117,798 79,422 Free Cash Flow $257,36
Slide 47: KMP 2002 Budget
46 KMP 2002 Budget Income 2002 2001 Change 01 - 02 % Change Segment Earnings before DD&A Product Pipelines 413,762 38.7% 380,216 43.4% 33,546 8.8% Natural Gas Pipelines 262,067 24.5% 226,683 25.9% 35,384 15.6% CO2 Pipelines 112,722 10.5% 111,402 12.7% 1,320 1.2% Terminals 196,653 18.4% 157,036 17.9%
Slide 48: KMI 2002 Budget
47 KMI 2002 Budget Income 2002 2001 Change 01 - 02 % Change KMP 403,680 46.2% 251,860 35.0% 151,820 60.3% NGPL 359,862 41.2% 346,352 48.2% 13,510 3.9% Retail 60,504 6.9% 57,449 8.0% 3,055 5.3% Power and other 49,797 5.7% 63,348 8.8% (13,551) (21.4%) Total Segment Income 873,843 100.0% 719,009 100.0%
Slide 49: Quarterly Earnings and Distributions
48 Quarterly Earnings and Distributions Q1 Q2 Q3 Q4 Total KMI Earnings 25-30% 20-25% 20-25% 25-30% 2.58 KMP Earnings 25-30% 20-25% 25-30% 25-30% 1.83
Slide 50: KMI Growth Drivers 2002
49 KMI Growth Drivers 2002 KMP (46% of expected 02 segment earnings) – Strong internal growth – Detail in KMP section NGPL (41%) – Contract renewals ensure stability – Horizon and St. Louis expansions come on-line – Additional demand – power plants, storage projects, Permian expansion
Slide 51: KMI Growth Drivers (Cont)
50 KMI Growth Drivers (Cont) Retail (7%) – Stability ensured through weather hedges – Citizens acquisition – Full year of cost savings from capital projects – Longer term growth of 3-4% Power and Other (6%) – Includes only two projects currently under development – Michigan and Arkansas – Developmen
Slide 52: KMI Growth Drivers (Cont)
51 KMI Growth Drivers (Cont) Equity income – Better performance from TransColorado – Paid down TransColorado debt G&A – Up slightly in 02 Interest Expense – Lower debt balances reduce expense Minority Interest – KMR drives growth – full year, more outstanding – TRUPS - $22mm each year
Slide 53: KMP Growth Drivers
52 KMP Growth Drivers Product Pipelines (39%) – Pacific – volume growth, tariff increases; full year Calnev – Plantation – volume growth, tariff increases – CFPL - volume growth, tariff increases – North System – volume growth, tariff increases, Citgo – Transmix – Colton expansion, full year of Duke
Slide 54: KMP Growth Drivers (Cont)
53 KMP Growth Drivers (Cont) CO2 Pipelines (11%) – Volume increases offset by pricing and expenses Terminals (18%) – Bulk: – Full year of acquisitions: Pinney, Vopak, etc. – Volume growth, tariff increases – Liquids: – Full year of acquisitions: Stoltz, Boswell – Expansions Additional acquisitions
Slide 55: KMP Growth Drivers (Cont)
54 KMP Growth Drivers (Cont) G&A – Primarily a function of acquisition growth – Growth slower than growth in revenues and margins Net Debt Cost – Target 40% debt to capital – Lower rates provide some additional benefit – Generally target 50% floating, 50% fixed Minority Interest – Trailblazer (until
Slide 56: KMP Preliminary Balance Sheet
55 KMP Preliminary Balance Sheet December 31, 2001 2000 Cash and cash equivalents $ 62,802 $ 59,319 Other Current Assets 317,138 451,942 Property, Plant and Equipment, net 5,082,612 3,306,305 Investments 440,518 417,045 Other Assets 819,393 390,599 Total Assets $ 6,722,463 $ 4,625,210 Accounts and n
Slide 57: KMI Preliminary Balance Sheet
56 KMI Preliminary Balance Sheet 12/31/2001 12/31/2000 Cash $ 16,134 $ 141,923 Other Current Assets 344,461 291,719 Property, Plant and Equipment, Net 5,703,952 5,667,991 Investment in Kinder Morgan Energy Partners 2,806,615 1,819,281 Other Assets 667,607 466,075 Total Assets $ 9,538,769 $ 8,386,989
Slide 58: Balance Sheet Ratios
57 Balance Sheet Ratios 2002 2001 2000 1999 KMI Debt to Capital 45.6% 47.4% 62.2% 66.7% Debt/EBITDA 3.48 4.16 5.60 7.93 EBITDA/Interest 4.71 3.38 2.49 1.94 KMP Debt to Capital 40.6% 46.1% 46.7% 39.7% Debt/EBITDA 2.83 3.53 4.01 4.03 EBITDA/Interest 5.36 4.36 4.75 5.31
Slide 59: Off Balance Sheet Debt
58 Off Balance Sheet Debt $Millions Entity Asset Ownership Interest Debt at 100% (a) Comments KMI Jackson Power Plant Preferred interest, plant $250 Obligations related to plant operator performance and operation KMI Ft. Lupton Power Plant 50%, AEP owns $149 Non-recourse remainder KMI Igasamex 21%,
Slide 60: Prior Off-Balance Sheet Debt (October 1999)
59 Prior Off-Balance Sheet Debt (October 1999) $Millions Entity Asset Ownership Interest Debt at 100% (a) Comments KMI /KMP KMTP 100% $360 Purchased assets from Occidental in August 2001 KMI TransColorado 50%, Questar owns $200 Paid off in October 2001 remainder KMI Bushton Lease 100% $200 Sold to O
Slide 61: Liquidity
60 Liquidity KMI KMP Year-end CP balance 424 591 Commercial Paper capacity 900 1,050 Remaining capacity 476 459 Current CP rates 2.10-2.15% 2.05-2.10% 02 Maturities March 200 October 200 Credit Facilities - October Spreads 5-Yr 140 155 10-Yr 160 160 30-Yr 190 175
Slide 62: Expected Financings
61 Expected Financings KMP $Millions Commercial paper balance 591 Tejas acquisition 750 KMI – Generate >$400mm of free cash flow Debt issue maturing in March 200 Trailblazer acquisition 68 – Maintain 50% debt to capital Cochin acquisition 29 1,638 – Pay down debt – Repurchase equity Debt offering 50
Slide 63: Other Credit Issues
62 Other Credit Issues Limited ratings triggers – ISDA’s for commodities – only use to hedge limited commodity exposure Contingent liabilities – Operate Jackson plant, some financial support post-16 year tolling period (KMI) – KMR exchanges (KMI) KMP creditwatch negative at S&P – Equity offering – L
Slide 64: KMR is KMP
63 KMR is KMP KMR KMP Distributions Shares Cash Yield 5.8% 5.8% Exchangeability KMP Common Units None Voting Rights In Parity with KMP Limited Optional Purchase Yes Yes Mandatory Purchase Yes No Tax Considerations Allocated Taxable Income No Yes Non-Qualifying Income No Yes UBTI No Yes K-1s No Yes S
Slide 65: KMR Trades with KMP
64 KMR Trades with KMP 40 39 38 37 KMP 36 Price 35 34 KMR 33 32 31 30 5/15/2001 12/31/2001 Date
Slide 66: KMR Share Performance
65 KMR Share Performance KMR has traded on average, within 1% of KMP price Consistently closed above KMP in 2002 Total exchanges into KMP have been small to date Low short interest levels in KMP and KMR Trading volume has been reasonably liquid. Expect additional liquidity via additional offerings S
Slide 67: Financial Summary
66 Financial Summary KMP – 12% growth in DCF/unit to $2.40/unit before acquisitions – $2.50 year end run rate (no acquisitions) – 40% debt to total capital – Will distribute $700mm KMI – 32% growth in EPS to $2.58 – 50% debt to total capital – Long term growth 20-30% annually – Generating tremendous
Slide 68: Kinder Morgan
KINDER’ MORGAN