Slide 1: Corporate Development and Capital Markets
Corporate Development and Capital Markets Mike Morgan
Slide 2: Agenda
Agenda General Partner Incentive – Math or Morality? KMR vs. KMP Price Capital Expenditures Sustaining Cap Ex Expansion Cap Ex Proposed Dividend Policy Change Acquisition Outlook and Financing 2
Slide 3: An MLP Unit is NOT a Common Stock
An MLP Unit is NOT a Common Stock An MLP is not taxed at entity level An MLP is required to distribute all available cash on a quarterly basis All MLPs provide GP with significant participation in growth Distributions to unit holders are largely tax deferred Unit holders are “limited partners” with
Slide 4: General Partner Incentive - Background
General Partner Incentive - Background General: GP/LP split established by partnership agreement All MLPs structured with a GP incentive fee Of thirteen pipeline MLPs, all except 2 have a top tier of 45-50% − EPD (25%) and KPP (30%) Of thirteen pipeline MLPs, 4 are currently in highest tier.
Slide 5: General Partner Incentive - Future
General Partner Incentive - Future At present, no reason to restructure the partnership Going forward return to LP is attractive − 7% yield plus 8-10% annual growth implies 15%-17% total return potential Has not impacted our ability to grow distribution and provide unit holders with very attract
Slide 6: Cash Distribution/Unit
KMP has grown distribution 2.5 X since achieving 50% tier KMP Distributions/Unit $0.70000 $0.60000 Cash Distribution/Unit $0.50000 $0.40000 $0.30000 $0.20000 $0.10000 $- 96 1Q 97 1Q 98 1Q 99 1Q 00 1Q 01 1Q 02 1Q 50% threshold Quarte r 6
Slide 7: KMP has provided investors attractive return since entering 50% tier
KMP has provided investors attractive return since entering 50% tier Comparative Annual Returns (a) 161% 75% KMP SPX MLP (b) 55% 47%47% 42% 40% 37% 35% 33% 29% 29% 23% 21% 15% 14% 16% 3% 4% 1% -1% -5% -10% -9% -12% -22% -25% 1997 1998 1999 2000 2001 2002 6-yr Average (a) Annual return for indicated
Slide 8: KMP has raised $1.8 B of equity since entering 50%
KMP has raised $1.8 B of equity since entering 50% Comparative Annual Returns Since Offering (a) KMP SPX UTY 35% 31% 30% 24% 24% 25% 20% 17% 15% 10% 5% 4% 5% 0% 1% 0% -4% -3% -5% -1% -4% -10% -15% -16% -19% -19% -20% Offering 97 KMP 98 KMP 00 KMP 01 KMR 02 KMR Total Offering Amount $13 $258 $163 $1,
Slide 9: KMP has and can make accretive acquisitions
KMP has and can make accretive acquisitions Cost of Equity Cost of Debt Nominal Yield 7.0% 10-year Fixed (50%) 6.5% GP Gross-Up 4.5% 10-year Floating (50%) 4.5% Pre-Tax Cost of Equity 11.5% Pre-Tax Cost of Debt 5.5% 60% 40% Weighted Average Cost of Capital = 9.1% VS. Acquisition multiples of: 6.0X 1
Slide 10: GP in 50% tier offers LP more downside protection
GP in 50% tier offers LP more downside protection KMP $809 Distribution General Limited L.P. Share Per LP Unit (b) Partner Partner $701.1 G.P. Share (a) Tier I $0.00 to 2% 98% $0.605 $547.7 Tier II $0.605 to 15% 85% $333.3 $0.715 41% $198.3 40% Tier III $0.715 to 25% 75% $152.9 38% $0.935 $30.1 34%
Slide 11: KMR vs. KMP
KMR vs. KMP KMR Discount/Premium File preliminary 6/25/2002, -1% 10% proxy to remove File Final Proxy 7/24/2002, -3% exchange Begin 4/11/2002, 0% 5% KMR Roadshow 0% 1 1 01 01 02 2 2 2 02 02 03 -0 -0 p- - - -0 -0 -0 p- - n- ay J ul e ov an a r ay J ul e ov a M S N J M M S N J -5% 7/31/2002, -7% -10%
Slide 12: KMP vs. KMR Price Chart
$25 $30 $35 $40 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 KMR Jan-02 Feb-02 Mar-02 Apr-02 KMP vs. KMR Price Chart May-02 Jun-02 KMP Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 KMP Dec-02 Jan-03 KMR 12
Slide 13: KMR was created for institutions
KMR was created for institutions KMR KMP Distributions Shares Cash Yield 7.5% 7.0% Voting Rights In Parity with KMP Limited Mandatory Purchase Assures value in liquidation (a) No Optional Purchase Yes Yes Tax Considerations Allocated Taxable Income No Yes Non-Qualifying Income No Yes UBTI No Yes K-1
Slide 14: KMR is a Tax Efficient Way to Own KMP
KMR is a Tax Efficient Way to Own KMP Higher Current Yield When KMR Trades at a Discount KMP Cash Distribution / KMR Price (10 days prior to ex-dividend) Same or Better Terminal Value guarantee upon mandatory purchase events of higher of KMP or KMR value Same Voting Rights as KMP Taxes Share d
Slide 15: Capital Expenditures
Capital Expenditures Two Types of Capital Expenditures: Maintenance (Sustaining) Does not expand capacity Deducted from cash to determine distributable cash flow Expansion Expands capacity Over $400 million in 2003 Equity portion funded primarily by KMR paid-in-kind distribution − KMR = $2
Slide 16: Maintenance Cap Ex
Maintenance Cap Ex Why doesn’t KMP’s maintenance cap ex equal depreciation? 2003 Maintenance Cap Ex = $95 million 2003 Maintenance Expense = $60 million Total Maintenance $155 million 2003 Depreciation Expense = $216 million Maintenance cap ex varies greatly depending on age of pipe, historical ma
Slide 17: Proposed Dividend Tax Cut - KMI
Proposed Dividend Tax Cut - KMI Effect on KMI is very positive Currently $200 million returned to equity through combination of dividends and share repurchase If tax law changed, all $200 million could be returned through dividend, approximately 4% yield Allows investor vs. company to make rei
Slide 18: Proposed Dividend Tax Cut - KMP
Proposed Dividend Tax Cut - KMP Effect on KMP is neutral Who is affected? − Traditional C- C-corps and utilities would benefit − REITs, Fixed Income (Bonds/Treasury), MLP would not benefit Two Fundamental Questions: − Does change result in new money flowing to dividend yielding stocks stocks or
Slide 19: Acquisition Environment
Acquisition Environment Pipeline MLPs spent about $6.5 billion on acquisitions in 2002 (a) KMP spent approximately $180 million on acquisitions, primarily terminals Several major pipelines traded – Northern Natural Gas, Central, MAPCO. Kern River in negotiated transaction Acquisition multiples in th
Slide 20: Partnership has many financing options
Partnership has many financing options KMP offering KMR offering Private placement Preferred instrument Joint venture Hybrid 20