Kinder Morgan, Inc. (KMI) Q4 2012 Earnings Report, Transcript and Summary

Welcome to the quarterly earnings conference call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. Go ahead, sir. You may begin.

All right. Thank you, Sharon, and welcome to the Kinder Morgan Investor Call. Today, we'll be discussing results for Kinder Morgan, Inc., which I'll refer to as KMI; for Kinder Morgan Energy Partners, which I'll refer to as KMP; and for El Paso Pipeline Partners, which I'll refer to as EPB. I'll give an overview, then Kim Dang, our Chief Financial Officer, will give you a detailed financial numbers discussion, and then we'll take any and all questions that you might have. As usual, we'll be making statements within the meaning of the Securities Act of 1933 and the Securities and Exchange Act of 1934. Let me start by reminding all of you that the focus of all the Kinder Morgan companies is on producing cash in increasing amounts and distributing that cash to our shareholders or unitholders. 2012 was another very successful year at Kinder Morgan. And reflecting that success, all 3 of the companies declared increased distributions or dividends for the fourth quarter, and all equaled or exceeded their annual budget target in terms of distribution or dividends per unit or share for the full year 2012. Let me start with KMI. There, we increased our dividend to $0.37 a share, that's up 19% from the dividend in Q4 of 2011. For the full year 2012, we declared $1.40 in dividends versus $1.35, which was our original budget target for 2012, and $1.20, which was the declared distribution for 2011. That's an increase of 17% year-over-year. And in 2012, we generated over $1.4 billion at KMI in cash available to pay dividends, and that's up 62% from 2011. Now as you can see on the sheets attached to the earnings release, that resulted in $1.55 cash available for dividends per average share. But in an effort to be fully open about this, I think the better way to look at it is to use the record date shares because if you remember, we require -- we acquired El Paso during the middle of the third quarter. And if you do that, the actual cash available for dividends per share is $1.46 per share, that's a 20% increase over 2011, and results in $62 million of excess coverage above the actual dividends declared for 2012. The growth at KMI was driven by strong performance at both KMP and EPB, and by the former El Paso Pipeline assets, which still are at KMI before being dropped down to KMP or EPB. We achieved more than $400 million in annualized cost savings as a result of the El Paso merger. That's well above our initial target of $350 million per year. Looking ahead at KMI, as we previously stated, we expect to declare dividends of $1.57 per share in 2013, that's up 16% from the 2012 budget target and up 12% from the 2012 declared dividends per share of $1.40. In 2013, we expect to sell our 50% interest in Gulf LNG to EPB and our 50% stakes in EPNG pipeline and midstream assets to KMP. The future growth looks very good as we currently identified over $12 billion in expansion projects and JVs across the Kinder Morgan companies, which we believe we will construct. And we have many more projects to which we continue to pursue customer commitments and believe we will be able to expand in high order on these additional projects. In short, our enormous footprint of pipelines and terminals is providing us with a tremendous opportunity for sustained, profitable growth, which we expect to last for years to come. So that's KMI. Let me turn to KMP. At KMP, we increased the quarterly dividend to $1.29 per unit, that's $5.16 annualized, and we will distribute $4.98 for the full year 2012, that's consistent with our budget, and up 8% over the 2011 distribution of $4.61 per unit. Our DCF per unit at KMP was $5.07, that's up 8% also from the $4.68 in 2011. All 5 of our business segments at KMP recorded higher results than in the prior year, and segment earnings before DD&A and certain items increased by 20% in 2012 to almost $4.4 billion. Now turning to the segments. At our Products Pipeline segment, refined products volumes were down by about 1.5% for the full year 2012 compared to 2011, but NGL volumes were up about 22% and our ethanol and biofuels volumes were up by 11%. We're making good progress on all of the roughly $700 million in new projects that we have in this segment as we've detailed in the earnings release. Turning to our Natural Gas segment, there the growth is driven primarily by the drop downs of TGP and half of EPNG, which were made during 2012. We also benefited from good performance of the Texas Intrastates and from increasing volumes on our Eagle Ford assets. As a result of all this, transportation volumes across our natural gas network was up by 11% for the full year. Some of this was driven by electric generation load and, for example at TGP, at the Tennessee Gas Pipeline, electric generation load was up by 12% for the year. At the Natural Gas segment, we have a great footprint and we're finding lots of projects to invest our money in. We have $2.7 billion of projects currently underway, and that doesn't include a lot of projects that we have high hopes for in the near to intermediate future. For example, that doesn't include our potential conversion of part of the EPNG system to crude oil deliveries from the Permian Basin to California. That's a project we call the Freedom Pipeline. We're starting work on that. As we mentioned for the first time last quarter, we've had good interest from both producers and refiners. We're a long way from having a project buttoned down. But whatever the cost of that project, and it would be something in the $2 billion range, is not included in this $2.7 billion backlog that I referred to. We have -- we're making good progress on that $2.7 billion and think that we have a lot more announcements to come over the course of 2013. In our CO2 segment, the growth there was led by a very strong performance at SACROC. For the fourth quarter, SACROC produced 30,600 barrels per day, that's up 10% from the fourth quarter of 2011. And frankly, what's happening at SACROC is we're just discovering more and more opportunities to expand the field. And by doing that, we're pushing back the decline curve that people anticipated would be starting in a particular year, that year seems to be more and more distant. In short, I think as Tim Bradley often says, big fields get bigger. And I think that's what we're seeing in this very large SACROC Unit. In addition to SACROC, our NGL production at Kinder Morgan, most of which is in the SACROC area, also reached record levels. It was up 13% for the full year 2012 versus '11. Our Yates volumes were pretty much on target for the year. Katz volumes were up nicely from 2011, but still below plan. We're working very hard to get those volumes ramped up more quickly and in accord with our original projections. On the sales and transportation side, the demand for CO2 still remains very strong in the Permian Basin and surrounding areas. We are working on our Southwest Colorado expansion efforts that we've talked to you about in the past. Those efforts are underway. And actually, we expect an increase of more than 50 million cubic feet a day in CO2 production coming out of Southwest Colorado in 2013. And that will help to service some of this real demand for CO2 that we're seeing. In our Terminals group, the growth was driven by our liquids terminals, particularly in Houston and New York Harbor, and by higher demand for export coal. For the full year 2012, our export coal volumes were up by 38%. In this segment, we have $1.4 billion worth of projects that are underway. The great majority of them are on time and on budget. We think we have lots of opportunities for additional liquid storage and handling facilities, particularly in the Houston Ship Channel and in the Edmonton, Alberta area. And we just made another major announcement on the ship channel project just earlier this week, and we've reiterated in our earnings release. And we also think we have additional opportunities for export coal handling on the East Coast and along the Gulf Coast. In our Canadian segment, they had a strong year, they had good throughput on Trans Mountain, good throughput on Express, and benefited from favorable booked taxes. That's a positive for the segment. It washes out in the way we calculate our distributable cash flow, but it did improve the performance of the segment, as Kim will take you through. The big project, of course, there is the Trans Mountain expansion, and we recently upsized that due to additional shippers signing up long-term contracts. And we've now announced that, that project would increase the capacity of Trans Mountain from 300,000 barrels a day to 890,000 barrels a day, with over 700,000 barrels per day of that committed under long-term contracts. Of those long-term contracts, 93% of the volumes are committed for 20 years and 7% for 15 years. Looking ahead at KMP, we expect to declare distributions of $5.28 per unit for 2013. That's up 6% from 2012, and we expect to invest about $2.9 billion in expansions and small acquisitions at KMP, and that excludes the drop-downs that we anticipate doing from KMI to KMP later this year. Turning to EPB, we increased the distribution per unit there to $0.61. That's 20% over the distribution for Q4 of 2011. We distributed -- we will distribute $2.25 per unit for the full year 2012, that's up 17% from 2011. Our distributable cash flow per unit for full year 2012 was $2.82 at EPB versus $2.45 in 2011. And that's an increase of 15%. The growth at EPB was driven by solid results at our pipeline and storage assets, some expansions at SNG, the drop-down of assets from our GP and by cost savings associated with KMI's acquisition of El Paso in May of 2012. We're also benefiting from significant increased demand from natural-gas-fired power plants, particularly at SNG, where power generation demand was up 30% for the fourth quarter and 42% for the full year 2012. We continue to make progress on providing additional capacity to our customers on our Elba Express Pipeline and in planning for a liquefaction facility at our Elba Island, Georgia re-gas facility. Looking ahead, as we previously said, EPB expects to declare distributions of $2.55 per unit for 2013, an increase of 13% over 2012. Now let me talk briefly about some upcoming organizational changes, which were detailed in the earnings releases. In December, we wrapped up the KMI management-led buyout, which dated back to 2006. This resulted in the distribution of substantial KMI shares to about 80 members of the senior management at Kinder Morgan under the MBO incentive plan. All these shares came out of the stock owned by the MBO investors, and not one cent of cost was incurred by the public shareholders of KMI or, for that matter, KMP or EPB, to fund this incentive plan. In effect, this program was a long-term incentive plan for our senior management from the time the privatization was announced in May of 2006 until now, and it obviously served very effectively as a retention factor at Kinder Morgan. The great majority of those in the incentive program have decided to stay with Kinder Morgan, but a few have elected to retire or take other positions within the company. And I thought I would give you a quick summary of those changes. I will continue as Chairman and CEO of the Kinder Morgan companies. Park Shaper has elected -- our President has elected to retire as President of Kinder Morgan but will remain on the board of KMI. Park's contribution to the success of Kinder Morgan just cannot be overstated. He's been with us for 13 years and we'll miss him terribly. He's done a great job, and we're just delighted he's going to stay connected to the company as a member of the board at KMI. Steve Kean, who's currently Executive Vice President and Chief Operating Officer, will become President and Chief Operating Officer for Kinder Morgan effective March 31. Steve's been with us for 11 years, the last 6 as COO. Now the other changes that are coming in the next few weeks and months. Jeff Armstrong, who's currently President of our Terminals segment, will move over to become Vice President of Corporate Strategy for Kinder Morgan. As we say in the release, we're just seeing an unprecedented number of opportunities in North American energy that cut across business unit lines. We think Jeff is really ideally suited to help us identify ways to coordinate our efforts and look for opportunities to extend the Kinder Morgan model to new related lines of business, and that's what he'll be doing on a going-forward basis. He'll be succeeded as President of the Terminals business by John Schlosser. John's currently Vice President of Business Development for the Terminals organization, and has been with us in a predecessor company since 1999. Tom Bannigan, who's President of the Products Pipelines, will be retiring. He'll be succeeded by Ron McClain, who's currently Vice President of Operations and Engineering for the Products Pipeline group. Ron's been with us, our predecessor companies, for over 30 years and is long-experienced in the Products Pipeline field. Tim Bradley, our CO2 segment President, is retiring. He will be succeeded by Jim Wuerth, who's currently Vice President of Finance and Accounting for that segment. Jim has been with us in a predecessor company for over 30 years and brings an awful lot of experience to the table. Joe Listengart, our General Counsel, will not be retiring. He will be stepping down from his current position as General Counsel. He'll be succeeded by Dave DeVeau, who's currently Vice President and Deputy General Counsel. Joe will continue working for the company assisting as needed on significant transactions and other matters. David Kinder, the VP of Corporate Development and Treasurer will be retiring. He'll be succeeded by Dax Sanders as the VP of Corporate Development. Dax has been with us for 12 years, with exception of a 2-year period while he earned his MBA at Harvard Business School. So he is very familiar with the Kinder Morgan acquisition opportunities, has been an active participant in accomplishing our prior successes. Kim Dang will stay as Vice President and Chief Financial Officer, and she will pick up responsibility for the Treasurer and Investor Relations departments from David. And she will have 2 new key people working with her, David Michels, who's currently Vice President of Finance for Kinder Morgan, will become Vice President of Investor Relations and also Chief Financial Officer of El Paso Pipeline Partners. He'll report to Kim. Also reporting to Kim will be Anthony Ashley. Anthony is currently Director of Finance for Kinder Morgan, and he will become Vice President and Treasurer for us. In addition to myself, Steve, Kim and Jeff, the other members of the senior management team are staying with Kinder Morgan, specifically Tom Martin who's the President of our Natural Gas Pipeline group, and that group now makes up about 54% of the cash flow at the Kinder Morgan companies. And his whole entire senior commercial management team is also staying. Ian Anderson, President of Kinder Morgan Canada, will stay, as will Jim Street, our Vice President of Human Resources and Administration. So I'm tremendously grateful for the contributions that Park, Tom, Tim, Joe and David have made. I appreciate their commitment to ensure our smooth transition. We expect to have the transition essentially completed by March 31, although all of them have committed that they'd be willing to stay on into the second quarter to make sure that the transition is smooth. I remain very optimistic about the future of Kinder Morgan, especially considering the size of our footprint and the tremendous amount of growth projects we've identified. And believe me, I believe this team will continue to deliver for our unitholders and shareholders. And with that, before I turn it over to Kim, I'd just like to let Park Shaper say a few words, and then Kim will then go into the financial details. Park?

All right. Well, thanks, Rich. I'll say a little bit about the background on my decision here, and it was a very, very difficult decision. I have enjoyed the opportunity to work with bright, dedicated, committed, direct, straightforward people on a set of assets that is truly advantaged and well-positioned in many ways and on a set of diverse transactions that have been fascinating and extraordinary. And I have been able to ride alongside as these people have achieved success after success. And I owe Rich and Steve and every Kinder Morgan employee a debt that I can never repay. But it has been 13 years, every day for 13 years, Rich and Steve and Kim and many others have had to put up with me. It's time to show them some mercy. But beyond just compassion for them, this effort has taken an inordinate amount of my time and effort and focus. My kids are 16, 14 and 11. They have never known me other than to be preoccupied with Kinder Morgan. And so the time is right for me to redirect that time and energy and focus on my wife and children, whether they like it or not. But that being said, it's not that easy to get rid of me. I'm here now, happy to answer any questions that you all may have. I will be here in 2 weeks for the investor conference. I will be here on a normal basis through at least the end of March, and I'm very excited to continue on the KMI Board of Directors. But I think the most relevant thing I can tell you is I am convinced that we have the greatest set of midstream energy assets ever assembled in North America at a time when the opportunities for growth in the midstream business are abundant, and we're operating those assets with the greatest management team and employee base that has ever been assembled. And all of that makes it very easy for me to say and to truly believe that for Kinder Morgan, the best is yet to come. And with that, I'll give it to Kim.

Okay, Kim.

Okay. So now to go through the numbers for the fourth quarter, I'm going to start with KMP then I'll move to EPB and do KMI last. On KMP, the first page of numbers in the press release is the GAAP income statement. As we say most quarters, there's -- we don't think this provides a very relevant picture of the way that our business operates. And so I'll direct you to the second page where we calculate distributable cash flow, which is the measure upon which we base our success and the -- and our distributions. So as Rich said, we are declaring a distribution of $1.29 for the quarter. We just -- we are generating $1.35 of distributable cash flow, so we have coverage of just over $20 million. The distributable cash flow per unit is up 8 -- or is up 6% in the quarter. For the full year, we're generating $5.07, that's up 8% based on the declared distribution of $4.98. We have just a little under $30 million of coverage for the year. That is below our budget of $71 million for coverage, which I will go through, but is primarily driven by the performance of our CO2 business and, specifically, lower NGL prices, as well as our products business unit missed its budget. But a couple of lines above that, you'll see the total distributable cash flow, $495 million in the quarter, that's up $70 million from the fourth quarter a year ago. For the full year, $1.78 billion -- or $1,778,000,000, that's up $253 million or 17%, and it's right on our budget. So looking up at the top of the segments to see what drove the growth for $70 million in the quarter and $253 million for the full year, you can see segment earnings before DD&A up $289 million in the quarter, up $745 million for the year. Over 80% of the $289 million for the quarter was driven by Natural Gas Pipelines and CO2. And for the full year, almost 90% of the growth came from Natural Gas Pipelines and CO2. Looking at the specific segments, Products Pipelines was up $15 million in the quarter, and that is primarily a function of, as Rich mentioned, NGL volumes on Cochin. It's also a function of nice volumes on our Southeast Terminals and on the ramp-up that the commissioning and startup of the Kinder Morgan crude and condensate line. For the full year, Products Pipelines is up $9 million. It is about 4% below its budget for the year, and that's primarily a function of Transmix where we had a contract expire in the first quarter, and then also volumes were slower to ramp up on the crude and condensate pipeline than we had originally budgeted. That -- those volumes really started moving in the fourth quarter. We expect it will start moving in the summer. Natural Gas Pipelines up $184 million in the quarter, up $423 million for the year. Natural Gas Pipelines was significantly above its budget, primarily as a result of the drop-downs. Now that -- the growth from the drop-downs was offset somewhat by the lost income from the FTC asset sales also because of lower volumes on KinderHawk as a result of less drilling in the dry gas areas and also worse performance than we expected out of our Texas Intrastate, again, primarily as a result in the Eagle Ford -- or volumes in the Eagle Ford were slower to come on than what we originally anticipated in our budget. CO2, up $56 million in the quarter, up $232 million for the year, below its budget, a little over $50 million or about 4%. And all of that and more was driven by NGL prices. Oil volumes were actually on a net basis, about 400 barrels per day above our budget, and NGL volumes on a net basis were actually about 700 barrels a day above our budget. Terminals up $14 million in the quarter, up $51 million year-to-date. They were slightly below their budget, within 1% of their budget. And that's primarily due to lost business due to the hurricanes, low water levels on the rivers which inhibited some of volume movements, and some lower steel and salt volumes. Now as we say in the press release, on the lost business due to the hurricanes, this was obviously a relatively small number given that most of our charges on the liquids terminals comes from monthly warehousing charges, and we were back up in operation very quickly there. On Kinder Morgan Canada, up $20 million in the quarter, up $30 million year-to-date, and versus our budget, up $28 million. Now as Rich said in his comments here, we got a big benefit from booked taxes in the segment that's showing up here. That benefit was about $13 million in the quarter and $16 million year-to-date. Also, as he said, when we calculate distributable cash flow, we add back booked taxes and subtract out cash taxes. And so these booked taxes do not have an impact on our calculation in distributable cash flow. If you look at Kinder Morgan Canada's results net of the booked taxes, it's up primarily as a result of strong results at Express Pipeline. Now dropping down about 12 lines to general and administrative expense, a higher G&A expense of $22 million in the quarter, $45 million for the year and higher than our budget by about $21 million. Versus our budget, all of this and more was a function of the drop-downs from KMI. Absent the drop-downs from KMI, we actually would have run a positive variance on G&A. Similar story on interest. Interest -- increased interest of $42 million in the quarter, $101 million year-to-date and $43 million higher than our budget. Again, absent the acquisitions, primarily the drop-downs, interest would have been a positive variance versus our budget. Now dropping down about 25 lines to sustaining CapEx, which is just above distributable cash flow before certain items. Sustaining CapEx was increased, an increase of $39 million in the quarter, an increase of $73 million for the year and over our budget by about $37 million. Again, similar story here to interest and G&A. Absent the drop-downs, net of the FTC sales, this would have been a positive variance versus our budget, primarily is a result of lower sustaining capital spend on some of the FTC assets during the period that we own it, and also as a result, CO2 pushed some of theirs into 2013. Looking at the certain items for the quarter, there are 2 significant ones that I'll point out: $51 million of expense related to casualty losses, primarily Hurricane Sandy. As we say in the press release, these losses will largely be covered by insurance. And then an $18 million benefit on a release of tax reserves. These are a release of tax reserves on TGP that are related to periods prior to KMP's ownership. So we pulled those out. So that is -- that's KMP's distributable cash flow. Turning to the balance sheet, we ended the year debt-to-EBITDA, which is the last line of numbers on the balance sheet, at 3.7x. That's slightly up from year-end 2011 at 3.6x, but it's lower than where we were at the end of the third quarter. At the end of the third quarter, and we told you this at the time, we adjusted for the FTC sale that was imminent at that point in time, we were at about 4x, and we brought that down to about 3.7x as a result primarily of issuance of equity, but also growth in the EBITDA. The 3.7x is also a little bit better than what I told you on the third quarter call. We -- I projected to end the year at about 3.8x at that point in time, but we ended up spending a little bit less on expansion capital during the year than we thought. And we also issued some additional equity versus our forecast at that time. To quickly reconcile debt for you, debt for the year is up $2.9 billion. For the quarter, it is down $2 billion. For the quarter, we spent just under $500 million between acquisitions, expansion CapEx and contributions to equity investments. The most significant item in the quarter, obviously, was the sale of the FTC assets. On a net basis, we received about $1.75 billion from that sale. We raised equity of about $670 million, and that includes the KMP offering, the KMP aftermarkets and then the KMR distributions. We sold 42.5% interest in BOSTCO to TransMontaigne. They have the right to repurchase that interest. That resulted in proceeds of $79 million. And then there were working capital and other items of about $17 million. For the year, $2.9 billion increase in debt. We spent about $7.78 billion between acquisitions, expansion capital and contributions to equity investments. The largest piece of that was about $5.66 billion on the drop downs. Also on the acquisition side, we bought midstream -- half of midstream in June for $300 million from KKR. We spent about $1.5 billion on expansion CapEx and about $200 million on contributions to equity investments. The sale of FTC assets generated $1.75 billion net. We raised $2.86 billion in equity between the KMP offering, the KMR offering, the ATM and the KMR distributions. That number also includes the contribution from the GP to maintain its interest. The sale of BOSTCO was $79 million inflow. We unwound swaps earlier in the year that was little over $50 million. We paid out rate case reparations of a little over $50 million. And then working capital and other items were a benefit or inflow of approximately $149 million. A lot of that associated with stock premiums that we received on our Canadian assets. That's KMP. Next, I'll move to EPB's income statement. And similar to KMP, I will move to the second page to our calculation of distributable cash flow. The bottom -- or the second to the last line of numbers, distributable cash flow per unit, $0.75 for the quarter, that's a 36% increase from the fourth quarter of 2011; $2.82 for the year, which is a 15% increase from 2011. The $0.75 resulted in about -- a little over $30 million of coverage for the quarter, and the $2.82 resulted in over $100 million, precisely $119 million of coverage for the year. Distributable cash flow in total, $163 million in the quarter, up $49 million. For the year, $590 million, up $107 million. Now let's look up at the segments, the first line of numbers on the page, see where that growth came from. You can see earnings before DD&A up $40 million in the quarter. Now I'm sure that's not all of the earnings that the assets generate because El Paso acquired -- El Paso Partners acquired a partial interest in an asset, CIG, in the second quarter. So it had already consolidated that interest because it owned over -- that asset because it owned over 50% of it. So the -- but the minority interest, there's a minority interest expense to allocate the earnings for the 14% to El Paso, which occurs later down the line in the income statement. So if you look at the reduction in minority interest expense because EPB acquired that 14%, that's a $5 million increase, so $45 million of growth generated from the assets. That's offset, you see a couple of lines down, by increased interest of $6 million. G&A is actually a benefit, quarter-to-quarter, of $18 million as we're getting a -- the cost savings that we've implemented at the time of the merger. The GP interest is up $26 million. And then sustaining CapEx, we've actually got a savings year-to-year of about $18 million. That gets you to the $49 million in growth. For the full year, again, looking up at the earnings before DD&A from the segment, up $90 million. Again, that doesn't tell the full story because of the acquisition of partial interest. So you add back the reduction in distributions to the minority interest, $39 million increase. And so $129 million of growth coming from the assets. As Rich said earlier, a large part of that is driven by the acquisition of Cheyenne Plains, of CIG, also some by the acquisition of an interest in SNG. That's about 69% of the growth is generated from the acquisition, and then a large part of the balance comes from expansions, power demand and lower OpEx on Southern Natural. G&A is a benefit. For the full year, again, the cost savings that were implemented, the interest is increased by about $33 million. GP interest is up $70 million, and then sustaining CapEx is a benefit of $57 million, again as a result of the cost savings. And I should say the GP interest is up as a result of higher units and higher distributions per unit. So that gets you to the $107 million in growth in distributable cash flow year-to-year. Looking at EPB's balance sheet, debt-to-EBITDA at year end was 3.9x. That compares to 4x, and I'm looking -- to look at debt-to-EBITDA at the end of 2011, I'm really basing it on the numbers in the footnote, which were the actual -- based on the actual debt balance at 12/31 of '11. The numbers that you see on the -- up on the -- inside the balance sheet themselves have been adjusted to recast for Cheyenne Plains. So it includes the debt of Cheyenne Plains in periods which we did not own it. So based on the actual debt outstanding at 12/31 of '11, $3.832 billion, we were at 4x. And so a little bit of improvement versus the end of the year. Versus September, we were at 4.2x, so a little bit of improvement versus last quarter as well. The change in debt for the quarter, $44 million reduction. For the full year, there's a $400 million increase. In the quarter, we spent $17 million on CapEx. We had excess coverage of $32 million. We sold the SNG offshore assets, and that generated about $50 million. And then we had working capital items and other items of about $22 million, which is primarily timing on accrued interest and accrued taxes. For the full year, debt was up $400 million, expansion CapEx was $71 million, the acquisition, the drop-down, including assumed debt, was a little over $800 million. We issued over $340 million of equity. We had excess coverage of $119 million. There was a cash outflow of $45 million at the time we terminated the AR program, the SNG offshore sale was $50 million, and then we had $15 million of working capital and other items. Now turning to KMI, which went through the declared dividend and the cash available per share. So I'm going to look at the total consolidated cash available to pay dividends, which is the fourth line from the bottom of the numbers. $439 million, that is up $196 million in the quarter. For the full year, $1.411 billion, that's up $545 million or 63% from a year ago. If you look at the growth for the quarter, the $196 million, as Rich said, it was primarily driven by our interest in KMP and our interest in EPB. The interest in KMP -- the distributions coming from KMP increased by $96 million in the quarter, and that's a result of the increase in the LP distribution of 11%. Also, KMI took back some units in the drop downs and so they have more KMP units. And then also there's more units outstanding, which impacts the GP interest. The cash flow or the distributions from EPB is up $100 million. So if you look at the KMP distributions and the EPB distributions together, the $197 million -- and as I said 1 minute ago, we had $196 million of increase in the quarter. And so the other items, the cash available from NGPL, the increase in G&A expense, the increase in interest expense, are largely offset by the incremental earnings coming from the EP operations, to give us a net benefit for the quarter of $196 million. Similar story in the full year, the distributions from KMP, up $267 million. The distributions coming from EPB up $275 million. So $542 million of incremental cash flow coming from the investments in the 2 MLPs, versus $545 million of growth. And so, again, the EBITDA coming from the El Paso assets that we continue to own, really offset the increase that you see in interest expense, G&A expense and sustaining CapEx. That is it on KMI's cash available to pay dividends. Looking at the balance sheet quickly, KMI ended the year with $11.4 billion of debt, that's up $8.2 billion from year-end 2011. Obviously, as a result of the El Paso acquisition. For the quarter, it's up $216 million. And so let me just reconcile the quarter for you quickly. We had transaction-related expenses net of tax benefits of about $75 million. We purchased stock or warrants of about $80 million. The warrant repurchase was about $19 million, and then there were some sponsor shares that the company repurchased associated with the management incentive program. We made contributions to equity investments of about $21 million. And then when you look at the performance metric versus the actual cash we received, there's some timing of, versus -- declared distributions, versus when we actually received those distributions. But the main difference is KMR. We include the benefit of the distributions or the additional shares as cash. In truth, we have not decided to -- we have decided at this point not to sell those. And so that's a $20 million difference between the performance metric and the actual cash. And then there's about $19 million in other items. So that's it.

Okay. And with that, Sharon, if you'll come back on, we'll be willing to take any questions that you all may have.

[Operator Instructions] Our first question comes from Brian Zarahn's line, at Barclays.

Sorry to hear about some of the management changes, but I look forward to seeing everyone 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 and you were replacing some of the Rockies assets you were divesting. But can you talk a little bit about the thought process and do you still expect the drops to be finished next year?

Yes, as you recall, our original target was -- we said when we did the deal, the El Paso acquisition, that we would finish this sometime in '15. We now believe we will wrap it up in '14 and probably, I would say in the first half of '14. But -- so we are ahead of schedule. Clearly, as we look at the drop downs, we got to couple that with the amount of capital expenditures that we have lined up at KMP and EPB without the drop downs, absent the drop downs, and look at what -- how much we think we can put out into the market without disrupting the pricing or anything. And that's how we came to the decision. So we will do these drop downs in 2013. That will still leave Ruby, half of Florida Gas will be the 2 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.

In terms of the multiple, would it be reasonable to assume similar multiple for the transactions in 2012?

I think that's a reasonable assumption, yes. Obviously, it has to be approved by both the independent directors of both boards, who are just starting on the process. As we said, we expect to do the drop down into KMP in March and we expect the drop-down and EPB will do -- will be done more in the August, early September timeframe.

Okay. And 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 of when you think you may have a decision?

Well, we, as I said in my remarks, we're out working with both shippers in the Permian and refiners 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, or the next quarter in April, I think we'll be able to give you an update on it. So far, the response has been positive, but until you get the horse on the ground and 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 at the spread, the Midland/Cushing spread, is over $12. So you've got a big disconnect. You've got a lot of new production coming online out there and even once additional capacity from Cushing down to the Gulf Coast is built, I still think you're going to have some depressed prices. And on the other hand, of course, the Southern California market, very expensive to buy crude out there. So it's kind of a marriage made in heaven. But again, like all our other projects, we won't build unless we have firm commitments turned [ph] up to ensure that is an adequate return for us.

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?

Kim?

Yes, I mean, our effective tax rate is probably 36.5%. You do see a benefit in the 2012 numbers for about a $200 million use of the NOL. And so we're 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.

Your next question comes from Gabe Moreen of Bank of America.

Congrats to those retiring, and based on Kim's new responsibilities, I hope she's got a stash of 5-hour energy or something under her desk, because I don't know how she's going to do it all. But anyhow, I just had a quick question and Rich, you just mentioned the Midland to Cushing differentials. In terms of the CO2 segment, I apologize if this has been addressed in a previous Analyst Day or on a previous call, your realizations at the CO2 segment looked all right. But did those differentials hurt you at all in terms of realizations? And can you maybe remind us in terms of capacity coming out of the basin if you're doing okay there, particularly given that SACROC productions has been exceeding expectations?

Yes, we're doing okay on getting it out. It's just that 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 into 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. But 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.

Okay. And I guess, just as a follow-up to that, have 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?

Tim?

We have not entered into any long term transportation agreements. We are in negotiations with the purchaser that is associated with one of those pipeline projects. And that is -- we expect to get that relationship firmed up during the first quarter. But today, and throughout '12, we've had no problem dispatching our production.

Our next question comes from Brad Olsen of Tudor Pickering.

You guys -- I realize that a lot of other midstream companies have kind of followed in Kinder Morgan's path as far as getting more involved on the rail side of things and your Watco investment was one of the first kind of major midstream moves into the rail industry. Have you guys considered any further -- I guess, any further integration into Watco beyond the preferred investment that you already have?

Well, our integration beyond the preferred investment is on individual projects, and we've just got an additional project now that involves a facility that would be able to handle both crude and condensate in and out of the Houston Ship Channel, a joint venture with Watco. So those are the kind of things we're concentrating on. There's a lot of people -- a lot of companies playing in the crude oil and condensate transportation by rail. We're just one of several. But we're very bullish on this and think we will be able to pick off a number of individual projects on a going forward basis through our partnership with Watco. They are good partners and we work well together with them. And they bring the rail expertise, we bring the terminal laying storage and handling expertise.

Okay. Great. And when you think about the process for abandoning a pipeline in anticipation of conversion to a different form of service, it was something that you pursued while developing the Pony Express project before the KMI pipeline was sold. And now you're looking at it again on the Freedom Pipeline. Generally speaking, do you feel that there is a regulatory environment that's receptive for potential conversions or abandonment filings or has it gotten more difficult over the last couple of years?

Well, first of all, of course, Pony Express, and we no longer own that, and I'm not up-to-date on all of the latest developments. But at least to my knowledge, is going very well and looks like it's going to be built. And the key thing there, and that's what we will find on Freedom Pipeline, is making sure that the level of service you're currently providing to your gas shippers is maintained. And that's certainly what we're going to be able to do. And part of the cost on Freedom Pipeline, a significant part of it, will be to make certain that we are able to provide the same level of service to the customers that we're now providing. But that said, we have underutilized capacity on that line, and we can't ever predict regulatory response, but we certainly will make the case and we think it makes a lot of sense that this is the cheapest and the best way to get Permian oil production to California, to saving untold millions of billions of dollars by using this line as opposed to a new build. And we think it makes a lot of sense and we will make certain that we will be able to demonstrate to the regulators and to our customers that they are not being disadvantaged by the fact that we're doing that conversion.

Great. And one last question. When you -- for the 2013 guidance you provided at KMP, for $5.28 distribution, is that excluding the impacts of any unannounced drop downs?

Yes, it includes the drop downs that we talked about. The other half of the EPNG and the other half of midstream. If we were to make drop downs on top of that, our acquisitions in addition to that, that would be additive or accretive to the $5.28.

Our next question comes from Paul Jacob of Raymond James.

Supposing that we do end up seeing a light sweet glut of crude on the Gulf Coast this year or next, as a lot of people think, how do you think you might lever your rail footprint in the Permian to take advantage of those crude differentials? And I'm just saying upfront is that I do recognize the joint venture that you guys have there in the manifest capacity. I'm just trying to get a sense for the timing and perhaps scale of what you might be able to do if oil [ph] differentials de-migrate south.

Well, we certainly will take advantage of it as much as we can. We're somewhat constrained with our present assets. But as we enter this new joint venture with Watco, we'll have more capacity. And the bigger the differential, the more value we offer to our customers. And again, I think this emphasizes the fact that I believe even after you get more connections done between Cushing and the Gulf Coast, I still believe there will be a very great interest in moving crude to California. So I think that's the biggest single opportunity. Crude by rail is important in that you've heard us talk before, that I believe that is going to be part of producers' long-term portfolio because they're going to want some optionality. Now as I think it will be a relatively small part because moving crude by rail is more expensive than moving it by pipeline, certainly, and as pipeline capacity gets built, that will take up the lion's share. But I think you'll see a lot of savvy producers who'll want to save back, who knows, 10%, 15%, 20% of their production in a given field to use rail transportation. So if there's a big difference between Houston and St. James, I can get it to St. James. But I think the biggest opportunity of all, beyond the crude by rail, is the building of the new pipeline capacity. And that's why, again, as I said, we have a lot of work yet to do. That's why something like the Freedom Pipeline, just to me, has all kinds of sex appeal. It's just a marriage made in heaven, I think.

Okay. And then are there any specific regulatory barriers that you could perhaps outline regarding either moving crude into California via, perhaps, the Freedom Pipeline, if that does end up going forward, or perhaps any terminal opportunities that you might see if you decide to extend your footprint there?

Well, answering the latter question first, clearly, there will be terminal opportunities, I think, as part of this. And we are already looking at that. There will be staging terminals at various points. And that's part of the cost of the project. I think overall, we think all the barriers are certainly achievable. We've got a team that cuts across various lines. We've got a natural gas group, Western operations out of Colorado Springs. In fact, Mark Kissel, who really masterminded the Pony Express, is now doing the -- this conversion, or potential conversion. But we also have significant input from people in our product segment to -- who are more used to dealing with this kind of product. So -- I think we're in good shape, and we don't see any barriers that would prevent us from taking crude into California, assuming that we can get the approval to convert the usage of the pipeline.

Okay. And last one for me, just kind of a housekeeping item is, what are you guys budgeting for your NGL price stack for 2013?

We budgeted -- Tim?

Last year, we averaged about 54% of West Texas Intermediate crude prices and this year, we're budgeting about that same order of magnitude. I believe it's 52%, and our budget number for West Texas Intermediate is just under $92. So doing the arithmetic on that, that would be mid-40s.

And just keep in mind that, that percentage of WTI is specific to our mix of NGLs. We'll touch on the sensitivity to that in the Analyst Meeting here in a couple of weeks.

Our next question comes from Ted Durbin of Goldman Sachs.

I wanted to ask a question about the Express-Platte sale. I guess I'm wondering why not buy out the other 2 owners on effectively the same terms? I guess what I'm asking is, are you expressing the view on the asset itself? Are you -- how are you seeing the oil pipeline opportunities more broadly? Maybe you can just talk about the thinking behind that sale?

Yes. As usual, it's economics driving it. And as we've said previously, you have to remember that our ownership interest is in a different form than our 2 partners. So that we were collecting -- our interest was collecting essentially interest on the debentures. And so we get about $13 million to $15 million a year out of that project. So even if volumes ramp up and the volumes have been good on Express lately, even if they ramp-up, we don't get very much of that because we have a priority distribution, but we don't get as much of the upside as our 2 partners do. So to our interest, we are selling, for $380 million, an asset that is returning $13 million, $15 million to us. So it's sort of a no-brainer. And that doesn't mean that Spectra is not making a good deal or that the other 2 partners aren't doing well. It's just that the deal that we have dating back many years, or several years, is a different deal. And so for us, when we can realize that kind of money and even on an after-tax basis, something a little less than $300 million, we, it's just a no-brainer for us to go ahead and sell rather than buy out the other 2.

Okay, that's great. Again, stepping back, just thinking about some of the -- sort of strategically, you mentioned looking at different assets, I'm just wondering your views on -- what's called some of the alternative assets that are starting to come in at the MLP structure. We've got some chemical assets now. We've got refining. I mean, just talk a little bit bigger picture there, are there other things that you're looking at, as you're looking across different types of assets that come could come in?

Well, anything we look at will have a great emphasis on predictability of cash flow. So we are not interested -- we have a model that we think works very well and has for over 15 years. And we're not really interested in stepping too far out from that model. But we do think there are things -- and like I said, an example of this, cutting across business lines is something like the Freedom Pipeline, where we can make use of several different assets. We did this with KMCC, the Kinder Morgan Crude and Condensate line, when we used some of our Texas Intrastate duplicative assets to build -- to be the mainstay of building that pipeline, saved a lot of cost and were able to give our customers a better rate because of that. And I think we're just going to continue to examine things like that. And I think we will find some moderate step outs. And I think we will find more opportunities. But we don't have current plans to launch off in a big -- different direction, particularly one that would involve volatility. But there are so many opportunities in this midstream sector. We haven't even talked about, as all of you know, of course, FP&L, Florida Power & Light, has put out an RFP for a major new pipeline into Florida. We will certainly be bidding on that. It's very close to our SNG system, where they want the pipeline to run, and of course we don't have the Florida gas. So there are just a lot of opportunities and I know I've said this, you're tired of hearing it, but the advantage of this -- the advantages of this massive footprint that we've now assembled, across the whole midstream spectrum, but particularly in the natural gas field is just irreplaceable. As Park said, and I really believe that, I don't believe there's been this set of assets, set of assets this good, ever assembled in North America. And if we can't make good use of that for many years to come then we ought to be lined up and shot. And I think we will be able to make good use of it. And we're just seeing more and more opportunities every day. Now we're not naive. It's more difficult to permit things now than it was a few years ago. You have a lot of environmentalists, NGOs, attacking infrastructure development and we're not naive about this, but we think there are tremendous opportunities. A lot of opportunities to move natural gas into Mexico. We've just touched the tip of that with our Sasabe or Sierrita pipeline that we've announced. It's about a $220 million project out in Arizona. But both off of our Texas Intrastate and off of EPNG, we're going to have a lot of opportunities to drop significant quantities of additional gas into Mexico, where the need for gas utilization, particularly for electric generation, but also for industrial use, is ramping up rapidly. And I think we will see us eventually expanding our Monterrey system, eventually expanding parts of our Texas Intrastate system to drop more gas at the border in Texas and then I think we'll see more opportunities off of EPNG to serve areas in Mexico that are further west between Texas and California dropping off of EPNG. We could go on and on. But there are just tremendous opportunities that we're finding, and $12 billion seems like a lot. But I think we will find a lot more opportunities on top of that and they'll be developed over the period of the next several years.

And then last one, just quick one, is on the synergy. It sounds like the $400 million that you're expecting, that's all fully recorded in this quarter. There's not really any more synergies we ought to be modeling for 2013?

Steve?

Well, the synergies that we have, I mean, we've given you the guidance, it's over $400 million. What we've done is now we've been through our 2013 budget process. So what we've done is built up a bottoms-up budget. And it incorporates all those synergies that we've identified. And we're pretty confident that number has come out again above the $400 million. But that's -- so that's all in 2013.

Yes, it's a rolling 12-month though, is what that year 1 represented. As Steve said, it's incorporated into the '13 budget, but the over $400 million represents the year 1 savings.

And we do think we'll get something further than that in the out years. That number will improve in year 2 and year 3 post the merger and that will be reflected in the '14 and '15 budgets.

Our next question comes from John Edwards of Crédit Suisse.

And Rich, just, can -- maybe you said this already, but if you did, I missed it. Do you have an idea now on the El Paso potential conversion? What kind of volumes might be going on that?

You're talking about our Freedom Pipeline?

Yes, on Freedom.

We've run various cases. I mean it can be as little as 250,000 barrels a day up to potentially 400,000 barrels per day depending on the customer interest and demand. And that can ramp-up over a period of time.

We can move a lot of barrels.

Okay. And then is there a -- and so that's within the realm that would make the project economic?

250 is...

Yes, 250 would make the project economic.

250, okay. Great. And then, just -- could you give us an update on permitting on Trans Mountain?

Sure. Here's where we are. As I said in my remarks, we reopened the open season in response to requests by a number of shippers who didn't sign it the first time and went to the NEB and asked to be permitted to take another crack at it. And that increased our committed barrels now to over 700,000. We are still in the phase right now of getting the NEB to approve the tariff mechanism that underpins all of these contracts that we signed up. So we have over 700,000 barrels a day signed up, almost all of it for 20 years, 7% of it for 15 years. We expect that the NEB will embrace that or say, "Look you, this has been entered into between viable parties on both sides." We've had 13 shippers, among them, some of the largest enterprises in Canada. And once that's blessed, which we would hope and expect will occur sometime probably in the third quarter, sometime later this year, the hearing is actually set in February, I believe, or early March. But we would expect to go through this phase and then by the end of this year, our intent would be to file our actual application for the environmental permitting and the route, the details on the route and all the other things that we need to get approved to get a permit to build. We expect to file that. And again, we don't know how long that will take. And we know there will be significant opposition. But we expect, in the end, to get it approved. And we expect to put it in service probably in the late 2016, early 2017 timeframe. But all those things are, to some extent, beyond our control obviously. And we'll just have to see how things develop. But we are moving ahead and so far, we're encouraged by what we're seeing.

[Operator Instructions] [Audio Gap]

Okay. Well, thank you, Sharon, and thank you very much, everybody. And we look forward to seeing you at the Analyst Meeting in a couple of weeks and we will be happy to answer any and all questions there in even more detail than we have today. So thank you and have a good evening.

This concludes today's conference. Thank you for your participation. You may now disconnect.