Kinder Morgan, Inc.
Q2 2012 Earnings Call Transcript

Published: 19 Jul 2012

[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

[Kimberly Allen Dang:]

Okay. Thanks, Rich. Okay, I'm going to start with the numbers on KMP. I'll do EPB second, and KMI, third. And so looking at the first page of numbers on KMP, the GAAP income statement, we don't think that the GAAP income statement is overly meaningful. We're going to focus on our calculation of EPS. But a few things I want to point out here, one, we're declaring a distribution today of $1.23. That's up about 7% from the second quarter of last year. The other thing on the GAAP income statement, you will see that there is an incremental loss on the remeasurement of our discounts -- that's the FTC assets -- to adjust them to fair value. That's $327 million. That's noncash. When we go to the DCF calculation, you'll see that we exclude that. However, right above that, you'll see the income from discontinued operations, the $48 million. When we calculate DCF because we still own those assets and we get those cash flows, we include that in our calculation of DCF. So on the second page, towards the bottom of the page, you can see our DCF before certain items. As Rich mentioned, $366 million in the quarter, up $42 million or 13%. For the 6 months, $828 million, up $122 million. Now just to back up one second, what we're doing in calculating DCF is we're taking GAAP net income before certain items, the primarily -- the primary certain item is the loss on remeasurement that I just mentioned. We're adding back DD&A, including our share of DD&A. We're making some other small adjustments, book cash taxes and some other small adjustments, taking out sustaining CapEx to get us to what our DCF is. So that is $366 million in the quarter. That's about $1.07 per unit. That compares to the distribution that we're declaring today of $1.23. So we have negative coverage in the quarter, which is -- we expected. We told you that, that would be the case, so it's last quarter and it's the time we went over the budget. For the 6 months, $2.44 of distributable cash flow per unit compared to a distribution of $2.43. So slightly positive on coverage for the 6 months. For the full year, on coverage, what we're expecting is to be at 1x coverage or maybe slightly under that. And I'll go through in a minute as I go through where we are relative to our budget, but that's primarily a function of lower NGL prices and then lower results, operating results from our KinderHawk assets. So looking back up at the segment, $959 million in segment earnings before DD&A, up $107 million in the quarter, up $257 million year-to-date. The Products Pipelines, as Rich mentioned, down $9 million in the quarter, down $13 million year-to-date on an actual basis. That is primarily a function of the lower rates on Pacific. We do have lower performance on our Transmix business as we had a contract expire there, but that's largely offset by a favorable on Cochin as a result of a settlement with our shippers. The same factors are driving the year-to-date. With respect to the budget, we're very close to the budget year-to-date. For the year, we expect to end slightly below the budget. Natural Gas segment's up $47 million in the quarter. It's up $103 million year-to-date, and that's a function of the KinderHawk acquisition, the SouthTex acquisition and just favorable results in our trading business and our Fayetteville Express Pipeline, as volumes ramped during 2011. With respect to our budget year-to-date on Natural Gas, we're below our budget, primarily as a result of KinderHawk. And then as things progressing more slowly in the Eagle Ford as Rich mentioned. For the year, on Natural Gas, we expect to be above our budget as a result of the drop-downs. And so absent the drop-downs, we would expect that we would end below our budget, primarily as a function of KinderHawk. CO2 business is up $52 million in the quarter. It's up $131 million year-to-date. Obviously, oil price is up. Our oil volumes in the quarter are up about 800 barrels per day, largely as a result of caps. Our NGL volumes are up in the quarter, about 1,100 barrels a day, and then that's slightly offset by lower NGL prices. The same is true for the quarter except for the oil volume is flat. So the same factors, except the oil volume. Year-to-date, we are below budget on CO2, and that's a function -- oil production is, as I said, about 850 barrels per day below our budget. However, for the full year, given SACROC, the improved performance of SACROC, we're expecting to end pretty close to our production budget. And so for the full year, we're expecting CO2 to come in about 5% below its budget, and that is primarily a factor of lower NGL prices. Terminals up $17 million in the quarter, up $34 million year-to-date. 80% of that is internal growth in the quarter, primarily higher volumes on our liquids terminals, higher rates and expansions on our liquids terminals, higher coal, export coal volumes and higher petcoke volumes. And the same factors are largely true on the year-to-date basis. Year-to-date, Terminals is on budget. And for the year, we expect them to exceed their budget, primarily due to higher export coal volumes. Kinder Morgan Canada is flat in the quarter. It's up about $2 million year-to-date. They're slightly exceeding their budget year-to-date, and we expect for the year that they will slightly exceed their budget. Dropping down to G&A, which is about in the middle of your page, G&A is down $2 million versus -- I'm sorry, is up $2 million versus last year. It's up $10 million versus last year, year-to-date. It's on budget year-to-date. And -- but for the year, we expect it to be above its budget. And we expect to be its -- for it to be above its budget largely as a result of the drop-downs of GDP and EPNG. Absent the drop-downs, we would come in under our budget on G&A, primarily as a function of higher capitalized overhead as capital expenditures have increased to the $2.2 billion that Rich mentioned before. Interest expense, up $12 million versus the second quarter last year, up $19 million year-to-date. That's primarily a function of the higher balance. Our balance is up about $1.3 billion. Year-to-date, we are favorable to budget as a result of lower rates. For the full year, we expect to be above our budget as a result of the acquisitions. If you strip out the acquisitions, we would expect that interest expense would be favorable versus our budget, also as a function of lower rates. Sustaining CapEx in the quarter is up $3 million. So higher spending in the quarter than a year ago. It's also up year-to-date. Versus our budget year-to-date, we're actually favorable. We've spent less than we anticipated. Some of that is timing. But for the full year, we expect sustaining capital to be above our budget, and that's also a function of the acquisitions. Our full year forecast does build in the impact of the drop-downs and from KMI, as well as the FTC divestitures. We think we'll be in the range of $55 million higher than our budget. If you strip out the acquisitions, we would come in favorable to budget. Primarily, some has moved -- some of the sustaining CapEx has moved to O&M and then there is a small amount of savings and deferrals. So that is the DCF for the quarter. I'll move to the balance sheet. The balance sheet -- I'm just going to focus on the debt. $12.6 billion is our net debt in the quarter. That results in a debt to EBITDA of 3.4x. That's down from year end of 3.6x and down from last quarter at 3.5x. We expect to end the year at about 3.9x debt to EBITDA, but that also has all the debt associated with the drop-down transactions and only a partial year of the operating results. So if you pro forma the EBITDA for a full year, so you take out the FTC assets and you put in a full year of TGP and EPNG, we would end the year at 3.7x. The change in debt for the quarter is about $55 million. For the year-to-date, it's about $223 million. And just to go through the main drivers of that, on the quarter, we had about $730 million of spending. It was $400 million of expansion CapEx, about $300 million of acquisitions and about $35 million of contributions to equity investments. We issued equity of $578 million. That's KMR. That's KMP at the market. We issued about $300 million in the Midstream transaction. We had a rate case settlement payment of $54 million. We unwound a swap that largely offset that. That was a positive $53 million. Our coverage was negative $56 million and then we had a working capital positive of $157 million. And that is primarily accrued interest. Year-to-date, $223 million change in debt. We spent a little over $1.1 billion year-to-date. That's about $700 million in expansion, $330 million in acquisitions, the biggest acquisition being the $300 million Midstream acquisition, and about $86 million in contributions to equity investments, primarily Eagle Ford and EagleHawk. We raised about $817 million of equity. The Canada rate case began and a swap on line [ph] largely offset. Coverage was about $2 million positive and then we had $82 million of positive working capital, which was primarily dark [ph] premiums, accrued taxes, AP and AR, offset by some inventory purchases in our Transmix business. So that's KMP. Moving to EPB, and the first page of EPB is also the GAAP income statement. As Rich said, we're declaring a distribution of $0.55 in the quarter. The GAAP income statement recasts our prior period results to include Cheyenne Plains as if EPB had owned Cheyenne Plains during all periods presented. So when I go to the next page and we go to our calculation of DCF, it will not -- it will only include Cheyenne Plains for the periods that we owned it. So you can see the incremental impact from the acquisition. DCF calculation, this is going to -- for some of you who follow EPB, it's going to be a little bit of a new format. This format is consistent with KMP's format. I think we get to the same answer at the end of the day, it's just done -- it's laid out a little bit differently. So more to KMP, we're just taking that income, adding back DD&A and subtracting sustaining CapEx. There are a couple of other adjustments to get to DCF that you'll see at the bottom. Those are consistent with the adjustments that El Paso was making previously. So DCF before certain items, as Rich mentioned, at $135 million in the quarter, up $17 million in the quarter, up $22 million year-to-date. $135 million is $0.65 on a per-unit basis versus our $0.55 declared distribution, results in coverage of about $20 million. On the 6 months, the $278 million is $1.35 per unit compared to our declared distribution of $1.06. That's about $60 million. And as Rich mentioned, for the year, we expect to declare distributions of $2.25 and to have coverage in excess of $80 million. Now just looking at the $17 million, where did that growth come from? If you look out at the segments, the segments were up $17 million, and that's primarily the acquisition of Cheyenne Plains, as well as improved results on Southern Natural as a result of the completed expansion project and greater power demand load. That $17 million, though, because El Paso consolidated the -- all the pipelines in prior periods, it didn't own 100% of those pipelines, and so you're seeing the benefit of the acquisition down below in the minority interest line. So as EPB has bought more of those assets from El Paso, the minority interest decreases. And so you see that benefit down in the minority interest line below. So if you add that, that takes your $17 million, there's about $4 million of benefit from those incremental acquisitions since 2011. So that's $21 million total increase in the assets. Sustaining CapEx is a positive $17 million in the quarter. That's because there were -- in 2011, there were some nonrecurring maintenance items. There's some timing, which I will get to in a second, and also the cost savings that we've implemented. So we have $38 million of cash flow available. Interest is up by $10 million as a result of the acquisition. GP incentive is up $13 million as a result of these units issued and the increase in the distribution. There's some other items that are about $2 million, and that takes you to the $17 million. Same analysis for the year-to-date. The segments are up $7 million. The incremental from acquisitions is -- it shows up in the minority interest line, is about $30 million. That's $37 million total. Sustaining CapEx is $29 million lower. Now on sustaining CapEx, for the full year, what we're expecting is around $55 million to $60 million. So you can see in the quarter and year-to-date, there is some timing relative to the full year. But we do expect -- but we are lower than last year in the quarter. Interest is up $20 million. GP incentive is up $25 million year-to-date. There is about $1 million of other items, and so that takes you to the increase of $22 million for the year-to-date. On EPB's balance sheet, the largest change in EPB's balance sheet relates to the drop-down of CIG, the 14% interest in CIG and the Cheyenne Plains. And so you can see that the debt is up about $509 million. And then you also see equity is negative. And those results because we have to recast. And so when we recast this as we own these assets in all periods, when you originally do it, you don't have the financing because they're assuming this happened way in the past. So you put assets on your books. Adding to that, creates a positive in equity. And then when you go finance these assets that are already on your books for GAAP purposes, that is going to be a negative running through your equity account. And so you can see that happening this quarter. On a debt-to-EBITDA basis, 4.7x versus 4.1x. Now the debt here on the balance sheet has also been recast for Cheyenne Plains. So the 3.990 at the end of the year is not really what was on the balance sheet at the end of the year. So -- what was on the balance sheet at the end of the year was 3.825. So we're up about $800 million year-to-date, and we're up about 700 -- sorry, we're up $800 million from the quarter. We're up about $750 million year-to-date. The acquisitions, $635 million went out the door on that, but we also issued equity for $64 million. So $570 million net. We assumed $176 million in debt, there is $23 million in expansion capital, $45 million in the termination of an AR program. Cheyenne Plains came with cash of about $20 million. There's about $20 million of coverage and then there's working capital of about $27 million negative, largely associated with accrued interest. Year-to-date, the acquisition, $635 million. $176 million of debt assumed. $40 million of expansion CapEx, same $45 million on the termination of the AR program, same $20 million of cash. Equity issued, $64 million. Coverage is $60 million and then the working capital is about $4 million. And so that is EPB. Moving to KMI, just couple of overall comments for those of you who might be new. This is our calculation of cash available to pay dividends at KMI. So what we are showing here is the cash that we received based on the declared distribution at KMP and EPB. It is the cash we -- or the cash available for us from our investment in NGPL. And then this quarter, we have added a second section because now KMI owns assets. And so we've tried to divide the schedule

[Richard D. Kinder:]

Okay. Thank you, Kim. And with that, we will take any questions you may have.

[Operator:]

[Operator Instructions] The first question comes from Ted Durbin with Goldman Sachs.

[Theodore Durbin:]

I guess, starting with KMI here, I'm trying to make sure I understand, Kim, your commentary on the El Paso assets. So you're saying the $142 million of EBITDA is a clean number? In other words, we shouldn't be adding anything back in terms of transaction or any other kind of payments that were related to the acquisition?

[Kimberly Allen Dang:]

That's right. And you can see that detailed in Note 9 on that schedule. We talk about the transaction costs that are excluded from this. And most of those transaction costs are noncash or they're one-time in nature or both.

[Theodore Durbin:]

Okay, great.

[Kimberly Allen Dang:]

But the -- adding the -- and so just one other thing. The EBITDA is just 37 days.

[Richard D. Kinder:]

Yes. Just from May 24 through June 30. Okay?

[Theodore Durbin:]

Yes. Got it. And then can you talk a little bit about your NOL position here post the transaction and how that will play into the cash tax rate you expect to play -- to be paying going forward?

[David D. Kinder:]

There's a fair amount of NOLs that were utilized on the sale of the E&P business, just as we've discussed previously. There are some remaining that are available for drop-downs. We also expect in a number of instances to do a number of dispositions unassociated with the drop-downs. And so we'll manage that as we go forward. There's also some portion of the NOLs that we're not able to use this year and that will roll over into future years.

[Theodore Durbin:]

I guess is there any estimate you can put on what the cash tax rate would be based on all that?

[David D. Kinder:]

I mean, I think the right way to think about the cash tax rate is to think about it once we get back to a normal steady state where we're primarily a general partner. And then, Kim -- I mean, when we get there, 36%, 37% is around the -- the right recurring cash tax rate to think about.

[Theodore Durbin:]

Got it. Okay, great. And then last question is just kind of thinking about capital allocation here at KMI again. Desire to pay down some debt versus increasing the dividend. You had a ratings downgrade yesterday. I guess, some -- would you just talk a little bit more about how you're thinking about the balance sheet?

[Richard D. Kinder:]

Well, of course, first of all, we're going to have the proceeds from the drop-downs to apply to the debt. And again, as quickly as we can, we're going to drop down all these assets into KMP and EPB to get back to being a pure GP. So that's the main source of the debt paydown. And we will intend to distribute -- again, under this formula, we're going to distribute the cash that's generated and available for dividends.

[David D. Kinder:]

I think we have a fairly straightforward path to getting to consolidated debt-to-EBITDA of around 4.5x through the drop-down process. And so I think we'll be working our way to that as we go through these transactions. And again, that's a full 12-month EBITDA to consolidated debt, meaning all of the debt at KMI, EPB and KMP.

[Operator:]

Next question comes from Darren Horowitz with Raymond James.

[Darren Horowitz:]

From a product development -- project development standpoint, if you back out the Trans Mountain expansion and you think about breaking down that remaining, call it, $6 billion of backlog, how do you guys think about allocating capital towards the additional coal export opportunities that seem very promising, relative to possibly importing more gasoline to replace U.S. Northeast refinery closures similar to that expansion you did at Carteret versus, let's just say, enhanced petcoke export abilities?

[Richard D. Kinder:]

Well, I think, first of all, the underlying principal areas, we're not doing any of these unless we have good long-term contracts. And then we just look at it, and we'd be happy to do them all if we have good long-term contracts on it. Just enormous opportunities. Now like I said on the coal export facility, we have 4 right now that have -- are up and running, and 3 of them are being expanded. We have a fifth that we will eventually go to, also on the East Coast, but we're not prepared to do that yet. So I think there are enormous opportunities there, someplace between -- I have said these figures before, they vary a little bit quarter-to-quarter. Someplace between $450 million and $650 million in coal export facilities alone. But we're going to have an expansion at Galena Park pursuant to a new long-term contract that we will be releasing information on tomorrow, as a matter of fact. We're going to have other expansions. Certainly, the Edmonton South terminal, as we say in our release, is actually upscaled again because we had more long-term contracts. I think the BOSTCO facility on the ship channel will also probably be upsized because we think we're about to move beyond 6.6 million barrels that was our original anticipated amount of tankage. We think we'll be able to expand that. So just a lot of opportunities. Again, we'll look at them based on whether they clear our return on capital targets and whether we have good long-term contracts behind them.

[Darren Horowitz:]

Last question, and this is more for Kim. Kim, as it relates to KMR's ability to effectively issue equity and be de facto equity as it's viewed for KMP, how do you think about the market's ability to absorb KMR equity throughout, not just this $2.2 billion capital program, but beyond that?

[Kimberly Allen Dang:]

Well, I guess, we have a couple of tools in our toolbox. I mean, we can issue KMR, or we can issue KMP. And we have the ATM, or we can do stand-alone overnight offerings or marketed offerings on KMR. And so I think on these transactions, KMI will be taking back some equity, which lessens the need. We can do in the range of $300 million a year on the ATM. KMR in and of itself is generating $500 million a year. So you've got $800 million of equity that is sort of -- happens automatically before you even need to go to the market. And so if you think about it that way, that's -- if you say 50-50, that's $1.6 billion capital spend before you even need to access the market on an offering.

[Operator:]

The next question comes from Steve Maresca with Morgan Stanley.

[Stephen J. Maresca:]

A couple of questions on Trans Mountain. Rich, you mentioned that -- something to the effect of recent events, suggested the Canadian government seems intent on streamlining approvals. I don't know if you can expand on that a little bit at all?

[Richard D. Kinder:]

Yes, and those of you who follow it closely, the Premier Harper -- Prime Minister Harper's government has said that they want a full environmental review of these projects, but they want it done on a timely basis. And in fact, there was an article in one of the trade rags this morning saying that the NEB was taking steps in that regard and was looking at an 18-month time horizon for saying yes or no on projects, no matter how complicated they might be. Now I'm always leery when you just set some time frame. But I think, clearly, future projects like Trans Mountain, from the time you file, are not going to be dragged out for 3 or 4 years and have thousands of hours of hearings. I think it -- everyone will have their say at the table, but I think it will be done in a very fair but expedited basis. So we believe it will be done quickly. Now what we have done is, as many of you know, is we have filed with the NEB for approval of the commercial contracts. In other words, what we're doing is converting a pipeline that now moves 300,000 barrels a day and is essentially an open-access pipeline. Now we're expanding it dramatically and we have 500,000-plus barrels that is subscribed under 20-year contracts, clearly leaving plenty of room to handle all of the spot bases. You got 240,000 barrels, 750,000 minus 510,000, to handle all the other business. But we want to get that approved to make sure the NEB agrees with our commercial efforts here, our commercial understandings that we have reached in binding agreements with our customers. In the meantime, we are already going through what's called a consulting project with various interested parties, including NGOs, including the First Nations groups, primarily in British Columbia, and then we will file for the actual permitting of the pipeline itself in late 2013, and that's when the -- when that process will start. And again, if you assume 18 months and that may not be the exact right time, you assume 18 months, you file late in 2013, that would get you approval in the mid-2015 time horizon, give us time to build it in 2015 and 2016. So that's kind of the game plan, nothing -- no rocket science here. But there has been some very positive developments from the standpoint of the Canadian national government saying these are very important assets. It's not just oil sands production, it's some of the mineral production in British Columbia, some of the potash in Saskatchewan, other areas of Canada where they want to make sure that they have an orderly process to consider these. And I think that, that's going to be a positive for our process.

[Stephen J. Maresca:]

And how should we think about project returns for this in terms on returns on invested capital and then the $4.1 billion cost? I know it's early, but how are you potentially protected on that not rising?

[Richard D. Kinder:]

Well, I don't want to go into all the details on returns. I think it's a -- it's an appropriate return and one that's embedded in the contracts, and I think it's a good return for us. It's also very fair to our customers. From the cost side, as we've done in our other projects in Canada, there are cost-sharing mechanisms that -- some of this more locked-in cost will not be subject to escalation or pass-through. Those that can move up or down with events we can't control will be subject to a pass-through arrangement. There'll be a non-control cost. So we think we've got a pretty workable solution there. This is what we did on the last time we expanded Trans Mountain from roughly 220,000 barrels up to 300,000. And it worked very well.

[Stephen J. Maresca:]

Okay. And if I can leave with a couple of quick ones on just the NGL headwinds, what's the ability of you guys to hedge more on NGLs? And are you currently assuming the deck as is, current NGL prices, stay where they are for the rest of the year? And then final thing, as you mentioned, you have less ethane in your mix. I was wondering if you could just give a rough breakout of sort of the mix, ethane, propane, butane, [indiscernible].

[Richard D. Kinder:]

Yes, I'll let Tim Bradley, who runs CO2, do the latter. But on the former question, we've talked about this before, any hedge that you do on NGLs, in our view, is a pretty dirty hedge. And so we hedge incredible amounts of our production, but we apply it all to the crude oil side, and that means the NGLs is where we have not applied the hedges. And as far as the deck is concerned, yes, we are basically using the forward deck, again because we have more ethane in the mix. Our numbers show we'd be down about 23%, we put that in the press release, from what we had in our budget that we did last November when we just looked at basically the forward curve. And Tim can give you some more flavor on that. Tim?

[Richard Tim Bradley:]

Yes. The NGL mix that you'll commonly find in the Permian basin would be 40% to 50% ethane. We use some of the ethane that we produce in our residue gas. It powers our power plant. So the ethane content in our produced NGL stream is only 18% as it leaves and goes to market. The rest of the mix is pretty much standard in terms of -- the next biggest component is propane, then going down to the isobutanes and pentanes and so forth, natural gasoline. So the ethane is basically being cut in half and being used in our power plant.

[Operator:]

The next question comes from John Edwards with Crédit Suisse.

[John Edwards:]

Just a follow-up to Steve's questions. So the dollar amount that you're expecting from the lower NGL prices this year, can you just translate that for us?

[Richard D. Kinder:]

Yes. I think Kim said that. We think that's a downturn of about $60 million resulting from that, if what we project now continues for the rest of the year.

[John Edwards:]

Okay, great. And then as far as the trajectory or the pace of drop-downs and financing of such, if you could just give a little more flavor on that.

[Richard D. Kinder:]

Yes. I'll say a couple of things. First of all, as we've said, we expect to drop -- to make the drop of 100% of Tennessee and 50% of EPNG in the third quarter, this quarter. We also expect to complete the sale of the FTC mandated sale in this quarter. With regard to future drop downs, we're going to do them as quickly as we can to both MLPs. We originally said it would probably take us to sometime in '15 to get all this done. I'm modestly hopeful we can get it done substantially in advance of that. I'm looking forward to the day when Kim will be able to give you a much simpler summary of how we get to cash available for dividends at KMI, and it will be simply all the GP and units. We will be back to being a pure GP. Now part of the reason for that is that the sale that was mandated by the FTC is somewhat larger than we thought it would be and, therefore, KMP can move more quickly. It has more proceeds coming in than we anticipated. It can move more quickly to take on more assets. But we think we can move this pretty quickly, and we're anxious to get back to a pure GP, where you can evaluate it just on that basis.

[John Edwards:]

Okay. So broadly speaking, maybe -- and thinking about it, maybe end of '14 is -- might be a reasonable assumption for our modeling purposes?

[Richard D. Kinder:]

No, that's probably as good as any. I would hope we might even beat that a little bit.

[John Edwards:]

Okay, great. And then as far as -- what's the expectation now for financing, kind of what you've been doing before, sort of 50-50? And then how much paper do you think KMI might take back in the process?

[Richard D. Kinder:]

Now a part -- David, you want to...

[David D. Kinder:]

Yes. I mean, in KMI, we'll take some back as Kim noted. And I think the ultimate financing will be consistent with what we've done in the past, with the objective of maintaining a very solid balance sheet at KMP.

[Operator:]

Our next question comes from John Tysseland with Citigroup.

[John K. Tysseland:]

Rich, I guess do you envision being able to leverage TGP's asset position to expand really your further investments in the Midstream, kind of like what you did in the Eagle Ford but up in the Marcellus? And I guess what kind of timing do you think about if that is the case?

[Richard D. Kinder:]

Yes. We definitely plan on doing that. And so far -- again, remember, we're just 2 months into this thing. So far, I've been very encouraged with the opportunities we have. We're going to move on them just as quickly as we can get the long-term contracts solidified, and I would hope we'd be in a position to make some announcements in the third quarter of some projects. And I think there will be others after that. Tennessee is a fantastically positioned pipeline. And the other thing that -- across all of the El Paso assets, we kind of sweep away storage. But the combined entity, all the Kinder Morgan companies, now have about 680 Bcf of gas storage capacity, and we think there are enormous opportunities there to use that more efficiently, to create more injection and withdrawal capacity, serve our customers better, and we've got a full court press on that. And I don't know if you want to call that midstream exactly, but certainly it gives us a lot of additional opportunities. So they are just -- when you add all this up, power demand, storage opportunities, opportunities to expand the midstream off of this big footprint of pipelines we have, we're just really encouraged about the long-term opportunities. And when we talk about approaching $10 billion in potential projects now, I think those will go very nicely as we get deeper and deeper into this, and that will be over a period of several years, I think. So yes, I think just lots of opportunities to leverage Tennessee, additional opportunities out West and additional opportunities in the Southeast.

[John K. Tysseland:]

Yes, that's great color. One more thing. When you look at TGP and EPNG, I believe both of those are already in LLC's and don't need to be, I guess, converted into C corps before they're dropped down into KMP, but I just wanted to confirm that. And then also, how many other assets are currently in sub-C corps that are up at the KMI today?

[Richard D. Kinder:]

David?

[David D. Kinder:]

Yes. Tennessee is already in a LLC. EPNG will be converted into an LLC at the time of the drop-down. I think if you look at some of the other assets up there, John, you have the Midstream operation, which is already in an LLC that KMP owns 50% of. Citrus FTC is in C corp and will remain in C corp in that regard. Ruby is in a flow-through entity and then Gulf LNG is in a flow-through entity. So I think you're right, predominantly. The biggest asset that's not is FGT/Citrus but outside of that, should be enough flow-through-type vehicles.

[John K. Tysseland:]

And then lastly, on EPNG, you have a big chunk of contract rollovers in 2012. How do you think about those contracts renewals as you move on throughout the year and also year-to-date? And then given -- looking at the basis differential -- I mean, the basis differential remains pretty attractive so it seems like you would get pretty good support for that. But I was trying to figure out how you think about that on a cash flow forward basis.

[Richard D. Kinder:]

Yes, well, you're right. The basis differential has been pretty good. And I think on a going-forward basis, we've got a model we're working on that we had when we put the acquisition plan together. And so far, we're tracking pretty close to that model. So I think we'll do that well or better. The real opportunity of course on EPNG, I believe, is east of California. There is a tremendous demand for increased exports to Mexico. We have publicly surfaced already about 3 of those projects, and we think that -- not only does that have the benefit of allowing us to earn money on incremental investments as we build, if you will, drops or laterals down to the border off of the EPNG mainline, but it also obviously puts more volume through the EPNG mainline. And I think we -- that will be a big source of opportunity for us. I think, also, you will have some east of California coal-fired generation that we'll be converting to natural gas as time goes on, and I believe there may be some potential for alternative uses. Some of the EPNG lines, there's a lot of duplication there. So we're just getting into it, but we've got a very bright guy running that for us, and I think we will find some real opportunities to benefit there.

[Operator:]

[Operator Instructions] Curt Launer with Deutsche Bank.

[Curt N. Launer:]

Wanted to just follow up with some of the questions that have asked before in maybe a couple of different ways. First, relative to the specificity you've given us of an expectation of 50% of EPNG to be dropped down, you could go through what your expectations might be relative to the financing model of that and how much debt remains to be assumed by KMP in that drop-down. And also, I guess I'll admit to try and ask the NOL question that started this session in a different way. Have you reported or do you expect to report maybe this year end the tax basis from the old E&P assets, such that we can figure out the outlook for taxes on gains on future drop-downs?

[David D. Kinder:]

Yes. I mean, the amount of debt assumed in the drop-down [indiscernible]?

[Unknown Executive:]

Yes. On Tennessee, Tennessee basically has about $1.8 billion of debt, and El Paso Natural Gas is about $1.15 billion on an 8/8 basis down at El Paso Natural Gas.

[David D. Kinder:]

Yes. And then on the NOLs, my expectation is that there will be disclosure in the 10-K, just like there was this year.

[Operator:]

The next question comes from Harry Mateer with Barclays.

[Harry Mateer:]

So just looking for a little clarity, if you can provide it, on your latest thoughts on the EP Corp. debt. And how should we be thinking about drop-down proceeds flowing across KMI debt versus the legacy EP Corp. bonds?

[David D. Kinder:]

I mean, I think the right way to think about that is that we will end up guaranteeing the EP Corp. debt, and so what we will do with proceeds is pay down debt in the most efficient manner possible. But it shouldn't make much difference to bondholders.

[Harry Mateer:]

Okay. So it's really just going to be driven by the cost of paying down debt, and we shouldn't think of any particular strategy between the 2?

[David D. Kinder:]

Right. The strategy is going to be minimizing the cost.

[Operator:]

We do show one last question from John Edwards from Crédit Suisse.

[John Edwards:]

Yes, just a follow-up. In the past, you've been guiding at KMI, I think at 12.5% dividend growth. And KMP, I believe it was around 8% distribution growth per unit going forward. Any change to the long-term guidance at this point?

[Richard D. Kinder:]

Yes, the guidance has been, since the time we did the merger and announced the merger last fall, has been 12.5% growth at KMI. That's off the '11 base through 2015 and 7% compound growth at KMP. And that's also off of the 2011 base, so through 2015. So yes, we feel good about those, 7% at KMP, 12.5% at KMI and about 9% at EPB, and those all continue to look good. And I think, just -- I think you can tell from this call that we're pretty enthusiastic about the El Paso assets. Sometimes, we've done a lot of these acquisitions, sometimes you get in there and you turn over the rocks and there's nothing but big snakes under it. But in this time, we've turned over the rocks and actually, we haven't found very many snakes, if at all. So we're very positive on -- nothing that we have encountered so far has led us to assume any kind of negatives versus our original acquisition plan on the El Paso assets.

[David D. Kinder:]

Yes, Rich. The other thing I'm going to add is going to go back to a couple of the questions that have been asked. We're not dodging the questions on the NOLs. You should just recognize, on the NOLs, this is a function of the tax return. The actual calculations won't be finalized until we do our tax return next year. And so we don't want to be giving you numbers that may ultimately move, and it's complicated enough that it's difficult to come up with the estimates. And so that's why we're not being forthcoming with numbers right now. Those are difficult calculations.

[Operator:]

I am showing no questions, sir.

[Richard D. Kinder:]

Well, thank you all very much for listening to us. And if you have other questions, don't hesitate to call Kim or David or the rest of the team. Thank you.

[Operator:]

Thank you. This does conclude today's conference. You may disconnect at this time.