Kinder Morgan, Inc.
Q4 2014 Earnings Call Transcript

Published: 22 Jan 2015

[Operator:]

Welcome to the quarterly earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Today’s conference is being recorded. If you have any objections, please disconnect at this time. I’d now like to turn the meeting over to Mr. Rich Kinder, Chairman and CEO of Kinder Morgan. You may begin. Rich Kinder Okay. Thank you, Sharon, and welcome to the investor call. As usual, we’ll be making statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. I’ll make some introductory remarks, Steve Kean, our Chief Operating Officer will talk more about operations and our backlog; Kim Dang, our CFO, will review the numbers for the fourth quarter and full-year ’14; and Dax Sanders, our Vice President, Corporate Development will talk about an acquisition that we just announced this afternoon. Let me just start by summarizing very briefly that acquisition. We think it’s a very exciting and strategic acquisition that we announced by separate release this afternoon. We are acquiring Hiland Partners, which is a large privately owned midstream company with crude transportation and gathering assets and gas gathering and processing assets, primarily in the Tier 1 sweet spot acreage of the Bakken formation. It’s overwhelmingly fee-based and it gives us the platform for further growth in the Bakken where we currently have no asset. We think we can do in the Bakken the kind of expansion that we did on our Kinder Morgan Crude and Condensate system down here in the Eagle Ford, which has grown from less than 50,000 barrels a day throughput to having virtually all of its 300,000 barrel per day capacity contracted for in future deliveries. So think of what we’re doing as building a spider web that we intend to expand over the coming months and years. The consideration for the purchase is $3 billion, including approximately $1 billion of assumed debt. We have a bridge loan commitment to finance the remainder. And longer term we will finance that remainder with equity and debt to maintain our appropriate level of debt to EBITDA ratio previously communicated to both the rating agencies and to our equity investors. The transaction will be modestly accretive to DCF per share in ’15 and ’16, with the accretion ramping up thereafter and is supported by long-term contracts with the systems largest shipper. That’s an overview and Dax will give you more details in just a few minutes. Now let me get back to ’14 and the outlook for ’15. As you know, we closed the merger of all the Kinder Morgan entities into KMI during the fourth quarter. And so that made for somewhat of a noisy quarter post closing, but bottom line our DCF per share for the quarter was $0.60 and we’ve declared a dividend of $0.45. That leaves excess coverage for the quarter of $320 million. Looking at the $0.45 dividend, that’s a 10% increase to the fourth quarter of ’13. It means that we will have distributed dividends for the full-year ’14 of $1.74 per share versus $1.60 in ’13 and $1.72 in our plan. Now we were negatively impacted to a certain extend in the quarter by lower commodity prices primarily in our CO2 segment, but we were still able to produce strong results and in my judgment that shows that our toll road like assets perform well, even when prices for underlying commodities are extremely volatile. Now looking to the future, we said when we announced the merger of all the Kinder Morgan entities back in August of ’14 that we expected to be able to declare a dividend of $2 for our calendar year ’15. To grow that dividend at a compound annual rate of 10% out through 2020, and have more than $2 billion of excess coverage over that period from ’15 through ’20. We are still comfortable with the first two projections and we are still comfortable that we will have substantial excess coverage. But I have to admit it's hard to ascertain exactly what that will be, that amount will be, given the recent volatility in commodity prices. But as an example in an effort to be as transparent as possible, let's just take a look at 2015. When we released the outlook in December ’14 for the year 2015, we based it on $70 oil and $3.80 gas. That’s what we assume and we did our budget back in the fall of ’14, and it represented the forward curves at that time. We projected $2, declared dividend for ’15 and that’s up 15% from $1.74 in ’14 and we said we’d have “over $500 million” of coverage. As we refined our budget, the actual coverage number in our budgets is much greater. It's $654 million to be precise at those prices that I just mentioned. Now in this world of lower commodity prices, we look closely at the impact on our excess cash and found it to be about $10 million per $1 change in crude price. And that’s about $7 million in our CO2 segment that you heard us mention time and time again pretty consistent from year-to-year and about $3 million throughout all of our other business segments in the Company. In addition, we think we have sensitivity of about $3 million for each $0.10 change in natural gas prices. Like everyone, we are unable to predict exactly where the prices will be for ’15, but you can make your own estimate and see that almost under any circumstances we have substantial excess coverage and I think relatively little sensitivity compared to a company that will produce about $8 billion in earnings before DD&A. Now in an effort to be even more transparent, and without predicting prices at all, let me just take you through an example. Let's say you want to take our outlook and say I believe we are going to have an average of $50 WTI crude price this year at an average of $3.20 on Henry Hub natural gas price. What would that do to this $654 -- $654 million of excess coverage on top of the $2 dividend? You would start with the crude and you’d say crude is going down by $20 a barrel, our sensitivity is $10 million per dollar therefore that’s a $200 million degradation. On the natural gas side, if we went from 3.80 to 3.20, that's a $0.60 degradation, which would be six times $3 million or $18 million. That gets you to a total of $218 million. You take that off the 654, and you got $436 million of excess coverage still there over and above paying a $2 dividend. Now let me be real clear. There is obviously a myriad of factors beyond price that influence the accomplishment of any annual plan. But I’d emphasize that the commodity sensitivities that I have just outlined do not, do not include the positive impact of cost reductions in our CO2, EOR operations, which we’re working on and believe will happen and which certainly happened back in 2008 and 2009, the last time we had a dramatic change in crude oil prices to the negative. So hopefully that gives you some guidance and rather than us trying to redo numbers, you can do your own figuring of the outlook we gave you back in December, but the bottom line message from me would be that we still have lots of excess coverage, and you can roll that forward to other years and talk about exactly where the excess coverage is and it gets even more difficult obviously the further out you go, because who knows where the prices will be there -- will be then. But I think the main thing is, this kind of toll road structure that we have allows us to survive and prosper very nicely even in a low commodity price environment. Now when I'm finished, Steve is going to detail our current backlog of projects which remain very strong and this backlog is to me a clear indicator of future growth and cash flow at KMI. Now let me close by -- my part of the presentation by addressing succession planning at Kinder Morgan. I have said publicly for some time that our Kinder Morgan succession plan called for Steve Kean, to succeed me as CEO with me continuing as Executive Chairman. We now expect that change will take effect on June 1, 2015. Let me make a few points for you. First of all, I can assure you this is not going to change in any way the Company -- the way the Company is being run. Secondly, my name is on the door and I don't plan to go anywhere. The Office of the Chair will still consist of Steve, Kim and myself and post June 1st, I’ll still be involved in all major decisions including acquisitions and expansion projects. I want to also assure you, I’ve never sold a share of my KMI stock and I don’t intend to do so in the future. So to kind of sum that area up as we say in Texas, I plan to die with my boots on. But more importantly, Steve, Kim and the rest of the management team are doing a really outstanding job now and I can assure you they will continue to do so in the future and that this Company will continue to grow and meet its commitments to its shareholders, its customers, and its employees. And with that, I’ll turn it over to Steve.

[Steve Kean:]

All right. Thanks, Rich. And briefly I want to say I’m honored to have the opportunity, particularly coming from Rich, who is one of the best and most accomplished CEOs in America, who by the way, still has his boot on. I'm also ready and committed and determined to do my part here. So I'm excited by the opportunity, but there is no reason for any of you to be -- as Rich said, you can count on his active involvement and you can count on Kim and me, the leadership team here and our 11,000 co-workers to run this great network of assets safely, profitably and reliably everyday and continue to grow the Company. So this will be the most seamless transition in the history of corporate America. So now let’s do the quarter. Backlog first and then our segment update. On the backlog since our investor conference in January of 2014, we have grown our backlog by nearly $2.8 billion. Our current backlog stands at 17.6, which is down slightly from the last quarter. Over the quarter, we added 1.24 billion of projects, while we put into service $730 million worth of projects for a net addition of about $500 million. But the impact of lower commodity prices let us to reexamine our CO2 investments and we were moved from the backlog a little under $800 million for the quarter and the majority of that came out of the backlog for the CO2 segment. The additions to the backlog, were in our pipelines and terminals businesses. The largest being the addition of Palmetto refined products pipeline serving the Southeast U.S. That project includes the pipeline. It also includes an upstream expansion of the plantation pipeline system and associated terminal investments and the total to our share assuming others opt in for their shares would be about $800 million. Now the additions to the terminals and pipelines backlog underscore the continued strong demand for our midstream energy infrastructure. Now brief Segment review and I'm going to focus on the performance on a full-year basis compared to 2013. In gas, earnings before DD&A were up $352 million or 9% year-over-year to $4.069 billion. The gas segment benefited from a full-year of the assets that we acquired from Copano, including some growth in those assets as well as strong performance from our Tennessee and El Paso system. We continue to see strong demand for long-term firm natural gas transportation capacity. So, even in this fourth quarter that we just went through, we added another 242 million cubic feet a day of long-term transportation commitments with an average term of 12.8 years. So if you look at the total going back to December of 2013, since that time over that 13 months we’ve added 6.7 Bcf of new and pending commitments with an average term length of 17 years. That's about 18% of the capacity of the underlying pipeline systems those commitments are associated with. We expect the demand to continue as I think we’re still at the beginning of what ultimately be needed both for power generation and industrial and PetChem load. We are also seeing improvements in storage opportunities. I think, first in the current market, but also in terms of the long-term commitments. We got a firm long-term commitment of 3 Bcf of storage on our Texas Intrastate system by an LNG customer during the quarter. And I think all of this on the transport and storage side points to continued optimism about the overall value of our gas network. CO2 segment earnings before DD&A were up $26 million or 2%. But looking at the fourth quarter on a year-over-year basis, the segment was down 6%. So clearly we faced deteriorating commodity prices in the fourth quarter, but operationally we saw record years at SACROC, which was up 8% year-over-year and was averaging 35,500 barrels a day in the fourth quarter and a record CO2 volumes and NGL production. Yates was down slightly 2% year-over-year and although Katz and Goldsmith are up on a full-year basis, both continue to perform below plan. But in total, oil production is up due to the outperformance at SACROC which is our biggest field. As I said, we’ve reduced our backlog in the segment while we continue to have many good investment opportunities here. We will lay some of those out at the conference. We delayed plans on various new developments including the St. Johns Field and associated pipeline infrastructure with that development. Turning to products, segment earnings before DD&A on a full-year basis were up $76 million or 10% with strong year-over-year growth on KMCC and SFPP more than offsetting a decline in our transmix business. The key operational developments in this segment are improved refined products volumes and a ramp up in crude and condensate volume on KMCC. All refined product lines gasoline, diesel inject were up in 2014 versus 2013, including plantation gasoline volumes were up 4.4% for the full-year versus 1.5% without plantation and 1.1% for the EIA. Much of the full-year difference is due to plantation therefore, but in the fourth quarter, we saw gasoline volumes on SFPP, our West Coast system up 4.4% year-over-year and what we believe is a sign of economic improvement in the markets we serve and also in part perhaps the beginning of a demand response to lower prices. From a project standpoint and product, we’re experiencing a further delay in our Houston Ship Channel splitter project on the KMCC system. We now expect March 2015 in service. On the other hand, our various build outs of the KMCC system are going very well with several of them coming in ahead of schedule and/or under budget. And I already mentioned Palmetto, which had a successful open season in the fourth quarter and was added to the backlog. In Terminals, segment earnings before DD&A for the year were up $181 million or 23%. The growth was split roughly two thirds, one third in favor of organic growth versus growth from acquisition. We continue to see strong performance in our Gulf coast liquids business and benefited from the expansions coming online in Edmonton and the Houston Ship Channel primarily. During the quarter, we brought online Phase 2 of Edmonton, two crude by rail facilities and our liquids terminal expansion for Methanex at Geismar, Louisiana. In this segment we continue to see strong demand for liquid storage and handling, again particularly in Edmonton and Houston. And nearly all of our $2.1 billion backlog in this segment consists of expansions of our liquids facilities and again on the Gulf Coast and in Alberta. On Canada, our segment earnings here were down $17 million year-over-year. That was really a result of FX; otherwise the segment had a good year. But the main story continues to be our progress on the $5.4 billion expansion of Trans Mountain. That expansion is under long-term contracts as you remember, they’ve been improved by the NAV. We filed our facilities application in December ’13 and we’re working through that process under schedule that calls for a decision in January 2016 and we expect in service date late in the third quarter of 2018. We continue to make good progress in our consultation processes. We also recently completed some important though controversial testing at one of the mountain in Greater Vancouver. And that will enable us to minimize impacts on local residence for the last few kilometers of our build. So that’s it for the segment update and the projects. And with that, turn it over to Kim.

[Kim Dang:]

Okay. So turning to the attached page numbers to the press release. The first page is our GAAP income statement. As Rich said, it was a -- it’s a bit of a noisy quarter given the closing of the transaction about two thirds of the way through the quarter and we’ve got a number of certain items that are littered through the GAAP income statement. So I’m going to turn to the second page, which is where we have these items delineated, so that you can see them individually, and also is our calculation of distributable cash flow for KMI. Now this is a new format for KMI. Previously KMI, we use the financial metric cash available for dividends. We’ve now converted KMI for the DCF formula, we previously used for KMP and EPB, which is net income plus DD&A, including our share of joint venture DD&A plus book taxes minus cash taxes minus sustaining CapEx including our share of JV sustaining CapEx and plus or minus some other small adjustment. This formula will work for all the periods presented, even though its prior to the consolidation transaction, because KMI consolidates KMP and EPB, so net income at KMI includes a 100% of the earnings for all three companies. For periods prior to the fourth quarter of 2014, we subtract from our DCF formula the declared distributions we made to KMP and EPB public unitholders resulting in a number per DCF that it is equal to what we previously reported as KMI’s cash available to pay dividends. For the fourth quarter, there will not be distributions made to KMP and EPB unitholders, because the transaction close before the fourth quarter record date. So there will be no MLP distributions to subtract. However, the KMI shares that we issued in November will receive the full KMI fourth quarter dividend. So when our average shares outstanding for the fourth quarter we show the newly issued shares as outstanding for the entire fourth quarter. So with that explanation of the overall format and the new format let me take you through a couple of numbers. This is the format that we’d -- we expect to continue to use going forward. The DCF for certain items in the fourth quarter was $1.278 billion, that’s up $796 million. You can see that the 2.133 billion shares outstanding again include the newly issued shares for the entire fourth quarter to get us to $0.60 DCF per share available versus the $0.45 dividend. For the full-year, we’re at $2.618 billion of DCF, up $905 million. Again, the weighted average shares here 1.3 billion shares include a full fourth quarter of the newly issued shares to get us to $2 in distributable cash flow before certain items versus the $1.74. The segments let me go through a couple of numbers. Steve has taken you through a lot of the detail. The segments produced our earnings before DD&A of $1.972 billion in the quarter. That’s up $98 million or 5% with the big contributors that -- to that being Gas up $51 million or 5% and Terminals up $56 million or 25%. For the full-year, segment earnings before DD&A up $630 million or 9% with the biggest contributors being Natural Gas pipelines up $352 million or 9%. Terminals up $181 million or 23% and Products pipeline up $76 million. Now versus our budget for the full-year, natural gas pipelines came in above their budget. They’re about 2% above their budget, primarily because of incremental transport revenues on TGP and EPNG. CO2 came in about 6% or $90 million below its budget primarily due to lower oil prices and a higher mid-cush spread and also some higher expenses at our Goldsmith field. Our products came in about $68 million below its budget primarily because of volume -- lower volumes by KMCC, a lot of which we will receive revenue in later years, make up revenue and the delay in the splitter. And then Terminals came in about $10 million above its budget as a result of the APT acquisition. Without the APT acquisition, Terminals would have been below its budget because of some lower coal volumes, expansion delays and negative impact of FX. The certain items in the quarter that were totaled $98 million loss. The more significant ones were the $235 million impairment on our Katz field, primarily -- all due to the lower price curves that we’ve to use in that task. And then we also had a benefit that offset that, a non-recurring tax benefit of about a little over $100 million. So that is for the DCF page, for KMI for the quarter. Looking at KMI’s balance sheet and comparing that to December ’14 balance sheet to the December ’13 balance sheet, you can see the impact of the transaction primarily in four or five different lines. In deferred charges and deferred income tax, what’s happening there is KMI was previously in a deferred tax liability position, because of the step up on the transaction and the [indiscernible] tax basis that we’re getting in the assets, we actually now have a deferred tax asset and so you see a big swing between deferred income taxes and the assets deferred charges. You also see a big increase in other shareholders equity and a reduction in non-controlling interest as the public unitholders of EPB and KMP went away and we issued new KMI shares. The other large change is that which I’m going to reconcile for you in just a minute. We ended the quarter with $40.6 billion of debt, which is about 5.5 times debt to EBITDA relatively consistent with where we expect it to end. Our debt is up $5.1 billion for the quarter and so let me take you through those the larger changes contributing to that. The consolidation transaction was a cash outflow of about $4.06 billion that was 3.9 for the cash portion of the deal plus associated fees. Expansion CapEx, acquisitions and contributions to equity investments were about $1.1 billion in the quarter and then we made a CPC settlement payment of about $319 million for a cash outflow of $5.5 billion. We raised equity prior to the close of the transaction at EPB, there was ATM of $126 million and then we have about $250 million cash inflow from other items or working capital source, which is primarily the coverage that we generated in the quarter and that gets you to the $5.1 billion. So with that, I’ll turn it to Dax.

[Dax Sanders:]

Thanks, Kim. Just to reiterate what Rich says, this is an acquisition that we’re very excited about is it will give us a premier asset in a premier basin. At this point, we have a significant presence in every major producing region in North America, except the Bakken. With this acquisition, we will now have a major position in the Bakken and a long-term partnership with some of the most prolific producers in the Bakken, including Continental Resources. To give you a bit of detail on the transaction, it is again approximately $3 billion in total enterprise value, very slightly accretive out of the gate, but based on our assumptions , it should be $0.06 to $0.07 accretive a couple of years out. Looking through the lens of 2015 expected EBITDA; approximately 86% of the margin is fee-based with the remaining 14% subject to commodity exposure, primarily through POP processing arrangements in the gas processing and gathering segment. There are essentially three main businesses to Hiland. The first is oil gathering, which consists of four facilities represents approximately 59% of the EBITDA and it’s almost exclusively fee-based with really no direct commodity exposure. Hiland serves most of the major producers in the Bakken and has over 1.8 million acres dedicated with a large piece of that centered at what many considered to be the Tier 1 portion of the Bakken as Rich mentioned. The second is oil transportation, which is essentially the Double H pipeline. Double H represents approximately 27% of 2015 EBITDA and it’s a 100% fee-based. Double H is a 485 mile pipe extending from the Dore Terminal in McKenzie County, North Dakota along the North Dakota/Montana border down to Guernsey, Wyoming where it ties into Pony Express. It includes 500,000 barrels of storage in two trunk stations. It’s in the process of being commissioned right now with the initial capacity of being approximately 84,000 barrels a day, but increasing to approximately 108,000 barrels a day at the beginning of next year. Just to understand by firm commitments for approximately 60,000 barrels a day with an open-season in process right now for an addition -- for additional barrels, again, currently in process. As of Monday, Double H had nominations for approximately 80,000 barrels for February, which is its first full month in operation. The third business is gas gathering and process, and which consists of five different facilities, and represents approximately 14% of the EBITDA. It’s almost exclusively non-fee-based or commodity exposed through the POPs that I mentioned earlier. Again, the largely fee-based nature of these assets limits our direct commodity exposure -- exposure to commodity prices. However, it’s certainly not lost on us that there is indirect commodity exposure in that the economics of these assets are in part dependent upon whether the oil behind them continues to be produced. We believe that the risk of the oil being produced is largely mitigated by the quality of the acreage that is dedicated to Hiland and will be driving the economics of the oil gathering. As we mentioned in the release, the acreage driving our economics is largely located in McKenzie, Mountrail and Williams counties and represents some of the best drilling economics in the Bakken and in North America. Consequently, we believe this acreage is economic to producers even in the current commodity environment. Some Bakken producers, including some of our customers have publicly revised our guidance for drilling in CapEx in recent weeks to account for the current commodity environment and we have taken that into account in our analysis. Further, while nobody can really contemplate what will result from a substantial decline in commodity prices from here, the relative attractiveness of the acreage should position us well versus other acreage competing for a finite number of rigs in such an environment. Again, to summarize, we believe this is a highly strategic acquisition with some premier assets that largely fit our toll road concept and are located in an area where we’ve had no presence. We will be inheriting a very talented group of employees, that have built a great company and we look forward to doing great things with this franchise.

[Rich Kinder:]

Okay. Thank you, Dax. And Sharon, if you will come back on, now we will take any questions that our listeners may have.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Shneur Gershuni of UBS. Go ahead sir. Your line is open.

[Shneur Gershuni:]

Hi. Good afternoon, everyone. Rich, first wanted to offer congratulations on your accomplishments and Steve also wanted to congratulate you on your upcoming expanded responsibilities.

[Rich Kinder:]

Well, thank you. You’re kind.

[Shneur Gershuni:]

Thank you. Just a couple of quick questions here. I was wondering if we can talk a little bit more about today’s acquisition. You’ve had a lot of pundits out there talking about the Bakken, with production being flat at best possibly declines and so forth. I was wondering if kind of the opportunity over the next couple of years as you see accretion pick up, is that a function of moving some of the trucking volumes onto the pipeline system? Is that kind of how we expect to see the opportunity on a go-forward basis kind of given the bleak environment that we’ve out there for the Bakken?

[Rich Kinder:]

Again, let me start with this, and I'm not sure if we posted this on the Web site, but if not, we should have. If you look at acreage around the country and what are the breakeven price is based on WTI prices, this area of the Bakken is right at the top of the list. It's one of the two top producing basins in terms of breakeven prices. So we don’t think that it is nearly as bleak as other parts of production are if you want to use that word. Secondly, obviously a big part of the upside is a ramp up in this Double H pipeline. We are starting out in the 80,000 barrel per day range ramping up to about beginning of next year 108,000. And again, we believe that the combination and as you may know, there is a joint tariff arrangement between Double H pipeline and the Pony Express line that gets you all the way to Cushing and then of course there is several avenues now to get from Cushing on down to the Gulf Coast. And we believe by putting all that together, we provide by far the most economic way of getting barrels out of this very sweet spot in the Bakken. So we think HH is a real winner, both near-term and long-term. So that’s part of it. The other thing is that we have looked at the EURs on these wells, we have looked very carefully at the drilling plan of our largest customer, and we have adjusted for exactly what they plan to do, what we believe they plan to do with the rig counts that have already been announced. So we think we’ve been pretty conservative in the way we have assessed this and believe that it’s an incredible asset for us. Now let me say that beyond that I think we have the opportunities I said in my opening remarks to do here kind of what we did in the Eagle Ford on KMCC and that is to build out this system to make it bigger to do some acquisitions to do some extensions and the fact that we have about 1.8 million acres dedicated to this. I think it shows -- will show very well in the long-term. And look -- we had to look at this in the long-term, not in the flavor of exactly what’s happening today. So we think long winded way of saying, we think we’ve been very conservative in looking at the front end of this transaction and still think it has enormous long-term growth potential.

[Shneur Gershuni:]

Okay. And just a follow-up on that. In terms of permanent financing plans, any sense on an equity to debt ratio that you’re thinking about?

[Rich Kinder:]

Yes, we’ve been very clear since the time we announced the merger last August, after meeting with the rating agencies that we’d stay in that band of 5.5 to 5.0 debt to EBITDA and certainly driving that down towards the lower end of the range as we move on out toward 2020. We’ve been very consistent on that. We’ve said that the Holy Grail for us is maintaining our investment grade rating.

[Shneur Gershuni:]

Great. And one final question. You had mentioned in the prepared remarks that you had taken out a little under $800 million from your backlog out of the CO2 business due to lower commodity prices. I was wondering if you can sort of share the commodity price that you’d assume to take that out was that -- was it $70, was it $50, just trying to understand the sensitivity to see if that’s possibly going to change on a go-forward basis given where crude prices are today?

[Steve Kean:]

Yes, I don’t have a specific price for you, but what we did and in a lot of cases what we're doing is delaying our expectation of making these investments and in some cases that was delaying it outside of the five-year window that we typically used for defining the backlog. We are going to give you at conference next week some more specific return numbers to go with various development activities that we have going on. But I think the way to kind of slice it is, it is very economic for us to do CO2 development and pipeline work where we’re expanding kind of off of our existing footprint. So like Southwest Colorado with Cow Canyon and the Cortez pipeline, particularly the North part of that expanding that to make that available and it’s certainly very economic for us to be doing infill drilling in SACROC and additional HDHs at Yates. And so the kinds of things that are building off of and utilizing our existing infrastructure are very economic. And if you have a price recovery that's back in the $70, $75 range I think you'd see some of those projects that we pushed out or pushed off coming back on.

[Shneur Gershuni:]

Great. Thank you very much, guys.

[Steve Kean:]

One other clarification that $800 million, that was predominantly CO2, but there were few other cats and dogs in there as well, but it was predominantly CO2.

[Shneur Gershuni:]

Great. Thank you

[Operator:]

Our next question comes from Darren Horowitz of Raymond James. Go ahead your line is open.

[Rich Kinder:]

Hey, Darren, good afternoon.

[Darren Horowitz:]

Hey, Rich. Good afternoon and Rich and Steve congratulations to both of you on your respective announcements. Rich, just a quick question and I realize you are going to get into a lot more detail on this next week, but I’m just curious with the current forward commodity curve, have you seen a big shift away from more producer push to more demand pull or consumer pull type projects and specifically with regard to export opportunities around Galena Park, the Ship Channel. I know we’ve talked about ultra low sulfur diesel exports and obviously that big tank expansion that you’ve discussed that was underwritten by a new shipper, but I’m also thinking about more of an emphasis on Pasadena in addition to Galena Park, further Bosco build out, more ability to get more product on the water quicker.

[Rich Kinder:]

I will turn that over to John Schlosser, who runs our Terminals Group.

[John Schlosser:]

Yes. We're looking at 35 million barrels right now. We have six different projects we're working on that will bring it up to 41 million barrels. We are going from 8 docks to 11 docks. So we feel we have the premier footprints in North America for clean products and we see more projects and more growth opportunities in that area as we go forward here.

[Darren Horowitz:]

In terms of aggregate CapEx and maybe it’s too early to do this, but can you put a rough cost number on that and is it fair to assume unlevered cash on cash returns may be in the low to mid-teen range?

[John Schlosser:]

Yes, we’re managing actively right now a little under $2 billion worth of projects on the Houston Ship Channel between Bosco, Pasadena and Galena Park and some of our other expansions.

[Darren Horowitz:]

Okay.

[John Schlosser:]

And the returns are all in the low to mid teens.

[Darren Horowitz:]

Okay. And then, last question for me maybe …

[Rich Kinder:]

We subscribe over term contracts from our customers. So it’s not like building tankage on spec here.

[Darren Horowitz:]

Sure, sure. And then, Rich last question for me maybe, as you are looking at the existing opportunities that obviously with the challenges across natural gas, natural gas liquids and crude oil prices. In terms of cash on cash returns are the best bang for your buck with regard to allocating capital, is this the biggest area of opportunity for you?

[Rich Kinder:]

Well, I think we have got opportunities across the board. I think - I said last August when we announced this that what we’d have is a much lower cost of capital under the new arrangement or a lower hurdle rate, if you will, which again on after-tax basis is about 3.5%. And not that we are going to do 4% projects, but it gives us a lot more leeway to make accretive acquisitions and we’re certainly going to use that currency to make good acquisitions. And I think that if there is a silver lining in these clouds of low commodity prices, it’s going to be the ability to make some extremely good acquisitions over the next 6 to 12 months. Now we’re not the only player here that’s going to be looking at the same thing, there are other well capitalized midstream companies, but I think you’re going to see consolidation opportunities and everything I said last August I think is even more true today than it was then, given the decline in prices.

[Darren Horowitz:]

Thanks, Rich.

[Operator:]

Our next question comes from Brad Olsen of TPH. Go ahead your line is open.

[Rich Kinder:]

Hi, Brad. How are you this afternoon?

[Brad Olsen:]

Hey, good afternoon Rich. How are you?

[Rich Kinder:]

Good.

[Brad Olsen:]

My first question is really just a follow-up on some of these others -- on the Hiland acquisition. You guys mentioned that there would be some incremental CapEx and I’m kind of -- I'm just trying to understand where that CapEx is going to go? Is there additional construction left on the double H pipeline or is that further building out the crude gathering or the GMP asset footprint?

[Rich Kinder:]

I’ll ask Dax to answer that question.

[Dax Sanders:]

Yes, Brad. We think that we will be able to invest roughly $850 million from call it 2015 through 2018. There is kind of an aggregate oil well connects, some gas well connects remaining CapEx on the Double H. The Double H has roughly $30 million left spent to spend and a little bit more than that to spend to get it up to roughly 108,000 barrels. Now what that doesn’t contemplated all is substantial expansion of the Double H, Rich is something that we will certainly be put in time and got an opportunity into. But that gets us up to in the 108,000 barrels a day.

[Brad Olsen:]

Got it. And so, safe to say that the vast majority of the remaining $800 million is gathering and processing and crude gathering?

[Dax Sanders:]

I think that’s right.

[Brad Olsen:]

Okay, got it. And when you think about kind of the competitive environment in the Bakken, some other midstream operators have made asset acquisitions up there over the last few years, and when you think about kind of what percentage of the market is spoken for under long-term midstream agreements and what might still be up for grabs? Do you see an opportunity to attract incremental customers?

[Dax Sanders:]

Yes. I guess, what I would say is that as we mentioned in the release we’ve got good long existing relationships with a lot of different customers, including some very prolific producers out there, but we don’t have them all. We haven’t necessarily -- we have really good acreage dedications with the ones we do have which make us feel really good about this business, but there are some that have and doesn’t have the historical relationship with that we do have a relationship with and we will absolutely be spending a lot of time to try to -- to try solidify this relationships with the Hiland assets.

[Brad Olsen:]

Got it. I guess, shifting gears a bit to the natural gas pipeline side of things, it looks like you guys are still pushing forward on the Northeast direct project and I was -- there have been some press releases out about some of the work you’re doing around multiple different rights of way, how is that process going? I guess, from a kind of simplistic view which is really the only view that I do -- the simplistic view is going to New York State, moving along a right of way that’s similar to constitution which has become kind of regulatory quagmire. What seems to be a really encouraging project with a lot of customers who seem excited about it that right of way issue kind of sticks out as something that could delay timing or cause problems. There are -- is that point of view accurate or fair?

[Rich Kinder:]

I don’t really think it is. And let me tell you why we have adjusted this write away so that today the huge percentage of the write away is along utility easements. Now there’s certainly people who are going to say not in my backyard, but that’s why we have Berk as enabling agency and we will have in fact, we are going to have forgotten how many open houses here in the next few weeks actually this is a winner in all these communities talking about it. But in the end we will have a route, and we would expect the Berk to approve that route because it is reasonable and look, you have to look at the underlying economic need here. If there is one area of the United States that needs additional natural gas it is New England. And the area of New England with this ending at Dracut is exactly the location where you need to be in order to serve that market which initially will be LDCs, and you can see how we’ve announced the LDCs in the pass who have signed up. We now have reduced almost all those to PAs and longer term of course beyond the LDCs in the end the power generation market in New England has to have more capacity on pipelines. It just can't work any other way and we plan to be there to catch that ball when it comes off the backboard. So, I think we can do this. We’re proceeding very in close consultation with everybody up there including our customers and including government officials. And I’m astounded sometimes, frankly and this goes beyond this project. I’m astounded that even as recently as a couple of years ago, people I believe -- the general public rightfully believe that natural gas is the savior. It emits half as much emissions as other power generation alternatives for example, and it’s the lowest emitting fossil fuel, this is the bridge fuel for the future even if we -- you believe will eventually move more to renewables. And now we’ve got a cautery of people around the country assumed to be attacking every expansion of every pipeline, and I just -- I still believe in the common sense of the American people and the regulators, and I think in the end projects that are really needy like this will get approved and will get built. Now let me emphasize that there is not one damn set of that North East direct project, either the supply portion or the market portion that is in the backlog that Steve took you through. So this is a project that we’re working on and if it gets built it would be added into everything we projected for you thus far.

[Brad Olsen:]

That’s great color, Rich. I appreciate all the color everyone. Thank you.

[Operator:]

Our next question comes from Carl Kirst of BMO Capital. Go ahead sir. Your line is open.

[Rich Kinder:]

Carl, how are you doing?

[Carl Kirst:]

Good afternoon. Good, good. Thank you, and certainly congratulations to both of you. And just, maybe if I could stick with NED for a second, because I’m just curious now from the other aspect, from the commercial aspect. Is there any better sense of how the market is shaking out from the demand pull aspect, i.e. what, perhaps Maine might do to kind of push you over the finish line or anybody else for that matter?

[Rich Kinder:]

I’ll let, Tom Martin who runs our natural gas pipeline to answer that.

[Tom Martin:]

Thanks, Rich. Now as he said, as Rich said we have gotten most of our LDC part of this project summed up. So, it is really going to the State of Maine and ultimately the power customers that will be the next phase. And we think over the next quarter maybe two at the most as we will have a very clear picture on getting those commitments in place to, we believe to move forward with this project. But a lot of work to be done between now and then, certainly need to work with the state and local officials as well as the commercial aspects of the these transactions and all the -- as Rich said, all the people that need this commodity have been very positive towards this project and we are very optimistic that we’ll get this done.

[Carl Kirst:]

Understood. So it sounds like this spring is still at least a potentially still a realistic scenario as far as knowing how the chips are going to fall.

[Tom Martin:]

Spring into mid-year. Yes.

[Carl Kirst:]

Okay. If I could ask a question on the CO2 business only because Rich I think you mentioned that the current budget for instance does not include any of the potential benefits of cost reductions, and I’m just curious in the experience of 2008 and 2009 if there is any sense of magnitude of what that was back then as far as possible offset we maybe looking at this year.

[Rich Kinder:]

Yes, Jesse.

[Jesse Arenivas:]

Yes, thanks. I think our target is going to be at 15% of our total operating budget. Keep in mind our 40% of that is tied to natural gas prices or correlated to the natural gas price which is power. So, we’re shooting for an overall 15% reduction in cost roughly $30 million of the non-committed dollars. In regards to 2008, 2009 we were able to achieve a little higher percentage of that, but what we’ve learned through that period is that we tied a lot of our drilling and well work programs in contracts to crude price. So when we lowered the budget to $70, there’s already a wedge out of that. So in aggregate it’s probably going to be closer to the 20% consistent to what we got in ’08 and ’09.

[Rich Kinder:]

And obviously, Carl, he’s talking just about the O&M, the operating budget. There will also be savings on the capital side. But as far as impact on 2015 reducing the O&M cost we believe 15% is a good solid number, and they’ve already achieved about a third of that with contracts. They’ve already renegotiated just since the first of the year. So, I think we will have that. And again, there will be a lot of moving parts obviously in this kind of environment, but we don’t have that in place with our numbers yet.

[Carl Kirst:]

Understood. And then lastly if I could, this is just sort of, I guess a micro question, but to the extent that we saw the excess coverage again keeping the $70 oil plan moving up from $500 million to $650 million -- $654 million. Was that basically just a nuance to the bonus depreciation at year end, or was there something more going on there?

[Rich Kinder:]

Kim?

[Kim Dang:]

Sir. That was just Carl, we went out with our budgets where all the pieces were in place here and so we went with over $500 million. It was over -- it was $600 million at the top, but one of the moving pieces was that we were finalizing some of the tax purchase price allocation and so that’s why we went out with an estimate as opposed to a precise number.

[Carl Kirst:]

Understood. I appreciate the clarification. Thanks guys.

[Rich Kinder:]

Thank you, Carl.

[Operator:]

Our next question comes from Craig Shere of Tuohy Brothers. Go ahead, your line is open.

[Rich Kinder:]

Good morning, Craig.

[Craig Shere:]

Good afternoon, and congrats Rich and Steve and the whole team. When the market was questioning I’m not understanding as much, a year ago you guys kept a steady sale and simplified things dramatically. Congratulations for job well done.

[Rich Kinder:]

Thank you.

[Craig Shere:]

Couple of questions here, on the EOR side, really great growth at SACROC, Katz was also up I think 6% sequentially. Can we get some more color on that and also the ramping trends that Katz and Goldsmith that maybe was behind schedule over the last couple of quarters and can you comment on appetite for EOR growth CapEx initiatives in the current environment with things like ROZ or the Yates NGL flood?

[Rich Kinder:]

Yes, and Craig we’re going to go into lot more detail next week at the analyst conference. In fact I think Jesse has got a slide that’s going to show you basically what returns are at various WTI prices broken out by SACROC, Yates, Katz, ROZ, so on. But I think the huge story or success story here is that SACROC, and you’re going to see next week that once again that if you’ve attended our conferences every year people asked whether SACROC start this inevitable decline? And I remember at one time it was going to be 2008, 2009, then it was 2014, 2017, 2018. We continue to move that out because frankly it is just a fantastic field and we’re now doing a lot of infill drilling that is very economic. It gets more economic than putting on new patterns by a fair margin. And again Steve gave you the average for the year and for the fourth quarter. Starting this year, we’re right at 37,000 barrels a day at SACROC and our budget that we set for this year is about 33,000 barrels a day and now we’ll have moving parts elsewhere in CO2, but thus far we’re off to a very good start and it’s largely due to SACROC. So we see that. Certainly the ROZ, I think is at the upper end of the curve in terms of clearing price versus something like infill drilling at SACROC, and we’ll just have to see how that comes out. But certainly the money we’re spending now on our test patterns there is economic given the cost we’ve already presented, it’s very economic on a going forward basis. And then we’ll just reassess that for that on where the prices are. Steve or Jesse, do you want to add something? They’re nodding their head, so I guess they’re agreeing.

[Craig Shere:]

Okay. And just one more question, it would be on an ongoing basis quarterly if maybe we could kind of track the growth CapEx inventory or portfolio relative to what was originally envisioned when you issued your original guidance through 2020, I realize there’s some moving parts including commodity prices. But where do we stand right now in terms of maybe needing just a couple of billion dollars more at the same commodity prices you originally assumed to fulfill that long-term growth guidance.

[Rich Kinder:]

Well, go ahead Steve.

[Steve Kean:]

I was just going to say, I think that we can give you some more insight into that. But it’s very hard to define what in -- what people have called our shadow backlog is going to fall into the backlog. But we believe we’re going to get a substantial piece of additional CapEx beyond what we’re showing you in the backlog and our performance over the year and from quarter-to-quarter is generally demonstrating that too. The other thing that’s hard to incorporate in there is acquisitions like the one we’re talking about today. We expect we’re going to see those as well. So those are shots that are just a little bit harder to call. But you have -- you’re making a good point. Certainly with some additional capital deployment in our existing businesses we can call back some of the damage done in our CO2 business from lower commodity prices. So we can help get back some of what would have otherwise been a deterioration from the transaction that we were talking about back in August.

[Craig Shere:]

Sure. I guess, that was my point of just making up the free cash flow that was originally guided and maybe getting to the point eventually being able to increase the 10% CAGR on the dividend?

[Rich Kinder:]

We would certainly -- that’s our intent too. And again as you can see I mean, we’ve got a lot of positive cash flow even with lower commodity prices. It’s just harder to judge on a going forward basis. But the reason I took you through ’15 is that’s something that I can get my pea-sized brain around and so you can see that in the year like ’15 and I’m not saying that, that’s the same every year, but you can kind of see where you are, and the impact of commodity pricing on the bottom line in terms of distributable cash flow and excess coverage.

[Craig Shere:]

Great. Thank you very much. I look forward to next week.

[Rich Kinder:]

Good.

[Operator:]

Our next question comes from John Edwards of Credit Suisse. Go ahead. Your line is open.

[Rich Kinder:]

Hi, John. How are you doing today?

[John Edwards:]

Doing well, Rich, and congrats on your upcoming transition, I guess, well deserved.

[Rich Kinder:]

We are great. Steve’s as good as they come. Not going to be hanging around. So, go ahead.

[John Edwards:]

Well congrats to Steve as well. But I’m just curious on the highland deal, if you can give us an idea of the economics behind the acreage that’s dedicated in other words maybe what the breakeven costs are for that acreage?

[Rich Kinder:]

Yes, I don’t know if we -- and I’m going to turn it over to Dax. Dax I don’t honestly know whether we posted any slides on the Web site yet. I think we’re going to. And the one that we used with the Board today I thought was very good. Dax, do you want to kind of take it through that?

[Dax Sanders:]

Yes, absolutely. I think John a couple of things -- couple of sources, generally I think if you look at one source I think and this is publicly available is a presentation the Continental Resources who is a pretty well respected producer up there put on our Web site based on a presentation couple of weeks ago, and they show a graph that shows effectively a PV-10 at a WTI price of effectively 40 bucks and assuming no modest amount of cost cut from this kind of department. So, that’s one piece of data out there. Lets just say and again that’s in terms of the WTI price. We’ve got another I guess piece of information from a bank that shows, effectively Bakken, Tier 1 Bakken being, if you look across different acreages across the United States being really second only to the Eagle Ford Tier 1 in having sort of, again kind of a PV-10 or 10% IRR breakeven with the WTI price in the range of call it $35 to $45, and again that assumed some cost cuts that are probably appropriate for this environment. But those are the types of numbers that we think about them. And again, I think what you heard all these producers say, a lot of these guys have said probably is, they’re reducing rig counts but they are high grading their portfolios and substantially increasing the EOR targets in the wells that they’re drilling and they’re really focusing in on the higher grade acreage and focusing rigs on that acreage. And that’s really kind of what we take into account our analysis.

[John Edwards:]

All right. That’s really helpful. Is there, in terms of those ranges, I mean, is there some percentage. I think you said there was 1.8 million acres dedicated, is there some percentage that say the economics or more at the fringe, say it’s not economic below $60 or $70 -- I mean, its -- I assume its some kind of a curve in terms of how this shakes out?

[Dax Sanders:]

Yes, I would just say that the majority of that acreage is stuff that we believe is concentrated in what we kind of defined is that sweet spot which is again the sort of McKenzie, Mountrail and Williams counties. So, I mean we think that’s – that really is kind of what's driving that.

[Rich Kinder:]

And just again some touchdowns for you, John, and again a lot of different people have other opinions but the North Dakota, Department of Mineral Resources put out a report on January 8 that ranked the counties in North Dakota by breakeven oil price, and the rankings – the three counties that were primarily, were the heart of what we have is in is McKenzie, Williams and Mountrail and those were three of the top five counties in North Dakota according to the Department of Mineral resources, and McKenzie has the most rigs. Williams has the second number of rigs and Mountrail has the third largest number of rigs. So, I mean, I think certainly its some -- when you that much acreage 1.8 million acreage, some acreage is going to be better than others and then I got to grow up everything. But certainly we think and believe that we are right in the Tier 1 sweet spot of the Bakken, otherwise we wouldn’t have done the deal. And the other thing is we’ve got long-term contracts on this. So again whatever happens in that acreage we feel we’re going to be able to benefit from it and benefit our customers for years to come.

[John Edwards:]

Okay, that’s very helpful. And then you indicate, it’s a 10 times multiple by 2018. What's the multiples for like ’15, ’16, ’17, if you can give that?

[Dax Sanders:]

I think the only guidance we have there is that it is modestly accretive in 2015 and then we build through that 10 times by 2018.

[John Edwards:]

Okay. All right.

[Rich Kinder:]

It’s accretive every year from the get-go. So, I think that’s the important thing.

[John Edwards:]

Okay. Okay, that’s really helpful. That’s all I had. Thank you very much.

[Rich Kinder:]

Okay. Thanks, John.

[Operator:]

Our next question comes from Chris Sighinolfi of Jefferies. Go ahead. Your line is open.

[Rich Kinder:]

Good afternoon, Chris.

[Chris Sighinolfi:]

Hi, Rich. How are you? Thanks for taking my question. I just wanted to follow up on a couple of things -- to follow-up on things that may or may not be in the guidance, I know Carl followed up on some of the cost reductions that might be possible at the CO2 business. I was curious you have mentioned in the fourth quarter the times the impact in Canada, just wondering if that was sort of part of the wait of quarter scrub on what you’re offering for 2015. I’m sure you’re going to go into more detail in the suite, but I was just curious about the widening Canadian dollar impact.

[Kim Dang:]

Sure, and we can go on to this more next week. But what we have in the budget is 0.92 times for the exchange rate.

[Chris Sighinolfi:]

Okay. And is there any sort of broad sensitivity, Kim that you’ve offered on that?

[Kim Dang:]

We’ll have that for you next week.

[Chris Sighinolfi:]

Okay. Perfect. And then Kim, your kind of last quarter call to offer detail on hedge positions and I think you had commented that you might add sort of end of year-end or beginning in the year sort of look to add additional hedge positions. Just curious if you did that, and if so, if we can get an update on where things stand?

[Kim Dang:]

We continue to add hedges. We have on-going hedge programs right now. We’ve got about 80% of 2015 hedge at about an $80 price, 50% of ’16 and a $79 price, 32% of ’17 at the $79 price, and 20% of ’18 and an $81 price.

[Chris Sighinolfi:]

Great. Okay. And I guess, final question maybe for Steve or for Rich. In terms of the CO2 business I know there was the comment earlier about the CapEx that came out of the five year plan. I’m just wondering how we should think about the impact on -- potential impact on sort of volumes, Rich you had talked about SACROC slide and the slide you guys have about. Eventually when does that asset start declining if and when just wondering how we think about in context of some of the CapEx coming out over the next five years, what perhaps we are to be doing from a model perspective and thinking about that sort of base level of decline on the asset?

[Rich Kinder:]

Well, on SACROC and again this is early. We were kind of seeing the best of both worlds here. We’re actually seeing the ability to increase production with less CapEx intensive programs. So that’s a bit of a change from where we even were I would say six months ago, Jesse and so there’s been some -- there’s been some improvement there which is to keep figuring out better and better ways to get at the oil there. When it comes to the other fields again I think its less about, I think looking at it field by field than it is more about the type of development. So, where we have existing infrastructure in the field. So we’ve got gathering lines, we’ve got injection lines, we’ve got tanks, those sorts of things. The infill part of our program is going to be economic. And what moves to the margins is a new build out or new development, new pattern in the same development. That gets a little closer to the edge, and then a brand new kind of Greenfield development is probably outside the edge. And that’s a real summary way to think about it and again we can get more specific with some specific development plans that we have when we get to the conference next week, but is that covered, Jesse?

[Jesse Arenivas:]

Yes, I think maybe to look at, it’s the backlog I think the question is, heavy weighted towards CO2 development, not the EOR business. So, I think the push out of the 800 million or so is more focused on our new CO2 sourced development and not just the EOR projects. I think that’s the way to look at it.

[Chris Sighinolfi:]

Okay. Thanks a lot for the time guys. I appreciate it.

[Jesse Arenivas:]

Yes.

[Operator:]

Our next question comes from Adam Steinberg of Waveny Capital Management. Go ahead. Your line is open.

[Rich Kinder:]

Good afternoon, Adam.

[Adam Steinberg:]

Hi. Thank you. Hi, how are you?

[Rich Kinder:]

Good.

[Adam Steinberg:]

Good. I’ll eco the comments that others have made in the call about extending our congratulations to you guys. But it seems like the market is not really rewarding some of these accomplishments that you guys have achieved, and Rich, I saw your comments in the release today, but I was wondering maybe you can go further than just saying you won't sell and will the company consider buying back some of the stock and or the want?

[Rich Kinder:]

Would the company consider buying back some of my stock? I’m not …

[Adam Steinberg:]

No, no. Some of the stock in the open market.

[Rich Kinder:]

No, that’s not in our present plans. Again, what we have said is that we’re going to concentrate on this tremendous dividend growth story that we’ve got and be very careful about maintaining our investment grade rating by keeping -- by paying close attention to and keeping that debt to EBITDA in the range that we have talked about over the last six months.

[Adam Steinberg:]

Great. And then just one follow up maybe. You talked about -- you reiterated dividend and guidance in the future. Does today’s acquisition add to that or is it sort of the core business a little weaker and that makes up forth?

[Rich Kinder:]

Well, I think this is additive with what we’re doing today with the accretion and the out years is additive to what we had before. I think you have to look at on separate tracks. In other words what we’ve got here is a tremendous set of assets and admittedly are somewhat I think pretty minor -- in a pretty minor way compared to if you were [indiscernible], but impacted by the lower commodity price, we never denied that. We’ve given you guidance on that. And any acquisitions that we do or any new expansion projects that we had at the backlog we don’t have now will -- if you want to say offset that or will add to it. So, I think we certainly won't do any acquisitions or expansion projects unless they’re accretive to the cash flow.

[Adam Steinberg:]

Got it. Thanks.

[Operator:]

And I’m showing no further questions at this time.

[Rich Kinder:]

Okay. Well, thank you very much everybody. I know it’s been a pretty long conference call. We’re very excited both with the results for 2014, the outlook for ’15, and with our newest acquisition. Thank you and have a good evening.

[Operator:]

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