Wed, 10 Dec 2008|
Automatically Generated Transcript (may not be 100% accurate)
All right thank you. Think all of you for attending. Hopefully I can figure out and operate this -- that. It's -- you'll feel free to read through the disclaimers. But I'll skip over him. -- -- Kind of the basic. Can Morgan overview its presentation that it's been very similar -- for the last ten years. And in -- in the breakout session happy to take whatever questions you may have. Can Morgan energy partners is a large the largest master limited partnership that's -- -- in the green box. About 22 billion dollar enterprise value communities -- market value the equity plus the debt. In 2000 and Kate will have about two and a half billion dollars of even. Distributable cash flow north one point eight billion dollars. They're really two ways to home. Came. One of the straight master limited partnership units and that's what you see is KMT. And then we have another security that's called -- morrow which is really designed to be economically equivalent to -- -- But to be more appealing to institutions. And so KM are. In order to be appealing -- institutions and eliminate some of the negative tax consequences -- institutions have. With owning an LP equity pays its distributions. In additional shares rather than in cash. Now have to generate the cash to support those distributions. But again in order to eliminate those negative tax consequences and institutions have. We counting him out the equity -- we basically retain that cash. And -- the distributions in additional shares its exact same thing as an automatic distribution reinvestment vehicle. It ends up -- -- even more tax efficient man. The in LP units themselves. And that's because taxes on -- are are only -- -- and the owner sells shares. Hand at that point in time the taxes are all capital gains and if it's been years -- -- original purchase. Than their -- long term capital gains. So -- it's an attractive security again the design. Is meant to deepen the pool. -- -- -- and then Hampshire as many of you are familiar. You know -- structure itself is a very efficient structure because it cuts that'll layer taxation. The partnership itself -- -- -- -- -- don't pay taxes -- that entity so you're able to distribute cash. That should generate. And it very -- tax efficient manner. -- -- the box to see down in the lower right is general partner that general partner of -- It's a former M in the morning it's now known as -- nineteen. Strategy hasn't changed since this and he became Kinder Morgan in February of 1997. What we do is own and operate. Stable fee based energy infrastructure assets and -- assets that we tend. Now that we -- -- be vital to their energy and. For structure. The country so their major pipelines and terminals that are necessary. To move energy products across the US and to keep the economy running. Now we focus on increasing utilization of those assets. We focus on expanding those assets where we can do so -- with economically. And with little risk. And we focus on buying additional assets that fit that criteria. And integrating them into the structure. And -- as I mentioned it's all alone within within a very tax efficient structure which is a master limited partnership structure. The most efficient structure in which to own these kinds of assets. But what really drives. Value. Add came. Is our foot -- it's this set of assets. And so you can see we have a very broad and inverse set of assets is laid out on the map. High level where the largest independent refined product system in the country. That means -- the largest independent transporter. Of gasoline diesel fuel and jet fuel. For the second largest natural gas pipeline system in the country. We are the largest transporter of CO2 in the country. We are the largest independent terminal operator in the country. And we also operate. Some crude pipelines. Looking at those assets. On -- refined product side. We have heavy concentration on the West Coast it's our Pacific system and count -- that's over on the left side. And in in the southeast with the plantation line in Central Florida and then we also have a natural gas liquids sign line coach and which runs from Canada through the midwest. And I -- back actually all the way into this morning at. On the natural gas pipeline side we have concentrations in the Texas entrust states you see there along. The Gulf Coast of Texas and east Texas. In in coming out the Rocky Mountains. On the natural gas pipeline side we're building a number of major projects the largest of which is -- Rockies express pipeline coming out of the Rocky Mountains to the east. It will move natural gas all the way to eastern Ohio -- and Ohio will be. -- in point of that pipeline we are in service currently. To eastern Missouri. We will be in service all the way to eastern Ohio. By November 2009. -- that pipelines under construction although again. Back half of it's already in service. We're also building the mid continent express pipeline which comes out of the Barnett shale in the -- for shale. And news gas to the east -- connecting. With a number of the major natural gas pipelines have been transport that gas to the midwest and to the East Coast. Now we're building -- -- man Morgan Louisiana line. Which connects win today LNG re gas facility. The nation near facility and -- -- pants and transport that dance again across. Louisiana where it crosses a number the major natural gas pipelines that again -- that -- to the midwest. And to. The East Coast at -- real quick because this is representative of the type of projects that we do. You probably think well I mean that that project's gonna be a loser because there's not going to be any -- coming in. What we completely agree -- we don't expect volumes to come into that terminal. In this market doesn't make sense for -- come into the US given worldwide prices. But we don't build -- project. Based upon some speculation around what future volumes are going to be. We don't build a project. Unless we have secure commitments from customers that -- that we're gonna earn a reasonable return. So in the case can Morgan Louisiana. We have twenty year contracts. From Chevron and took -- For all of the capacity of that line and they will pay yes whether they -- or not. And so our revenue is locked -- EM we're not gonna take risk we're not gonna go and put hundreds of millions of dollars into the ground. With now contracts. From credit worthy customers that ensure that we're gonna earn an adequate return. And so that's true for all of these projects again it's probably just most dramatic. With that pipeline because it's unlikely that there will be significant volumes transported across that line. OK the next segment talk about CO2 million largest independent transporters CO2. -- what we're doing here is we're moving CO2 from southwest Colorado. Down to the Permian Basin where we injected into mature. Oil fields are really. On the CO2 sales and transportation side what we're doing. Is producing the CO2 transporting it to the Permian Basin selling it to third parties they injected into the air fields in order to -- oil recovery. So it's enhanced oil recovery projects. -- now as part of that business we also own production fields. In west Texas most significantly -- -- -- field and the gates field. We own those fields because. We felt there were opportunities. To optimize. The CO2 flooding that was going on there. -- in the -- gates that were flooding was CO2. It was nitrogen injection. And I and we felt that if we replace the nitrogen was CO2 we could increase production and we've been successful at that. So what we've done is expanded -- Our CO2 business into. These oil production fields. Now that's a little bit different from the other businesses that were engaged -- generally we don't have direct commodity price exposure generally. The products that we move or that we handle are owned by our customers. We don't have ownership -- -- You know crude oil should be at twenty dollars a barrel. 400 dollars a barrel are natural gas could be 5 dollars and am. Or fifteen dollars and him it doesn't matter to that's all we're doing is moving somebody else's product. -- in the exception is a CO2 business where we do have oil production. We try to reduce our exposure to short term fluctuations. In commodity prices there. By hedge -- -- get into that a little bit more in another slider to. McPherson remaining segments. Talk about terminals in largest independent terminal operator in the US. Here we are us the warring and handle -- A number of liquid products such as natural -- such as gasoline diesel fuel and jet fuel a little bit of chemicals and in a lot of bull materials and that's coal. Petroleum Coke. Cement steel salt. Potash. Whole variety of of other products and sodium we don't facilities -- product may come in by rail. And more story we may -- -- we'll get paid for those kinds of services in and we may loaded out by Bartrum loaded out by ship. Or -- may come in by barge and we loaded out by truck or by rail just a whole variety of things but we have these major assets. Where those kinds of activities both the storage and in the blending in in the trans loading occur. In in the last segment it's can Morgan Canada. Which is really a couple of crude pipeline systems. The most significant of which is trans mountain system which runs from Alberta to the West Coast -- -- the sole. Major pipeline that moves crude and refined products out of Alberta over to the West Coast which is vote. British Columbia. Down to the port of Vancouver hand in to Washington State. Where we move product to the refineries there in that state. So those -- the segments. Graphically here they are in terms of relative size. So again now start up -- -- natural gas pipelines about 47%. Of our 2008 budgeted DC -- you can see it's about half Texas and -- states. Capped Rockies products pipelines about 21%. -- wait budgeted DC yes. CO2 is about 28%. You can see about a third of that is a CO2 sales and transportation business. About sixty about two thirds of it. Is the oil production. And then you can see our hedge profile there 2008 about 83% -- 2009. That's 783% hedge -- CR average price per barrel there as well significantly below. Current market prices and current market prices have come down. But especially below where market prices were a few months ago and that is because we head count the long term and you can see. We're already 30% hedged in 2012. We have hedges that go out to 2013. On the terminal side. It's about evenly split between liquids and -- about 19%. 08 budgeted DC yet and and can Morgan Canada's smallest segment. About 5%. Oh wait DC yet but. -- I think you can see here that were well diversified across these different business segments. But what we've been able to do with that footprint of assets and you know -- -- -- that footprint you can see that were adding significantly more currently. But what we've been able to do and what we focus on. Is growing the limited partner distribution per unit and you know when -- talk about the distribution per unit. Again -- Kmart distribution per share is exactly equivalent just paid in shares rather than cash. The main focus. And I think it's a driver a value for our unitholders. Is that distribution per unit and you can see that sense this -- 1997. We've grown that at a rate of 17%. Per year. That means the -- per unit to our unitholders is gone out. On average 17% a year over the last 1011 years. Pretty significant growth. In truth if you take that. And you assume that our yield stays constant you know he's tend to trade on -- because we distribute out most of our cash flow. -- -- trade on what that distribution is relative to the price if you assume a constant yield. And typically we yield around 7% currently it's a little bit more attractive than at around 88 and a half percent. But you assume a constant yield what that would imply as a total return. Is seventeen plus 724%. Because what she'd be getting. Is your cash distribution in that -- -- you you buy at that first year cash distribution is 7%. If that -- stays constant in the distribution goes up by 17% that means your unit has to appreciate by 17%. So again -- simple back of the envelope way to think about returns. Just take that distribution growth and and on the yield you're assuming that -- stays constant that's a pretty significant return. Now we don't expect going forward that we're gonna grow at 17%. Every year. Although truthfully the distribution in 2008. Is growing 16%. Over the distribution in 2007. But going forward we expect it will be able to grow at around an 8% rate will be able to grow the distribution per unit at around 8%. Again if you take a 7% yield and assume. That you can keep it or not that you can that the market keeps that constant that that's a reasonable yields going forward. What you're talking about is a 15% return. With half of that coming in cash in a very tax advantaged -- -- because a significant. Amount of the distribution whether young came Peter Kmart is tax deferred -- are all of -- is and tell you itself came. -- -- getting half of it in a tax advantaged way. In any other half in growth. All based on a very stable set of assets in these are assets. That generate this cash in just about any environment hand are generating cash. They are high cash flowing long life assets begin to us that seems like a very attractive return and I'll show you the actual returns on the next slide. But the other point on this side is we've done that without levering up the balance the -- A function. Increasing leverage in order to generate these equity returns you can see our debt to even -- remained relatively constant. Over. That ten year life cycle. So what our actual -- spent. Came 27%. Again since the end of 1996. And it kmart's been 12%. Since the IPO of Kmart in 2001. I talked about the stability assets one thing that that allows us to do and more committed to this we -- -- be as transparent as we can. Is it allows us to be very specific about what we expect to -- In the coming year and you know we expect that in the next few weeks we'll talk about what we expect the distribution to be in 2009. But what you have on the left side here is what we have said as our budget and then gone through in detail and RG anywhere investor -- is gone through well the underlying. Cash flows -- that generate that distribution per unit and -- what we have actually generated. We've either hit or exceeded that distribution every year but one that one year was 2006. And there are budget was three dollars and 28 cents -- we came in at three dollars and 26 cents so less than a 1%. Mess that we're not happy about missing at all. But again I think that shows the consistency of these assets. For 2000 names are targeted distributions four dollars and two cents. Of course we expect continue to maintain a solid balance sheet. You know what's going to derive the growth going forward again off of this -- Diverse set of assets. What we're trying to do is take it -- into the major trends that are going on in these businesses. And so -- talked about the fact that we're building a number a natural gas pipelines. What's driving manner shifting sources of supply for natural gas -- increased production out of the Rockies -- increase production in the Barnett shale. You had expected. Additional importation of LNG now commented as -- gas facilities. What that meant is they're needed to be additional pipeline capacity in order to transport that natural gas from the -- source to the demand -- And what that led to -- opportunities to build new pipelines we're not the only ones building new pipelines. But we are building our share of new pipelines. Increase. Use of renewables. But people look at this and -- -- -- move a bunch of gasoline. Diesel fuel and jet fuel you know as we go to ethanol and -- biofuels. Maybe hydrogen or some like that. You know isn't that going to negatively impact you. What thing important thing to consider is economics. Renewable fuels first of all right now. Most of them are on economic compared to the fossil fuels I -- that's unfortunate. About truthfully if they were more economic than fossil fuels you'd -- greater use up. But you know ethanol subsidized biofuels are subsidized again in order to encourage the usage. But because of those economics. What you wanna do if you are a renewable fuel manufacturer. Or marketer. -- take advantage as much as possible of the existing infrastructure. Because if you have to build additional infrastructure if you have to duplicate infrastructure the next gonna drive your cost disadvantage. Greater so you want to take advantage of that infrastructure -- much as possible what that means for us. Is that we store much ethanol and our terminals we -- budget ethanol at our terminals over our truck racks. We are transporting ethanol through our pipelines in Florida. It's led to a tremendous opportunities in our existing assets to handle these fuels and we expect that we'll continue. Growing production out of -- oilsands. Again is driving the need for additional infrastructure coming out of there we just completed an expansion of our trans mountain pipeline. We've taken that pipeline for about 225000. Barrels a day up to 300000 barrels a day we expect they'll be demand. Some point. Over the next 510 years for additional capacity to move more of that product to the West Coast we're very well positioned to take advantage of that. High crude oil prices. Drives to -- -- for CEO to. Been the beneficiary of that we just recently completed an expansion of our CO2 production and transportation facilities so did that this year. Increase use of heavy crude. I'm leads to more production. -- -- a byproduct of petroleum Coke which comes at a cookers and so for. Comes from a higher sulfur crude. We are the largest pet -- handler in the US. We handle a fair amount of -- for as well we expect that to be a growing business going forward. Not demographic growth coal imports exports. You know again in in these economic times I mean those -- may play out a little bit differently clearly refined products volumes. In 2008 have not around like they have historically we'll see how that plays out going forward. In coal imports and exports we actually. Expanded a couple of our facilities. On the East Coast to handle coal imports coming in from South America. Now what's -- actually is as important not comment. They've gone to Europe mainly because of bottlenecks in both production. And terminals and so export capacity in Australia. And so Australia's have had trouble with coal production in had trouble at its terminal facilities and getting that -- -- of the country. What that's meant is that Asian demand has been met more by south African coal previously that south African -- was going to Europe. Now Europe is short it's source of supply. And so the south American call that our customer had been intending to bring into the US has been going to Europe and not only that. But some of North American coal has been going to Europe what that means is that our facilities where we're expecting to import additional volumes. We've been exporting -- Now once again this is a function of Helm you know we go about our business we got a contract from that customer. With minimum volumes. Included before we invest in -- capital to explain and expand our facilities -- our customers' payments even though they may not be importing the coal which they originally intended to do. Now in point of fact this particular customer is now exporting coal. And so they are utilizing our facility. But we're make an additional money because now they're exporting rather than importing. Not so again I mean I think that goes to the flexibility of our assets in the end. The conservative nature our investments again we will only do it if we are highly confident. That we're gonna earn an adequate return. Now these next few pages I'm gonna skip over it really goes into detail on several of the trends and I was talking about. This is shifting natural -- natural gas sources of supply the natural gas pipelines that we're building renewable fuels. And crude production from the oilsands -- they high oil prices increased use a heavy crude. Nicole imports and exports. Where that takes here's a summary of the major projects that we have going on now. You can see this total is nine point four billion dollars. A number of this I think it's almost half is already complete. The remainder will continue to work on through 2012. This is a summary of the capital that we've invested actually just through 200715. Billion dollars it's actually. Split. Fairly evenly between acquisitions and expansions. It doesn't include what -- investing this year and it doesn't include what we're investing going forward sodium we've had tremendous opportunities to invest. And then I've also tried to tell you that were pretty conservative about the decisions. To invest that capital or -- we will invest that capital. And so what that should mean is that if we've invested this fifteen billion dollars if we're truly conservative and if we lock. Those returns in as I'm telling you that we have -- we should -- pretty attractive returns. On those investments and so what we do is we track every year. Our cash on cash return in terms of the total amount we've invested. In cash in each segment and the cash flow that we've generated that year. In order to demonstrate to you again that we're doing what -- what we say that we're doing that we are investing very conservatively. So what this shows you is a return on investment by segment. And again what this is is the cash generated in that year divided by the cash invested in those assets these numbers are on lever. At the top of the page the main table so they don't include. Any financial leverage this is saying is and our products pipeline segment we tend to earn twelve to 13% a year. In our natural gas pipeline segment it's more like 161718%. On RC -- -- side it's in the low twenties. Recognize it on the CO2 side this has the impact of our hedges. And so this is not at market price this is that our hedge price. This is what we've -- if you put market price in there that return would be significantly higher now granted I mean. We're not getting market price -- there's no reason for us to show it that way. But I do wanna point out we're not -- -- market price here so that our actual return is lower this is our actual return including the hedges. Terminals you know at 1617%. Trans mountain news segment I didn't have -- for all of 2007. Earned about 11%. Without -- she is about 14%. Un levered return on investment. And when you add in the impact of the financial leverage of the debt that we put on this and again we think we have a very conservative debt structure very conservative capital structure. You're 26 point 7% return on equity. And again you know balance sheet. Remains solid we will continue to. Keep it -- very conservative. Now that being said we are not without risk. We operate a lot of regulated assets. Our rates on those assets can and have been challenged. We have adjusted our rates at times -- as a result of those challenges. That we expect to continue. On the CO2 crude oil production side those volumes are a little bit more difficult for us to predict. Relative to our volumes. On our pipelines -- -- our terminals and truthfully. And and that's an area where we are volume sensitive on our natural gas pipelines were not going insensitive because what we do is lease capacity. -- people pay us for capacity so they pay -- whether they ship or not. But we are going insensitive there in his volumes -- a little bit more difficult to predict. This year we actually are dead on our expectations in terms of our production volumes. Construction cost overruns. There's been a difficult environment in which to build pipelines. Especially. Large diameter pipelines are a whole bunch of 42 inch pipelines that are being built by -- -- major projects are primarily 42 inch pipelines. In by others and what that is meant. Is that the contractors. Don't have didn't have the capacity to build that meaning long line large diameter pipes. So they didn't have the equipment to do it but most especially they didn't have the labor to do it. And so they signed up and on the other thing that happened is so demand for construction of those -- way exceeded contractor supply. But that network was a couple of things. Line. They had the power when it came to negotiating contracts used to be -- actually this is the way that we built Rex west that we can get fixed price contracts. Meaning we would -- the contractor a set price per mile. And so we didn't wear the risk upon construction overruns from the contractor perspective. After Rockies express west contractors stop signing contracts that went because they didn't have to because the demand was so great for their services relative to the supply. That they basically contracted on -- time and materials basis although it's a little bit more favorable to us than that it's really a target price. Which is essentially time and materials but their profit tends to be less if they go over the target price and their profit by design is greater. If they come in under the target price. But it's still mostly time and materials. That they had that advantage -- we had that disadvantage -- we contracted with them the second part was they did not have. The experienced man power to construct these pipelines and what happened there was -- -- One. They needed more people to do it and to those people were less -- So they lost out on efficiency in in two ways. Needing more people meant there was a lot of competition for these people and drove the cost per person up. And in these people weren't as skilled so it took more people to do the job and so you -- got a compound in effect there. And that drove costs up on a number of these pipeline projects. We still believe because how we conservatively estimate cash flows. That on most of our projects we will earn attractive -- -- and I say we conservatively estimate how we conservatively estimate cash flows. When we look at cash flows that are going to generate the return that we require. On these projects we tend to only count cash flows that are locked -- So again on these natural gas projects what we're doing is selling capacity. And so again our customers pay us whether they ship or not. And so that's locked in that's what will count. That revenue -- is what we will count towards our return. When we put the pipeline in service we generally earn greater revenues than that the way that we -- those greater revenues are in the number of ways -- -- one. Win they ship they tend to generate some ancillary. Revenues those are relatively modest some commodity charges. But what were also able to do typically is sell some interoperable services which is if our customers are not utilizing their full capacity. We can sell in a reputable service to another customer which basically means if we have room on the -- then will move your molecules. And you know we do that every day we do that every hour every minute if we have room on the pipe then we'll take one of our -- irreparable customers and will move their volumes. That's additional revenue that's not -- when we go and project. Our revenues for this project. There's also back calls which is if you can find somebody who wants to move the gas the other way you can do that even if your fault it's great revenue for a pipeline. There's also. A number of services that are in line -- services park and loan services that are essentially storage on the pipeline. And when you have a large long line pipeline. Like this you actually have a lot of gas that's basically mine filled -- that pipeline that we own. What we can manage around that line fill such that we can sell storage services in essence to our customers utilizing that line -- Again that's an an additional revenue stream that we don't count. When we need projected return on the project and what again all I'm saying there was what that has allowed us to do. Is remain confident that will earn an attractive return on these projects. Even in the face of cost overruns. Other risks environmental. We handle a lot of hazardous materials we are insured but that can be an operational issue we believe that we operate our assets as well as anybody does he hand. That all our assets -- the most efficient ways to handle these products. Terrorism again more insured for that interest rates we do have a significant amount. -- floating rate debt so we have exposure there. So what that means in total. Game we believe that we have a very stable set. Highly valuable long -- -- assets. That we think we can generate an attractive cash distribution on and then we can grow that distribution. Again in a very straightforward manner generating an attractive returns for our investors. And that's that's -- -- more in -- so I think we'll now go to a breakout session believe it's in the laurel room right. And take whatever question John I have.