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If you‘ve been paying any attention to what’s going on in the Master Limited Partnership (MLP) space recently, you’ve undoubtedly come across Kevin Kaiser’s name. Kaiser is the Senior Energy Analyst at Hedgeye Risk Management and the guy who’s ruffling more than a few feathers questioning certain energy companies’ accounting practices. Here are some recent noteworthy headlines about his research:

  • Young analyst draws Wall Street ire taking on Kinder Morgan (via Reuters)
  • Why a 26-year-old analyst has managed to rattle Wall Street (via Quartz)
  • Research firm rebuts Kinder Morgan’s rebuttal (via MarketWatch)
  • Is Kinder Morgan Scrimping on its Pipelines? (via Wall Street Journal)

Kaiser Questions Kinder Morgan - kindm

Kinder Morgan, the current target of Kaiser’s attention, (finally) allowed him to ask a few questions in their quarterly conference call yesterday. One of Kaiser’s key contentions all along is that Kinder Morgan is understating it maintenance capex. As you’ll see in the transcript below, Kaiser was trying to get some color on the management team’s philosophy regarding the calculation of their distributable cash flow.

Analyst: Kevin Kaiser, Hedgeye Risk Management - Analyst

Question – Kevin Kaiser: A question on CapEx for gathering and processing. What is CapEx budget for gathering and processing on a quarterly basis including Copano?

Answer – Steve Kean (President and Chief Operating Officer): I don't know if we have that number broken down.

Answer – Rich Kinder (Chairman & CEO): We don't break it out separately. It's part of our natural gas CapEx.

Answer – Steve Kean: We have CapEx on Copano and Altamont and some in Texas, some in other -- in Texas as well but we don't have a break out of that.

Question – Kevin Kaiser: Okay so no break out for GNP by sustaining CapEx versus expansion CapEx either?

Answer – Steve Kean: No, I think that's just aggregated in our total Gas Group.

Answer – Rich Kinder: Total Natural Gas segment aggregates all of the -- whether sustaining CapEx or the expansion CapEx is all aggregated.

Question – Kevin Kaiser: Okay, and then on the Company wide -- so the budget for this year for sustaining CapEx will be $339 million. That's before Copano. If KMP only spent that on an annual basis, so no organic expansion CapEx, how would the segments perform over the long term? Would the Company be able to keep cash flow flat?

Answer – Rich Kinder: I'm sorry, I don't--

Answer – Kim Dang (CFO): Well, I think that we have growth -- are you asking if there's growth absent spending CapEx in KMP?

Question – Kevin Kaiser: The question is really if the budget was only limited to the sustaining CapEx, would the additional asset base be able to -- would it be maintained -- would the cash flows be maintained over the long term $339 million?

Answer – Rich Kinder: Oh, I see your question. Yes, we've said this several times and these are ballpark numbers, of course, but generally speaking that 5% or 6% this year happens to be 7% growth in distributions. We think probably 1.5% to 2% is organic growth, in other words, if you didn't spend any capital you would get that. At KMP that comes from a number of things. One is, of course, the inflation escalator that we have on our FERC-regulated products pipelines. The second is on automatic escalators that we have on some of our terminal assets. So you'd probably have we estimate 1.5% to 2% growth if you didn't spend any capital. And then the rest of that growth comes from -- primarily from new projects that come on line.

Answer – Steve Kean: That's obviously subject to market conditions. Market conditions determine the growth on just the existing asset base on a stand-alone basis.

Question – Kevin Kaiser: Right and how would 1% to 2% organic growth be possible with just $339 million if you spend about $400 million in ENP alone and that's not in the sustaining CapEx budget?

Answer – Rich Kinder: As I just said, I'm not following your question I guess. You ask how much organic growth you had without expansion CapEx and that's the kind of number that we use, about 1.5% to 2%. Kim?

Answer – Kim Dang: Kevin, is your question if CO2 production would stay flat if we weren't spending expansion capital?

Question – Kevin Kaiser: No, the question is really if you -- on the business, the entire KMP business how would cash flows trend over the long term if we only spend $339 million a year in Capital Expenditures.

Answer – Kim Dang: I think Rich just answered it.

Question – Kevin Kaiser: Okay and then the last question I have is do you consider distributable cash flow to be synonymous with free cash flow?

Answer – Kim Dang: Kevin, look, what we're looking at is how much cash flow that the MLP generates before expansion capital. Because our partnership agreement requires us to finance expansion capital, to distribute everything that we generate and to finance our expansion capital. So what we are comparing, distributable cash flow is to the cash flow that we have available for distributions to our unit holders before we factor in expansion CapEx.

Question – Kevin Kaiser: Okay, so you would say it's not -- you would not say that free cash flow and distributable cash flow are the same thing?

Answer – Kim Dang: If you're defining free cash flow as cash flow after expansion CapEx, then I would say that distributable cash flow and free cash flow are not the same thing but it depends on how you're defining free cash flow.

Question – Kevin Kaiser: I would define free cash flow as cash flow from operations minus the capital expenditures needed on an annual basis to maintain those cash flows from operations?

Answer – Kim Dang: Well that is not, unfortunately, that is nice that you would interpret it that way but that's not the way that our partnership agreement defines it and therefore, that's not the way we are allowed to segregate it.

(Source: AlphaSense transcripts)