金德摩根 (KMI) 2015 Q4 法說會逐字稿

Welcome to the quarterly earnings conference call.

(Operator Instructions).

The conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr Rich Kinder, Executive Chairman of Kinder Morgan. Thank you, you may begin.

Great, thank you, Vince, and thanks for joining us today for our analyst call. Before we begin as usual I would like to remind you that today's earnings release and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934 as well as certain non-GAAP financial measures.

And we encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for a list of risk factors that may cause actual results to differ materially from those in such forward-looking statements. Before I turn the meeting over to Steve Kean and Kim Dang to review the fourth quarter of 2015 financial results and other important developments during this period, I would like to talk a bit about the future of the Company.

We will be delving into the 2016 outlook in more detail at our upcoming investor meeting next week. But I believe it is important to focus on a few key points. KMI's underlying business remains strong even in this challenging environment. Our year-end results turned out very consistent with what we projected to you in our third-quarter call both from a DCF standpoint and a debt to EBITDA standpoint. This says to me that our fundamental businesses are doing well notwithstanding the current weakness in our industry.

Fundamentals don't seem to matter in this Chicken Little the sky is falling market, but they should to prudent long-term investors. We are a generator of a tremendous amount of free cash flow, about $5 billion per year. That's after we've paid all of our operating costs, our interest expense and our sustaining CapEx. There are several ways we can utilize that cash flow.

We can delever the balance sheet, internally fund our growth capital needs and/or return cash to our shareholders through either increasing the dividend and/or buying back shares. We have significantly reduced our anticipated capital expansion expenditures for 2016. You will hear more details on that from Steve today and at our investor conference. And that's a trend you can expect to continue as we high-grade our capital investments and selectively joint venture projects where appropriate. As we reduce those expenditures we will obviously have more cash to continue to strengthen our balance sheet and return to our shareholders.

Reducing the dividend was not an easy decision, but given the strength and sustainability of our business and the cash generated thereby, I believe as largest shareholder, you will see KMI emerge as a stronger Company with a strengthened balance sheet, higher coverage on the dividends we pay and with no need to access to equity markets for the foreseeable future. And with that I will turn it over to Steve.

All right, thanks, Rich. I'm going to cover three topics before hitting on some -- a few segment highlights. First is the performance of our business in these challenging times, second is our counter-party credit risk and third, our growth capital, and then I will do some segment highlights. Looking at full-year 2015 compared to 2014 here's the summary.

On an earnings before DD&A basis, three of our five business segments grew year-over-year. Gas was up 1%. Terminals was up 8%, and products was up 27%. Kinder Morgan Canada would've been up year-over-year but for the effect of a weakening Canadian dollar. And no surprise, CO2 was down 22% as result of lower commodity prices. To put this performance in context this performance was against the backdrop of a very negative environment for the entire energy sector.

On a full-year basis, 2014 -- 2015 to 2014 oil prices were down 49%. Of course they are down further still from there, and gas was down 40%. Oil and gas commodity prices directly effect a portion of our EBITDA which we quantify each year. But the larger driver of our business is the demand for what we actually sell, energy transportation and storage services. That's the primary business we are in. Let's look at those numbers.

In the gas business which provides more than 50% of our segment earnings before DD&A, our transport volumes were up 5% year-over-year, and sales and gathering were up 4% each on a full-year basis. Our products pipeline volumes were up 3% on refined products and up 15% on total liquids transported. That includes crude condensate and NGLs, and those were driven by expansions and the Highland acquisition.

While most of what we handle in our liquids businesses is made up of our refined products and other liquids, not crude, crude is in the news. So let's look at our crude transportation outlook. Our Trans Mountain system is prorated. That means there's not enough capacity to serve the available demand. KMCC, Kinder Morgan crude and condensate, our Eagle Ford pipeline, its volumes have been growing through the year with our expansions.

We have good contracts. We are in a resilient location in the Eagle Ford, and we have great down stream connectivity to end use markets and storage and dock capacity. In this business especially now, contracts matter, location matters and connectivity matters and we have all of that with the KMCC system. July -- first half of the year July year-to-date numbers were about 193,000 barrels a day transported. December was just under 240,000.

It is much smaller piece of the overall picture, but our Wink pipeline in West Texas is moving record volumes. So even our crude transport assets are doing pretty well under the circumstances. Finally the liquids part of our terminal segment which is now 74% of the earnings before DD&A of that segment, so volumes increased 18.7% for the full-year and 11.3% in the fourth quarter.

Granted for all of these businesses our contracts and many cases call for us to get paid whether the capacity is used or not, which is a good thing by the way. So volume is not always a perfect driver of margin. But it is a good indicator that notwithstanding drastically lower commodity prices, the demand for our specific midstream assets is really quite good.

Commodity prices do directly affect us in the CO2 business and a subpart of our midstream business. We also suffered in our bulk terminals business in coal and steel and especially from the bankruptcy of two of our important coal customers. Those things absolutely pulled back our performance without a doubt.

But it is important to remember, particularly in times like these, that our primary business is the transportation and storage of energy commodities for a fee and that the commodities that we handle the most are natural gas and refined products. So notwithstanding all of the headwinds we faced in our business, we believe that once again we demonstrated that our large diversified portfolio of fee-based assets can produce stable results even in extremely tumultuous market conditions.

Now let's talk about counterparty credit risk just briefly. We're going to talk more about this at the conference next week. We continue to monitor closely our counterparty credit risk as we always have. Fortunately we are a large and very diverse Company with operations across a number of sectors and across a spectrum term within those sectors.

We have a large customer base with only about 20 customers accounting for more than 1% of our annual revenues, and a great majority of our customers remain solidly investment-grade. The largest of those 20 customers is about 5% of our revenue, and that customer is rated double A minus. We estimate that our top 25 customers constitute about 44% of our revenue and just over 80% of the revenue from that top 25 is coming from investment-grade rated entities.

We will provide you with some more detail and more refined analysis on our customer base at next week - next week's conference, but those are some high-level indications. And just once again, 20 customers, only 20 customers account for more than 1%. The largest of those is just under 5% and is rated double A minus. Our top 25 constitute 44% of the revenue, and 80% of that is from investment-grade sources. Thirdly we also worked hard this last quarter on securing our investment-grade debt metrics for 2016 and beyond and ensuring that we can continue to invest in high-quality opportunities that allow us to grow value per share.

We high graded our backlog to focus on the highest return opportunities. We're aiming to reduce spend, improve returns and selectively joint venture projects where appropriate. We reduced our 2016 spend that we initially announced to you by an additional $900 million. That's off of $4.2 billion we said December, and we've reduced our backlog by $3.1 billion from the third quarter of 2015. And that's with just under $1 billion worth of projects placed in service during the quarter.

That action along with the retaining of cash above our annual $0.50 annual dividend obviates the need for us to access the capital markets, shores up our investment-grade debt metrics, and both of those things add stability to our outlook in difficult times while enable us to continue to grow our value over time. Now just a few segment highlights, and Kim will cover all the financial details here. Again just some operational things, natural gas as I said, volumes were up 5% compared to fourth quarter. That's higher volumes on the Texas intrastates because of exports to Mexico, higher throughput on EPNG, also Mexico and power generation load. And looking at those two sectors of demand for just a minute, so our power demand on our systems was up 10% on a full-year basis year-over-year --I'm sorry 10% for the fourth quarter and 16% for a full-year basis compared to 2014. And throughput to Mexico was up 22% on a year-over-year full-year basis across our systems and is now about 2.4 -- 2.3 to 2.4 BCF a day on average.

Also worth reminding you over the last two years the gas group has entered into new and pending firm transport capacity commitments totaling 8.5 BCF a day, and about 1.6 BCF of that was previously unsold capacity. We now estimate that of a natural gas consumed in United States about 38% moves in our pipes. Some of that is moving on other pipes, too, gathered into ours or delivered off of ours, but 38% of the gas consumed is moving at some point on KMI pipelines.

And we believe that the combination of power demand, LNG exports, exports to Mexico and additional [bet cammon] industrial demand on the Gulf Coast create a bright outlook for our gas transportation and storage assets. Products pipelines as I mentioned refined products up 3% compared to 2014, and that's -- this demonstrates the upside of lower commodity prices in at least some parts of our business. And as I said earlier, total volumes were up 15% with the effects of the acquisitions and expansions in our liquids business.

CO2 SACROC generated record annual gross oil production during the full-year up 2% compared to 2014. It was down 11% quarter-to-quarter in the fourth quarter versus a record Q4 of 2014. Combined oil production across all of our field was up 2% compared to 2014. Net NGL sales volumes were up 3% compared to 2014, and we kept a close eye on costs and produced cost savings in OpEx and sustaining capital of roughly 25% off of our 2015 budget.

The terminals business was up 8% year-over-year on segment earnings before DD&A. This continues to be the tale of two businesses with strong performance -- very strong performance in our liquids business which is now roughly three quarters of this segment offset by continuing -- continued weakness in our bulk terminals driven again by weakness in coal and steel volumes and compounded of course with the bankruptcy of our two coal customers..

The strength of our liquids performance is driven by several organic growth projects, our Jones Act vessel additions, the [boatback] terminals acquisition in the Houston ship channel, and we continue to have a very strong outlook for the demand for our capacity in the significant positions that we have built in refined products in the Houston ship channel and in oil in Edmonton. Finally an update on Kinder Morgan Canada and Trans Mountain in particular.

This expansion as I will remind you is under long-term contracts with customers who want to see the project built. The three key areas of focus for us now are the NEB recommended order, consultation and accommodation with the first nations and the satisfaction of the BC government's five conditions. We're making progress on all three though not as quickly as we would like.

With respect to the NEB we received our draft additions conditions in August. We think they are manageable, though we did seek important changes especially around the time required to approve specific portions of the project. We are waiting to see if further process will be required by the new federal government and remain hopeful that all the work that we have done to date both inside and outside the NEB process to address stakeholder concerns will be taken into account. We're currently scheduled to receive the NEB recommended order in May and the order in Council process to follow.

We continue to make good progress in meeting the consultation and accommodation obligations we have with first Nations. We've added several mutual benefit agreements which bring actual support for the project from a majority of the bands that our most directly affected by the project. On the BC five conditions, the BC government has made clear that we are not there yet but have clearly left the door open to closing the GAAP which we are working to do.

We have this project in the backlog, and we are aiming for a third quarter of 2019 completion. And with that I will turn it over to Kim.

Thanks, Steve. Let me start with comparing against what we said last quarter which was that we expected to end the year with approximately $300 million in coverage and debt to EBITDA of 5.6 times. Now we ended the year with almost $1.2 billion in coverage as I will take you through in a moment. That's not an apples to apples comparison due to the change in our dividend policy.

If you adjust the fourth-quarter dividend to the $0.52 per share that we expected to pay prior to the decision to reduce the dividend, we would have ended the year with approximately $297 million in coverage, and that includes absorbing over a $40 million reduction in our fourth-quarter results that we did not anticipate as of the end of the third quarter to account for the Arch bankruptcy. On the debt to EBITDA side, we ended the year at 5.6 as expected, and I will take you through the details of the balance sheet in a moment.

On the face of the GAAP income statement you will see that revenue is down both for the quarter and the full year compared to the corresponding period in 2014. This quarter we've added a line to break out cost of goods sold which you can see is down more than the decrease in revenues. As I've said last three quarters, change in revenue is not a good predictor of our performance as we have some businesses where revenues and expense fluctuate with commodity prices, but the margin generally does not.

We believe that the best indicator of our performance is the cash we generate or DCF per share. However, for those of you who need adjusted EPS for your models, adjusted EPS without certain items is about $0.21 in the quarter which is slightly above consensus. DCF on the second page of the numbers on the press release we calculate for you distributable cash flow. We generated DCF for the quarter of $1.233 billion and $4.699 billion for the year.

For the quarter DCF is down approximately $45 million versus the fourth quarter of 2014. For the full-year, DCF is up $2.1 billion. The increase in the full year is largely the result of the acquisition by KMI of KMP and EPB that was completed in the fourth quarter of 2014. So a lot of the benefit to DCF is due to fact that the MLPs are no longer outstanding, and you can see that benefit in the line of our DCF calculation entitled MLPs declared distributions. For the quarter, the 4% reduction is primarily the result of our CO2 segment which was down about $77 million.

Our terminal segment down about $20 million primarily as a result of the Arch bankruptcy and increased interest expense and preferred interest payments. Although we are not happy to be down 4%, in light of the overall circumstances in the energy and capital markets, as Rich and Steve have both said, we believe this performance is very strong and demonstrates the stability of our assets. For the full-year DCF per share is probably the best way to look at our results, because it takes into account the benefit to DCF with the merger transactions as well as the cost of the approximately 1.1 billion shares that we issued to purchase the MLPs.

For the full-year DCF per share is $2.14 or an increase of approximately 7% over the $2 per share in 2014. For the quarter DCF per share is down approximately 8% for the reasons I mentioned a moment ago with respect to DCF plus incremental shares issued to finance our projects and to reduce leverage. The $0.55 of DCF per share for the quarter and the $2.14 per share for the year results in coverage for the quarter of about $950 million and year-to-date coverage of $1.18 billion.

As I said a few minutes ago, if we had paid a dividend of $0.52 in the fourth quarter, coverage would have been around $300 million -- just under -- versus our budget of $654 million. Let me give you the major components of the $350 million change versus our budget. If you utilize the commodity sensitivity metrics that we gave you last January a $10 million change in DCF for every $1 change in crude and $3 million change in DCF for every $0.10 change in natural gas, the impact to our full-year results is approximately $246 million.

We have additional commodity price impact of a little bit over $20 million most of which is due to the deterioration in the crude to NGL ratio. Many to NGL prices deteriorated more than crude prices, and we budgeted for a constant ratio. Indirectly, commodity prices impacted us by another $117 million due to three primary things, lower CO2 sales volumes, lower gathering and processing volumes in our midstream natural gas segment and a weaker Canadian dollar, so the FX impact impacting our terminal segment and our Kinder Morgan Canada segment.

Coal bankruptcies impacted us by over $65 million which was Arch and Alpha. So you take those items that I just went through, that accounts for about 4 -- over $450 million, so well more than the total variance of about $350 million. There our lots of other moving pieces both positive and negative, but primary offsets to the $450 million were lower interest expense and CO2 and other cost savings. Let me give you a little more granularity on where we ended up in the segments versus our budget.

Natural gas pipelines ended up about 1% above its budget as a positive impacts of the Highland transaction, better performance on the Texas intrastate, SNG and TGP were largely offset by the impact in our midstream group of lower commodity prices and lower gathering and processing volumes. CO2 ended the year approximately 15% below its budget as we projected last quarter. This as we have discussed is more than our commodity price sensitivity would indicate, and it is driven by lower crude oil volumes, lower CO2 volumes and lower capitalized overhead as a reduced -- as result of reduced expansion spending offset by over $40 million in cost savings.

Terminals ended the year approximately 10% below its budget versus the 6% we discussed last quarter with the primary variance being the Arch -- the impact of the arch bankruptcy. The terminals segment was negatively impacted in its budget by lower coal and steel volumes, again the largest piece being the Alpha and the Arch bankruptcies and also the FX impact of the weaker Canadian dollar. Products ended the year approximately 2% below its budget.

The positive impact of the double H pipeline which was acquired in the Highland acquisition is slightly more than offset by approximately $24 million of commodity price segregation consistent with the sensitivity, lower volumes on our KMCC pipe that we budgeted and lower margins in our trans mix business. Finally, as we discussed last quarter, KMC was below its budget for the year by approximately $20 million due to FX.

On the expense side interest, cash taxes and sustaining CapEx all came in lower than expected therefore a positive variance versus our budget, and that was somewhat offset by higher G&A. The negative variance in G&A is driven by the Highland acquisition and lower capitalized overhead as a result of lower expansion capital spending. On interest the incremental interest is associated -- associated with financing the Highland transaction was more than offset by a lower balance than our budget and lower rates when you take out the impact of the Highland transaction.

Finally, we expect cash taxes and sustaining CapEx, they came in lower than our budget, or they are -- said another way, they were a favorable variance. There are a couple of certain items in the quarter that I want to highlight for you. One, we reported an estimated $1.15 billion non-cash goodwill impairment on our midstream natural gas assets. We also reported approximately $284 million in impairment on other assets primarily in our CO2 segment. These impairments were driven by lower commodity -- by the lower commodity price environment and also by lower stock prices.

Let me give you this warning, if commodity and equity prices continue to fall, then there is -- then we may have impairments in future quarters. We also reported as a certain item in this quarter a $200 million benefit associated with the contract buyout payment that we received on Kinder Morgan Louisiana pipeline. With that, I will turn to the balance sheet. On the balance sheet we ended the fourth quarter with debt -- net debt of $41.2 billion.

Based on $7.37 billion of EBITDA, that gives us a debt to EBITDA ratio of 5.6 times again consistent with where we thought we would end. The $41.2 billion is an increase in debt of $610 million for the full year, and it is decrease in debt of $1.235 billion for the quarter. Let me reconcile first the quarter, $1.235 billion decrease in debt. We spent about a little under $940 million on acquisitions, expansion CapEx and contributions to equity investments.

We issued equity of about $1.58 billion. The contract buyout that we received on KMLA was $200 million, and we received an income tax refund of the little over $150 million. And then working capital and other items were a source of cash of about over $240 million. Let me say that here you would expect I talked about coverage in the quarter being $950 million, but that coverage is based on the $0.125 dividend, the 953, the -- what we actually paid in the fourth quarter was the dividend that we declared in the third quarter so the $0.51. So when I'm reconciling the debt the $0.51 dividend is what was paid in the quarter in the cash that went out the door. So you did not see the benefit in the fourth quarter yet of the reduced dividend.

You will see that going forward beginning in the first quarter. For the year, debt -- the change in debt was an increase of $610 million. We spent about $6.9 billion in cash on acquisitions, expansion CapEx and contributions to equity investments. Highland was $3.06 billion, and then we spent about $3.4 billion in expansion CapEx. Those are the major components of the $6.9 billion. We made a pension contribution of $50 million.

We issued equity including the preferred of $5.4 billion, the contract buyout on KMLA was $200 million. We received $347 million in income tax refund, and then we had about $400 million of coverage and other working capital items that was the source of cash. And that gets you to the $610 million increase in debt. So with that, I'll turn it back to Rich.

Okay, and, Vince, if you will come back on, we will take questions.

(Operator Instructions).

Brandon Blossman, Tudor, Pickering & Holt

Good afternoon. Hey, Rich. Let's see, on CapEx and the high grading process for the growth CapEx backlog, Rich or Steve, can you walk through the process of how you evaluate each project in that context and what thoughts go into whether you go forward with a project or not related to counter-parties and related to return metrics? And obviously you're out of the market, so the current yield should not matter to you, but obviously you have some metric or hurdle rate internally. Has that changed at all over the last 6 to 12 months?

Yes, we have elevated our return criteria and -- look, the way we've gone through our project backlog is to take out of it things that we have not committed to that are -- that don't meet the current return hurdle. And I won't tell you exactly what that is, but I think a reasonable benchmark is think of mid-teens returns after-tax, okay? And what we are trying to do is really make sure that we are investing capital in the highest return opportunities that we have, make sure that we are fulfilling our commitments and delaying spend where it can be delayed or deferred and taking on partners where it makes sense for us to take on partners.

I think what we've been able to do successfully over the years is originate really good returning midstream energy projects, and so because we are able to do that even though we are viewing our capital as quite finite, there are people out there who are happy to participate with us as partners. And we are exploring those opportunities where those make sense, so we think our returns are adequate on separable projects that could be -- that could be joint ventured. They are quite good and we think people will be interested in joining us on those projects. We would continue to build it, own it, operate it, et cetera, but it gives us an opportunity to free up capital, to deploy in higher return opportunities or to use with the balance sheet or to ultimately in the longer-term return cash or increase dividends just depending on what the circumstances -- what appears to be most rewarded at the time.

So it is really doing economically rational things like deferring spend where you can. We flushed out some scope changes, cost savings, other things that are real improvements to the economics, finding joint venture partners where those things make sense and channeling the capital that we have to the highest returns that are in the backlog right now and potentially to some new projects. So again our capital is constrained for that.

That's quite helpful, actually. I guess same topic or same general topic, different item, Elba, the go ahead expected in May. What's the process with Shell in terms of getting formal approval or FID for that project and have you had you had any communications or color (multiple speakers)?

Yes, it is under contact, and it is approved to go forward, and just again a reminder on that, that contract is -- we are not taking commodity risk on that facility. Shell has signed up for a 20 year contract that will make this part of the LNG that's in their portfolio, and so we're not taking -- they are entering into a terminal use agreement essentially with us on that project. They also have enough of a portfolio around the world that they don't need and it is not hinged on dependent upon non-free trade act approval.

So that project is very much a go from our perspective. We do need our -- FERC 7C certificate, and we are in the process now. We filed for it and expect to get it in roughly second quarter. And we have applied for and think we should be able to obtain non-free trade agreement authority, too, to take that commodity -- for Shell to take that commodity to other places. So things are proceeding very well there.

For the FTA approval is just an incremental benefit to Shell. It's not (multiple speakers)

Non-FTA. Right, non-FTA. They can go to free trade act agreement countries as it is.

Okay. So just -- I mean it sounds like it is essentially a go assuming that the FERC timeline hits on the May or mid-year time frame?

That's correct. Right.

Any color or commentaries around construction costs? Presumably it gets to be an easier project given where we are in the macro environment and labor cost and all that good stuff.

No, it is a fair point. The construction environment for LNG facilities is improving, and we are working on an EPC contract, and we have plenty of interest in that. So with an EPC contract -- there is nothing in this world that is turnkey in anything that's this complex, but that allows us to shift a considerable amount of the construction risk to the contractor.

Okay. That sounds like all good news. I will jump back in the queue for further questions, thank you, guys.

Thank you.

Kristina Kazarian, Deutsche Bank.

Hi, Kristina, how are you?

Good, guys, how are you? I really appreciate the CapEx number. A quick question there, and I don't know if I missed it some point during the call, but could you guys give a quick update on NED and how I should be thinking about that and where it sits within the growth backlog?

NED is in the growth backlog. Without commenting on any really specific project, because we've got competitors and customers there. I think just more broadly, we are going through the process that I described earlier on the backlog and looking at the whole thing and where appropriate taking joint venture partners, et cetera. So really you can think of that process is we're evaluating and looking at is applying to a large part of our backlog.

Perfect. Just wanted to make sure it was till in there. And then you guys gave a lot of great clarity around counter-party details so thanks for those, but how about on the lower end of the scale? If I aggregated counter-parties that were be B minus or below, do you know how large that number would be as a percent of revenue and how I should be thinking about that?

I do not have that at my fingertips, but let me tell you what we're going to try to accomplish by the time we see you all next week. We're going to have the numbers that I took you through with a little more specificity and maybe some refinement to them, and we are also going to be trying to quantify at least in select cases, a net exposure number. So in other words you cannot think of exposures in gross terms, you have to think of the value of the thing that you are selling if you resold it in a market. So we are looking at some of those things, too, to give you a little bit more color around it. I mean I would say that generally when we look at our top 25 customers we picked those as fairly representative grouping, and as I said that's about 44% of our revenues.

Perfect, that's helpful and lastly, Rich, maybe to get you to pontificate a bit, because I get this question all the time, can you maybe touch on high-level what you think it is going on out there? It is been roughly a month-ish since we had the dividend cut to reset market expectations, but there still is a lot of volatility. How are you thinking about what's generally going on in our market?

Are you talking about the market in general or Kinder Morgan specifically?

I'm doing both of them.

Both of them. Well, I'm good at pontification as long as I follow Mark Twain's old saying that making predictions is difficult particularly when they concern the future. But I think looking at where we are today, I'm obviously very disappointed as you would expect at where the KMI stock price is and the way we've -- the market has treated us post the dividend.

We thought we took a great deal of uncertainty out of the equation, and as I said, the key fundamental thing is the amount of distributable cash flow we produce. And of course valuation 101 would say that regardless of what you do with your free cash flow, your distributable cash flow, whether you dividend it out, put it in a new projects as long as those are good new projects, and ours are, or buy back stock or pay down debt really should make no difference from a valuation standpoint.

But clearly parts of the market are not on that same page. I believe that long-term the fact that we have no need to access the equity markets, not just for 2016 but for the foreseeable future, and that we will self fund our capital expenditures, our growth capital should in the long when I think be a very solid underpinning to this Company, and we're going to be able to return a lot more money to our shareholders in the long-term as well as delever the balance sheet.

I think as far as the overall market is concerned, I said in the opening remarks it seems like a Chicken Little the sky is falling market, there seems to be no discrimination among based on quality or based on virtually anything. It is just, if oil prices go that, sell everything in the energy sector. And I think that's a very wrong-headed, short term view, but the market is what the market is. Obviously we believe we are tremendously underpriced. If you look here's a Company that is going to have close to $5 billion of free cash flow in the total market cap, but this level is $27 billion, $28 billion I'm afraid to even compute, it upsets me so much.

But that's my feeling on its, probably more than you wanted to hear, but as the largest shareholder I can tell you it is very frustrating.

Then I say congrats on the DCF number. That's it for me today, guys, thanks.

Okay.

Ted Durbin, Goldman Sachs.

All right, Ted, how are you?

Okay, Rich, thanks. Going back to the CapEx here, the projects, the $3.3 billion, how much of that is for projects that should come into service say in this year or maybe into next year? How much EBITDA uplift should we be looking for there versus how much of these are more of the longer lead time type projects?

Yes, I don't have off the top of my head break down on the timing on in-service for the remaining $3.3 billion. It is going to be a combination. We will give you updates when we get together next week about the projects and the associated in-service dates and things like that when we have the conference next week.

One way to look at all this, and Kim will take you through more of this next week, it is hard to predict what's going to happen. There so many winds blowing in all kinds of directions in this market. But I think we can give you some guidance. The fact that you look at what our backlog is which we reduced, but that backlog should produce a certain level of cash flow, and if we are funding it ourselves you don't need to deduct interest from that or additional equity issuance, you just look at how much that backlog is going to produce as the pig goes through the boa constrictor. And then you can add that onto whatever view you want to take of commodity prices or anything else. Should be pretty simple way of looking forward and applying your own view of the bigger market, and we are going to move down that line, show you some of that at the investor conference next week.

Got it. Appreciate that. Just on terminals here, we had a tough quarter, I guess thinking through to 2016, how much of that's going to flow-through. What do you have in terms of the minimum volume commitments and how those run off and maybe even over a multi-year view on terminals?

So Ted, as you saw today in the press release, we revised the 2016 budget, and so both the Arch and the Alpha bankruptcy we have taken into account in the 2016 budget.

Okay. Great and then if I could just squeeze one more in just on the hedging. Where are you guys are on the hedging in the CO2?

On CO2 hedging, for 2016 about 70% hedged at $69, in 2017 54% at $73, 39% in 2018 at $75 and 21% in 2019 at $65.

Perfect. I will leave it at that, thank you. See you next week.

Jeremy Tonet, JPMorgan.

Hi, Jeremy.

Hi, good afternoon. I was just wondering if you can walk us through a little bit more on the high-grading the projects as far as that applies to CO2 and what prices you guys need to see out there to deploy capital or what still make sense in this commodity price environment, could you help us think through that?

Yes. So CO2 has been a multi part capital review, because we have been keeping up with commodity prices as they have come down. And so what we're spending money on when we put incremental capital into CO2 what we are looking at is getting a very good return, an upper teens or plus 20 plus percent after-tax unlevered return, incrementally, meaning for the oil that that particular program or that particular development is going to produce at the current forward curve.

Then we also look at when we are doing the evaluation we look at what an NPV 15 breakeven price is for crude so that we can see how much if you will, headroom or how much room we have to have that be a successful program if we proceed with it. So we have been -- as prices have been coming down we have been bringing the CapEx down. And we have been eliminating programs. It still make sense to invest in some programs, but you are going to see a lower CapEx number for CO2 for 2016 than probably we've ever had. But still some pretty decent production with that plan.

So we keep bringing it down and we look at the price, those two ways. And the third thing I would say about the way we evaluate it is that these are programs spends, right. So what do you are doing is you say okay, we're going to do this many infills in SACROC. So we are going to go out and do infills. The infills produce oil that tends to be front end loaded, but if they are not performing the way we think they should or the price is not where we think it needs to be, and I am just picking out infills, that's probably a pretty high return, high-end project for us, but just to use it as an example.

We have the flexibility to scale that program back and not deploy that capital. So we have high graded the CO2 capital, kept up to date with what commodity prices are although as you know and as you can see from today that is a day to day exercise. But we also have flexibility in the spend when we do deploy it.

Great, thanks for that color, that's helpful. I was wondering as well on the gathering and processing business, thoughts that you that you guys have as far as visibility into volumes and if you could help us think through that and where producers are, because everything is changing so rapidly so just wondering how you think about that and what risk you see to that part of the business?

I will start and let Tom pick up with additional detail. The gathering and processing part of our business, that really has two parts to it. There's a piece of that business that is secured under transport agreements with minimum takes that look something like what you would see in a gathering agreement or a fee based processing arrangement which looks something like you would see in the rest of our business.

The second part of that business is percentage of proceeds kinds of business where we are more exposed to commodity price. We picked up some of that with Copano and some of that with the Highland acquisitions as well. So you have to break it apart, and we are talking about seeing if we can break that out further, quantify that further so that people can see the two parts of that business.

What we are trying to do on the percentage of proceeds part is to try to migrate that more to fee-based, so we are in the start of that process right now. But we do have exposure there, so then that becomes commodity prices assumption driven. What do you think commodity prices are going to be, what do you think processing spreads are going to be, and we made some high-level assumptions in the budget including a NGL price deck that we used. So we think we have calibrated that reasonably well.

But there is certainly variability in part two of that business as I mentioned it. Tom, anything more?

I would say overall the volume trend I think we will do better than our peers. Our network was in I would say the premier locations of all of these basins, but I mean there's no question as you trend in time at these lower commodity prices you will see lower volume activity but again as Steve said there's a high degree component on many of these agreements where we add some fixed component for that so it is really just on that volumetric component of the overall (technical difficulty).

Great. Thanks for that and then just to make sure I have right as far as the capital market activity for 2016. Was that no activity for equity, and was that no activity on the debt side as well, did I get that right?

We will go through that at the investor conference, but that's generally what we are thinking.

Got you. Great. Thanks for that, that's it for me.

Craig Shere, Tuohy Brothers.

Good afternoon, Craig.

So there's been some questions about what's involved in raising the hurdle for growth CapEx and of trying to hone CapEx portfolio down. To the point of what was raised by Steve that you definitely view a limited amount of potential spend to be had and hence looking for third-party capital or JV relationships, is there a particular absolute or proportion of DCF that on average in the annual spend you see as your sweet spot?

No, I think, look, again you've got to break all these things down. If you look at some of the capital projects that we do that are, if you will, build outs of our existing network, those things are very high returning projects and they are on our networks, so it's not like we're going to look for a JV partner on them. In many cases like where it is building out connections or adding some capability in a terminal or something like that, it is really not separable, and we can do it, and we can get relatively quick and early returns and generally very good returns for it.

That there are projects maybe at the other end where they are quite attractive for market return. They are probably less of return than what we are looking for on an incremental investment basis, and they are separable or identifiably separate from the rest of our network, and those would be obvious JV candidates for it -- for us. But what we are trying to mainly due here is we are try to make sure that we first and foremost defend our debt to EBITDA metrics and maintain a secure investment grade rating and the CapEx that we spend in 2016 drives that. So we're going to be very mindful, and we're going to treat it as finite and precious, and we're going to allocate it to the highest available returns that we have.

But there are going to be projects that we are going to have the opportunity to do, and we're going to continue to do those. And we are going to JV the ones that are, if you will, amenable to being JV'd where we continue to build the projects, operate it and own a significant interest in it, but we maybe bring third-party capital in in order to help cover some of that cost. So broadly, that's how we are looking at these things going forward.

That helps and makes sense. I guess what I'm trying to get that is on an absolute basis when you think about getting your arms around balance sheet, achieving the transition, if there was a large chunky position in the growth CapEx inventory that dropped out, would that change how you look at new projects and alternatives?

Look, I think you have to look at what the situation is when and if that occurs. Obviously in today's market if something happened, we would love to be buying stock at this kind of ridiculous level. But that may not be the case a year or two years from now. If the market is more rational we might use that to increase the dividend. We are certainly going to be continuously mindful, as Steve said at keeping our investment grade rating and maintaining a real solid balance sheet.

Yes, but just very simplistically, and we outlined this in the release today, even after we have done a revised budget, reducing measurably the commodity assumptions and raising the interest rates projection in accordance with the forward curve, you do all that and we still have $4.9 billion of DCF for the equity holders. You deduct the roughly $150 million in preferred dividends, leaves you about $4.7 billion available to the common, you pay $1.1 billion in the reduced dividends, that leaves you $3.6 billion, and as we've said we've reduced our capital expenditure program to a little less than $3.3 billion. Now there's a heck of a lot of other moving parts in that, but when you just look at very simplistically the ability to fund a capital project program we can do that.

Now to the extent that that $3.3 billion is something less than that, that would free up more money to either further delever the balance sheet or return to shareholders through one of the two methods that we've talked bout. I think the real message here, guys, is we are self funding now. Okay? And I've got to tell you that to me, that's a big relief.

Nobody's affected anymore than I was by the dividend cut, okay? But the point is we are building a very solid, stable balance sheet with the ability to return an awful lot of cash to our shareholders over the next few years.

Thanks, that's helpful. Look forward to next week.

John Edwards, Credit Suisse.

Hey, John, how are you?

I'm good, Rich. Given the market circumstances I guess as best as can be expected. I will just ask a couple questions. I will save the rest for next week, but just I'm wondering on your -- on contracts, particularly in the natural gas sector, are you seeing rates fall on contract rolls, and what's your average contract tenor now? And if you are seeing rates come down a bit, order of magnitude if you could give us a ballpark?

I'm thinking Tom can weigh in here. I think we have -- we continue to see good strength on our renewals in our Texas intrastate business. SNG is very strong, TGP, the eastern pipes are very strong. The place where we've seen and we've seen it some this year already, John, is on some of the pipes that are exporting out of the Rockies. So there we have seen deterioration on renewals, but generally speaking we've got a great set of natural gas assets and very strong and I think well-positioned for the longer-term. If you look in the appendix to our normal investor presentation deck you will see a layout of contract tenors for each of our business units. We will have an updated version of that for everybody next week.

Okay, fair enough. And then how do you view the probability now on -- I think you had the supply path into market path on northeast direct, you secured -- obviously roughly secured one of those paths. Where do things stand on the rest of it?

I think we continue to make progress there, and as I said, we will continue to evaluate it as we evaluate all the projects that we have in the backlog.

Okay. Then just the last thing in terms of the change in capital spend, you already alluded to the fact that a lot of that was because of the fall in commodity prices so you are taking out of it on -- in the CO2 segment. And then you've raised the hurdle rate as well. I guess if you could, what's contributing to that and also about just a range -- about how much you raised your hurdle rate overall, that would be great.

Okay, on the CO2 we will have all the expansion capital laid out by business unit next week, and you will see what makes up that $3.3 billion, and that's got everything in it including assumed acquisitions. So we will give you the full breakdown of that.

And as I said a little earlier in the call, you've got to look at every project individually. And how secure the contracts are, what the credit worthiness of the counterparty is, house could revenues are whether there upside in it, et cetera, but we have been elevating what we are evaluating investing in to kind of a mid-teens after-tax return area so we may be waiting to see that. We will see some of those opportunities on build-out of existing network, but we are prepared to wait and see if that's what it takes to make sure that we are allocating capital to the best opportunities.

Okay, and just my final one just I -- asking Kristina's question a different way, how much revenue faces credit risk works in terms of what's the risk of loss? You went into a lot of detail and everything, but would you say it is 1% or 2% of EBITDA overall, or is it's something more? How should we think about that?

It is hard to quantify the answer to that question. I think you can take comfort in the fact that we've got a very diverse set of customers. It's a relatively small number that amount to even more than 1% of our revenue. And one quick clarification there, revenue is an interesting subject when you are thinking about something like the Texas intrastates where the revenue moves with -- the cost of goods sold and revenue move in tandem with the commodity prices. In that case we look at margin.

I mean margins, Steve.

Yes, so I think you can take comfort in the fact that there's a relatively smaller group of customers that even amount to 20% or 1% to -- 20 customers amounting to 1% or more, and the top 25 customers, 80% of that is investment-grade. And I don't have better specific data points to give you than what I did but I think that if you -- I think we compare favorably to a lot of other people in our sector when you consider those metrics versus what a lot of other people are facing.

Okay, fair enough. I will leave it there and looking forward to seeing you guys next week.

Thank you.

Becca Followill, US Capital Advisors.

Hi, Becca, how are you?

I'm good, thank you. This may have already been answered, but I'm sorry if I missed it, on the $900 million CapEx reduction did you specify where that was coming from?

Not specifically, we talk about CO2 a little bit in answer to one of the questions that came, but no, we had a combination of efficiency gains I would call them where we reduced scope or found a cheaper way to do things. We did cancel some projects or assumed away some previously unidentified acquisitions that was probably on the order of two thirds of that number, canceled or suspended or just assumed away that we would not do as many acquisitions as we had in our previous budget expectations. So that would be the biggest chunk of it, but it is a combination of things.

We are going to break those down, business segment by business segment at the conference next week, so you can see where the changes are between what our original budget was and where we are now.

Thank you. So there's not one specific project that accounts for a majority of that?

No. No.

Okay. Then on NGPL with your acquiring an additional stake in it, are there -- is there any CapEx in there or in your budget allocation for an equity infusion, or what are the plans there on NGPL?

We did assume some capital in NGPL, we do have some pretty attractive expansion projects there that we and our partner intend to go forward with. That will be, that will just be as a part of the gas group, I'm not sure we're going to be breaking that out separately.

In terms of an equity infusion there's nothing assumed in there?

No, we do assume that we will be putting some capital into NGPL to help support project development for next year.

But beyond project development, no additional equity infusion?

Yes.

There's some.

There is some in there?

Yes. It is in our budget.

Perfect. Thank you. That's all I have.

Thank you, Becca.

[Bill Greene, EMP Investments].

Yes, primarily for Rich. I'm a very substantial shareholder, family shareholder since 1990 -- the late 90s when you went public. The stock seems to be as you've indicated ridiculously cheap, but it is a dividend orientation, return of capital dividend orientation. So the question is with all these moving parts that you've described, and you went through a description before about the balancing act between the capital spending and the growth and just doing a little back of the envelope arithmetic here.

If you'd kept to the 10% dividend increase that you promised originally, if there had been no trouble in the credit markets the way there was, you would have something like a $3 dividend or $3.20 dividend five years down the road which would have produced about an 8% yield on the $40 stock that you then had. Now you've got a stock roughly 25% of that $40. If you look out -- I know you cannot be too specific but in terms of having a basis to buy the stock here, obviously the dividend in the future, three to five years down the road is going to be the crucial determinant as the capital spending starts to fade away.

So is there any kind of guidance that you can give numerically about that balancing act so that a person who says I'm going to buy a $12 stock today, obviously if you stopped all capital spending today you'd have a 20% return with a $2 dividend if you restored it. So the balance between the capital spending and the growth that you're going to develop for that is crucial here to getting some handle on the ultimate investment return here.

So it would be very powerfully useful to have a little more definitive color on that balancing act, Rich, in terms of the five-year outlook. What can we as shareholders paying $12 today look for in terms of a dividend five years down the road as the capital spending may phase down?

This is Kim. I think in terms of what you can expect in the dividend, that's hard to say today. I think in terms of what you next week at the conference as Rich said we are going to show you the portfolio of the backlog of projects that we have. We are going to give you an approximate multiple that we expect to earn on that.

So you -- that is just the backlog has nothing to do with our base business, but you will get a sense for how much distributable cash flow we think will be produced from that backlog. Than people can make whatever assumptions they want to make about what happens with the base business and how -- where exactly we take the balance sheet and how we return capital at some point to people whether that's share repurchase or dividends or otherwise.

But I think there is very good financial theory that says whether a Company pays a dividend or does not pay a dividend does not impact the value of the firm. So we can tell you how much cash that we are going to produce from these investments, and then I think from that you can come up with what you think the value of the stock is worth.

Yes, but as long as you keep spending capital you're not going to be able to distribute that and do the good things you are talking about so there's got to be some endpoint here, it is like the Amazon story with -- in a different industry. As long as you continue to spend capital at this rate you are not going to have the funds available to distribute it in the fashion you are talking about. So how do we get some fix --

What do you are saying is that the value of the firm depends on the dividend policy --

No, it can depend on a lot of different things but I'm looking here $6.4 billion in distributable cash flow with your current capitalization would produce that $3 dividend. So are you going to get to $6.4 billion or so five years down the road? That was sort of the original promise that Rich had made last year with the 6% to 10% dividend increase or the 10% dividend increase on the $40 stock. That's why we held the stock there.

Had we any suspicion, the question is getting some idea of the flow here of the path. The path is crucial. And some sense of that, otherwise you've got a $12 stock here which is a disaster as we all agree. So the market isn't following your line of thinking. That's the problem. The market isn't looking at the valuation of the Company the way you would like it to. It is because you converted from an MLP and there is a tremendous focus on dividend, and now there's the fear that that dividend isn't even secure, not so much for you guys but for other people because of the way -- of the problem with the debt and the problem with the availability of financing given the challenges.

So the question is that's the game here, it is a numbers game, and the question is how are those numbers going to play out? Do we have a $6.4 billion DCF in the future? Which will be available for payment, that's the key isn't it? Tell me if I'm wrong.

What we've try to say is that we are going to have a lot of cash flow and you can take where

Yes.

Just let me finish, please. You can take what we have today which is roughly $5 billion of free cash flow. You can look at our backlog. We can give you an idea of what the expected return on that is, and then you can take that number and let's say that's $1, whatever it is, per share, you can take that and add it to our present number and buildup what you think the cash flow will be in 2020 or 2021. But I want to again caution you that we have not been in this business 35 years. This is the most more headwind, side winds anything that I've ever seen and to sit here and give you a number in 2020 would be insulting to you and to everybody else.

And what we are trying to tell you is we've got a lot of cash flow, we are going to do that, we are going to use that in the way that makes the most sense for the Company and its shareholders. And if that involves buying back shares or increasing the dividend to a level, that's what we are going to do. We are not going to waste the dollars and the backup for that is just what Steve has talked about is we are high grading, we reduced the backlog by $3.1 billion. To the extent we reduce it further or joint venture more of the backlog, that is going to free up more cash earlier.

On the other hand, is going to in the long run depreciate somewhat the amount of cash we have coming out of those additional investments as a result of the backlog. This is what we are committed to. We showed you what we generated. We are going to generate -- we generated $2.14 last year. That we think is going to continue to grow very nicely over the years.

Right, but the question is will the capital expenditures at some point -- in other words, it is very much the Amazon story. At some point we're going to stop spending and produce larger, an infinitely large dividends. Right now if I go back to the $40 promise, you were not afraid then to talk about a 10% dividend increase at that time. So I'm assuming that that situation is still pretty much if force. It is just that the numbers have changed for all the reasons we know.

But as far as the basic business is concerned which is what I'm hanging my hat on because I have not sold a share either is whether to buy more shares based on the idea that that original promise that you made is still pretty much intact, and the way that promise is going to come to fruition is in the year 2021, let's say, we won't have the CapEx and we will be up to start distributing huge amounts of money to shareholders. That's the thing we are all looking for I think.

Let me close --

Is that wrong or not wrong?

I think I've answered the question that what we are trying to say is this is a very complicated world. We are generating cash flow, that cash flow with think will be increasing as time goes on, and we have uses for it, and we are going to look at it at that time as to what makes the most sense. Of course as we finish these capital projects we do not anticipate huge new additional capital projects, but we will see what the opportunities are in those out years. The whole thing is to create value for the shareholders and if the best way to do that is distributing it in dividends, that's what we're going to do.

If the best way is to delever the balance sheet, that's what we're going to do. It is a combination of all these factors, and in this hectic market it's just very difficult to give you some specific number you can rely on in 2020 or 2021. But I appreciate your concern and certainly we agree with you, I'm the largest shareholder, I want to see all kinds of value derived by the common shareholders of this Company.

Thank you.

At this time we don't have any further questions on queue.

Okay, well thank you very much. We appreciate you listening with us, and we will see most of you next week in Houston. Thank you.

Thank you, sir. That concludes today's conference call. Thank you all for participating. You may now disconnect.