金德摩根 (KMI) 2016 Q2 法說會逐字稿

Welcome to the quarterly earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session.

(Operator Instructions)

This call is being recorded. If you have any objections, you may disconnect at this point. Now, I will turn the meeting over to your host, Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Sir, you may begin.

Thank you, Laura, and welcome to our call. As always before we begin, I'd 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 Exchange Act of 1934 as well as certain non-GAAP financial measures. 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 to 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 as forward-looking statements.

Let me begin by just making a very few introductory comments before turning the call over to our CEO, Steve Kean, and our CFO, Kim Dang. First of all, the operating results for both the second quarter and year to date are very consistent with Kim's guidance which she shared with you on our Q1 call and which were in our Q1 earnings release. I think this demonstrates once more that our assets are consistent generators of strong cash flow even in these times of volatility.

Several specific events have happened since our last call, mostly positive. First of all, the National Energy Board of Canada recommended approval of our Trans Mountain expansion project. This is an important step, but we still need an [ordering] counsel and that decision is expected in December of this year.

We also entered into joint ventures as you know with Southern Company on our SNG Natural gas system and with Riverstone on our Utopia pipeline project and have also divested an additional approximately $175 million of non-core assets. These steps allow us to significantly improve our balance sheet with the expectation of now ending this year, 2016, at about 5.3 times debt to EBITDA which is an improvement from the 5.5 times budgeted.

In addition, we are also reducing our future need for expansion CapEx, and all of this is getting us measurably closer to being able to return significant additional cash to our shareholders through either increasing the dividend or buying back shares. I can assure you we will continue on this flight path as we work to maintain and strengthen our balance sheet while at the same time preparing to deliver increased value to our shareholders. With that, I will turn it over to Steve.

All right. Thanks. I'm going to update on capital and counter-party credit and then hit on some additional segment highlights and trends that we're seeing.

On the capital update, we've been talking for several quarters now about high-grading the backlog and how we'd do that. That consists of making sure that we are attending to our balance sheet but also ensuring that we grow our DCF per share through investments that we're making at attractive returns and that we are now finding out of the excess cash flow that we generate without needing to access the capital market.

The high-grading include select joint ventures on assets and projects. The Utopia JV shows that we can originate high-value midstream projects that are valued by investors. On SNG, we are entering a JV with our largest customer in a transaction which brings value to that asset through specifically identified opportunities and is accretive in the medium term.

We have trimmed some projects from the backlog where they don't make sense from a return standpoint or in today's commodity price environment. We've also made scope and cost savings improvements, and in some cases, deferred costs on projects that we are proceeding with.

One example of this improvement is in the gas group in this quarter and part of the reduction in the backlog is due to this. We renegotiated a contract with a customer and the result of that renegotiation was a reduction in our capital spend for that project, a boost [of the] turn, acceleration of the in-service data of a portion of the revenues, and we freed up some capacity that we believe we can resell.

Meanwhile, the customer got the benefit of a lower-cost, longer term solution. We are going to continue to work on additional opportunity within our backlog and in addition to our current projects.

The results of these efforts is a backlog which now has a EBITDA multiple of 6.5 times. CapEx -- that's excluding CO2 projects which tend to have a higher return but are more commodity price-sensitive.

We now expect to spend discretionary capital of $2.8 billion in 2016 which is down from $2.9 billion last quarter that we estimated for the year and down $500 million from our plan for the year. Our backlog is now $13.5 billion down from $14.1 billion, and that is a function of projects going into service, the Utopia JV, the project renegotiation that I mentioned and netted against some project position. So, in short, we are making good progress in doing what we told you we would do, and that progress is on the balance sheet as well as positioning us to grow our DCF per share.

On customer credit, we continue our extreme focus throughout our commercial and corporate organizations. In the past quarter, credit default amounted to about 0.3% of budgeted revenue annualized and most of that is associated with the Peabody bankruptcy that took place in the first two weeks of the quarter. Without that, we would be well under 0.1%.

Again, putting our situation in perspective, we are a broadly diversified midstream Company. We've got a strong and diversified customer base which includes integrated energy majors, utilities, and end users. So, the credit picture is stabilizing.

Now for some of the segment highlights and trends. Overall, and I compare to a year-over-year basis [here]. Segment earnings before DD&A and certain items was down $31 million, or 2% from Q2 of 2015 to Q2 of 2016 -- so $31 million down. CO2 by itself was down $59 million due to lower prices primarily and lower production even though CO2 is making plan due to some price improvements and good performance on the cost savings front. Compared to the same quarter last year, gas is down 1% while terminals and products are up 4% and 8%, respectively.

Some broad themes on our year-to-year performance. We continue -- number one, we continue to see strong demand for natural gas across our network. Transport volumes are up 5% year-over-year. We're getting good terms on storage, transportation, and sales renewals in our business.

Power burn on our pipes is up 8% year-over-year and recall that power burn was up 16% from Q2 of 2014 to 2015 so there is strong compounding growth coming from the power sector. For the first time ever, gas is making up a larger share of the fuel for power generation and coal. That has been true year to date for 2016. It was very close in 2015.

In the last -- most recent quarter, Q2 of 2016, 35% of generation came from gas versus 27% from coal. Gas exports are up on our system, too. Exports to Mexico have grown to 3.3 Bcf a day, and 75% of that volume moves on Kinder Morgan pipes.

We continue to believe and we're seeing the need for natural gas transportation and storage services growing as the demand in the power generation sector, industrial sectors continues to grow along with export demand from Mexico and LNG. The products pipelines were getting the benefit year-over-year of higher volumes on [KMCC] and [koshen] and the startup of the second splitter unit in the Houston ship channel.

In terminal, we are seeing the benefit of new liquids capacity coming online. Remember, liquids makes up a little better than 75% of our segment earnings before DD&A in this business, and we are also seeing increased utilization [amongst] that expanded capacity. More capacity online and higher overall utilization of that capacity. The second quarter was a record-setting quarter for throughput on our liquids terminals.

On the bulk side, while coal volumes are down year over year, other bulk volumes are partially offsetting that decline particularly in pet coke and metals. We also renewed our steel-handling arrangement with Nucor for 10 years with some value enhancements in that new deal. Overall, the bulk part of the business -- the entire year-over-year change could be explained by the coal bankruptcy.

The negatives affecting the business on a year-over-year basis are, of course, lower commodity prices which affect us directly in the enhanced oil recovery part of CO2 and indirectly in our gathered volumes of gas of crude and condensates. But, even with oil prices and gas prices that are lower year-over-year by 18% and 26%, respectively, we are showing durable performance from our portfolio.

Lastly, an update on our Trans Mountain expansion. This continues to be a two-steps forward, one-step back development. I will start with the fundamentals.

What we consistently hear from our producer customers in Canada is that they are counting on this project to get built. Putting the recent fires aside in Alberta, production continues to grow and takeaway capacity projects continue to be behind the demand. Oil prices have hurt Alberta for sure, but from the perspective of our expansion, the supply and demand fundamentals for takeaway capacity are good.

We are in the midst of the federal review process, as Rich mentioned. We have our NEB recommendation. Finding the project to be in the public interest, and the federal government is undertaking this further consultation process with the objective of final decision in December of this year. We have made great progress with communities along the route and have agreements of support from a majority of the most directly affected [first nation stand].

We are actively engaged with the BC government on the satisfaction of their five conditions, and we are making very good progress there. We're going to be actively working with contractors over the summer on the always-challenging work on cost and final scope of the project.

Finally before turning over to Kim for the financials, I'm going to point out as you probably noticed the release is in a slightly different format than usual. What we're doing is showing GAAP measures with equal or greater prominence per the recent SEC guidance to public Companies. As always, we will continue to show you all the numbers including the non-GAAP measures that we use in our management of business. But, this is the format we will show them in going forward. With that, I'll turn it over to Kim.

Thanks, Steve. Let me start by reiterating three overall financial points that Rich mentioned to you that we believe you should take away from this call. Number one, as Rich said, our full-year guidance has not changed from the updated guidance we gave you last quarter. We continue to expect that EBITDA will be about 3% below budget, and DCF will be approximately 4% below budget. To be consistent with the guidance we gave you last quarter, this guidance does not include the impact of the SNG JV which we anticipate will close in the late third or early fourth quarter.

Secondly, we expect to end the year at 5.3 times debt to EBITDA, which is down from our budget guidance and the guidance we gave you last quarter, largely as a result of our balance sheet improvement efforts. When you annualize the EBITDA impact from the SNG transaction, we expect that the full-year impact would be slightly higher than the 5.3 times.

Third, our debt-to-EBITDA target is still around five times, and once we reach that level, we will decide how to return value to shareholders and we are not committing to a specific method at this time.

On our dividend today, we're declaring a dividend a $0.125 per share consistent with our budget and the guidance we gave you in December of last year. Looking at our GAAP income statement, you will see that revenues are down significantly. As I say in many quarters, we do not believe that revenue or the changes in revenues are necessarily good predictors of our performance.

We have some businesses where revenues and expense fluctuate with commodity prices, but margin generally does not which is why you also see a large change in cost of sales during the quarter. In addition, our GAAP numbers can be impacted by non-cash, nonrecurring accounting entries or what we call certain items.

If you turn to the second page of numbers, which shows our DCF for the quarter and year to date, I believe you will get a better picture of our performance. We generated total DCF for the quarter of $1.05 billion versus $1.095 billion or the comparable period in 2015. Therefore, total DCF was down about $45 million, or 4%.

The segments were down approximately $31 million, or 2%, with the $59 million decrease in CO2 offsetting increases in terminals and products. The $31 million decrease in the segments was partially offset by a $23 million decrease in G&A and interest expense. When you net out the $39 million increase in our preferred stock dividends, you get a DCF variance of $47 million versus the $45 million that we show on the page. There are a bunch of other moving parts, but that gives you the main one.

DCF per share was $0.47 in the quarter versus $0.50 for the second quarter of last year, or down $0.03 with about $0.02 associated with the DCF variance I just walked you through. And, it's about $0.01 due to the additional shares that we issued during 2015 to finance our growth projects and maintain our balance sheet.

Therefore, despite approximately 20% decline in commodity prices versus the second quarter of last year, our performance was down approximately 4%. We believe these results demonstrate the resiliency of our cash flows generated by a large, diversified platform of primarily fee-based assets.

Certain items in the quarter were relatively small. They were income of approximately $8 million, but let me describe a couple of them that you wouldn't have seen before so you can make sure you know what they are.

We had a contract early termination revenue, which is $39 million of income which was associated with a customer buying out of its storage contract on one of our Texas intrastate storage fields. We also had a $21 million in legal and environmental reserves, and that was primarily related to settlement of our over 10-year litigation matter with the city of San Diego.

Let me give you a little bit more granularity on our expected performance for the full year versus our budget. We expect natural gas pipelines to come in approximately 2% below its budget primarily as a result of the lower volumes in our midstream group and a 4.5 month in-service delay on our EEC SNG pipeline expansion. As a result of a delay in receiving our FERC certificate.

CO2 is expected to end the year on its budget, and essentially here what is happening is we have some price help and cost savings that are offsetting a little bit lower oil and CO2 volumes than we budgeted. We currently expect terminals to end the year about 4% below its budget primarily due to the impact of the coal bankruptcy.

We expect products to end the year approximately 5% below its budget due to lower crude and condensate volumes on KMCC, double H, and double Eagle, lower rates on our SFPP pipeline, and the sale of our Parkway pipeline. Right now, we are projecting KMC to be essentially on budget.

On the expense side, interest, cash taxes, G&A, and sustaining CapEx on a combined basis are expected to come in positive versus budget. Or, said another way, generate a favorable variance primarily as a result of lower interest. With that, I will move to the balance sheet.

From the balance sheet, we ended the quarter with $41.3 billion in debt. That is an increase in debt of about $97 million since the end of last year, and it's a decrease in debt versus where we ended the first quarter of about $234 million. Let me reconcile that for you.

DCF in the quarter as I mentioned a moment ago was $1.05 billion. We spent about $870 million -- a little under $870 million on expansion CapEx and contributions to equity investment. We distributed or paid dividends of about $279 million. We received proceeds from asset divestitures and JVs of about $220 million, and then working capital and other items was a source of cash of about $110 million.

Year to date, we generated $2.28 billion in distributable cash flow. We spent about $1.88 billion on expansion capital, on acquisitions, and on contributions to equity investments with the only significant acquisition being the acquisition of the BP terminals in the first quarter.

We paid dividends of $558 million. Again, we had proceeds from asset divestitures and JVs of $220 million. And then, we had working capital [used] of about $160 million to get you to the $97 million increase in debt year to date. We ended the quarter at about 5.6 times debt to EBITDA which is consistent where we ended last year and consistent where we ended the first quarter, and as we have mentioned a couple of times on the call, we expect to end the year at 5.3 times debt to EBITDA. With that, I will turn it back to Rich.

Laura, if you'll open the lines, we'll take any questions that may arise.

(Operator Instructions)

Our first question is from Kristina Kazarian from Deutsche Bank.

Good afternoon. I know you went through this last week so sorry for doing it again. But, I've been getting a lot of questions.

Can you help me recap the profile of assets you would be up for JVing? I know we've talked about Elba. Any thoughts on timeframe to that?

And then, TMX is the largest standalone project in the backlog. Would you be up for doing anything in any way on this one?

We have not been talking about specific JVs other than what we put in as a placeholder, right, when we announced our plans for the year, and there are competitive reasons for doing that. We don't want to be beholden to any one particular transaction. We've got some commercial considerations and competitive considerations around counter-parties that we are working with there. So we are not identifying for you the whole list of things that we would be considering.

But, I think it is safe to say that we would look at and evaluate if we could make it work just about anything on our backlog that is separable that we think we can extract good value for and that we can get promoted on and boost our return on, and we will have the full list. A lot of things that are in our backlog are things that are components of our existing network, our existing asset base, and so those are a lot harder.

The other thing I would point out is, and this was part of our strategy in maintaining some flexibility on what we would work on and what we would get done, we have gotten so far already this year -- we've gotten to a point where we brought our debt-to-EBITDA metric down to 5.3 which is better than where we expected to end the year. I know that is not a definitive answer on here's the list of things that we looked at doing. That is the kind of characteristics of things that we look at doing, and we have made great progress on it.

That's helpful. On TMX, can you remind me what the next steps would be if we get the order of counsel in December?

There is another process going on which is the BC environmental assessment -- environmental certificate, I guess you would call it, which we believe will be close in time to when the federal decision comes out. Maybe it lags by a month or so. That's another requirement.

And, again, we are working through the BC condition five process which is the premier's statement of conditions that she would like to see met in order to sanction a project, right? And, we are making good progress in those negotiations.

Then, last one for me is an asset level one. Can you talk a little bit more about the gathered volume number? Was this in line with what you were thinking post-1Q, especially in the Eagleford? Then, the same thing on that increase in power demand number being up so much?

I would say first on the gathered volumes, we made some good progress during this quarter and maybe a little bit at the end of last quarter in terms of signing -- and we'd sign six or seven. I think six with existing shippers. Seventh with a new shipper. Incentive agreements to try to bring volumes to our system above the contract minimums.

We lost some volumes on our Eagleford system that we are now getting back by entering into these arrangements. It's probably a little bit worse than what we would have been shooting for or hoping for, but I think we have taken the right steps during the quarter to get some volumes incented back on the system. And so, I'd look for improvement from here.

Perfect. Thanks for taking -- .

On power, we were watching to see how power generation would play out. I think I will say, and Tom Martin is here, too. A little surprised to the upside on the year-over-year improvement when you think about how big of a leap we had last year.

If you look at the year-to-date number, it is not quite as strong because we had that weak winter and so Q1 was actually down a little bit. But, if you look on a Q2-to-Q2 basis after having a very robust growth from 2014 to 2015, we saw growth on top of that of 8%. Here, I'm just talking about our system. So, 8% on top of that 16% that we saw before which I think is very strong, and I think bodes well.

We had -- another data point there is we had five of our six biggest days for power generation on the SNG system happened in the last 45 days. Five of our biggest. Five of the six biggest.

Great, thanks for all the answers two weeks in a row on calls.

Thank you. Our next question is from Shneur Gershuni from UBS.

Good afternoon, everyone. I just want to clarify I guess your response to Kristina's question about the JVing of assets.

If I'm to understand the backlog correctly, if there is a project that's basically a Brownfield expansion to an existing asset, that makes it more difficult to pull off a JV but not impossible? But, more likely to happen on something that is more discrete? Is that a fair way to think about it?

That's a good way to think about it.

Okay. If I'm remembering your call from last week, you indicated that the SNG asset sale -- the fact that you took an operating asset and then entered that into a JV, that seemed more of a one-off type of thing and not to really think about that on a go-forward basis.

Does that apply to your CO2 business? Or, is that one segment that you would actually consider JVing or outright selling?

As we said last week, in general, it's not going to make a lot of sense for us in general to be selling interest in up-and-running assets. That tends to be an expensive way to raise capital.

I would characterize it as a somewhat unique opportunity in the SNG case because what we had there is our largest customer, a great power market in the Southeast US, and some specifically identified and agreed to opportunities that we could jointly pursue in this JV that again, somewhat unusual for such a transaction would actually make a sale of the interest in an existing asset accretive in the medium term. That is a fairly unique situation.

We had -- as Kim mentioned in some of her updates on the cash numbers, proceeds from other asset sales that we did. And, again, they are -- I think, we've had a few others. They are somewhat exceptional, and it is either case where -- it's really a case where the customer on the asset or a third-party has a much higher value or places a higher strategic value on the underlying asset. Parkway was an example.

There were some others. Smaller examples during the quarter. We sold a small trans mix facility which we were essentially just doing spot business through and really not making much of anything on it. And, we had a third-party who is interested in doing more with that asset. So, again, I think those are exceptional cases, but where we see them, we go get them.

Okay. If I can follow up with some financial-related questions.

First of all, the credit market has been a lot more generous on issuers lately versus a couple months ago. Has there been any thoughts to pre- funding some of the upcoming maturities?

And, I was wondering if you could walk us through the Delta on maintenance CapEx? It seems light. Is it seasonal? Or, is this part of your efforts to continue taking some costs out of the structure?

On the debt side, you are right. We could issue ten-year bonds right now at sub-4%. A very attractive market.

We do not have any need to access the capital market during 2016. We will continue to evaluate whether it might make economic sense to pre-fund 2017. Obviously, we are going to be -- we expect later in the year we will be getting proceeds from the SNG transaction, and so you have to take that into account as well.

On the CapEx -- sustaining CapEx, we're going to come in we think probably within 1% of our budget on sustaining CapEx. We are running a positive variance year-to-date versus our budget, but that's almost entirely timing.

It is timing of the work. We still plan to do the work.

We are getting some cost savings, but we also planned to get some cost savings. So, it's relatively modest beyond what we budgeted for. As always, the work that we have identified that we are doing for compliance and safety, we are focused on getting done and will get done by the end of the year.

One final question, if I may, and it may be an off-line question. The CO2 business -- how much of a benefit are you getting from the hedges this year? Is that something that you're able to quantify relative to your budgeted guidance?

It's about $265 million.

Perfect. Thank you very much.

Our next question is from Jean Ann Salisbury from Bernstein.

Good afternoon.

We can't hear you. Operator, we may have lost the last caller. You want to go to the next one?

The next question is from Brandon Blossman from Tudor, Pickering Holt.

Good afternoon. I guess one quick. I will ask a very similar question in a slightly different way.

Steve, you have made impressive progress, both on the capital high-grading side and the JV side. That obviously takes pressure off to get anything else done, in the very near term. How would you characterize discussions on either point there currently? And, what your expectations are over maybe the next 12 months?

Brandon, I think you're right. It puts us in the position of being more patient and selective as we look at any other opportunities really for the balance of the year. Again, that's why we're very pleased with the progress that we have made here in the first half of the year, and the fact that it does put us in a position to be more selective about what we want to do going from here.

That said, we are not sitting on our hands. We will be looking at all opportunities, and again, it is our intent to get back as quickly as we can, judiciously done, to the point where we can return more money to our shareholders. That is our intent.

We've been saying that since we made our decision on the dividend last December. And, I'm just enormously proud of the job that Steve and the whole team have done in getting us this far, and there is more to come and we are working on it.

Thank you for that. Then, just a couple quick ones. Elba Express -- is that still 100% your project? Or, is that 50/50 now?

It is 100% ours.

It's 100% ours.

Okay. Then, on [oil] volumes, is that -- I think, Kim, you said you had come in slightly under budget on volumes. Is that because of the CapEx reduction relative to plan? Or, is that a performance on the field?

It is primarily performance on the fields. Jesse is here from our CO2 Group, and he can comment a little bit more.

I think it's right.

It's performance. We are learning more as we go here, and we are sharpening our pencils on the programs going forward. But, we had less performance than we expected.

If you look at the year-over-year, a big part of the year-over-year impact is we had some -- what really was a record-setting infill program at SACROC that we saw the benefit of in -- really from Q4 of 2014 through the first half or so, Jesse, of 2015.

Thank you for that. That's all for me.

Our next question is from Jean Ann Salisbury from Bernstein.

Hey guys. Just a follow-up on that last question. At this level of $220 million of investment in the EOR business, what is your current yield? What ongoing decline rate we should expect going forward on oil volumes?

Not necessarily expecting an ongoing decline rate. What we do in this business is we are looking at deploying capital that gets us an attractive return on the incremental barrels that we are producing that is associated with that capital spend. And so, that's how we look at each of our investments here.

We don't aim to necessarily with regard to returns keep production flat or grow it slightly. We really make those decisions on each individual capital investment in the development programs that we spend money on in CO2.

Okay, thanks. As a follow-up, can you remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June -- June 1. And, what we're waiting on to proceed there is we have got to get through the rehearing progress and rehearings were filed 20 days after we got our certificate.

There is a rehearing process that we're going through now that should take 60 days from the date of that filing, and we still need that. We've got to get through that process.

Some other smaller permits we're waiting on.

Some other permitting. Yes.

Those are imminent.

As far as from Shell's perspective, they are aligned with the timing with you

I don't know what you mean by aligned with the timing, but it is a requirement with this project that we get a final FERC order. And, that includes not just the 7C but also the rehearing.

Okay, thanks.

Our next question is from Brian Gamble from Simmons.

Hi, Brian.

Good afternoon, everybody. Just a couple quick follow-ups.

Steve, you talked about the incentive agreements that you've been able to reach on the gathered volumes side. Great to see those volumes coming back to the system. Can you give any more color around what types of agreements those are? Maybe not give the exact rates but maybe talk about additional opportunities on top of what you've already captured as far as the magnitude of potential volumes that may come back in the back half of the year?

I think in a broad brush, we've got deficiency fees that are in play in many of these agreements, and we're not meeting the volumes associated with that. And so, anything we can do to entice incremental volumes incrementally and get a fee that downstream we get additional value, it makes sense to work around that deficiency. I think that is the general construct without getting into any more.

We would rather get the volumes than get paid the deficiency fee. We're working with our customers -- .

The volume brings incremental value then just getting paid the deficiency fee. We'll work on (inaudible). That's what we've seen. It makes sense for both the producers and for us.

That volume is moving back to your system that had been going in different directions? Or, have you actually been incentivizing producers to produce volumes that they may have chosen not to based on the -- based on just making the deficiency -- (multiple speakers)

I would say it's probably bringing volume back to our system that may have been going other places.

Great. On the power burn side. Great to see the Southeast region contributing such huge days to that piece of the business.

Has there been any change in that recently? You mentioned five of the six biggest days in the last 45 days. We've also seen a pretty healthy move in the gas price over that time period.

Were those five or six days particularly in July? Or, was that more of a June event that maybe we are starting to see a little bit of softness as the gas price goes up? Any color on the trend there would be great.

It was June and July. I think split fairly evenly. It was certainly not a wholly June phenomenon.

Generally I think we believe that we are going to see really strong volumes even at these current gas prices through the third quarter. Once we get latter part of September and we're still pushing $3 or upper $2, there may be some switching back. But, certainly not seeing any indication of that at the kind of weather we're seeing right now and expect to see through August.

Great. Appreciate that.

Our next question is from Darren Horowitz from Raymond James.

Darren, how are you doing?

I'm fine, Rich. Two quick ones for me. First, with regards to your comments around enhancing shareholder value.

I realize it is hypothetical, but I'm curious how the impact of the conversion of the preferreds to common shares might influence your preference on which measure of equity value enhancement you choose first? Meaning, if it is a share repurchase to manage some of that incremental dilution? Or, maybe it's a bit more of a balanced approach?

I think as we've said, and Kim has been very clear on when we get to around five which is our target then I think we will look at what's the most opportune and expedient way of returning value to our shareholders. We are not trying to judge in advance. We won't do it just to avoid the potential dilution of the conversion of the prep. We will look at it as to whether it makes sense to buy back shares or increase the dividend.

Again, I emphasize we are running at a $2 DCF rate, and we are pleased that the stock has rallied here post the announcement on SNG to the $22 range. But, that is still about a 9% yield on DCF. We look at that and are still amazed that it is that high.

Okay, I appreciate the color. Steve, one quick one for you. Just with regard to the Northeast.

The expectation there possibly regarding TGP working with customers, possibly expanding that system beyond what's stated in scaling it up. With the developments that have transpired since the close of Q1, has anything changed there?

No, we continue to talk to customers, but there is nothing definitive there, Darren. The need for gas in the Northeast is real. It is present, and we still think that there are capacity needs and we'll talk to our customers and continue to work with them on finding something that makes sense. Not of the same scale as [NETs] but perhaps something else.

In the meantime, we're expanding TGP like mad. We are bringing gas down from the Marcellus in Utica down to the new market area, if you will, of the South, the Gulf Coast for LNG exports openly going to Mexico as well and serving demand down here in Texas. As well as power plant laterals and a couple of other projects. We are actively investing in TGP, but no update really on Northeast utility customer contracts.

Thank you very much.

Our next question is from Jeremy Tonet from JPMorgan.

Good afternoon. I just wanted to talk about Canada first and given that British Columbia isn't necessarily known to be the easiest place to do business. I'm just wondering if you had any reaction as far as what they have said there recently with TMX expansion?

And, does this enhance your ability to potentially find JV partners here? Because it seems like this could be an ideal project to bring in a partner for.

First on BC, as I said, I think Ian and the team have been making very good progress there. I assume you are referring to the energy minister Bennett's comments here recently reported in Bloomberg. We think that the environment overall I would say is improving. We are making progress in getting matters worked out with BC, but we are not there yet. Still working on it.

I think, again, hypothetically from a JV perspective, the more of these kinds of things that we're able to resolve and get behind us, the more value there is to a potential investor. But, again, we're not -- we've got nothing active going on on the project. It is 100% ours right now. But, I think whether it is 100% ours or ultimately whether there is a partner, getting these things taken care of from a regulatory and political standpoint is very helpful.

Great, thanks for that. As far as the 5.3 times leverage that you are targeting for year end right now, how much incremental asset sales or JVs does that bake in at this point?

Nothing significant.

Great, that is it for me.

Our next question is from Ted Durbin from Goldman Sachs.

Ted, how are you doing?

Doing well, thanks. Going back to the 6.5 times capital-to-EBITDA multiple that you put in the press release which is now down from the 7.5 times that you spoke about at the analyst day. Can you walk us through the details of how you got from 7.5 to 6.5? I'm assuming it's taking net out of the backlog, but what are the other ways that you are bringing that multiple down on investment capital?

That is really kind of all the items that I listed out there. We have had some contracts restructured. We've had some projects -- NED being the largest single one that had below average returns compared to the overall backlog that have come out.

We have also looked for ways to make on all of our projects if there are scope improvements that we can make. Cost reductions that we can take on. Occasionally, pushing capital out to closer in time when the project is coming in service. All of those things help improve the returns and the multiple on the existing project base.

Okay. Now with the new project base, can you remind us how much of these projects actually have take-or-pay-type components? Or, how much of them depend on volumes that are maybe outside of your control? I'm thinking in terminals or other places?

The majority are going to be under contracts with customers. On a percentage basis, I guess essentially what you can do is exclude the CO2 portion of it and generally everything else is going to be under contract.

Okay, great. Just stepping back here, you are earning 6.5 times multiple returns which is certainly very good returns. At what point do you say that's enough on asset sales, JVs, et cetera. This backlog is too good, we actually don't want to give this up?

The backlog in the projects that we are going to be bringing on are part of our effort to improve our DCF per share. So, we are going to keep -- but, that doesn't mean that we won't keep trying to find ways to optimize the scope and do other things that are going to boost returns.

Going forward we have set fairly high -- we are in a self-funding world right now. So, we will continue to look for incremental project opportunities, but we've raised our return criteria to something -- again, it always varies on any individual project depending on the risks and rewards, but we have kind of used as a rule of thumb 15% unlevered after-tax return.

So, we continue to look for those projects and have authorized several along the way through the year, but we will look to boost returns on what we have. And, we will raise our return thresholds as we look at incremental capital investments.

Okay. If I can sneak one more in on trans mountain. Any update on your views on the costs there to meet the [107] conditions now that you had some time to go through there? And, just remind us if you'd have any ability to -- if the costs were higher to pass those costs through to customers?

We are working on the costs right now and working with our contractors right now and will be over the course of the summer. Contractors always want more than we want to pay them, and we're going to be pushing back hard on that process over the course of the summer to try to keep costs down and under control.

Once we arrive at a cost that we turn over to our shippers and our final estimate which will be some time early next year or maybe late this year even. Then, we have flow-through protection on certain identified uncontrollable costs. That includes things -- that's once we've set the price.

Once the cost has been set -- that includes things like First Nation's costs, steel costs. One of the more complex spreads through the mountains and then the last 40 kilometers into lower mainland.

That's it for me. Thank you.

Our next question is from Faisel Khan from Citigroup.

Thanks for the time. A few questions.

First, I want to go back to some of the answers around the gathered volumes. I'm a little bit confused.

You've gone from roughly 3.5 DCF a day in gathered volumes down to below 3 a day. I think, Steve, what you were saying is that that's basically it. A lot of that was volumes above and beyond MPC, and now you're saying that that's going to stabilize going forward?

What happens in the basin will drive a lot of that. Starting to see some people come back to the Eagleford, but you not only have to come back, you have to bring a lot of rigs back in order to see that flatten out and then start to increase. Frankly, I don't think the basin is at that point yet.

Most of what we have been focusing on is where we lost some volumes to third parties, we're trying to incent those to come back to the system rather than just collecting the deficiency charges from those customers. And, as I said, I think we have made some good progress over the course of the quarter in doing that. But, so long as the overall basin is declining, what we're doing is fighting off decline in trying to stay above that decline rate if you will. But, I don't know -- it depends on whether the basin decline starts to slow, I think, and level out.

I will point out, too, because we haven't talked about Highland. We actually had year-over-year and over-budget improvement on our Highland gathering assets in North Dakota. A lot of that was due to also restructuring and contracts and primarily migrating them from percent of proceeds to fee-based, which gives us both greater stability, but also happen to have a beneficial impact on this year's earnings.

We talk a lot about Eagleford -- in the Haynesville, we have done an arrangement to try to incent a current customer to do some drilling. And there what we have done is have divided, if you will, the contract between what is already under contract to us and new or incremental wells and providing discounts there to try to incent some drilling. But again, the overall gathering picture is primarily driven by what the overall basin picture is.

Okay, to go from 3.5 to under 3 in two quarters is pretty extreme. Is that level of decline going to continue into the end of the year?

You may see some decline, but it won't be at that rate.

Okay, got you. The Eagleford volumes you talk about, that is just on the liquid side, the 3 -- going from [344 down to 304]. That's what you're talking about there, or is there another mix of gas volumes you are talking about within the gathered volumes?

There is significant [straps] gathered volumes in the Eagleford as well from our Eagleford gathering system and the assets that we acquired from Copano. And, those are factored into our overall gas gathered volumes that we report on the numbers page.

That makes sense on the G&P side.

On the CO2 production volumes, I want to go back to a question that was asked before. The 15% decline in volumes year-over-year, that's not the natural decline rate of the field if I remember correctly. I thought that the field if you are not spending a lot of capital in SACROC and [gates] that volumes might decline by about maybe mid-single digits based on how much CO2 you're injecting in the field but 15% seems like a lot.

This is Jesse. No, it is not a natural decline.

As Steve said earlier, we had a record quarter and half year in 2015 based on a very successful infill program. But, the candidates are not as prolific in the area at the moment so that is really the driver period to period. It is the success of that particular infill project.

What is the natural decline in the field from here on out? If you could give me a best guesstimate?

It's probably more along the 6% to 9% in on the area of the field.

Understood. The last question for me.

On the asset sale program, there was some trade publication news that you are in the market to sell the Jones act tanker business. Is that still an asset that is on the market? Or, have you pulled that asset from the market?

Again, Faisel, we are not really talking about specific processes or assets for the reasons I said earlier.

Okay, one more if I could. The drive to get to return capital to shareholders as quickly as possible, I'm just wondering -- you have announced a lot of asset sales already. I'm just wondering do you risk racing too quickly to return capital back to shareholders and maybe not retaining assets that may have better value over the longer term? I'm just trying to understand that balance between asset sales and returning capital back to shareholders over a certain time period?

I think it is a balancing process, and we are certainly not going to sell anything that doesn't make sense strategically for us. That is why for the most part, and Steve has explained it very clearly, the thought behind the joint venture with Southern company on SNG. But, beyond that, our effort has been concentrated on new projects where we could bring somebody in who would reward us for the efforts we have made on those projects thus far and participate heads up with us on a going-forward basis.

I think we are trying to balance this very carefully, and we are not going to rush into anything that doesn't make sense strategically. We are obviously in this for the very long term.

Great, thanks for the time.

The next question is from Craig Shere from Tuohy Brothers.

Hi, Craig.

Hey, three questions. The first, pretty quick.

On the fall to 6.5 times from what I think was guided 6.7 times CapEx-to-EBITDA on the remaining non-CO2 growth CapEx, is that mostly on efficiencies and that gas pipeline project restructuring? Or, were monetized projects in the completed Magnolia tanker at higher multiples?

I think Magnolia would have been in there all along. It is the contract restructuring. It's the utopia JV. Those would probably be the two main contributors to it.

But also, we have as I've said looked for ways to cut spend or reduce scope where we have the opportunity to do so without -- and enhanced return as a result. Those are probably the two biggest single components.

Okay, great. Kind of the bigger picture here.

I know the balance sheet repair and having the flexibility to return money to shareholders is foremost in your minds. But, of course if you had to make a choice and you had unlimited ability to reinvest at 6.5 times EBITDA, certainly that would be preferable to returning money to shareholders. Currently excluding CO2 and [CWIP], I think you have about $10 billion of proportional spend now from 2016 to 2020 and over 50% of that is trans mountain. How would you handicap the prospects for this fee-based outstanding growth CapEx inventory to materially fill in and expand over the next couple years?

As Rich said, we are trying to balance things. There are two things we are trying to accomplish here.

One is we want to get our debt-to-EBITDA down into the vicinity of five times. The other thing we want to do is grow the DCF per share, and that involves investing in projects as we've described and getting good returns for the capital that we do deploy.

We are doing this in a context of being self-funding. We are trying to make sure that we are dedicating our capital that we have to the best returns that we can get and not be in a position where we have to access the capital market.

Those are really the things that we are balancing. We remain focused on getting the balance sheet in order and in improving our DCF per share. And, we believe following that course will allow was to be in a position to return cash to shareholders.

If you look at what our opportunities -- it remains to be seen what the total investment opportunity is going to be out there. But, I think there is a very reasonable case, right -- a reasonable scenario where we are in a situation where we are generating significantly more cash, particularly as these projects come online, more cash than we're investing.

And, when we are in that position, we are also going to be in a position to either, as we said multiple times, either further de-lever the balance sheet or return value to shareholders in the form of buybacks or increase the dividend. As we get closer in time to that, we will be evaluating which one of those approaches is the best way to maximize shareholder value.

Understood. I guess what I'm trying to get at is that there is a much higher value proposition potential, and that is if you get close to five times net debt-to-EBITDA toward the end of next year and you have this flexibility and still can issue 10-year debt at sub-4%. If you could find 50% of the cost of all of your growth CapEx at 6.5 times with cheap debt, you would have enormous amounts of free cash flow to both fund growth CapEx and return to shareholders.

I'm trying to get a sense of if you think that having additional projects in line with the attractive inventory you currently have -- there was a point you had over $20 billion of inventory. Do you think that there's prospects in the next two, three years to start recharging that?

That's a possibility, and that is absolutely something we would look at. But again, the place we are trying to maintain ourself right now is not to have to access the capital markets. It doesn't mean that on the right terms and conditions we wouldn't.

Okay, last question. On CO2, I think for the entire segment there was originally budget of $1.8 billion of growth CapEx over the five-year plan. I think the forward strips in 2016 and 2017 are above your plan assumptions, but longer term, the strips are still stubbornly low. Any reason to think about, particularly with some of the volumes being less than originally anticipated, any reason to think about that spend over the five years coming in?

Five years coming in?

They're falling. Plus then, the $1.8 billion.

As a matter of fact, we're up slightly from the $1.8 billion in the first quarter. At the current strip we have, the $1.8 billion still fits and works at the current strip.

Great. Thank you very much.

Our next question is from Chris Sighinolfi from Jefferies.

Thanks for the time this evening. Just a couple quick follow-ups from me. Kim, starting with CO2 for a moment.

You have been willing to give us some updates in prior calls on the hedge book and activity. I'm just wondering if there has been a update on the hedge positions? If so, if you could update us as to where you stand?

Sure, as we said on the last call, we continue to lay on hedges in a programmatic fashion in order to stay in line with our hedge policy. For 2017, we're 51% hedged at $68, 36% in 2018 at $72, 24% in 2019 at $60, about 6% in 2020 at $49.

Okay, thanks. I think you had said earlier in the call that there were $175 million of arranged sales in the products businesses, and I was curious -- you had a press release out with regard to Parkway. I was curious if you could quantify how much of it was that?

No, we can't due to confidentiality commitments. Cannot talk about a specific [commitment]. We try to give you some -- I have got a little bit of guidance there.

If you aggregate all those things that we sold -- so, not teasing out Parkway. But, just aggregate the other -- it was a terminal asset that was sold. Of the three total assets sold, $172 million in proceeds, and the EBITDA multiple was about 13.5 times.

Okay. Thanks, Steve.

I also had a question with regard to trans mountain if that project is formally a go when all is said and done, could you -- I don't know if you know at this point or, if you could help us think about how the cadence spend would go on that asset particularly in 2017 and 2018? Or, is it mostly concentrated in the final year?

It's concentrated in 2018 and 2019.

We won't start actual pipe construction until late summer of 2017. So I would say that if you think about 2018 and 2019 as being the peaks when the project would complete with a half-year in 2017 [is the way to think about it].

Okay. I think a final question for me. I don't mean to beat a dead horse, but I wanted to revisit the balancing act that you spoke about with Faisel and then Craig's comments around the de-leveraging efforts versus capital deployment opportunities.

Steve, recognizing that you don't need to access the capital markets, but I'm just wondering at what point -- what are the conditions under which you would? I get that the effort around JVing on in-flight projects is seemingly the most attractive thing particularly if the party can bring something to that other than just capital. We have obviously seen asset sales, but it's kind of tricky when you're selling underlying cash flow and utilizing some of the NOL balance. I'm curious, the goal around de-levering, where, when, and if equity issuance would play into that?

At this price level, we don't want to issue equity. I think right now we are going to live within our cash flow.

As we look out in time, we want to do projects. We want to do projects that have good returns on them. If they have good returns, we think that will be value-creating to our investors. If we can do projects at 6.5 times EBITDA, that is going to be a priority.

As we look out in time and we look at the backlog that we have and we look at the potential opportunities that there may be, we see that there is probably going to be cash flow in excess of the capital project once the balance sheet is repaired. That is why we are saying once the balance sheet is repaired then at that point in time we will be in the position to return value to shareholders through share repurchases or dividends because we think there will be some projects, don't get me wrong -- we just think the cash flow we will have will exceed that amount of projects.

Okay, I think I'm clear on that. Thanks.

Our last question is from John Edwards from Credit Suisse. Your line is open.

Just a couple quick ones for me. Do you have the breakout of the sub-sectors for the backlog? If you could give that to us now?

Yes, hang on. Natural gas is still about 30% of the backlog in the current -- this is the 13.5% that we talked about. Gas is 30%, products after the JV is sitting at 2%, terminal is at 15%. CO2 is 14%, and then KM Canada carrying the project at the USD5.4 billion is 40%.

Okay. What changed from the -- you said it came down about $1 billion. Was it mostly coming out of natural gas?

It came down from 14.1% to 13.5% so $600 million, and there were projects that rolled into service. We also in the previous backlog did not have a Utopia JV assumption. The JV of Utopia had an impact and was part of the decline.

As I mentioned we've restructured a contract with a customer and actually boosted the return, and that also reduced the capital associated with that particular project. And, those are the three biggest things. There were some fairly modest project additions that went the other way.

Okay. My only other one is can you quantify the amount of deficiency payments you are receiving?

I don't have that number. That is not something that we track separately. So, no.

That's it for me, thanks.

At this time speakers, I show no further questions.

Thank you very much, everybody. Have a good evening and thanks for dialing in for this.

That concludes today's conference. Thank you for participating. You may now disconnect.