金德摩根 (KMI) 2016 Q4 法說會逐字稿

Thank you for standing by and welcome to the quarterly earnings conference call.

(Operator Instructions)

This call is being recorded. If you have any objections, please disconnect at this time. Now I'd like to turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Sir, you may begin.

Okay. Thank you, Jay, and welcome to our quarterly call. Before we begin, as always, 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 1935 and the Securities and 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 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 turning to Steve Kean, our CEO, and Kim Dang, our CFO, for an update on our operational and financial performance, let me just start the call by reiterating our strategy at Kinder Morgan.

We are all about creating value for our shareholders. To accomplish that goal, we worked really diligently in 2016 to strengthen our balance sheet and we did. We also achieved financial performance consistent with the guidance we've been giving you since our first quarter call in April 2016. We expect that the strengthening of the balance sheet will continue in 2017.

We also expect that when we finish our work on JVs and as we work through the backlog, we will be producing cash well in excess of our investment needs. While we have alternatives in using that cash to deliver value to shareholders, our current thinking remains that the best way to deliver that value is through substantially increasing our dividend. We expect to update you on that in the latter part of this year when we announce our dividend policy for 2018.

Steve?

Yes. Kim will take you through the fourth-quarter and full-year performance in detail, so I'm going to focus on three themes on our performance that have implications for 2017 and beyond. First, our balance sheet strengthening initiatives, second progress in our growth projects, and third, where we are beginning to see some positive indications in the sector. On the first, we ended the year ahead of target at 5.3 times debt to EBITDA after executing on a number of joint ventures and divestitures through the year.

We have built our plans for 2017 to continue that progress, including a joint venture or IPO of the Transmountain expansion. Both of those approaches are attractive to us and interest is strong. We will develop both alternatives further this quarter and position ourselves to take advantage of the best one in terms of value and other key terms.

We believe that syndicating Transmountain is the right answer for our shareholders and for the project. It now represents close to half of our backlog and we believe the value we can receive from investors willing to participate, plus the syndication of risk that comes with it, makes bringing in other investors the best approach.

We have counted nothing for the value we believe will be realized from investors who wish to participate in the project when we came up with our ending debt metric of 5.4 times for 2017, so we believe we've left ourselves some room to improve on that metric as the year goes on. Bottom line, we exceeded what we said we would do in 2016 and we will work to beat our 2017 target as well.

Second, with respect to progress on our projects, starting with the backlog, it now stands at $12 billion, which is down from $13 billion last quarter. We placed a little under $800 million worth of projects into service during the quarter and about $1.8 billion over the full year 2016. We removed $200 million worth of projects in the quarter, and overall $4.6 billion of projects were removed over the full year.

Some of the removals during the year were based on regulatory circumstances, but in almost all cases, we were eliminating a project in order to accelerate -- removing the project accelerated progress on the balance sheet and freed up capital for our higher return projects. We also had $50 million of reduced cost in the quarter. Again, still reconciling on the backlog here. We added $167 million of new investment during the quarter and $740 million for the full year.

Now, much of that and some of the project removals were a function of high-grading our investments within CO2, eliminating some projects, adding others. In short, we high-graded the backlog to strengthen the balance sheet and directed our capitol to the highest return opportunities just as we said we would.

So in 2016, we improved the balance sheet, made progress on our projects, found a few new few high-return projects, closed the year with DCF and EBITDA results in line with what we've been projecting since April, covered our dividend and our growth CapEx needs without needing to access capital markets and we expect to continue our progress in 2017.

I think also worth noting, we've been watching counterparty credit risk over the course of the year and we have not had a default resulting in a revenue impact to us since early April of this year. We made that a priority and I think we've been successful through the year.

Of course, we were impacted early in the first quarter by bankruptcies from some of our coal customers. But we've done a very good job of holding the line since then on counterparty credit.

So third, I will give you an overview of the road ahead as some market recovery begins to take shape in the markets we serve, starting with natural gas. North American gas continues to be the long-term fuel of choice in meeting domestic and increasingly international energy needs. Growth, we believe, is going to be driven by the emerging demand coal from power plants. Gas exceeded coal's share of power demand for the first time in 2016.

Second, exports to Mexico, of which KM has about a 75% share. LNG exports, which of course are emerging on the Gulf Coast, and expect to reach a full level of between eight and nine BCF of capacity when the build-out is complete of just the current projects, and, finally, Gulf Coast, pet cam and industrial demand.

So the green shoots, we saw some green shoots in the fourth quarter, including some record-setting days on two of our larger systems. The return of price volatility, which our storage businesses were able to take advantage of, both for 2016 period as well as for 2017. We had about 0.5 BCF of new, natural gas capacity, sign-ups a little less than 100 of that, it was about 60 of that, was existing capacity, bringing the total over the last three-year period up to 8.7 BCF.

While gathered volumes were down on our system, the return of rigs to the Eagle Ford and Hainesville, the resilience of our assets in the Bakken, where we actually kept oil gathered, roughly flat and increased our gas gathering volumes were good leading indicators for us. To put this in context, our gas business represents about 55% of our segment earnings and gathering and processing is about 20% of that number.

In North American crude, green shoots were apparent as rig count rose significantly over the last half of the year and US production actually grew during the fourth quarter. Producers have continued to lower their breakeven prices with respect to the Eagle Ford specifically, which has hit especially hard -- was hit especially hard by the downturn. Acreage has now started to change hands from capital constrained players to new owners who we expect will do more with that position.

We expect to see volumes in the Eagle Ford, both gas and oil, to continue to decline in the first part of 2017 before flattening and then starting to grow as 2017 progresses. Refined products have held steady. Pipelines are the most cost-effective way to move products from refining to market centers and we have the largest refined product pipeline position.

Further, our terminals assets are well positioned. About 80% of our segment earnings before DD&A in the terminals sector now comes from liquids and that is predominantly from refined products. And in Houston, in particular, we are in great position to participate in demand growth as well as export growth for refined products.

On NGLs, while the NGL processing business is a small part of our network, there is visible growth that we are positioned to benefit from as pet cam projects are completed over the next one to two years. So overall, the long-term prospects for North American energy are bright and our assets are well positioned to participate in the recovery and growth.

I'm going to conclude with an update on our two largest projects: Transmountain and Elba. First, on Transmountain, Transmountain achieved two critical milestones in December of 2016 and this month in 2017.

On December 2, we received our certificate of public convenience and necessity from the government of Canada, and just last week, British Columbia Premier Clark announced that we had met our five conditions that she specified for heavy oil pipelines crossing BC and, also importantly, the BC government issued its environmental order approving the project with conditions.

These were enormous steps forward in enabling us to help Canadian producers access world markets and the steps were taken in connection with an overall package of federal and provincial policies and decisions designed to mitigate and address environmental, climate and First Nations concerns. So a comprehensive set of announcements coming from the federal and provincial governments over the last several months, of which this project was just one piece.

This expansion, our expansion is needed as Canadian oil sands production continues to grow, even though it is at a slower pace than it was two years ago and pipeline take-away capacity is constrained. We remain confident that the vast majority of our shippers want the capacity that they have, some may even want more, and there are other customers who are interested in capacity if it were to become available.

So this project has advanced significantly since our update last quarter. Here is what remains for us: We are finalizing our cost estimate for the shippers. We expect now that is going to be delivered in early February. We then have the shipper review of those costs, that takes place over a 30-day period and then we have a final investment decision that we expect to make some time late Q1 or early Q2.

During this period, we will be working on bringing in additional investors, either in the context of the joint venture or as an IPO, as I mentioned. So is going to be a busy next few months on our largest project.

Turning to Elba, we are under construction here. We are receiving notices to proceed from FERC under the 7(c) that we got -- the certificate that we got last June. The notices are coming through on a timely basis. So we're under construction. Just a reminder, we have a 20-year contract with Shell on this project.

While not essential in our contract with Shell, the project now has both FTA and non-FTA, that is free trade agreement, export authorization. We've got an EPC contract in place. We have this project identified as a JV candidate and believe that the prospects for concluding something on that front are very good. As we've said before, we don't have to JV the project, but we believe it is a good candidate.

It will attract good value from investors and we believe the prospects of concluding something there are very good. And with that, I will turn it over to our Chief Financial Officer, and our newest Board member, Kim Dang. Kim?

Thanks, Steve.

Today, we are declaring a dividend of $0.125 per share, consistent with our budget. I am going take you through all the numbers as usual, but I don't think you're going to find any surprises in our results, as adjusted EBITDA, DCF and net debt to adjusted EBITDA are all consistent with the guidance that we have provided since April, updated for the SNG transaction.

Starting with the preliminary GAAP income statement, you will see that revenues are down and cost of sales has increased, resulting in about a $457 million reduction in gross margin. As I have told you many quarters, we do not believe that changes in revenue or revenue itself are a good predictor of our performance. However, when revenues are down, we generally see a reduction in our cost of sales, which more than offsets the reduction in revenues, as we have some businesses where revenues and expense fluctuate with commodity prices, but margin generally does not.

That did not hold true this quarter, so let me explain. Both revenues and cost of sales are impacted by non-cash, nonrecurring account entries, which we call certain items. Certain items contributed $237 million of the quarter-over-quarter gross margin reduction, with the largest being an approximately $200 million of revenue that we recorded in the fourth quarter of 2015 related to a pipeline contract buyout.

Adjusting for these certain items, gross margin would have been down $220 million. The largest contributor to this decrease is the sale of 50% interest in SNG. As a result of the sale, we no longer consolidate SNG's revenues or cost of sales, but instead record our 50% interest in net income further down the income statement as equity earnings. Keep in mind also that SNG did not have significant cost of sales.

The impact of deconsolidating SNG was approximately $134 million reduction in gross margin for the quarter, leaving a reduction in gross margin of about $86 million, which I mean is more consistent with how we would review our results. The main drivers of the remaining gross margin reduction are consistent with those that I will cover for you on DCF in a moment. Net income available to common shareholders in the quarter was $170 million, or $0.08 per share, versus a loss of $721 million, or a loss per share of $0.32 in the fourth quarter of the prior year, resulting in an increase of $891 million, or $0.40 a share.

Now, before everyone celebrates 125% increase in our earnings, let me give you the numbers adjusted for certain items. Net income available to common shareholders before certain items was $410 million versus the adjusted number in 2015 of $463 million, down $53 million or 11%. EPS before certain items was $0.18, down $0.03 versus the fourth quarter of 2015.

Certain items in the fourth quarter of this year were an expense of $239 million, the largest of which was a $250 million non-cash impairment of our investment in Ruby. Although the majority of Ruby's capacity is contracted until 2021, the impairment was driven by a delay in expected West Coast natural gas demand to beyond that timeframe. Certain items in 2015 were a net expense of $1.2 billion, also driven primarily by non-cash impairments.

Let's turn to the second page of financials now, which shows our DCF for the quarter and year-to-date and is reconciled to our GAAP numbers in the earnings release. DCF is the primary financial measure on which Management judges its performance. As I mentioned in my opening remarks, our 2016 performance is consistent with the guidance provided since April, updated for the SNG transaction.

DCF and adjusted EBITDA are approximately 4% below our budget, and net debt to adjusted EBITDA is 5.3 times. We generated total DCF for the quarter of $1.147 billion versus $1.233 billion for the comparable period in 2015, down $86 million, or 7%. There are a lot of moving parts, but if you want a very simple explanation, the segments are down $123 million, primarily due to a reduction in our natural gas and CO2 segments, as a result of the 50% SNG sale and lower realized oil prices.

Interest expense was reduced by $41 million versus the fourth quarter in the prior year, as we used the proceeds from the SNG transaction to repay debt. These two items, the change in the segments and the change in interest expense, net to a change of $82 million, or approximately 95% of the DCF change. DCF per share was $0.51 versus $0.55 for the fourth quarter of the prior year, or down $0.04, almost all of which is associated with the DCF variance I just walked you through.

$0.51 in DCF per share results in $867 million of excess distributable cash flow above our $0.125 dividend for the quarter. For the full year, DCF per share was $2.02, resulting in almost $3.4 billion of excess distributable cash flow above our dividend.

Now let me give you a little more detail on the segment performance. The natural gas segment is down $114 million, largely due to the sale of SNG. Increased contribution from TGP expansion projects placed in service largely offset lower midstream volume. CO2 decreased by approximately $54 million, due to lower oil price and approximately 8% lower production. As Steve mentioned, the lower production was partially driven by project deferrals as well as reallocating capital higher return projects with slower production response.

The terminal segment was up $39 million, or 15%, driven by increased contributions from our Jones Act tankers and our joint venture with BP. Products was up 19%, impacted by higher volumes on KMCC and Double H pipes and favorable performance on our trans mix business, and KMC was down about $5 million due to timing of OpEx.

Versus our budget, as I previously mentioned, adjusted EBITDA was about 4% below budget, largely as a result of the partial sale of SNG, lower gas midstream, natural gas volumes and our natural gas segment, coal bankruptcy impact and reduced liquid throughput and ancillaries in our terminal segment, lower crude and condensate volumes in our products and lower crude and condensate volumes in our product segment. The individual segments ended up very consistent with the guidance we gave you in the prior quarter. DCF was down approximately 4%, with the negative variance on adjusted EBITDA somewhat offset by reduced interest in sustaining CapEx.

With that, I'll move to the balance sheet. On the balance sheet, you will see total assets down about $3.8 billion. A huge driver of the reduction in assets was the sale of SNG and you can see that coming through primarily in the plants, property and equipment line, and the reduction in goodwill.

Net debt, we ended the quarter at $38.16 billion. That translates into net debt to adjusted EBITDA of 5.3 times, as I previously mentioned, consistent with the guidance we gave you. For the year, debt is decreased $3.064 billion, and for the quarter, we had a reduction in debt of $1.088 billion.

And so let me reconcile that for you. In the quarter, $1.088 billion reduction in debt. We had $1.147 billion of DCF, we had about $627 million in expansion CapEx, acquisitions and contributions to equity investment. We had divestiture proceeds of $77 million, plus $776 million of the SNG divestiture proceeds we had placed in escrow on September 30 to pay down debt on October 1. So those proceeds were released from escrow. And then we paid dividends of $279 million. Working capital and other items were a very small source of cash.

For the year, a reduction in debt of $3.064 billion, DCF was $4.511 billion, expansion CapEx, acquisitions and contributions to equity investment were a use of cash of $3.06 billion. Now, that number is a little bit different from the number you saw in the press release and that is because this is a cash number and the number in the press release is an accrual number.

We got divestiture proceeds of $2.94 billion, the biggest piece of that was SNG. SNG we got $1.4 billion in cash and then also $1.2 billion in debt was deconsolidated. The other contributors to divestiture proceeds, we sold our Parkway pipeline, got $142 million. We got a promote on Utopia and then we got some proceeds on some small terminal sales.

Dividends for the year $1.12 billion and then working capital and other items was a use of cash of about $210 million and that's a whole laundry list of things including the Maple payments that we paid on the debt that we repaid in conjunction with the SNG transaction, timing on distributions from JVs, margin that went out the door, working capitol use on AP and AR offset by a positive working capitol on property tax.

So with that, I will turn it back to Rich.

Okay. Thank you and, Jay, we are willing to take questions now.

Thank you, sir. Participants, we will now start the question-and-answer session.

(Operator Instructions)

Kristina Kazarian, Deutsche Bank.

Good afternoon, guys and Kim. So congratulations on the TMX milestones. I got a quick question here, though. So I know I am still waiting for FID and you guys are thinking about what the final cost number will be, but could you just talk a little bit about that in the context of the 6.7 times bill multiple you referred to when talking about the project backlog and just generally how I should be thinking about the return on this project?

Yes, the return, it's a very good return on the project. It is, if you think about our overall backlog multiple being about 6.5 times EBITDA, it is a little bit better than that. Now, keep in mind, there's capital spend that's going on for a while under this project so that doesn't translate directly into an IRR, but it's a very attractive returning project and what we invest in this project, wherever that number comes out, we earn on that number when we set the final cost.

Perfect. That's helpful there. And then could you give a quick update on Utopia, as well? I know the press release referenced progress made on the right-of-way, but how should I be thinking about that?

So actually, this call last quarter, we had just gotten an order from one of the courts in Ohio finding that Utopia did not have imminent domain in that particular jurisdiction. We have since had mixed results, meaning that some have found imminent domain rights, common carrier status and public utility status in imminent domain, but we can't wait for all that to resolve itself.

So we, Ron McClain and his team put together a strategy to go pursue the right-of-way notwithstanding whatever the courts decide and they've made very good progress on that. And so I think the way to think about it is we believe we are going to get it done and we've acquired a substantial amount of the right-of-way and we believe we are going to complete it.

All right and last one for me. Can you guys talk a little bit more about this small, but looks like new, JV with n-Link and what the genesis for this project and strategic venture is?

Yes, so we have a position in the scoop stack area that came as part of the Highland acquisition and some acreage dedications there, or commitments there, and we looked for the most, the best returning opportunity to get that system built out, and essentially, because there is additional processing capacity in the area, we were able to come up with a much better project from an NBD standpoint than if we had laid our own pipe and built a brand-new processing facility. So it turns out better for shareholders, we utilized some underutilized capacity that our partner had and ended up with a better result for our customers and shareholders.

Perfect. I will leave it there and save the tough ones for the analyst day next week. Thanks, guys.

Thank you.

Shneur Gershuni, UBS.

Good afternoon, guys.

How are you doing?

Good. Just had a couple of quick questions. I guess just sort of following up on the TMX question. With the focus towards the -- to a potential JV, I was wondering if you could talk to us about how we should think about expectations of what the promote could potentially look like.

If I recall, with Utopia did about a 20% promote, but at the same time, when I look at where Canadian pipelines are trading at these days, it seems to be far higher than that. Is there a scenario where we could see a promote that's well in excess of 20%? I was wondering if you can give us some color as to how to think about how it would work?

Yes, we have -- well, no. We specifically have not given specific guidance on that because frankly, we don't want to set a marker out there. We want to run a process and test that value, but we don't want potential counter parties to see a number out there that they felt like that if I hit that, then I am done. So we think it is best for our shareholders, best for the project overall, if we just run the process.

But we can say that the interest has been very strong from potential JV partners and also strong interest in an IPO as an alternative.

Okay. Fair enough.

And as a follow-up question, in your prepared remarks, Steve, you talked about green shoots. When I think about the contracted nature of many of your assets in terms of some NBCs and fee-based and so forth, I was wondering if you can talk about, if these green shoots do continue, where we can potentially see a positive revision to your EBITDA guidance for 2017?

What might affect our guidance? Actually, we will get into that in a fair amount of detail next week at the call. I mean, I think one place that we've seen some value that actually has had an impact, now we've got -- not saying it's going to exceed 2017 plan, but the return of some value to the storage assets, I think, has been a good sign.

And that's a place that's a potential, a potential positive. But we will get into some, and you could say that too about through-put on our products pipelines potentially, through-put on, through our terminals facilities, et cetera, but we will give you a pretty good luck next week on what we think the drivers are in our Business for 2017.

Okay. As a final, final follow-up, and I suspect this is a next-week answer as well too, but you put out the return marker of 6.7 times excluding CO2 projects. I was wondering if you can remind us what the target was for CO2 related projects and how much of the backlog is represented by CO2 these days?

Yes, so we have set kind of a minimum of 15% unlevered after tax for CO2. And the projects that we've approved recently were well in excess of that amount. So we're not trying to identify -- we are trying to identify good, high returning projects, stress test them for oil price scenarios, et cetera, but we set that as kind of a minimum. And the total on EOR, or I'm sorry, the total on CO2 is $1.4 billion of the $12 billion in the backlog.

Perfect. Thank you very much, guys, and looking forward to see you next week.

Brandon Blossman, Tudor, Pickering, Holt & Co.

Good afternoon.

Good afternoon, Rich. Let's try a couple of LNG-related questions. Thinking about the potential for an Elba JV, what are the metrics that will help you determine whether or not it makes sense to you? Is it a return threshold? Is it a deleveraging metric? EB to EBITDA or something else or a combination of all of the above?

The reason for considering a JV on Elba is to address the balance sheet. So we'd, of course, take into account what the impact is going to be on our leverage metrics, but it is really a function of return. It is the value that we get for someone buying in and participating in the project.

Okay. Fair enough. Smaller question: the Southwest Louisiana supply project, is that tied to a Cameron online date or is that contractual February 18?

It is tied to their first in-service on that project.

Okay. So it looks like there's the potential you will get your part done before then. I guess then just very simplistically on the CO2 projects north of 15% return, I assume that that's strip grid pricing, correct?

Yes, we look at it on a strip, but then we also look at it with a sensitivity off of that strip to make sure that, to look at what a NPV 15% breakeven price would need to be. So we look at the pricing a couple of different ways.

Okay. That's all for me. Thanks.

We get comfortable with the potential if there's downside risk in the pricing, will we still have a nice returning and economic project for us?

All right. Makes sense. Thank you.

Jean Ann Salisbury, Bernstein.

It's been in the news a lot that Trump is supportive of Keystone. Just wondering what impact, if any, this has on the potential list of Transmountain shippers and maybe their willingness to pay?

So we don't think that it has much impact. We think that there are some significant advantages to the Transmountain project. Of course, it is under contract with shippers. And it is the project that we believe is in the lead and gets people to Tidewater where they can access a world market price. And so there is a strong interest in it and that strong interest has continued after Trump's election and after his comments on Keystone.

Great, make sense, thanks. And also on Transmountain, that's, as you know, the Canadian dollar has fallen pretty significantly since you started the Transmountain process. Just, I think this is true, but I just want to make sure that both the CapEx and the tariffs are in Canadian dollars. There's not really any ForEx impact either way.

Yes, so we carried the CapEx in our backlog in US dollars, but yes, the tariff is in Canadian dollars and the CapEx that gets communicated to our customers will be in Canadian dollars, as well.

Sure. So just in terms of returns, there's not really ForEx exposure?

No.

Okay. Thank you. And then --

Most of the spend is in Canadian dollars.

Okay, thank you. And then last one is you noted that a big reason that gas volumes were down was because of Texas intrastate due to the declining Eagle Ford. I'm just wondering how much room there is for Permian gas growth to offset this, or if you're kind of near your max for Permian gas flow?

On the intrastates?

Yes.

I think we're fairly full to the interstate system of what we can receive from the Permian.

Okay.

But, as Steve said earlier, I mean, I think we are approaching a bottom in the Eagle Ford volumes, expect those to flatten out towards the middle of the year and more than likely grow later in 2017.

Okay.

And Permian volume, putting the intrastates aside for a moment, Permian volume growth does tend to drive good value on our EPNG asset.

Great, that's all for me. Thank you.

Darren Horowitz, Raymond James.

Hello, Darren. How are you doing?

I'm doing fine. Thanks, Rich. I hope you and everybody are doing well. A couple of quick questions: the first, within products pipes on that segment, exiting 4Q, and I realize we will get more detail on this next Wednesday, but exiting 4Q, were you guys more optimistic about the incremental uplift on NGL volumes and margins or possibly weight KMCC and double-H could do with capacity utilization in Persian in the first quarter?

Ron, do you want to?

Well, what we have seen recently is strong volumes in Q4 in January and they've fall off a little bit, but I think we can expect KMCC volumes to return, as Tom said, the rest of the year, maybe some drilling goes on.

Okay and (multiple speakers).

Go ahead.

I'm just trying to get a sense of the expected pull through and kind of how that segment ultimately shapes up for year-over-year performance thinking about the quarters, but I know we will get into that on Wednesday so we can defer it until them.

If I could just switch quickly over to CO2, within that 8% lower reported production estimate or actual, outside of those project deferrals and that reallocation of capital to projects with slow production response that you guys discussed, was there anything from a legacy organic field decline perspective that caught your attention, maybe pattern conformance or anything that we should be looking out for?

Look, there is a natural decline associated with those fields. And we continue to work for ways to offset those declines, and historically, we have been able to do that and we're looking at, and we will go over this next week as well, looking for some opportunities to flatten out again or potentially even grow that production with some new opportunities in those fields. I wouldn't say that there was anything unexpected in what we saw in our results there.

Okay. And then last question for me, Kim, just a quick housekeeping one on that $250 million impairment on the equity investment in Ruby, recognizing obviously, the non-cash nature of it. Can you quantify for us maybe the magnitude and timing shift of that west coast natural gas demand that drove the impairment to be recognized? I'm just trying to get a sense of the drivers behind it.

Sure. It probably moved out three to four years.

Okay. Okay. Thank you very much. I appreciate it.

Keith Stanley, Wolfe Research.

Hello, good afternoon. How are you guys thinking about some of the legal challenges to the Transmountain project? Just your thoughts there on where you expect to be challenged, how you are feeling about the legal case and over what timeline we should expect some of these challenges to play out.

Okay. Several parts to that answer. So one is legal challenges have already been filed. Most of the legal challenges to date related to the project have resulted positively for the project continuing and a big part of that, I think, is due to the fact that the Canadian government, provincially and federally, has taken a long time, a lot of care and gathered a lot of information and attached a lot of conditions and engaged in a lot of consultation in order to make the orders that they ultimately issued very strong and hard to overturn on appeal.

So it was a lot of good work, building the record and listening to, responding to and putting in place the appropriate conditions to deal with the legitimate concerns that have been raised.

Our view of the appeals, and we will be filing our responses today or shortly to those that have already been filed, is that they are unlikely to succeed on a merits, on appeal, and that given the much higher standard for something like an injunction for example, they are unlikely to succeed in getting something that actually stops the project. So, I think the credit goes to our team up there, but certainly, the government engaging in such a thorough process, which ultimately makes those orders very strong.

Great. So you sound pretty confident there. One follow-up. Just anymore color on the merits when you're considering a JV partner for the project relative to an IPO of the Canadian business?

Just how you're weighing what some of the positives and negatives would be of each option. And also, how do we think about the timing of when you would look to do a sell down? Is it soon after FID or would you wait a little while on this?

Let's start out with the timing. We would anticipate doing something contemporaneous with the FID or shortly thereafter. And as far as timing is concerned, I think that will give you an idea.

There is a lot of pros and cons between the JVs and IPO and we can get into more detail perhaps next week on that. But I think the real salient point is that both are very good potential alternatives and we think we are going to have the ability to make a selection between the good and the better. So we think that it's going to be a decision that benefits our shareholders for the long run.

Thanks a lot.

Craig Shere, Tuohy Brothers.

Craig, how are you doing?

Good. Thanks, Rich. Good afternoon and congratulations to Kim on the Board position.

Quick question. So once you are done with the balance sheet repair, are you still planning on financing half of ongoing growth CapEx that is separate from JV partners in the debt markets and the rest of the operating cash flow?

I think that's a good summary. Obviously, we will look at the circumstance as we go forward, but clearly, our predilection would be to get to the point where we have gotten our balance sheet in the right shape and we think we are getting a lot closer to that. That's what we've indicated and I think you will see good results from JVs over the course of this year that will move us in that direction.

And when we've done that, then we will be able to maintain that balance sheet, that debt to EBITDA ratio, and without putting out new equity unless we desire to do. So we will be using excess coverage dollars above our dividend payout to fund the equity portion of the capital expenditures.

And while we'll look at all the alternatives as far as good new projects on a going forward basis, obviously, the Transmountain project is a little bit like that over used saw about the pig going through the boa constrictor. It is a huge pig going through and when you get through on the other side, we anticipate our capital expenditure levels will be less. We are still going to be looking for growth opportunities, but our capital expenditures will not be as great.

On that note, it didn't sound like there was maybe much added in terms of new project origination in the fourth quarter. How comfortable are you given the positive signs already discussed that maybe we could start to move over the next couple of years back towards that $2 billion to $3 billion in annual project origination?

And that could happen. Like we've always, we will continue to look for good, high returning projects. We believe that is the best way to deliver value is to invest it in good, high returning projects. But I think our current view is that we are likely to generate cash as these projects come on.

We are likely to generate cash in excess of those investment opportunity, the equity portion of those investment opportunities. And in those circumstances, we believe the best way to return value to shareholders is with an increasing dividend.

Understood. If you are only having to cover half of that out of your operating cash flow, you definitely have a lot free.

That's correct.

So last question, any update, and I suppose that you might touch on some of the specifics on the segments next week, but any update about prospects for contracting remaining unhedged Jones Act tankers?

Yes. Currently, I believe everything that's on the water is under charter. Is that correct?

So 11 of the 16 are under long-term contracts. Five have some exposure. The total exposure for next year to our budget is $2.9 million, or 0.2% of our total budget.

For 2017.

For 2017. 0.29% for the terminals budgets.

Total terminal budget, correct.

I got you. So all the exposure is for what's, in terms of anything meaningful, what's yet to be delivered?

Well, and some are existing charter terminations as well as ships roll-off of charter. And look, I think we've been very active in rechartering vessels as charter expirations come up. And I think have been pretty successful in what is no doubt a down market in making sure that our ships have charters even if it is at a reduced rate and that will continue to be our goal through the year.

I think also, we had hoped that we and the other large vessel companies would be able to take a little business from the ATB market and I think we are beginning to see we're competing for that business as well. We're starting to go see that it's prepped.

Great. Thanks for the color.

[Denio] Giovani, BMO Capital Markets.

Good afternoon.

Good afternoon, thank you. I wanted to circle back to the question on Ruby. So there was a write-down on Ruby this quarter. I think, if I'm not mistaken, MEP was a bit down last quarter. Are there any expectations of additional write-downs going forward, Fayetteville perhaps?

I think our carrying value on Fayetteville is like $100 million. So it's got a relatively low carrying value. But look, I mean, we have to assess our assets every quarter to make sure that we are carrying them at the right value. I don't see significant risk of impairments going forward, but we will have to make that assessment based on market conditions at the end of every quarter.

Got it. And the last question for me, most of my questions have been hit, what was the CO2 CapEx spend this past quarter?

For the quarter? I don't think we have a quarterly number for you.

All right. Thank you. That's it for me.

Thanks.

Jeremy Tonet, JPMorgan Chase.

Jeremy, how are you doing?

Good, thanks. I just want to go back to TMX here and just wanted to clarify, do you see any situation where you would go to loan with this project or at this point, you feel you have a lot of certainty with regards to the JD or IPO options that you feel pretty certain that that would happen at this point?

It's the latter. It's the latter. That's an option to us, but I think, as I said at the very beginning, we think that syndicating this is the right answer overall and we think that the interest level is high enough and strong enough for whichever route that we take that we are going to be successful in that syndication.

Great, thanks. And then could you just walk us through what you think might be the optimal amount to monetize at this point and how you think about gives and takes there?

It varies so much depending on the structure that's pursued and it's a broad enough range that I can't really give you a specific answer there.

Okay, great. And then just a housekeeping one there. What was the last number for the CapEx spend there? How current is it?

We have been carrying -- so it is, as we said in the earlier discussion, it is, we have been carrying it at $5.4 million and if you did -- US. So when you see it in our backlog, it is sitting there at $5.4 million US and if you converted that at the current exchange rate, it's about $6 million US.

Great. When was that last updated?

We've carried that same number for a while. What's happened is, just by kind of happenstance, is the FX rates have changed. It's stayed reasonably closely in line, so we haven't updated the US dollar number since the beginning of the project for our US investors. But it was done at a time when the loonie and the dollar were at par.

Okay. I didn't know if material costs or anything had changed much, but -- And then, just one last one, as far as shipper contracts, is everything set there? Is there any deadlines where things go past certain time frames that that could be changed or anything like that?

To be clear on the earlier question, costs have changed. Costs have changed and what we're in the process of doing now, have increased and is communicating that final cost estimate to shippers, which we expect to have prepared and delivered to them in early February. That's the current thinking. And there's a 30-day period of shipper review where they examine the underlying costs.

Because once that cost is set, that is the investment. That is what we earn on, so there will be a review process over 30 subsequent days after we give them the final cost estimate.

Great. And all the shippers are fully committed. Are there any kind of drop-dead dates where contracts would reopen or anything like that?

If the costs exceed a certain level, then there is an opportunity for customers to reconsider their position and turn their capacity back. But as I said at the beginning, there is enough interest from current shippers potentially in expanding their position as well as from other potential customers who are not currently shippers wanting to come in, that we remain very confident that capacity gets placed at the level it is today.

That makes a lot of sense. I would expect there to be a very high demand. And then just one last one, if I could. As far as, it seems like we are starting to see the makings of some industry consolidation out there, kind of smaller players getting pulled in in GP, LP consolidation continuing to pick up pace after you guys.

I'm just wondering how you see Kinder Morgan playing within that context going forward and whether that could be an opportunity to expedite delevering if you could do in all equity deal there?

We continue to look in that market and continue to look for those opportunities. We do and implied in your question, we are looking at DCF accretion, but we are also looking at leverage improvement, as well. That narrows the field, frankly. That narrows the field. But we continue to look actively in that market for opportunities.

Great. That's it for me. Thank you very much.

John Edwards, Credit Suisse.

John, how are you doing?

Doing good, rich. And congrats on the approvals on Transmountain.

Thank you. We think they are really significant.

Yes. Just a couple of clarifications. Just can you share with us or remind us how much has been spent on Transmountain development to date? And then in terms of the cost overruns, or if there is cost overruns, it sounds like the way things are structured with the shippers that they would, in terms of what they would pay on the shipping cost, they in effect, bear a portion or all, or maybe if you can share if there is any cost overruns, how that works?

Okay. So, starting with the first question, it is roughly CAD600 million gross and so there is also, remember we have part of our development costs are covered, it is over a 10-year period, but they are covered under our, what we call our firm 50 dock charges.

So we, years ago, we signed up shippers to give them access to firm space across our existing West Ridge dock and those proceeds go towards the defraying of development costs, and over the life of that, those charges, it's about CAD255 million. So you have to net that off. Those don't all come in the same time that we are doing the development. As I said, some of them come over overtime, but it is CAD600 million roughly gross and then net the firm 50 off of that.

On how the cost structure works, once the final cost estimate is delivered and we proceed toward project execution, there are two categories of costs. There is a set of uncapped costs and those are costs where if there is an overrun then that overrun would be to the project's account. Okay? Then there is a set of uncapped costs and those overruns, if there are any, those overruns would be added to the investment in the project and we would earn on those.

So it's not just flow-through, it becomes part of the investment and we earn on it. And those tend to be, as you'd expect, the most predictable elements of the build. They apply to things like steel costs, which are not going to be an issue, aboriginal consultation, ultimate accommodation and consultation of the accommodation costs and two particular parts of the build that are likely to be difficult and unpredictable when we are forecasting it.

Having said all that, what we are delivering to shippers will be a P95. We feel like, with all the work that has been done, we have narrowed the estimate, both on capped and uncapped costs, to a very narrow level. And at a 95% probability, meaning a 95% probability that we come in at or under the number that we deliver. Okay? So we think we have done a lot of work to make sure we have our arms around what the cost risks are there and are taking them into account in the final cost estimate.

Okay and just to help us out, in about what percentage is capped and what percentage is uncapped?

I don't have that offhand. The majority is going to be capped. But I don't have the specific percentage of the uncapped portion, but the majority, the substantial majority, of the costs will be in the capped category.

Okay. That's really helpful.

So it sounds like there's some kind of a sharing on the uncapped and then the capped is basically predictable costs that are locked in. So that is the idea, correct?

Well, yes. And on the uncapped, to be clear on that too, there is a possibility, since these are the more unpredictable category of costs, that they come in lower. And if they come in lower, the shippers get the benefit of that lower cost, as well.

It just rolls into the totals, John. It comes in higher on the uncapped portion, the total is increased so it come in lower, the total is decreased.

Okay, that makes sense. And then just on the schedule, I think the last schedule you shared with us was fourth-quarter 2019 or end of 2019 startup. Is that factoring in any expected litigation? How should we think about that?

Yes, we still view the project in-service as the end of 2019, so really think of 2020 as being when the revenue starts to arrive. And the schedule we are building takes into account what we think we are going to encounter, including the need to deal with litigation as we proceed.

Okay, great. And then the other thing I just wanted to touch on briefly was just every now and again, we hear these rumors flying around about the sale of the KMI EMP business. You had some discussion last year. It sounds like we are hearing some rumors fly again. We've always thought about it, that you would sell down if it could be effectively balance sheet accretive. Otherwise you wouldn't do it. Any other comments you could share with us on that, in that regard?

We don't comment on that kind of transaction activity, but I can tell you what we, the same things we talked about, I think, last quarter and what we've talked about in conferences in between, which is that we like that business. We get good returns on that business. We built a particular proficiency in that business in the EOR part of it.

The midstream part of it, the source and transportation part of it we integrated forward into EOR because we have got a scarce resource and that is CO2, and that resource is essential to getting certain barrels of oil out of the ground and we figured out how to do it. So we're happy to have that business. We are a shareholder-directed Company and we entertain, in any context really, something that will give us the opportunity to increase shareholder value, including the disposition of an asset that we own, as we have shown through this year.

But again, this is a business that we like. We don't have to do anything with it. The considerations around it in addition to the ones that you mentioned, John, have to do with if you did a disposition, and likely it would be DCF dilutive, and as the multiple uplift that you get on the remaining cash flows because they're viewed as more secure, enough so that at the day following, your investors are better off. And so that is a very important constraint, as well.

Okay. That's great. That's it for me. Thanks so much.

Thank you, John.

Tom Abrams, Morgan Stanley.

Thanks a lot. A couple segment questions. One is back on CO2. Is the 8% decline something that is, given your current spending and projects timing, is that 8% something we should assume for the next few quarters, or is it something that accelerates or even declines?

The way we invest in that business is not based on a decline rate or offsetting a decline rate or holding a decline rate or reversing it. It is really based on individual projects and whether the incremental oil that is produced for that capital is going to pay us a handsome enough return for us to make that investment.

So that is the way we do it and we don't plan for it, can't forecast for you a targeted decline rate or a targeted level of production. We address the project opportunities as they come forward and fund the ones that make economic sense.

And that being said, we will go through the 2017 budget next week and I think you will see in there that 2017 production is relatively flat versus 2016. And then to answer the question that was asked earlier about the CapEx for the fourth quarter on CO2, $73 million.

Thanks for that. The other question I had left was on the natural gas pipeline segment. Just trying to understand a lot of moving parts there. But if you took SNG out of both years or both fourth quarters, what would be the comparison?

If you take SNG out of both fourth quarters?

Yes. My impression is it is partly in 2015, but below somewhere in 2016. Just wanted to clarify the change, the rate of change there.

In other words, you want a number that reflects SNG, even though SNG wasn't joint ventured until September of this year, what would be the number Q4 of 2015 to Q4 2016 if SNG were out of both quarters?

Correct. Just what the underlying is doing.

The underlying business in SNG is relatively flat.

Okay.

SNG's underlying business, to make that clear. Year-to-date, I think the sale probably has an impact on the segment. Let me make sure that's clear. On the segment versus our plan of a little over $100 million. Now net to the Company, the impact is much less because you are getting, there is a piece of the G&A that goes away, there is a piece of the sustaining capital that goes away, and --

Interest.

And you have substantial reduction in interest because we use the proceeds to pay down debt.

Great. All right. Well, look forward to seeing you next week. Thanks a lot.

Sunil Sibal, Seaport Global Security.

Hello, good afternoon, guys, and congratulations on hitting the Transmountain milestones. Most of my questions have been hit, but just one clarification. When you look at the natural gas line segment, it seems like TGB and NGPL kind of had a good uptick year-over-year while other segments were probably -- other pipelines were pretty flattish. I was wondering if you could talk about what kind of upticks you are seeing in GPL and the TGB pipelines and flows or cash contributions?

Project driven, I would think, largely.

Project driven on TGB, but if you think about the prospects for those systems, just looking at the underlying fundamentals of the flows, et cetera, TGB continues to be a system that grows in value. The return of growth in Marcellus and Utica will just drive that further. It's participating in Mexico market demand expansion.

It's participating in LNG market expansion and it's participating in the power sector and it has had record power days, I think, this year, Tom, if I remember right. Same thing with SNG, very strong, and GPL, and GPL is also benefiting from volumes coming in on Rex West. Well, that is a Marcellus/Utica phenomenon as well.

And then pull on the downside from Sabine Pass, on the bottom of the system, from Sabine Pass and some incremental power demand and growth into Mexico. So all three of those systems, I think, are doing well, have good underlying fundamentals.

Any update on the re-contracting for some of the contractors that are rolling off on NGPL?

Contracts rolling off on NGPL? Generally, the re-contracting has gone well (multiple speakers).

Gone well. Some of our bigger customers, we actually have long-term commitments, as long as 10 years. But the regular tenor on some the more traditional LDC customers are every three years and we are still holding at or even better rates in some instances than we've seen in the past. And there seems to be good interest in the projects that we are working on NGPL as well. So I think the prospects are very good for all the reasons that Steve just mentioned as far as the drivers.

Okay thanks, guys.

All right, thank you. Speakers, as of this time, we do not have any more questions in the queue.

Okay. Thank you very much. We appreciate you all sticking with us for a pretty long call and have a good evening.

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