金德摩根 (KMI) 2017 Q2 法說會逐字稿

Welcome to the quarterly earnings conference call. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. You may begin.

Okay. Thank you, Natalie, and welcome to the Kinder Morgan quarterly analyst call.

Before we begin, as usual, I'd like to remind you that today's earnings releases and this call include forward-looking and financial outlook statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities Exchange Act of 1934 and applicable Canadian provincial and territorial securities laws as well as certain non-GAAP financial measures.

Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking and financial statements and use of non-GAAP financial measures set forth at the end of our earnings releases as well as review our latest filings with the SEC and the Canadian Provincial and Territorial Securities Commission for a list of important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking and financial outlook statements.

Let me begin the call by saying that at the end of 2015, when we made a very difficult decision to reduce our dividend for the first and only time in KMI's history, we said we would work hard to strengthen our balance sheet and fund our growth CapEx from our internally generated cash flow without having to issue equity or additional debt and that when we had made sufficient progress on those goals we would begin to return additional value to our shareholders through some combination of dividend increases and our stock repurchases. Since that time, we have reduced our debt by approximately $5.8 billion and funded all of our CapEx out of operating cash flow, while paying a dividend of $0.50 per share per year. Today, we're happy to announce multiple steps to return significant value to our shareholders. We plan to increase our dividend for 2018 by 60% from the current level of $0.50 per year to $0.80 per year beginning with the dividend payable for Q1 of 2018. We then expect to continue to increase the dividend by 25% per year for '19 and '20, resulting in a dividend of $1.19 and $1.25 in 2020. Additionally, our board today authorized a $2 billion share buyback program, also expected to begin in 2018. We intend to take these steps while continuing to strengthen our balance sheet by funding all our growth capital needs at KMI out of operating cash flow without need to issue equity or incur additional debt. We expect to maintain best-in-class coverage for our dividend, for example, about 2.5x coverage in '18 and 2x or better in '19 and '20.

To sum up, we intend to fund our growth CapEx needs at KMI from internally generated cash flow and return excess cash to our shareholders through a growing dividend and share repurchases.

And with that, I'll turn it over to Steve.

Okay. Well, that's the big announcement. I'm going to take you through KMI performance highlights and then turn it over to Kim Dang, KMI's CFO, to take you through the financials. Following that, I will update you on KML and turn it over to Dax Sanders, CFO of KML, to give you the KML financial update. And then we'll take your questions on both KMI and KML.

So starting with KMI. We had a good second quarter and a good first half of the year. Performance was a little better than planned for the quarter and the first half of the year. As we said on the first quarter call, we're calling that timing and expect to be essentially flat to plan for the year after adjusting for the impact of the IPO of 30% of all of our Canadian Pipelines and Terminals assets as a result of the IPO. Also, we have now completed the 2 key steps that we outlined at the beginning of the year to strengthen our balance sheet and put us in a position to return value to shareholders, as Rich told you. Number one, we completed the JV of our Elba Island Liquefaction project in the first quarter. That was consistent with our budget assumption. And in this quarter, we secured acceptable financing for our Trans Mountain expansion project. With those steps now complete, we project to end 2017 with a debt-to-EBITDA ratio of 5.2x versus the 5.4 we projected at the beginning of the year.

It's worth noting a couple of things from the KMI perspective on KML. By creating an entity with all of Kinder Morgan's existing Canadian assets and taking that entity public, we established a business that is broader than the expansion project. These assets include our existing Pipeline and Terminals asset networks in Canada, including what we believe is the best merchant terminal position in the Edmonton hub. The Edmonton position is a network with facilities interconnected with each other and with Trans Mountain and third-party pipelines. We continue to expand that network with our baseline terminal project, which I'll get into in the KML portion.

The Canadian Pipelines and Terminals businesses produced a little under $400 million of EBITDA Canadian in 2016. The strength of this business and its opportunity to grow further creates an entity that can raise its own capital for the $6.1 billion of remaining spend on the expansion. In fact, we closed shortly after the IPO on a construction credit facility that Dax is going to take you through in a bit.

So we were able to strengthen KMI's balance sheet using the IPO proceeds to pay down debt, secure an acceptable means of funding our largest expansion capital project, which will benefit both KMI and KML shareholders alike.

Now a few KMI business segment performance highlights for the quarter. First, the backlog currently stands at $12.2 billion. That's an increase from last quarter. We had new project additions in gas and CO2, which outpaced projects that were placed in service, primarily in the Terminal segment. We continue building out this backlog, which we expect will contribute significant EBITDA to the segments when complete. Overall project management performance has also been quite good, delivering results that are consistent with our investment decision. We are also, and I would say especially in natural gas, seeing additional opportunities on the horizon across multiple fronts whether its producer push projects out of the Permian, additional power plant connections, export needs to Mexico and LNG as well as storage opportunities.

In our Natural Gas segment, we saw transport volumes increase year-over-year Q2 to Q2 by 3%. Key contributors were Mexico exports, which were up 8% year-over-year; higher LNG exports coming off of our pipes; and partially offset by lower power demand.

On the other hand, our gas gathering volumes were down year-over-year by 12%. Gathered gas volumes were up in the Bakken, down in both Eagle Ford and Haynesville. And overall, we're seeing volumes flattening to slightly recovering in our key basins. Recall that our gas segment is 55% of our segment earnings before DD&A, and Gathering and Processing is only 18% of that number.

We signed an additional 280 a day of long-term firm transport agreements in the quarter, bringing the year-to-date increment to 680 a day and our total sign up of the last 3.5 years to 8.7 Bcf a day, of which 2.4 Bcf was existing previously unsold capacity, showing again that the rise of natural gas production and demand creates expansion opportunities but also adds value to the existing network.

We continue to make good progress on our 1.8 Bcf a day Gulf Coast Express proposed project, which goes from the Permian to a connection at Agua Dulce in South Texas with our existing Texas Intrastate System. We're not putting it in our backlog at this point, but we've had -- we've got a good offering to the market, and we're progressing our commercial discussions toward firm commitments. We also continue to see interest in our Permian capacity on EPNG, which has some very economic that is low-capital expansion opportunities to get more gas to Waha.

The overall summary on gas is that we continue to expect long-term benefit in this sector from increased LNG and Mexico exports, power and industrial demand, and those should continue to drive the demand for the Transportation and Storage Infrastructure that we own.

Shifting over to our Products Pipelines segment. Refined products volumes, NGLs and crude and condensate transport volumes were all up year-over-year. The benefits of these higher volumes were offset by some settlements, a project write-off implantation and the sale of our interest in Parkway Pipeline last year, all of which weigh in to leave us slightly down year-over-year on a segment earnings before DD&A basis.

Getting back to the volumes. Refined products volumes were up 2.2% year-over-year versus an EIA overall market growth number for April and May of 1.5%. NGL volumes are up 14% year-over-year. And in contrast to our gathered volumes, our crude and condensate transport volumes are up year-over-year on our Eagle Ford that is our KMCC asset and our Bakken pipes. Bakken performance is due in part to the delay of DAPL. The KMCC volumes I think are an indicator of the great connectivity and superior location of that system.

We've made excellent progress during the quarter on our Utopia pipeline project. Recall that we received an adverse decision on eminent domain in one of the Ohio Circuit Courts last year. Our team did an excellent job of acquiring the necessary right-of-way, including reroutes and the purchase of an existing pipeline. And so in the quarter, we finished acquiring all of the required right-of-way, and we are now about 1/3 complete on pipeline construction and on target for our scheduled January 1, 2018, in service. Really fine work and fine recovery by the project team on Utopia and, again, scheduled to be on time on January 1, 2018.

In our Terminals business. The segment earnings before DD&A were up 2% versus Q2 last year, primarily as a result of contributions from projects coming online in our liquids business, which makes up about 80% of the segment. Our leasable capacity in liquids was up 2%. Our utilization remains very strong at 95%. Both volumes were also up year-over-year, 4.5% -- 4.7%, which was led by performance in petcoke and steel.

Our commercial team wisely remained aggressive in keeping all of our Jones Act vessels under charter and discounting as necessary to do so. And we have all of those vessels under charter today and took delivery of 2 during the quarter, one at the very end of the previous quarter and one during the quarter.

In CO2, we experienced a lower effective oil price compared to last year and lower oil volumes. But we aren't plan -- we are on plan in this segment. We experienced record CO2 production in April and higher volumes year-over-year for the quarter of Q2 this year to Q2 last year. We're also seeing promising results from our recent pattern activation program, SACROC, and from our Tall Cotton residual oil zone development, which is now producing over 2,000 barrels a day.

So overall, a strong quarter, strong financial performance, continued progress on our project execution, completion of a key milestone in our effort to strengthen our balance sheet and position us to return value to shareholders.

And with that, I'll turn it over to Kim Dang.

Okay. Thanks, Steve. We're declaring a dividend today of $0.125 per share, consistent with our budget. On the performance, let me hit the high point first, and then I'll take you through the details. I'll start with the GAAP numbers, and then I'll move to DCF, which is the way that we look at and think about the numbers and performance.

Earnings per share and adjusted earnings per share are both flat versus the second quarter of 2016. DCF per share, which is the primary way we judge our performance, is $0.01 lower versus the second quarter of 2016 or approximately $28 million, primarily attributable to the sale of 50% of SNG, the KML IPO transaction in which we sold a 30% interest in our Canadian assets as well as higher sustaining CapEx and cash taxes.

For the second quarter and year-to-date, DCF per share is ahead of our budget; but that's largely timing, with sustaining CapEx being the largest contributor. For the full year, after the impact of the KML IPO, we would expect DCF to be on budget. Taking the impact of the KML IPO into account, we expect DCF to be less than 1% below budget.

On the balance sheet, we ended the quarter at 5.1x debt-to-EBITDA, down from 5.3 at the end of last year and at the end of the first quarter as a result of paying down debt with the approximately $1.25 billion in net proceeds that we received from the KML IPO. Our debt balance for the second quarter came in lower than what we've expected, primarily because some expansion CapEx got shifted from the first half of the year to the second half of the year. Therefore, we still expect to end the year at 5.2x, as we previously communicated.

On the expansion CapEx front, we're forecasting $3.1 billion for the year. That is down from our budget of $3.2 billion. The $3.1 billion does not include any KML CapEx including spending on Trans Mountain from June forward, as we expect KML to be a self-funding entity. Because of the equity that KMI has contributed to fund the Trans Mountain project prior to the IPO, KML has a capacity to draw on its construction facility to fund its CapEx for the balance of the year.

If you take a broader view on KM -- the Trans Mountain expansion has $6.1 billion in remaining spend. It's got a $4 billion revolver, and so there's about a $2.1 billion GAAP. And we expect KML to be able to finance the balance itself, which Dax will take you through when he walks through KML.

Now for some details. Looking at the preliminary GAAP income statement, you will see that revenues are up by 7% in the quarter; but cost of sales is up by more, resulting in $114 million reduction in gross margin, a similar phenomenon to what we saw in the first quarter of this year. The sale of 50% interest in SNG accounts for $112 million or 98% of this bearing. Therefore, if you exclude the sale, gross margin would be essentially flat, which is pretty consistent with how we view our overall results for the quarter.

As I said earlier, both earnings per share and adjusted earnings per share were flat for the quarter versus the comparable prior period. Net income available to common shareholders in the quarter was $337 million or $0.15 per share versus $333 million, also $0.15 per share in the second quarter of 2016. Net income available to common shareholders before certain items or adjusted earnings were $304 million or $0.14 per share versus the adjusted number in 2016 of $322 million, also $0.14 per share.

Certain items in the first quarter of this year were a benefit of $34 million. The most significant was a reserve relief on a litigation matter we settled. Certain items in the first quarter of 2016 were a net benefit of $8 million.

Now I'm going to turn to the second page of financials, which shows our DCF for the quarter and year-to-date and is reconciled to our GAAP numbers in the earnings release. As I've said earlier, DCF is the primary financial measure on which management judges its performance. We generated total DCF for the quarter of $1.022 billion versus $1.05 billion for the comparable period in 2016, down $28 million or 3%.

I'm looking at the breakdown of the quarter-to-quarter change. Segment earnings before DD&A and certain items is down $66 million. Natural gas is the largest driver, down $54 million. The SNG joint venture impact was approximately $73 million in the quarter. So absent the sale, the Natural Gas segment would be up slightly. Although this SNG transaction overall was dilutive to DCF, the segment impact of $73 million overstates this impact, as there are benefits reflected in other lines, with the primary benefit coming in interest expense, as we use the proceeds from that transaction to pay down debt.

The CO2 segment is down $8 million or 4%, primarily associated with lower oil production at SACROC, primarily as we reallocated capital to projects that had higher returns but longer lead times. The terminals and product variances in the quarter are small and largely offset. The Kinder Morgan Canada variance is also small.

G&A is a net benefit of $16 million quarter-to-quarter, primarily as a result of the SNG sale and lower franchise taxes. Interest expense is a benefit of $43 million in the quarter versus the second quarter of 2016 as a result of the SNG joint venture transaction and the KML IPO, as we used the entire net proceeds from both transactions to pay down debt.

Cash taxes and sustaining CapEx are higher by about $30 million versus the second quarter of last year, but we expected a budget of both cash taxes and sustaining CapEx to be higher than last year by even more than $30 million. So there is some timing on these items between the first half of the year and the second half of the year relative to our budget. Totaling those quarter-to-quarter variances, segment's down $66 million; G&A, a benefit of $16 million; interest, a benefit of $43 million; and cash and sustaining combined, increase of $30 million, results in a variance of $37 million.

The last piece of the variance relates to SNG. In our adjustments to convert net income to DCF, we add back JV DD&A and subtract out sustaining CapEx to more closely reflect the cash we expect to receive from our JV. Because SNG is a JV in the second quarter of 2017 versus a fully consolidated asset in the second quarter of 2016, there's approximately a $10 million benefit to JV DD&A between the 2 periods.

The net impact of KML for the period is buried in some of the line items I've discussed because it's small; it's less than about $5 million when taking into account the interest benefit.

DCF per share was $0.46 versus $0.47 for the first quarter of the prior year or down $0.01, all of which is associated with the DCF variance I just walked you through. The $0.46 per share results in over $740 million of excess distributable cash flow, above our $0.125 dividend for the quarter and $1.68 billion year-to-date. As I said earlier, for the quarter and year-to-date, we are ahead of our budget. But for the full year, we expect to be on our budget when you exclude the impact of the KML IPO.

The effect of the IPO will be seen primarily in 2 places; one, in net income attributable to noncontrolling interest, which will reflect an expense for the public 30% of net income, which will be somewhat offset by interest expense which will reflect the benefit, as we use the IPO proceeds to pay down debt. Including the impact of the KML IPO, we expect DCF to be less than 1% below budget.

And with that, I'll move to the balance sheet. We ended the quarter with net debt of $36.6 billion and net debt to adjusted EBITDA of 5.1x. Debt is down year-to-date $1.56 billion, and it is down in the quarter $1.24 billion.

To reconcile that for you. In the quarter, it's pretty easy. We're down $1.24 billion of debt, and the IPO proceeds were $1.25 billion. So essentially, everything else nets out. But to take you through some of the details, DCF was $1.022 billion, as I previously mentioned. Investments -- our investing program, expansion, CapEx and contributions to equity investment was a little over $875 million. We paid dividends of $280 million, and then we have working capital and other items of $129 million force of working capital, which was primarily associated with accrued interest, as most of our interest payments are made in the first and third quarters.

Year-to-date, we have reduced debt by $1.56 billion. And so to break that down for you, we generated DCF of $2.24 billion. We have $1.64 billion in investing activities between expansion CapEx and contributions to equity investments. We received $1.25 billion in IPO proceeds. We had a little over $450 million from asset sales and JV proceeds, primarily the Elba promote, our partner's catch up of this equity contribution and the sale of some of our noncore terminal.

We paid dividends of $560 million, and we have working capital and other items that were a use of capital of $178 million, which were a whole host of items but includes use of cash for inventory, primarily natural gas purchases; property tax payments, a lot of which occurred in the first quarter; debt issuance costs associated with the KML construction facility; and accrued interest.

So with that, I'll turn it back to Steve.

Okay. Now we're going to turn to KML. I'll give the update, and then -- and Dax will take you through the numbers and also a couple of key updates.

So just a reminder, KML consists of all of the Kinder Morgan Canadian Pipelines and Terminals assets. So those include our existing Trans Mountain Pipeline system, which runs [fault] and is the only outlet for Alberta crude to a world oil market price. It also includes, of course, the CAD 7.4 billion expansion to triple the capacity of that system. KML also includes the Puget Sound system, which takes oil from the Trans Mountain Pipeline and delivers it to Northwest Washington State refineries, a market that we would expect to grow over time. KML includes the Canadian portion of the Cochin system, which delivers condensate to Alberta for blending with the oil sands crude for transport. Crude comes down to the oil sands to our merchant terminal position in Edmonton, among other places, where it can move down Trans Mountain or third-party pipeline or through one of our joint venture crude-by-rail facilities. We've built our Edmonton position over the last 10 years and continue to expand it with our baseline terminal joint venture with Keyera, which is CAD 366 million investment to our share that's on time and on budget, with the first tanks coming online in January of 2018.

Finally, Vancouver Wharves, our multicommodity bulk terminal in Vancouver harbor and the gateway terminal for mineral concentrates both coming into and out of Western Canada, is also part of KML.

So in all, KML is comprised of 2 strong existing business platforms that are integral to fulfilling the transportation blending and storage needs of producers and refiners. It has substantial upside associated with Trans Mountain expansion as well as other potential expansion.

On the Trans Mountain project, I'll remind you that in Q1 we reached a significant milestone. We increased our cost estimate above the contractual cap. The cap was CAD 6.8 billion, and our revised estimate is CAD 7.42 billion. That gave our shippers the right to turn back capacity. At the investor conference in January, we expressed our confidence in the market need for the project. And in fact when all is said and done, all 708,000 barrels remain under long-term contract but now with the increased tolls, which include return on the additional capital we'll spend as well. We ended up with only 3% of the barrels turned back, and those were taken up in an open season. The contracts are predominantly 20 years, with one 15-year contract. So we have essentially reconfirmed the value and need for the project with a 2017 lineup of shipper needs based on 2017 market conditions, including oil sands condition.

Also, recall that we have built in protections for the cost that are more difficult for us to estimate and control on the project. These uncapped costs, associated with among other things the most difficult mountain and difficult urban portions of the build, if higher than shown in our cost estimates results in an adjustment to our total, which includes not only recovery of the cost but also the project return on those costs incurred. Now by the same token, reduced costs flow through to the benefit our shippers, and our shippers benefit from the fact that other portions of our costs are capped, and we would absorb the overrun there, if any. We also received our environmental approval for British Columbia earlier in the year and, of course, our federal government approval finding that the project is in the public interest of Canada.

So in the quarter, we made our final investment decision approving the project. We made a public offering that included all of Kinder Morgan's Canadian assets, and we secured financing. As we are moving into project execution, we're finalizing rates with contractors. We're ordering materials readying for construction to start in September. And we're doing that with substantial First Nations support, support from the federal government on a project of vital national interest, support from the Alberta government and with our BC environmental order in hand and with significant financing sources already secured.

And with that, I'll turn it over to Dax.

Thanks, Steve. Before I get into the results and outlook, I want to highlight a couple of occurrences on the bank capital mortgage front.

First, we received our initial ratings from the agencies. And consistent with our expectation, we received a rating of BBB from S&P and BBB high from DBRS. On the financing front, as Steve mentioned, we closed on a financing package that consist of a $4 million -- $4 billion base facility, a $1 billion contingent facility and a $500 million working capital facility, all of which positions us well to access a significant portion of the capital we need to build the Trans Mountain project, including accessing the Canadian pref market, as we discussed on the roadshow.

As I move into a review the results, I want to preface my comments with a caveat that while I will be offering quarter-over-quarter comparisons those comparisons are of limited value at this point given that we are reporting a quarter where KML was owned by the public for part of the quarter and will be compared to a quarter where it was wholly owned by KMI; and during those periods prior to the IPO, there were shareholder loans in place that generated significant FX, most of which is unrealized; interest and other items not reflective of the true earnings power of KML. Therefore, we would ask you to focus on the outlook for 2017, which you will see is consistent with what we discussed on the roadshow. Quarter-over-quarter variances will mean more over time. And obviously, we don't have a published budget for KML as a standalone company. But starting with our budget cycle this year, we will publish one, just as KMI does.

Now moving to the results and outlook for 2017. Today, we're announcing that the KML board has declared a dividend for the second quarter and an inaugural dividend for KML of $0.571 per restricted voting share, which corresponds to the pro rata percentage of the $0.65 annualized we suggested on the roadshow, adjusted for the 32 days in the second quarter that KML was public.

With respect to performance, and as Kim did with KMI, I'm going to walk through some summary items and then will provide incremental details starting with the GAAP numbers and moving on to DCF, which is the metric we believe is most reflective of performance.

With respect to earnings and net income. Earnings per restricted voting share is $0.11 for the quarter, which is derived from $25 million of net income, which is down from approximately $52 million of net income for the same quarter in 2016. Adjusted earnings, which adjust for certain items, were $36 million compared to $46 million for the same quarter in 2016.

With respect to DCF. DCF per restricted voting share was $0.083 for the quarter, which is derived from total DCF for the quarter of approximately $79 million versus $86 million for the comparable period in 2016, down $7 million or approximately 8%. That provides coverage of approximately $2.8 million, a reflective payout ratio of approximately 69%, again consistent with what we talked about on the roadshow.

Now moving to the details. Looking at the preliminary GAAP income statement, I want to point out the unusual item that is driving the almost $27 million decrease. FX moved from a gain of $5.8 million to a loss of $16 million. That $21.8 million swing was mostly related to the revaluation of the intercompany loans between KMI and KML that were repaid at the consummation of the IPO, again consistent with the message on the roadshow. And the items that drove $18.5 million of that $21.8 million were classified as a certain item. The remaining $3.3 million of the swing, not attributable to certain items and included in the variances for net income, EBITDA and DCF, was largely attributable to the settlement of intercompany AR and AP between KMI and KML and the revaluation of U.S. dollar bank accounts at KML. Going forward, while there may be some unrealized FX associated with intercompany AR and AP, now that KML is a stand-alone public company, those items will be settled on a monthly basis, and unrealized FX should be much less.

Now let's turn to the second page of the financials, which shows our DCF and is reconciled to our GAAP numbers in the earnings state -- earnings release. Segment EBITDA before certain items is down $10 million compared to Q2 2016, with the pipeline segment down approximately $11 million and the terminals segment up about $1 million. The largest pieces in the pipeline segment were founding on integrity spend at Cochin, OpEx at Trans Mountain and lower revenue on Puget. At the terminals segment, we had higher Vancouver work throughput and revenue offset by higher O&M at Vancouver Wharves. G&A is essentially flat. Interest cost is $4.4 million lower versus Q2 2016, primarily as a result of the repayment of the intercompany loans and greater capitalized interest associated with the project. Total certain items for the quarter were $10.5 million [tax affected], with the largest piece being the intercompany FX that I mentioned. The remaining $1.3 million is related to certain JV IPO costs that were booked to the Canadian business prior to the IPO. Both cash taxes and sustaining capital were essentially flat compared to the same quarter in 2016.

Now moving on to some specifics for the full year 2017. We expect EBITDA for the full year 2017, including pre and post IPO periods, to be just under $400 million. And we expect DCF to come in at approximately $320 million. Both of those are consistent with the $395 million and $318 million of 2016 EBITDA and DCF, respectively, that we highlighted during the IPO.

One item to highlight. You will recall that we recognized equity ADC as part of both EBITDA and DCF, which is a product of how much CapEx we spent on the project. So DCF and -- EBITDA and DCF will be affected by the amount and timing of spend on the project.

And with that, I'll move on to a few short comments on the balance sheet. From the end of the year to June 30, cash increased approximately $35 million, which is mainly due to withdraw on the construction debt/working capital facilities that I mentioned. Other assets increased $290 million, which is primarily attributable to CapEx spending. On the right-hand side of the balance sheet, debt decreased by almost $1.2 billion, and that was a result of paying off the intercompany loans. As of June 30, KML has total debt of $189 million, which is attributable to $190 million drawn on the construction and working capital facilities.

And with that, I'll turn it back to Steve.

Okay. We're ready to take questions on both KMI and KML.

Okay. Natalie, if you'll go ahead, we will take questions now.

(Operator Instructions) Our first question comes from Jean Ann Salisbury from Bernstein.

So now with -- the IPO is now behind you, I was wondering if you could give a little more color on the concurrent processes that you are wondering -- oh sorry, that you are running and how you decided on the IPO? And anything in hindsight that you would've done differently or maybe just communicated differently?

No. We were I think very clear in that we were pursuing both projects simultaneously, and we were maintaining a certain amount of competitive tension as a result, so we fully prosecuted both processes simultaneously. I think the considerations around the IPO that were attractive were project governance. I mean, it's -- you can only have one driver of the car when you're executing on a project of this magnitude. Certainly, we viewed the value proposition as good. We thought that by combining all of our Canadian assets into one entity we were creating a very attractive prospect for the market and had the ability to self-fund the capital needs of the entity going forward. So overall, it made sense for us to do the IPO, and that's the result we ended with.

That makes sense. And could you just give a little more color on why you decided to do the split between the share buybacks and the dividend raise? I know you had many trajectories that you could've followed.

Yes. So we think that we're generating cash that's in excess, that's surplus. So it's in excess of our needs for our capital projects while we're building them out, and so we see the room to return essentially all of that excess cash to shareholders. And we chose a significant dividend increase. I think that's a very positive for shareholders. But also a share repurchase, which is kind of unique in our sector. That gives us the ability to be opportunistic when we see an opportunity to purchase -- to return value to shareholders through a share repurchase rather than locking it all in on the dividend increase. So we think it's a good mix of ways to return capital to shareholders, return value to shareholders; substantially growing dividends, still very well covered -- extremely well covered, as Rich pointed out, with a share buyback program as a backstop, which gives us some flexibility to take advantage of opportunities.

And certainly, I would add that opportunistic purchases of shares is certainly something we would be interested in, particularly since right now our share of the DCF ratio is about 5 turns below our peer group average. So we think it's mispriced in that sense.

Our next question comes from Brandon Blossman from Tudor, Pickering, Holt & Co.

Sounds like a pretty good day on your side of -- on the phone.

We think so.

Yes. So I guess, let's start with KML. A decent equity currency there. Clearly, there's a little bit of equity funding to come. But maybe it's too early and not a fair question. But where do you see that entity ultimately going to in terms of public float size? What kind of strategic things could you do with that particular entity over time?

Yes. So first, in terms of the public, we do not intend as KMI to sell down additional shares from our interest, but the entity may do primary offerings to help raise the capital needed to fund its expansion. We also talked about on the road that it is a good currency, and there are opportunities on the M&A front that we would like to consider, and we will do that. Those are very hard to predict or to call or forecast, as you know. But we think there are some good opportunities out there, and we like a lot of the assets that we see in Western Canada. So I think it is a good currency. We think it'll help us raise capital and also maybe an acquisition currency.

Okay. Nice answer. More detailed question. Gulf Coast Express, what's the time line to getting that into the backlog as you see it today?

Yes. So as I said, we're trying to ripen some very strong interest into firm agreements. We think that, that is a matter of weeks to months in order to get that done. Again, we think we're making a very good offering to the market out there. We provide good takeaway capacity from Waha into South Texas where it connects with the intra -- our intrastate system, which we're very proud of. It reaches all the key markets that I think producers will be looking for takeaway too. Houston Ship Channel is now a premium market in the gas market, and that's driven by the fact that we've got LNG, POWER-GEN, pet chem development and Mexico demand that pulls very hard on our system. And so we think we have a very fine offering, and there is a strong degree of interest in it. But we're not counting it until we got them all in.

Our next question comes from Shneur Gershuni from UBS.

Just a couple of quick follow-up questions. Just for starting off, with Jean's question about the buyback versus the dividend. I guess, kind of -- I was wondering how much did the current stock price in your current -- on multiple relative to peers play into the decision to shoot for a buyback. And then I was wondering if you can comment about the duration or the expectation of how long it will take you to execute the buyback. Is that something we should think as ratably over 3 years or something that you'd like to achieve sooner than that?

I think, first of all, what we've given you is an outline of the future for the time period '18, '19 and '20. So I think you can expect that over those 3 years, obviously, we will be opportunistic in the way that we utilize those funds for stock repurchases. But we think this is a very strong combination of having a dividend increase that is substantial, 60% next year and 25% for 2 years after that, together with some firepower reserves for opportunistically buying back our own stock, while at the same time funding all of our expansion CapEx with internally generated funds. So it's -- and that really does 2 things. It keeps a very nice ratio of coverage of the dividend, which I think is important. And secondly, it continually improves the balance sheet because we are using our own internally generated funds to produce assets that will generate more EBITDA. So I think it's a win-win all the way around the horn, and that's our reasoning process.

Okay. Good answer. And as a follow-up question, with respect to Gulf Coast Express, I know there was a lot of interest in the open season. And from your prepared comments, 2019 sort of seems to be the target. Do you sense if that can potentially be brought up sooner than that just given the level of interest? And any sense on how much would it cost? Is there kind of like an estimate per mile that we should be thinking about?

We are in a competitive situation, and we're not giving you our cost estimate for reasons I'm sure you understand. I think -- look, producer timing is a little bit different. It varies from one to another, and there are some shippers who are more in a hurry than others. And because we're talking about a Texas Intrastate build, not a FERC certificate build, we may be able to accommodate earlier in-service dates for those customers who are in a bigger hurry, at least getting them to some market outlets. And so we're definitely in discussions about how we can go about doing that. And having it as a Texas Intrastate project gives us the flexibility to do that, that we wouldn't have in an intrastate natural gas pipeline project.

Okay. Just 2 little housekeeping questions on TMX. Is there any sign-offs you need from BC to keep the construction date on schedule? And do you have the CO2 spend for the quarter?

You want the CO2 spend first?

Sure. CO2 spend for the quarter was $118 million including our overhead allocation.

Okay. And Ian Anderson, President of KML, is here, and he can answer your question on BC.

Yes. On BC, as you know, we've got our primary environmental certificate for BC. We got it earlier this year. And we continue to need a good number of local permits from British Columbia and Alberta for that matter as they relate to crossings, road crossings, utility access, crown land, et cetera. And those permits are continuing to be advanced and filed, and work continues on them with British Columbia and with Alberta. In line with our construction schedule, it'll have us commencing in September.

Our next question comes from Ted Durbin from Goldman Sachs.

Just following up on that last question. I guess, we do have a new government, and it does seem that they're opposed, it sounds like, to TMX expansion. I guess, how are you going to navigate some of the objections that had been brought up by this new government? What might -- roadblocks or obstacles might we need to watch for as we move forward into construction?

Yes, Ted. I mean, as I said, the permit process is ongoing. It's continuing to progress, and we feel comfortable with that in line with our construction plans. I'm not going to speculate on what an NEB government might do with British Columbia at this stage in order to advance their views. We remain very confident in the federal decision that we have and the jurisdiction the project has federally. I've worked cooperatively with several provincial and federal government over the years the development of this project, and I want to do the same with Premier Horgan's government. I do look forward to talking to him soon and updating him on the project and our ongoing commitments to engage with communities and First Nations to advance a project that's in the national interest. So I think we'll just wait and see what Premier Horgan wants to do, and I look forward to his call.

Okay. Great. And I can come back to the buyback and not just buyback versus dividend but buyback versus, let's call it, organic growth. I guess, would you be buying back shares now given the choices of using your capital there versus sanctioning a new project at, let's just say, the average build multiple maybe a 7x build multiple you have in backlog right now? How do you think about that choice?

I mean, we think about in terms of the return for the capital that we're deploying. And we think that at the current stock price that is an attractive investment opportunity for us. We have a significant build-out, which we've already accounted for in our backlog in determining what the surplus cash was and have the flexibility to add additional projects to it. But the commitment we're making is that over and above the cash that we need in order to invest in capital projects, we're going to return essentially all of that to shareholders. It's going to be in the form of a dividend but also in the form of share buybacks, where those make sense.

Okay. Great. And then one last one that I just wanted to be clear on this because there's a mention of Kinder Morgan Canada being self-funding. Does that imply that you will no longer consolidate the debt that you'll incur to build TMX? Or is that still going to come through in terms of your debt-to-EBITDA calculation?

No, we will consolidate KML. We'll consolidate the EBITDA. We will consolidate the debt. And so that will be in our numbers. What I meant by self-funding is, I mean, we don't expect at this point that KMI will have to contribute equity into KML -- or buy KML's equities is another way to say it, in order to help KML fund the expansion project.

And just to be clear, those numbers starting with the $6.1 billion remaining funds necessary to construct were Canadian dollar numbers that Kim was mentioning, so I think she gave you, Ted, a pretty clear path showing how KML really will be self-funding.

Yes, no, makes total sense. I'll leave it at that.

Our next question comes from Darren Horowitz from Raymond James.

Congratulations on the announcements to enhance shareholder value. My first question, Steve, with regard to the Permian gas volumes at Waha in the South Texas, and y'all have done a good job outlining this. But can you just give us at least a rough sense of what you think the scale and cost of EPNG capacity expansions could look like? And more importantly, how you balance committing capacity on that line versus Gulf Coast Express? Obviously, if Gulf Coast Express, at least by our math, gets committed to 1.7 or 1.8 Bcf a day, it's going to be north of $1 billion project. That's going to have a different return threshold relative to what you can do on EPNG, again by our math. And then bigger picture, do you think logistically it's just a situation where the magnitude of downstream demand pull out of Waha could handle both the potential for 1.8 Bcf of commitments on Gulf Coast Express to Agua Dulce as well as scaling up EPNG?

Okay. Yes. Good questions. And so the key thing to understand is really the expansions on EPNG are really complementary to the Gulf Coast Express project. So -- but EPNG expansions are about getting gas to Waha. And just simplistically, I mean, what Gulf Coast Express is about is about getting gas away from Waha to the premium market that is now on -- now in East Texas. And so they're very complementary. In terms of the capital on EPNG, as I mentioned, we've got some fairly significant volume opportunities, one tranche of which is out in an open season right now, and then potentially a subsequent open season. And these number are like $500 million a day, Tom (sic) [Darren], on one of the open seasons. And there isn't a significant amount of capital that's required. So think of things like just being able to direct more gas to Waha by installing back pressure valves and additional meters and the like. Those things, those are relatively modest capital expenditures. And so very -- we think very attractive and, again, very complementary of what we can -- what we're trying to accomplish on Gulf Coast Express.

As a follow-up, Steve, how much of a competitive advantage is it of yours that you guys can help backstop not only the capacity on Gulf Coast Express but also some of these expansions, the complementary expansions on EPNG, just given the fact that you guys can buy 1-plus Bcf a day of gas across the system?

Yes, and we think it gives us an advantage, and it is on both ends of the system, as you point out. EPNG has a nice network in the Permian. And to the extent we can feed additional gas to Waha, which we believe we can at attractive returns for the small amount of capital that we would spend there, that's going to help -- that provides a good supply end for Gulf Coast Express. And then on the market end, as I mentioned, we think we've got an excellent Texas Intrastate system that's tied in with Mexico, LNG, pet chem demand, power demand, Houston Ship Channel industrial demand and utility demand in the greater Houston area. It's a great network with great connectivity. And so Agua Dulce used to be kind to be in the middle of the nowhere. You can get Agua Dulce and now you can get to Houston, which is all of a sudden really somewhere in terms of the value for the gas molecule.

Our next question comes from Craig Shere from Tuohy Brothers.

When you said about no borrowings to support growth CapEx, was that intended to mean through 2020?

Yes.

Okay. And is that -- do you think that's long-term positions? Or are you questioning the size of your growth CapEx?

No. Look, in developing our dividend policy for the next 3 years, which we are unveiling this afternoon, we looked at our expected capital needs from now through 2020 and obviously concluded that we had room to raise the dividends, still fund all of our capital needs internally and we use the excess to buy back shares. So that's all factored in, and we anticipate that we will continue to fund all of that growth capital with internally generated funds. I think we sometimes miss in all the noise what a huge, consistent generator of cash flow this company really is. And I think what we're talking about this afternoon really demonstrates that when you look at what we're talking about in terms of being able to maintain a significant capital expenditure budget and still increase the dividend and still have some money left over for buying back shares on an opportunistic basis.

So the other important aspect of that, Craig, is that it helps us continue with some natural delevering and continue to strengthen the balance sheet. So for the longer term, and we've been saying this for a while, what we are really aiming for is a strong investment-grade balance sheet, and we expect to see some natural continuing delevering there. It's not -- we're not done with that by growing returning -- growing return of value to our shareholders in the form of a growing and well-covered dividend and share repurchases, both of which we discussed today -- announced today, and then having the continued capacity to fund new capital investments. And so we think that we have struck this right in terms of what's going to create value for our shareholders overall.

Well, Steve, or maybe Kim, if you want to chime in, do you see at the end of this 3-year time frame getting to a point where you don't really need to worry about enhancing the balance sheet? Maybe it would be more opportune into the next decade to start funding half of growth CapEx for opportunities that's, let's say, 7x EBITDA with some low-cost debt?

Yes.

Yes.

Yes, absolutely.

Well, that sounds good. And then my last follow-up. All this kind of is predicated on the ability to sustain long-term new project origination. Can you comment in the quarter about the specifics about the gas pipes and CO2 projects originated? And can you opine about the recurring opportunities set to get to that $2.5 billion a year figure? Do you see the EPNG and Gulf Coast Express that you've talked about as kind of indicative of the opportunities in front of you and that there'll be more of that over time?

Yes. So narrowly, we have been constantly kind of reallocating capital and some -- adding some capital to CO2, where we see good returning projects. In gas, we had a project for an LDC customer as well as some gathering and processing CapEx that got added. And what that was offsetting was in the terminals business we had taken delivery of a ship that's now under charter -- that has been under a charter. And so those were the small pieces. But really, as I said, you -- particularly in gas, we're seeing opportunities, Gulf Coast Express is kind of the headline one. But we're seeing good opportunities that are being driven by power demand, the need to connect power plants, to some extent by gathering and processing but also Mexico and LNG. And so we're seeing the need -- I mean, natural gas demand and production is growing over the longer term, and that's going to drive some opportunities for us. And we have a great network, and so that means it doesn't have to be a greenfield expansion. It could be an expansion off of an existing -- in fact, it's better as an expansion off of an existing part of our network where we can potentially gain higher returns. So we're starting to see that, I would say particularly in the natural gas sector.

Our next question comes from Jeremy Tonet from JPMorgan.

Congratulations on the announcement. Just wanted to dig in a little bit more on the repurchases and just see, did you guys say what date that would start? And kind of any more color you're willing to provide around what level would make sense to repurchase? Sounds like the current level fits the bill.

Yes. The -- we announced this over the time frame of 2018 to 2020, and so that's the time period over which we're talking. As said earlier, we think our shares are a good investment at current prices, and we are looking to return essentially all of our cash in excess of capital needs to our shareholders. And with the dividend level we set today, with the capital opportunities we see today, we believe that's going to leave a substantial amount of cash that's available for share repurchase over the period. And then finally, we do expect to be opportunistic, which means we will be price sensitive in how we do our share price -- how we do our share repurchases. We haven't set a target price, and we're also not just going to be mechanically buying at the market. So those are broad parameters, I know, but I think we've given a pretty good set of guidance on a $2 billion share buyback program over this 3-year period.

Great. And I just wanted to follow up on the capital markets. It sounds like you guys don't need to access the equity or debt markets because surplus cash flow is going to cover all your growth CapEx. Would it be fair to say you'd only go to the market if something kind of upside materializes and you wanted the capital for that?

Yes, we -- what we're trying to do is position ourselves -- what we have done is position ourselves not to have to access to capital markets, whether that's debt or equity. It's hard to project whether there might be some set of circumstances in which that makes sense to do, but what we've done is make sure that we don't have to.

And we will be accessing debt markets to refinance maturing debt, but what we're talking about here is finance growth CapEx.

Great. And just one last one, just wanted to follow up on TMX time line extension. Just wanted to see when is the activity really going to tick up for the construction. Have you guys ordered the pipe yet? Or how should we think about the CapEx outlay that came out of there?

Yes. As far as the construction planning goes, we have initiated our first pipe order. We're finalizing our contracts with our general contractors, and I expect those to be finalized sometime between now and middle of August. Construction activity will commence in September according to plan. We won't have mechanical construction of the pipeline underway until early next year, and that was always the plan, and that's all in line with the completion date of the end of 2019.

Our next question comes from Chris Sighinolfi from Jefferies.

Just have a couple follow-ups on some of the topics already hit. I guess to start, the dividend and share repurchase questions. Obviously not trying to pin you to any firm commitment in terms of timing or cadence, but the KMI old dividend increases were nearly a quarterly event. So I'm just curious if you're planning to sort of resume that type of cadence or if it gets to like an annual step-up like a utility company, for example, might do?

It's a manual step-up. What we're saying is, and we said in the release that the increased risk is next year going $0.50 to $0.80. That will begin with the first quarter of next year. So in other words, the dividend that we pay for the first quarter of 2018 will be $0.20, and it will be flat for the year. And then again, we would anticipate taking that from $0.80 to $1 and then $1 to $1.25, and we would just flatten that out over the year.

Got it. Okay. Perfect. And then just I think I understand it but just want to clarify. In terms of the authorization, I mean, I guess I'm a little bit curious as to how the board determined the magnitude of the share repurchase authorization. It sounds like -- but I don't want to read in if it's not what you intended. Sounds like $2 billion is where the number that you could envision executing or exhausting between 2018 and 2020. Is that the right way to interpret that? Or was it just a nice round number that we could have out there?

Well, it is a nice round number, but you have [determined] it correctly. That's -- look, we did a lot of work, hundreds of hours Kim and her team with input from all of our business segments to develop this on a bottoms-up basis. And what we came out with, we stress test it, we looked at it from a lot of different vantage points. And this we thought was the optimum structure, and that's the number that came out in the wash. We'll see how all this plays out over those 3 years. But that's certainly our game plan, as we said, is to take the dividend up and have that amount of money left to buy back shares and, again, very importantly, continue to improve the balance sheet because we're funding our capital expenditures out of cash flow.

Okay. Two additional questions if I could. Just clarification on KML side. I get the point around, obviously, the consolidation. So Kim, just to clarify your comment about $3.1 billion of expansion CapEx. That was sort of the net to KMI portion, but what we should see represented on the cash flow statement is a consolidated figure over time?

That's right. And I think in our Qs, we put in a CapEx table in there, the CapEx that we're expecting for the year, and we're going to break it out between KMI and KML because we'll be consolidating KML so that you can see the total consolidated and you can see the KMI-only piece.

Okay. And then related to Steve's -- I think Steve you (inaudible) a question about KML's financing strategy. In the S-1, you guys were talking about maybe some preps and maybe some distribution recycling. I was just curious. I know you said you're not planning to sell down KMI's interest. But do you have any refined guidance as to what you're planning to do with the cash distributions on the KMI-owned portion? Does that get recycled at all? Or does that...

Yes.

Yes. On the KMI-owned piece, we'll probably do 25% of our distribution we would reinvest.

Okay. And do we just think about that then, Kim, as you effectively use that to buy additional equity but keep the cash on the balance sheet use up there to fund the program?

It's funding the expansion CapEx, yes.

Yes. Okay. And then just final question for me. The debt fair value adjustment figure came down precipitously in 2015. It's been hovering around $1.1 billion for the last couple of quarters. Just curious, as you go through the refinancing, as debt maturities come up and you place new debt to replace that, should we see that number continue to drift lower? Or any guidance as to how we can think about that might be helpful.

Well, the debt fair value number lives for a number of different reasons: one as interest rates move; and two, as our credit spreads move. And so if you can -- knowing where interest rates are going to go -- you have to know where interest rates are going to go and where our credit spreads are going to go to be able to predict what's going to happen with that over time. And so -- I mean, if you look at where we can finance a tenure right now, we can issue around 4%. And the maturities that are coming up in the near term are going to be at higher rates than that.

Our next question comes from Michael Blum from Wells Fargo.

I guess, first question is, you previously talked about a 5x target for leverage. Is that still the target? And if so, what do you think is the time line to achieve it now?

Sure. I think -- that is the target, and I think we've made substantial progress towards that target, which is why we feel comfortable with the dividend and share repurchase guidance that we're giving today. If you look at our debt balance at 9/30/2015, which was the end of the last quarter before we reduced the dividend, we paid down $5.8 billion -- over $5.8 billion in debt since that period of time. And so now, I think the deleveraging is going to come through 2 methods: one is EBITDA growth as these projects come on; and two, because we're funding our projects with 100% equity because we're funding it with the retained cash flow. And so we will continue to make progress towards the 5x, but it's probably -- it's going to be a little slower in reducing that leverage than we have been today because we are returning some value to shareholders at this point in time given that we have a little bit more flexibility with our balance sheet.

Okay. And then for your dividend guidance out to 2020, you gave some coverage targets as well. What are you assuming for growth capital as a run rate from 2018 to 2020 to sort of pay out that dividend, maintain the coverage, the buybacks, et cetera?

It varies by year. And so basically, we ran out the backlog and then we made some assumptions around what we thought opportunities would look like, so we just put in some unidentified capital in there. And to the extent that we've had high probability projects that weren't in the backlog, we would have included those as well. So we tried to take a holistic look at what we thought CapEx would look like going forward, not just running out the backlog.

Can you say what the kind of average annual is for the 3 years?

I don't remember what it was, Michael.

Our next question comes from Linda Ezergailis from TD Securities.

I appreciate the update on the Trans Mountain expansion permitting and construction time lines. I was just wondering if you could maybe also give us a sense of what might define the tempo of construction in terms of potentially any sort of gating factors tied to permitting or other considerations that might affect the pace of construction? Or what sort of slack you built in to account for some uncertainties?

Yes. I think, Linda, the way to think about it is that commencing this fall the bulk of the work is going to be preparation for major construction commencing next year, and that was always the plan. So the permit acquisition and the priority of permitting activities is built around that. So I think that you look at what do you need to do to prepare to construct and with things like clearing and terminal work and preparation of sites, et cetera. So that's the kind of activity that will likely be involved in this year commencing in September, with more of the heavy lifting occurring early next year.

And would you be able to perhaps stratify the remaining $6.1 billion cost between parts, labor and anything else?

I don't have that breakdown in front of me, Linda. Obviously, the bulk of the costs are labor cost. The bulk of those costs will be incurred in '18 and '19, with a peak sometime in later '18. But I don't have it stratified to any degree than that.

Yes. So I mean, I think this is -- if you look at it, the construction is still to come. So that's going to be construction equipment materials, all of those things. The amounts that would've been spent to this point would've been more around land acquisition and permitting costs and the like. So now the costs going forward are going to be more of construction and the materials equipment, construction including labor.

Our next question comes from Becca Followill from U.S. Capital Advisors.

Just following up on Michael's question. You're targeting, I think, 5.1x debt to EBITDA at the end of '17. The target is to get to 5x. If you're funding 100% of your capital needs with cash flow, that seems like that would take you well under or just slightly under the 5x going into 2018. So you would already be there. Then you'd have excess cash. So can you help me reconcile that with a buyback over a 3-year period and the target of 5x?

Yes. First of all, I think what we've said is were at 5.1x today at the end of the second quarter. And we would expect to end the year at 5.2x, but we ended the quarter on our debt balance a little bit lower than we were expecting because some of our expansion capital pushed to the second half of the year. So I think we're still on target to end of next year at 5.2x. And then...

End of '17.

At the end -- the end of '17 at 5.2x. Then next year on a fully consolidated basis we are going to be fund -- we're going to show the Trans Mountain revolver, the Trans Mountain construction facility in our numbers. And so we -- our debt-to-EBITDA numbers will be bearing the full load of the expansion CapEx, and so it will take some time. Even though we're funding all of our other CapEx with 100% equity, it will take some time to bring that down to 5.0.

Speakers, there are no questions in queue at this time.

Okay. Well, thank you very much everybody. We view this as a really important day at KMI, and we're glad you were here to ask your questions. Thank you.

Thank you, and that concludes today's conference. Thank you all for your participation. You may now disconnect.