金德摩根 (KMI) 2017 Q4 法說會逐字稿

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

Thank you, Sheila. Before we begin, as usual, I'd like to remind you that today's earnings releases by KMI and KML 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 outlook statements and use of non-GAAP financial measures set forth at the end of KMI's and KML's earnings releases and review our latest filings with the SEC and Canadian provincial and territorial securities commissions 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.

I'll be very brief in my remarks and then turn the floor over to Steve Kean, our CEO; and Kim Dang, our CFO.

The financial results we are reporting today for both the fourth quarter and full year 2017 demonstrate once again the strong cash flow generated by KMI. Equally importantly, we are living within that cash flow, paying our dividend which will increase this year by 60%, funding all of our expansion CapEx and returning additional value to our shareholders through our stock buyback program while continuing to improve our balance sheet, all with internally generated funds. To me, as the Chairman and the largest shareholder, this seems like a recipe for success, both now and for the foreseeable future.

Now notwithstanding that, let me add, notwithstanding that good performance, our world-class set of assets and the positive steps we have taken by improving our balance sheet and preparing to return additional funds to our shareholders through the dividend increase I mentioned, our stock continues to trade at a substantial discount to our peer group, and I certainly hope and expect that discrepancy to be overcome as we continue to meet our targets and return value to our shareholders.

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

All right. Thank you, Rich. So I'm going to update you on KMI performance highlights and then turn it over to Kim, as usual, to take you through the financials. And then after that, I'll update you on KML and then turn it over to Dax Sanders, CFO of KML, to give you the KML financial performance and financing updates. And then we'll take your questions on both KMI and KML.

Starting with KMI. We've been telling you each quarter this year that we had a good quarter and a good year-to-date. Above planned year-to-date, but it's all timing and it's going to shake out by the end of the year. Kim will break it down for you. But we're happy to tell you in this call that we finished 2017 very strong.

We also saw some improvements in market fundamentals and in the performance of our businesses, which I'll cover in a minute.

So here are a few highlights of 2017. First, we completed the 2 key steps that we outlined at the beginning of the year to strengthen our balance sheet and put us in position to return value to shareholders. We completed the JV of our Elba Island liquefaction project in the first quarter. That was done consistent with our budget assumptions. And in the second quarter, we secured acceptable financing for our Trans Mountain expansion project, creating a self-funding entity, KML, on the strength of all of our Canadian pipeline and terminal assets.

Second, we signed up 1.65 Bcf of long-term firm commitment on Gulf Coast Express, our joint venture with Targa and DCP. We did that in the fourth quarter and expect to sell the remaining 300 a day in the first quarter of this year. We believe there's very strong demand for the remaining capacity and we fully expect to put it to bed, having fully subscribed under long-term commitments. This is a great project connecting growing Permian gas production with our large pipeline network on the Texas Gulf Coast. That gas can then serve the growing Texas market as well as the growing Mexican and LNG export markets. This is a significant enhancement to our network and adds connectivity to a rapidly growing basin to supplement our Eagle Ford supply base.

All year long, our backlog has been stable at about $12 billion since our addition of new projects as offset projects going into service over the year. In 2017, we put in service just under $1.8 billion worth of projects. And our overall project performance proved quite good. In a recent look back -- and this is not just 2017, the prior years as well, in a recent look back at our transportation and storage expansion projects, we came out almost exactly where, actually slightly better, than originally expected in terms of a CapEx multiple of EBITDA. So we're getting the economic value for our expansions that we aimed for.

Operational performance was also very good as we operated safely, reliably and cost-effectively. We performed well during the most recent cold snap, with 3 of our largest gas networks hitting historical volume highs. And we performed well and recovered well in our gas, products and Terminals segments through Hurricane Harvey and its aftermath. On the cost side, we realized real cost savings, not just some deferrals, in maintenance capital expenditures. Our operations and our project management teams have a lot to be proud of for 2017.

We saw, and we're continuing to see, some nice volume trends. I'll compare fourth quarter of this year to the same quarter last year. First, on our Natural Gas business. Transport volumes were up 8% year-over-year. Sales volumes on our Texas system were up 4%. And crude and condensate gathered volumes were up 8%. While gas gathering -- gas gathered volumes were down 2% year-over-year, when we look at the sequential quarters, that's third quarter of 2017 to the fourth quarter, our gathered volumes are up in all 3 of our key basins: Eagle Ford; the Bakken; and the Haynesville.

The Haynesville in particular is an encouraging sign as the activity level and the operational effectiveness of our customers has been improving nicely. Our transportation network continues to benefit from higher export demand, both from LNG exports and exports to Mexico. We're now delivering 3 Bcf a day to Mexico, which is 70% of the total U.S. exports to Mexico.

Recently, we have also been seeing increasing storage values. Some of that has been driven by the impact of recent weather. But we also think there are some signs of perhaps a lasting improvement there.

In summary, growing U.S. gas supply and demand drives performance on our existing assets and creates growth opportunity. We signed up 2.3 Bcf of new, long-term firm capacity commitments in the fourth quarter, bringing the total for the year to just under 4 Bcf. And of that 4 Bcf for the year, 1.2 Bcf was existing previously unsold capacity. So it drives both the value of the existing network as well as expansion and growth opportunities.

Second in our Products Pipelines, we saw year-over-year increases in refined products, up 3.8% in the quarter year-over-year and 1.2% for the full year. That latter number compares to 0.5% for the EIA estimate of increase in demand for the whole U.S. year-over-year.

We also saw increases in our crude and condensate volumes of 1.7%. I'll make a bit of a cautionary note here. Our KMCC system serving the Eagle Ford was up year-over-year. It's well-connected and has been gaining in market share. It's a great system. But the Eagle Ford remains a challenged basin in terms of the transport capacity overhang out of that basin. So we're happy with the volumes but we remain very attentive to the competitive dynamics of that market and look to keep our pipe full. Overall, refined products, domestic consumption is on a slow growth trajectory. But refined products -- but our numbers have been a little bit higher than the domestic numbers overall. But refined products exports have continued to grow and we see that on our assets. One data point from our Houston ship channel refined product hub, we had a record month in December, moving 360,000 barrels a day over our docks on the Houston Ship Channel. John Schlosser and our Terminals management team have migrated that business into a primarily liquids, primarily refined products business built around our hub positions: Houston, Edmonton, Chicago and New York Harbor. John and the team have divested some of our nonstrategic bulk assets. We'll talk about this more at the conference next week. But the business has been transformed over the last several years. And the connectivity and the multimode, multiservice capabilities of these hub positions mean that our Terminals businesses is a lot more than storage and contango.

Another development, our Utopia pipeline project is mechanically complete. Mine fill is progressing right now and we expect to be in service in the next few days. About 3 weeks later than planned, but still in service in January of 2018.

Turning to our CO2 segment. A couple of observations. We are seeing an uptick in third-party CO2 demand as we enter the early days of 2018. Our oil production on a gross basis is up 1% year-over-year with SACROC up and with the combination of Yates -- or Katz rather, Goldsmith and Tall Cotton up on a combined basis, while Yates was down 5% year-over-year. We continue to see good results from the transition zone at SACROC and we've had a number of projects over perform as we charge with some of those barrels. Our performance has exceeded our original expectation and contributed to the increase in production at SACROC where production has recently been growing month over month. And we ended the year with December volumes, about 800 barrels a day higher than January of 2017. So very good progress there.

So in conclusion, a strong year with a strong finish at KMI. We performed well financially, commercially and operationally. We executed well on our expansion program. We strengthened the balance sheet and we provided a look forward on how we will be returning value to shareholders in the form of a well-covered and increasing dividend starting this year as well as a share repurchase program, which is already underway.

With that, I'll turn it over to Kim.

Okay. Thanks, Steve. Today, we're declaring a dividend of $0.125 per share, consistent with our 2017 budget. And we've previously indicated next quarter, we anticipate declaring a dividend of $0.20 per share, consistent with our guidance of an $0.80 per share dividend for 2018, which is a 60% increase over the dividend declared for '17.

Last quarter, I told you 2 things. I told you, one, that we expected to finish the year slightly behind our DCF budget due to the impacts of Hurricane Harvey and reduced contributions from our Canadian asset as a result of the May IPO of a 30% interest in those assets. And two, that we expected to end the year at 5.2x debt-to-EBITDA, with some possibility of ending at 5.1x.

Well, we finished the year not slightly behind our budget but ahead of our budget on DCF by approximately $26 million or $0.01 per share and at 5.1x debt-to-EBITDA.

In addition, we've generated approximately 300 more in discretionary free cash flow for the year than our budget. So we had nice performance in the fourth quarter and for the full year overall.

First, let me start with the GAAP numbers and I'll move to DCF, which is the way we look at and think about the numbers and performance. Like a lot of other companies this quarter, our GAAP numbers are significantly impacted by the change in the tax law. We booked $1.38 billion in estimated expense to account for the change which masks the nice performance in our underlying business. In addition, the charge also masks the fact that from a cash tax perspective, the new tax law is a moderate positive for KMI as it postpones the date when KMI becomes a federal tax cash payer by approximately 1 year to be on 2024.

On earnings, we're showing a net loss for the quarter of $1.045 billion or $0.47 per share for the fourth quarter, which is a reduction of $1.215 billion or $0.55 a share versus the fourth quarter of 2016. As I mentioned a moment ago, we had a $1.38 billion impact from the change in the tax law, which more than accounts for the decrease.

Adjusted earnings per share, which excludes certain items, including the impact of the tax act, is $0.21 per share, up $0.03 or 17% versus the prior period. DCF per share, which is the primary way we judge our performance is $0.53 per share or $0.02 per share, about 4% higher versus the fourth quarter of 2016. Total DCF of $1.19 billion is also up approximately 4%, $43 million in total dollars. The nice increase in DCF was driven by greater contributions from Natural Gas, from Terminals, from Products as well as Kinder Morgan Canada and lower interest, partially offset by lower contributions from CO2, higher G&A, higher sustaining CapEx and the impact of the KML IPO.

Overall, the segments were up 3% or $59 million, with Natural Gas contributing $41 million or approximately 70% of the improvement. Natural Gas benefited from nice performance on TGP, driven by short-term capacity sales and expansion projects and lower interest expense at NGPL where we have significantly reduced leverage and we're able to refinance a portion of our debt at lower rate. We also benefited from expansion projects on Elba and SNG and better performance on some of our gathering assets, primarily Hiland, which is in the Bakken. These benefits in Natural Gas were partially offset by lower contributions from some of our natural gas -- other natural gas gathering and processing systems, primarily South Texas and KinderHawk and the CIG rate case settlement. The increase that we saw in G&A was largely offset by a decrease in interest. Sustaining CapEx was about $11 million higher in the fourth quarter of 2017 versus 2016.

As you may remember, our 2017 budget for sustaining CapEx was higher than our 2016 expenditures.

Noncontrolling interest is higher by approximately $10 million. Noncontrolling interest is the primary place where we reflect the public's interest in the DCF of our Canadian assets. So putting that together, the segment is up $59 million. Interest and G&A offset, less sustaining CapEx increase of $11 million and a $10 million increase in noncontrolling interest explains $38 million of the total DCF increase of $43 million.

As I mentioned previously, DCF per share ended up ahead of our budget despite approximately $40 million negative impact due to KML IPO and Hurricane Harvey. Overall, the segments came in pretty close to their budget, overcoming the entire Harvey impact, and we benefited from lower sustaining CapEx and cash taxes. Sustaining CapEx was a nice favorable to our budget. Some of which was associated with deferrals to 2018. But as Steve mentioned, a significant portion was also driven by lower project cost than we anticipated and budgeted.

Certain items for the quarter were an expense of $1.5 billion, of which $1.38 billion was associated with our estimated impact of the new tax law. Given the comprehensive nature of the tax reform as well as the proximity and enactment to many company's reporting date, the SEC and the FASB have given companies up to 1 year to record the impact. Therefore, although we believe our estimate is an accurate one, we may have some further refinement to it in future quarters. The other more significant certain item for the quarter was $150 million noncash impairment of our investment in FEP.

Expansion CapEx. The expansion CapEx accruals for the year were approximately $3 billion. That's down from our budget of $3.2 billion. The $3 billion does not include any KML CapEx, including spending on Trans Mountain from June forward as KML was a self-funding entity. KMI did not have to make any contributions during that time to fund KML.

For the year, we generated approximately $380 million of discretionary free cash flow, which we calculate as DCF of $4.48 billion, less $2.98 billion in expansion CapEx and $1.12 billion in dividends. This exceeded our budget of $96 million by almost $300 million. As a result of our performance and improved debt metrics, we initiated our share repurchase program in the fourth quarter, 1 quarter earlier than we expected, purchasing approximately $250 million or 14 million shares.

And with that, I'll move to the balance sheet. On the balance sheet, we ended the quarter at 5.1x debt-to-EBITDA, flat to the third quarter but down from the 5.3x at the end of last year and below our budget of 5.4x, largely as a result of using the proceeds from the KML IPO and the Elba JV to pay down debt.

As you can see from our balance sheet presentation, we present 2 debt numbers just below the balance sheet. The first is net debt, which is the debt outstanding net of cash. And the second is net debt, including 50% of the KML preferred shares. We used the latter one, net debt, including 50% of the KML preferred shares, in our calculation of debt-to-EBITDA, which is consistent with how the rating agencies treat those preferred shares.

Net debt ended the quarter at $36.4 billion, down $58 million in the quarter and $1.75 billion for the year, which I will reconcile for you. In the quarter, we produced $1.19 billion in distributable cash flow. When you look at our cash flow statement, we spent about $830 million in terms of expansion CapEx and contributions to equity investments. Because we consolidate KML, that includes about $144 million of KML expenditures. And so KMI, excluding KML, is a little under $700 million of spending.

We paid dividends of $280 million. We repurchased shares of 250 million. And the KML funded its expansion CapEx that I just mentioned with about $190 million of preferred issuance. And then we had working capital and other items, which were a source of cash of a little under $40 million.

For the year, we generated $4.48 billion in distributable cash flow. If you look on the cash flow, expansion CapEx and acquisitions and contributions to equity investments, you'll see a number of almost $3.3 billion. Again, that includes the expansion capital for KML from June through December, which was about -- a little under $400 million. When you take that out on a cash basis, the number I gave you earlier, the $3 billion accrual basis, on a cash basis, we had about $2.9 billion go out the door to fund CapEx. Dividends were $1.12 billion, $250 million use of cash for share repurchase. And then we took in IPO proceeds of $1.245 billion, KML preferred of $420 million which was used to fund its expansion CapEx. We had asset sales and JV proceeds of about $500 million. The largest of that was a little under $400 million on Elba. We got a tax refund for $144 million. We had a legal settlement for $65 million, and we had working capital and other items that were a use of cash of about $300 million. That's primarily timing associated with JV distributions. That's inventory, use of cash on inventory purchases, use of cash to pay -- to put it -- $70 million to put in the KML debt facility and some other items. That gets you to $1.75 billion source of cash which we used to pay down debt.

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

Okay. Turning to KML. Good progress to report here as well. A reminder, KML consists of all of the Kinder Morgan Canada pipelines and terminals assets. And those -- they're our existing Trans Mountain Pipeline system, which runs full and is the only outlet for Alberta Crude to get to a world market.

We also have our Terminals position. We've built our Edmonton Terminals position over the last 10 years into the largest merchant terminal network in Edmonton and we continue to expand it with our Base Line Terminal joint venture with Keyera, which, as we announced earlier this week, is on time and on budget with the first 4 tanks of that expansion coming online earlier this week. The rest of the expansion is projected to be on time and on budget as well as it's completed in phases over the course of 2018. So good update there.

And 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 and it has a substantial upside associated with the Trans Mountain expansion. Looking back on what we've accomplished over the year, I think we've accomplished a great deal. Early in the year, we updated our final cost estimate following final federal approval to CAD 7.42 billion. That gave our shippers the right to turn back capacity to us. Ian Anderson and his commercial team placed all the capacity. And in so doing have essentially reconfirmed the value and need for the project with a 2017 lineup of shipper needs based on 2017 market conditions.

From the Pipelines perspective, the conditions supporting its construction or the need for it have improved from an economic standpoint. It's worth repeating that this is a much needed project. It has the key approvals from and the support of the federal government. Also recall that we have built-in protections for the cost that are more difficult to estimate and control. These uncapped costs are associated with the most difficult mountain and urban portions of the build. For example, if higher than shown on our cost estimate, they result in an adjustment to our total which includes not just cost recovery but recovery of a return as well. On the flip side, reduced cost flow through to the benefit of our shippers and our shippers benefit from the fact that other portions of cost are capped and we absorb the overrun on the capped portions, if any.

In the third quarter update as well as the December press release announcing our 2018 outlook, we noted progress on permitting at the provincial and local levels. But we also acknowledge the need to see more progress before it would be prudent to ramp up to full construction spending. So we've been executing on what we call a primarily permitting plan, and here's what we're accomplishing with that.

First, it's the prudent thing to do for our shareholders. We're managing spend at a lower level than full construction. And much lower than what we have planned in 2017 until we have greater clarity on permitting. To underscore that or to illustrate that, we ended 2017 at KML with no outstanding debt. We have a strong business with 0 debt on it at the end of the year. We have the capacity to ramp up to full construction spending when that appears prudent.

Just as importantly, Ian and the team have been working actively with the authorities, seeking the actions that would provide the needed clarity and making sure that we're getting them what they need from us. A couple of key developments there. The NEB granted our motion to allow us to construct notwithstanding the absence of permits from the Burnaby municipal government. Local governments are not typically in opposition as we establish community benefit agreements covering 90% of the pipeline route. But it is essential to be able for us to know that we can move forward even when local governments are opposed or are declining to act on permit.

Second, we have made some progress working with the provincial authorities in British Columbia on clarifying requirements and time frames on permits and authorizations. We're still working on this but we've made some progress. Here's what we're watching for as the milestones in our decision making process. First, the outcome of our broader motion at the NEB. This is the motion to establish a clear, fair and timely process for dealing with permits and approvals at the provincial and municipal level.

Second, we need to see continuing progress just overall on permitting. Numbers of permits coming in and granted.

Third, we expect in the first part of this year, hopefully early, but in the first part of this year to have decisions on the judicial reviews. We believe strongly, those reviews should end up affirming the government's actions to date. And we hope to see that come through in the first half of this year, if not earlier in the first half.

As this process is unfolded, good progress but still more needed. We've identified project schedule, and naturally associated with that is cost risk. We're using the term unmitigated when we put forward the December 2020 in-service projection because we've not completed the work necessary with our contractors to determine where we can save time and money on the build. And we don't have a clear view of when the starting point is for that until we have the additional clarity that I mentioned.

Bottom line, this project is needed. It's supported by the Federal Government of Canada, the provincial government of Alberta and many communities and First Nations along the route. We have actively sought the clarity that we need. We have seen positive developments on that front over the last quarter. And in the meantime, we are being very careful with our shareholders' money.

And with that, I'll turn it over to Dax to go over the financials and also the financing plan update.

Thanks, Steve. Before I get into the results, I want to highlight a couple of general corporate matters. On the capital markets front, we completed our second offering of the Canadian rate reset preferred stock in December. We launched with a base deal of $200 million. And in response to significant demand, we were able to upsize to $250 million and price with a 5.2% coupon which netted us approximately $243 million in proceeds. As a reminder, our preferreds get 100% equity treatment under our construction facility and generally 50% through the eyes of the rating agencies. Combining our first and second offerings, we've now raised $550 million of preferreds. Overall, the success of this offering is yet another positive step towards KML raising the necessary capital to fully finance the TMX expansion, as Steve mentioned.

Also, effective January 2, KML became registered with the SEC in the United States. As such, we will become a regular filer of quarterly, annual and other documents with the SEC in addition to our filings with the Canadian regulatory authorities. While KML currently does not intend to list in the U.S., being a U.S. registrant will ensure that we can continue to present our financial results in U.S. GAAP indefinitely and maintain the most efficient management and corporate structure.

As I move into the results -- into a review of the results, as I did with the last 2 quarters, I want to preface my comments with the caveat that while I'll be offering quarter-over-quarter comparisons, those comparisons are of limited value at this point given that we're reporting a quarter where KML was owned by the public, and we'll be comparing results 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 reflected with the true earnings power of KML. Therefore we would ask you to focus on the results from full year 2017 and how they compare to the guidance we have provided throughout 2017, and you will see that the results are consistent with the guidance. Quarter-over-quarter variances will mean more over time. And obviously, while we didn't have a published budget for KML to stay in 1 company for 2017, starting with 2018, we will publish one just as KMI does. In fact, we released the summary components of the 2018 budget on December 4 and we will speak to the details at the analyst conference next week. Going forward, we will be able to compare actual results to our budget.

Now moving into the results. Today, we're announcing the KML board has declared a dividend for the third quarter of $0.1625 per restricted voting share or $0.65 annualized, which is consistent with previous guidance.

With respect to earnings and net income, earnings per restricted voting share is $0.11 for the quarter, which is derived from approximately $46 million of net income which is up approximately 161% from approximately $18 million of net income from the same quarter in 2016. That increase is mainly due to the nonexistence in this quarter of the unrealized foreign exchange loss associated with intercompany loans that were settled with the IPO. Adjusted earnings was approximately $47 million compared to approximately $42 million through the same quarter in 2016 and is more reflective of the business' performance as it excludes certain items.

With respect to DCF. DCF per restricted voting share was $0.233 for the quarter, which is derived from total DCF for the quarter of approximately 83 million which is up about 15.5 million from the approximately 67 million in the period -- in the comparable period in 2016. That provides coverage of about 7.3 million and reflects a DCF payout ratio of approximately 70%.

Segment EBITDA before certain items is up $19.4 million compared to Q4 2016 with the Pipeline segment up approximately $8.8 million and the Terminal segment up about $10.6 million. The Pipeline segment was higher primarily due to higher AEDC associated with spending on the project, lower O&M associated with the timing on Cochin integrity projects completed earlier in the year and favorable Trans Mountain revenue from flow through of O&M and G&A cost as well as some increased capacity incentive. All of that partially offset by slightly lower revenues on Cochin. The Terminals segment was higher primarily due to a true-up on revenue on our JV with Imperial. The absence of unrealized foreign exchange losses from intercompany notes that existed in 2016 that are no longer in place or relevant in the post IPO period, which I mentioned, and higher revenues from Edmonton South and Vancouver Wharves. G&A is higher by approximately $5.3 million due primarily to timing of capitalized labor associated with the Trans Mountain expansion project, higher G&A at the terminals mainly from a true-up on allocations to the Base Line Terminal and higher costs associated with being a public company. Interest cost is $2.1 million lower versus Q3 2016 primarily as a result of a repayment of the intercompany loans.

Sustaining capital is favorable, approximately $3.9 million compared to the same quarter in 2016 due to timing with approximately $6.5 million of less spending on Trans Mountain, partially offset by approximately $2.5 million of greater spending on Vancouver Wharves. Cash taxes were essentially flat compared to the same quarter in 2016.

Now to briefly recap where we came in for the year compared to where we guided you. During the Q3 earnings call, I said that we expected EBITDA for the full year 2017, including pre-and post IPO periods, to be between $380 million and $390 million and that we expect the DCF to come in between $315 million and $320 million. In fact, EBITDA came in at approximately $388 million for the year and DCF came in at approximately $323 million.

Now I'll move on to a few comments on the balance sheet comparing year-end 2016 to year-end 2017. Cash increased approximately $80 million, which is due to $294 million of DCF, excluding AEDC of $29.1 million. Again, that's 323 Bcf less 29 of AEDC or $294 million before AEDC plus approximately $537 million of net proceeds from the preferred offerings offset by $576 million of cash paid for expansion CapEx, $75 million cash paid for debt fees, $58 million of distributions, net of DRIP proceeds and $42 million working capital of our use of cash. PP&E increased $527 million primarily due to spending on the expansion projects. Deferred charges and other assets increased approximately $91 million, which is primarily attributable to unamortized debt issuance costs on the construction of working capital facilities.

On the right-hand side of the balance sheet, total debt remained at 0, as Steve mentioned, as we ended the year with 0 balance at both the construction facility and the working capital facility.

Other current liabilities decreased by almost $167 million, which is primarily a result of the decrease in quarter and intercompany payables from KML entities to KMI which we have endeavored to minimize since the consummation of the IPO. Long-term debt decreased by almost $1.4 billion and that was the result of paying off the intercompany loans.

As you can see, with a 0 debt balance, we ended the year with net cash of approximately $239 million. Even after adding 50% of our preferred equity to our net debt balance, our net debt position is only approximately $36 million which is consistent with Steve's comments by being prudent and spending on [TNDP].

Finally, I want to offer a couple of comments on expansion capital. On the Base Line Terminal project, we've now spent approximately $281 million of our share of the $398 million project total with approximately $117 million left to spend in 2018. On the Trans Mountain expansion, we have now spent a total of just over $900 million as of 12/31 with approximately $550 million of that spent by KMI in the period prior to the IPO and approximately $385 million spent by KML since the consummation of the IPO.

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

All right. Sheila, we're ready for questions.

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

Congratulations on the Gulf Coast Express FID. I just had a couple of questions about that. The first one is the 3 -- maybe 4 owners on a gas pipeline seems like a lot, and I was wondering if you could give any color on how all these partners came to join the project. And do you think it was specific to GCX? Or is this kind of what doing business in the Permian now entails?

Well, I think -- and I'll let Tom expand if I miss anything here. I think, first of all, we're very glad to have those partners. They are significant players in the Permian Basin. They have significant upstream investments that they're making, and they are bringing significant volumes to the project. We are happy to have them in. And I think that they are interested in being in and bringing their volumes to the project because they think it's a good project. It did take a while to get all the JV stuff worked out. But we got through it, and we have very strong demand for the project. I think there is interest in the producer segment, certain parts of it, in investing at -- in midstream infrastructure. And of course, Targa and DCP are both very much in that business already. So they're investing in midstream, and they're already in that business. But I do think, even outside of the midstream sector, there is some interest in investing in midstream projects from the upstream sector. Tom, anything?

No. I mean, I think that's really the main point, is that the -- they brought to the table a significant volume commitment as well as investment capital, and we both -- we all 3 have a lot of experience with running major projects. So I think it's a good merit really for this project. And as far as other opportunities, I mean, it really just depends on the situation. I think we feel very good about our opportunity to develop and execute on incremental projects, certainly, projects of this scale as those opportunities develop. But if there is a nice fit with volume commitments and looking at opportunities similarly like, I think, the other 2 partners on this one, we might do it again.

Okay, that's helpful. And then just as a follow-up, what are the remaining major permitting milestones for the Gulf Coast Express? And then how optimistic is October 2019 startup? Is there kind of a big a thing that we should watch for that could cause it to slip?

I mean, it's a -- sorry.

No, go ahead, Tom.

An intrastate pipeline system. So we're really working this through local jurisdiction, and that process is getting started as of now. But we do -- we have a lot of experience of building pipeline in Texas and feel really good about our 2019 in-service period.

We certainly have permit hurdles to clear, but it's not like the clearing a 7c process at the federal level. So it doesn't take as long.

Right.

The next question comes from Kristina Kazarian with Crédit Suisse.

So a follow-up on Gulf Coast Express. Beyond the cash flow you're going to get from this project itself, can you talk a little bit about how we should be thinking about the follow-on impacts for your assets on both the upstream in the Permian and the downstream on the Gulf side as well?

Tom, go ahead.

Yes. I mean, clearly, there are some synergies on EPNG as incremental transportation opportunities afford themselves to the project and the connectivity at Agua Dulce both to our network and to all the growth into Mexico and LNG, I think, will create a lot of opportunity for incremental opportunities beyond what we've baked into the base project. I think layered on top, even beyond that is storage opportunities as Mexico grows, as LNG goes into service in Texas. I think those will all provide further opportunities to this particular project as well as volatility out in the Permian and how that translates at Agua Dulce. I think those will all be upside opportunities that will manifest itself in the project.

Great. And I'll ask a follow-on as well. On the TMX, I -- a project I appreciate the updates and the milestones and clarity there. That said, on the shifted timeframe to December 2020, how did you guys come up with that revised date? And maybe if you can talk around conviction level here. Or at this point, is it a project that we kind of just wait for continued updates as we kind of hit those milestones and that progresses?

Yes. We set the expectation of an unmitigated December 2020 date partly from the passage of time but partly from just having -- we need to have a stake in the sand to put out there for our project schedule development and our project planning. And we believe that, that's a reasonable date. And if another 2 weeks passes, that doesn't mean that we move that date out another 2 weeks. We have, we think, the ability to meet that date, and we'll continue to build our project plan around it.

Perfect. And a real quick one on fundamentals, turning it back there. Gathering volumes look like they got a bump versus our 3Q '17 numbers. Can you kind of just talk through about what you saw regionally?

Yes. We saw upticks in the Haynesville and in the Bakken as well as in the Eagle Ford and additional drilling activity in Haynesville and Bakken. And then driving the Eagle Ford, Tom?

Yes. I mean, those are really, I think, primarily recontracting efforts that drove those incremental volumes. Plus, there was a Harvey impact in Q3 that we got the -- we didn't have the same level of interruptions in Q4. But overall, I think we feel good about our Eagle Ford position. And they look (inaudible) in '18 but very excited about the Haynesville and the Bakken and Hiland as we go into 2018.

Yes. We had Harvey in Q3, and then we got freeze offs in Q4. But probably the Harvey effect was bigger.

The next question comes from Brian Zarahn with Mizuho.

Gulf Coast Express, the project is largely contracted. I'm sure you're happy to get that over the finish line. Any comment on average contract duration?

Yes. They're long-term contracts, meaning 10 years.

Okay. And then does your project backlog assume a 50%, a 35% interest in Gulf Coast Express?

I think we took it to 35%. We -- yes, we put it at 35%. It could be 50%, but we put it at 35%.

And when does the option to -- for that shipper to acquire 15% interest expire?

End of this year.

End of the year. And then on tax reform, a positive on the cash tax perspective, pushing that out another year. How do you assess the impact of lower corporate taxes on your gas pipeline business?

Yes. So there's been a lot of -- that's been a developing issue, and let me give you our perspective on it. The short answer is that we think that this is going to -- that the impact of this not meeting the potential flow-through of tax rate changes to shippers on our system is mitigated and will be spread out over time. So it's mitigated because you have to adjust for negotiated rates and discounted rates. So -- and an adjustment is going to impact what the max rates will be. So the extent you have negotiated rates in place, which were negotiated and don't vary depending on variations and cost of service or you have discounted rates, that mitigates the impact. We also don't think that the FERC can -- about 70% of our revenues, by the way, are under those kind of arrangements. And we also think it's mitigated because it was likely to be considered along with other changes in the cost of service. We do not believe that the FERC can or should isolate the tax law change for some separate immediate action. We also have many systems that have rates under black box settlements where all we agreed to is the final rates, we didn't agree on the individual cost of service component. So we think it's very well established that neither the pipeline itself nor the commission can selectively adjust one element on the cost of service without considering the overall cost of service. So our view on it is that this plays itself out over time through periodic Section 4 and Section 5 of proceedings and settlement.

I know it's a complex issue, and I'm sure we'll discuss this subject a little bit more next week at your Analyst Day. I'll leave off on a more of a housekeeping question. The share count at the end of the fourth quarter, roughly 14 million less. Or are there any other moving parts for the account for the buyback?

No, that's right. Yes, 14 million shares.

And then -- so just take 14 million off the end of the third quarter is the right number for the end of the year.

Yes, yes.

Our next question comes from Darren Horowitz with Raymond James.

Steve, a couple quick ones for me. The first regarding your comments around the TMX milestones and the permitting progress and I know we're going to get into this a week from now. But what do you think the threshold is that drives incremental confidence for you in terms of the pace of permits, like how many get granted? I remember last quarter you spoke about partials being granted that were almost 60% relative to what was needed, which I think over 620. So what are the critical permits as it sits now for the Ministry of Transportation out of the 80 or so that are needed by next year? Is this still Spread 3 and 4? Or has it developed beyond that?

Well, look, I think, really, the main factor in consideration is that we think we've got a reliable and timely process for getting the permits. We're not going to get all the permits before we would begin construction. But we do need to see that there's a process in place and that we can count on it and that the timing is going to be reasonable so that once we start, we can be confident that we're going to finish. So there's no -- we're not sitting around here with a magic number on permit count. We certainly look at that, absolutely. But I think it's more about making sure that we've got good working arrangements on how we're going to get through the permitting process, meet the requirements of the agencies, et cetera, but also that we have a backstop that will deal with any undue delays.

Okay, that makes sense. And then switching gears back to your comments on KMCC. How much pipe overcapacity currently exists relative to South Texas Eagle Ford supply? And when do you think that market effectively achieves balance between supply and takeaway capacity such that you can get a firming in rates?

Okay. Well, the headline numbers is worse than the reality, but we think that there's probably about 2 million barrels of takeaway capacity. And while the Eagle Ford is climbing, it's probably 1.2 million barrels a day or so. Now the reason I say that the headline number is worse than the reality is because if you look at the system that the Products Pipeline team has built over the years, they continue to add connectivity to that system on both the supply end and the market end, and we've seen volumes go up as I report it. So we're taking market share, right, taking market share, but the point I was making is there's a lot of capacity there. And so we have to discount to take share on renewals, and we'll do that where it's appropriate. But we've got a great system and we think a very good system that gives people access to Corpus as well as multiple points on the way to Houston and into Houston Ship Channel. And so we think that our asset is well positioned and well fixed. So Eagle Ford volumes will grow, and we'll continue to look for ways to add connectivity. And we'll be thoughtful about the recontracting process.

The next question comes from Dennis Coleman with Bank of America.

Just a couple follow-ups on the Trans Mountain project. You had this release on December 4 where you talked about the potential that it becomes untenable to proceed. And that seems like a fairly directed comment, but it does leave a little bit of begging. I mean, we've now extended the unmitigated delay another 3 months. What's the circumstance where you get to that untenable position?

Look, I think, again, what we're doing here is I think all the right things for our investors, for our customers, for everybody, and that is we are carefully -- we are being careful stewards of our capital and we're doing everything we can to get the clarity that we need in order to proceed. And that's the basis on which we're proceeding. We don't expect to find ourselves in an untenable position, but we've made that point in the filing seeking the relief that we've asked for from the regulator. And so we said the same thing to the investors we said to our regulators. That's how we do things.

Okay. So it was in the regulatory filing, I see.

Yes, correct.

Okay. Maybe a different one on the share repurchase program. You did $250 million right out of the gate in December. What kind of cadence do you see for that over 2018? Is it -- I mean, if you kept that cadence, you're done by July. Is it a longer time horizon, not a 2 year out of the gate?

Yes, we are not putting -- we're not giving specific guidance there. I mean, I'll say a couple things. One is that we think our stock price is attractive to buy, and the other thing is that we will be opportunistic about it. We will look at what our alternatives are for that cash, and we think the stock price is an attractive buy. But there could be project opportunities as well. So we're not giving guidance (inaudible).

Yes. And Dennis, what I'd say is when you look at distributable cash flow for 2018, we'll go through all this in the conference next week, less dividends, less growth CapEx. We have about $568 million in discretionary free cash flow budgeted for 2018 that we will allocate to either share repurchase, new projects, paying down debt or some combination thereof.

Yes. I tried to emphasize beginning of the call, the real strength of this company, I believe, is in the cash flow. When we're funding every -- all of our needs with internally generated cash flow and to have that kind of excess cash to use for various purposes, all of which we believe benefit the shareholder ultimately even if it's just paying down debt, making the balance sheet stronger, that's where we want to be and that's our game plan.

Okay. That's useful, and I'm sure you'll give more next week. One last -- a little more specific question if I can. Hedging, you have a very established program, but we've seen a nice recovery in commodity prices here. Any chance to accelerate some of the out years with what you're seeing here? Or will you stick with the program?

Yes, we'll stick with the program. We're a little opportunistic there in terms of when we put hedges on, et cetera, but we stay within the parameters that we have lined out for investors.

Yes. And Dennis, one of the reasons we stay within the parameters, in the parameters, I mean, you could be between 60% and 80%. We like the prices, we go to the 80%. We don't like the prices, maybe we stay at 60%. So we're opportunistic within the bands, but I think we're going to stay within the band. One of the reasons that we do that is that we do have some costs that are tied to oil price. And so if you hedge in a very different price market than when you actually go to produce the barrels and you have a cost structure that's tied to a very different oil price, you can get a mismatch. And so we found that executing on a program is the best way to get the barrels hedged but have -- execute over time to have a little -- to help from having a mismatch on the hedge price and the actual price environment where we're producing.

Okay, that's helpful. Obviously, it's worked over the last 15 years, so just a question what prices are.

The next question comes from Robert Catellier with CIBC Capital Markets.

Congratulations on the success on baseline so far on the results. I just had 2 questions on the Trans Mountain. There's 2 issues that I can see here before you can go to full construction. One is establishing that process to deal with the permitting issues, and the second is the judicial reviews. So could you clarify if you'd move forward if the NEB establishes a process for dealing with permits but before the conclusion of the judicial reviews?

Yes. I think we want to see the outcome of the judicial review, primarily the federal review because that's the central thing, the Order in Council that was granted 13 months ago, I guess, now. And look, we think -- so there's a model decision that you look back to, right, which is the Northern Gateway decision. And we read it. Looks to us like the federal government read it, too, and we did everything we were supposed to in putting together our filing and our participation in getting an NEB recommendation. It looks to us like the government did everything that it was supposed to do as guided by that order, if not, more frankly in what they did in terms of First Nations engagement, et cetera, et cetera. So that's our belief. But it's pricey to be wrong about that belief. And so we'd like to see that come to the outcome that we're expecting, but we'd like to see that play out.

The last question is on the right of way. Can you just give us a brief update there?

Yes. So the -- we are in the middle of routing hearings at the NEB. Some of those have taken place already. There's one going on regarding Chilliwack today. We have Burnaby coming up shortly as well. And so those are proceeding according to set a schedule, those are the places where we deal with route objections, where we identify the unobjected to lands and where we have the opportunity to procure. If we get objections to the route, we get a right of entry first. And then the question becomes what's the level of compensation involved. But first, we need to have the right of entry, and then we can determine or reach an arrangement on the compensation level. But the main thing in my mind is we need to see the route hearings progress. And they are, they are.

The next question comes from Jeremy Tonet with JPMorgan.

I just want to turn to the Bakken for a second and just was wondering if you could update us as far as your outlook there with Hiland, how things are progressing and how you see extending that platform. Do you see opportunities kind of repurpose assets or take away from the basin? Seems like there's certainly more growth at the commodity price level. I was just wondering if you could update us there.

Yes. So I'll break it into 2 pieces. One is the gathering and processing piece of this, which continues to grow, continues to be an opportunity for us to invest. Our volumes are growing there. We've been investing there and continue to add capacity. The other piece is the transport takeaway. And the transport takeaway with the in-service of DAPL is a bit over piped. So the Bakken is growing, and it may fill the takeaway space faster than it's filled in the Eagle Ford. And this is just a projection, as good as what you paid for it. But I think there's more growth going on in the Bakken and less overhang on the capacity front. On the other hand, Double H gets you to Cushing. DAPL ultimately gets you to an LLS kind of price market. So that does cause us to evaluate what else is short of capacity up there. And one of the things that appears to us to be short of capacity is NGL takeaway. And so it is a potential conversion candidate, but there is nothing to point you to specifically in that regard other than it looks like a nice fit.

The next question comes from Tristan Richardson with SunTrust.

Just with respect to Elba and cash flow timing there, is -- does cash flow follow the 2 distinct phases, initial phase and Phase 2? Or as those units come on, cash flow will follow as each unit comes up?

Yes. And so 2 things about that. We will have some more detail around Elba when we do the conference next week. But it is -- most of the cash flow, the majority of the cash flow, the majority of the revenue is associated with getting the first unit in service. And so we're diligently working on all of the units and as is Shell and their upstream manufacturer. But that's -- it's weighted toward getting the first unit into service, and so as you'd expect, we're very focused on getting the first units in service.

And then just lastly on Southwest Louisiana Supply. It seems straightforward but just curious if there's any contingencies the shipper has with respect to...

(inaudible) the project's [helps us what we need] with Louisiana project.

Pardon me. What's the question?

Right. Just -- is there any potential contingencies the shipper has if the downstream pull facility timing is delayed, et cetera? It sounds like shipment's already on your all's end in the first quarter this year.

The transportation contracts do not go into service when the facility does, so we would work with the customer as we do on other projects in the same situation to try to help them monetize or market their capacity. But there's no delay in our in-service of the transportation contract.

We are showing no further questions at this time.

Okay. Thank you very much. Thank you all for joining us this afternoon. Have a good day.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.