Kinder Morgan Inc - Class P (KMI) — Q4 2015 Earnings Call Transcript

Okay. Thank you, Vance. And thanks for joining us today for our Analyst Call. Before we begin as usual, I'd like to remind you that today's earnings release and this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. We encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for a list of risk factors that may cause actual results to differ materially from those in such forward-looking statements. Before I turn the meeting over to Steve Kean and Kim Dang to review the fourth quarter 2015 financial results and other important developments during this period, I'd like to talk a bit about the future of the company. We will be delving into the 2016 outlook in more detail at our upcoming investor meeting next week, but I believe it's important to focus on a few key points. KMI's underlying business remains strong even in this challenging environment. Our year-end results turned out very consistent with what we projected to you in our third-quarter call, both from a DCF standpoint and a debt-to-EBITDA standpoint. This says to me that our fundamental businesses are doing well notwithstanding the current weakness in our industry. The fundamentals don't seem to matter in this Chicken Little 'The Sky is Falling' market, but they should be prone to long-term investors. We are a generator of a tremendous amount of free cash flow, about $5 billion per year and that's after we've paid all of our operating costs, our interest expense and our sustaining CapEx. Now, there are several ways we can utilize that cash flow. We can de-lever the balance sheet and totally fund our growth capital needs and/or return cash to our shareholders through either increasing the dividend and/or buying back shares. We have significantly reduced our anticipated capital expansion expenditures for 2016. You'll hear more details on that from Steve today and at our investor conference. And that's a trend you can expect to continue as we high-grade our capital investments and selectively joint venture projects where appropriate. As we reduce those expenditures, we will obviously have more cash to continue to strengthen our balance sheet and return to our shareholders. Reducing the dividend was not an easy decision, but given the strength and sustainability of our business and the cash generated thereby, I believe as the largest shareholder you will see KMI emerge as a stronger company with a strengthened balance sheet, higher coverage on the dividends we pay and with no need to access the equity markets for the foreseeable future. And with that, I'll turn it over to Steve.

All right. Thanks, Rich. So I'm going to cover three topics before hitting on some segment highlights. First is the performance of our business in these challenging times, second is our counterparty credit risk, and third our growth capital and then I'll do some segment highlights. So looking at full year 2015 compared to 2014, here is the summary. On an earnings before DD&A basis, three of our five business segments grew year-over-year. Gas was up 1%, terminals was up 8%, and products was up 27%. Kinder Morgan Canada would have been up year-over-year, but for the effect of a weakening Canadian dollar. And no surprise, CO2 was down 22% as a result of lower commodity prices. To put this performance in context, this performance was against the backdrop of a very negative environment for the entire energy sector. On a full year basis from 2014 to 2015, oil prices were down 49%. Of course they're down further still from there, and gas was down 40%. Oil and gas commodity prices directly affect the portion of our EBITDA, which we quantify each year. But the larger driver of our business is the demand for what we actually sell, energy transportation, and storage services. That's the primary business we're in. Let's look at those numbers. In the gas business, which provides more than 50% of our segment earnings before DD&A, our transport volumes were up 5% year-over-year and sales and gathering were up 4% each on a full year basis. Our products pipeline volumes were up 3% on refined products and up 15% on total liquids transported. Now that includes crude, condensate, and NGLs and those were driven by expansions and the Hiland acquisition. While most of what we handle in our liquids businesses is made up of refined products and other liquids, not crude, crude is in the news. So let's look at our crude transportation assets. Our Trans Mountain system is prorated. That means there is not enough capacity to serve the available demand. KMCC, Kinder Morgan Crude and Condensate our Eagle Ford pipeline, its volumes have been growing through the year with our expansions. We have good contracts, we are in a resilient location in the Eagle Ford, and we have great downstream connectivity to end-user markets and storage and dock capacity. In this business, especially now, contracts matter, location matters, and connectivity matters; and we have all of that with the KMCC system. In the first half of the year, year-to-date numbers were about 193,000 barrels a day transported. December was just under 240,000. Now it's a much smaller piece of the overall picture, but our linked pipeline in West Texas is moving record volumes so even our crude transport assets are doing pretty well under the circumstances. Finally, the liquids part of our terminal segment, which is now 74% of the earnings before DD&A of that segment, saw volumes increase 18.7% for the full year and 11.3% in the fourth quarter. Now, granted for all of these businesses, our contracts in many cases call for us to get paid whether the capacity is used or not, which is a good thing by the way. So volume is not always a perfect driver of margin, but it is a good indicator that notwithstanding drastically lower commodity prices, the demand for our specific midstream assets is really quite good. Commodity prices do directly affect us in the CO2 business and a subpart of our midstream business. We also suffered in our bulk terminals business in coal and steel, and especially from the bankruptcy of two of our important coal customers. And those things absolutely pulled back our performance without a doubt but it’s important to remember particularly in times like these, that our primary business is the transportation and storage of energy commodities for a fee and that the commodities that we handle the most are natural gas and refined products. So notwithstanding all the headwinds we faced in our business, we believe that once again we demonstrated that our large diversified portfolio or fee based assets can produce stable results even in extremely tumultuous market conditions. Now let’s talk about counterparty credit risk just briefly. We're going to talk more about this at the conference next week. We continue to monitor closely our counterparty credit risk as we always have. Fortunately, we are large and very diverse company with operations across a number of sectors and across the spectrum within those sectors. We have a large customer base with only about 20 customers accounting for more than 1% of our annual revenues and the great majority of our customers remain solidly investment grade. The largest of those 20 customers is about 5% of our revenue and that customer is rated double A minus. We estimate that our top 25 customers constitute about 44% of our revenue and just over 80% of the revenue from that top 25 is coming from investment-grade rated entities. We’ll provide you with some more detail and more refined analysis on our customer base at next week's conference, but those are some high-level indications. Thirdly, we also worked hard this last quarter on securing our investment grade debt metrics for 2016 and beyond and ensuring that we can continue to invest in high-quality opportunities that allow us to grow value per share. We high-graded our backlog to focus on the highest return opportunities. We’re aiming to reduce spend, improve returns and selectively joint venture projects where appropriate. We’ve reduced our 2016 spend that we initially announced to you by an additional $900 million, that's off to $4.2 billion we said in December and we’ve reduced our backlog by $3.1 billion from the third quarter of 2015, and that was just under $1 billion worth of projects placed in service during the quarter. That action along with retaining cash above our $0.50 annual dividend alleviates the need for us to access the capital markets, shores up our investment grade debt metrics and both of those things add stability to our outlook in difficult times while enabling us to continue to grow our value over time. Now just a few segment highlights and Kim will cover all the financial details here. Again just some operational things, natural gas as I said volumes were up 5% compared to the fourth quarter, that's higher volume on Texas Intrastates because of exports to Mexico, our throughput on EPNG, also in Mexico and power generation load. And looking at those two sectors of demand for just a minute, so our power demand on our systems was up 10% on a full-year basis year-over-year - 10% for the fourth quarter and 16% for a full-year basis compared to 2014. And throughput to Mexico was up 22% on a year-over-year full-year basis across our systems and it’s now about 2.3 to 2.4 Bcf a day on average. Also worth reminding you, over the last two years, the Gas Group has entered into new and pending firm transport capacity commitments totaling 8.5 Bcf a day and about 1.6 Bcf of that was previously unsold capacity. We now estimate that of the natural gas consumed in the United States about 38% moves in our pipes. Now some of that is moving on other pipes too gathered into ours or delivered off of ours but 38% of the gas consumed is moving at some point on KMI pipelines and we believe that the combination of power demand, LNG exports, exports to Mexico and additional petchem and industrial demand on the Gulf Coast create a bright outlook for our gas transportation and storage assets. Products pipeline, as I mentioned, refined products up 3% compared to 2014 and this demonstrates the upside of lower commodity prices in at least some parts of our business. And as I said earlier, total volumes were up 15% with the effects of the acquisitions and expansions in our liquids business. CO2 sack rock generated record annual gross oil production during the full year of 2% compared to 2014 it was down 11% quarter-to-quarter in the fourth quarter versus a record Q4 of 2014. Combined oil production across all of our fields was up 2% compared to 2014. Net NGL sales volumes were up 3% compared to 2014, and we kept a close eye on costs and produce cost savings in OpEx and sustaining capital of roughly 25% of our 2015 budget. The terminals business was up 8% year-over-year on segment earnings before DD&A. This continues to be the tale of two businesses with strong performance - very strong performance in our liquids business which is now roughly three quarters of this segment offset by continued weakness in our bulk terminals driven again by weakness in coal and steel volumes and compounded of course with the bankruptcy of our two coal customers. The strength of our liquids performance is driven by several organic growth projects or Jones Act vessel editions. The bulk part terminals acquisition in Houston ship channel and we continue to have a very strong outlook for the demand for our capacity in the significant positions that we have built in refined products in the Houston ship channel and in oil in Edmonton. Finally, an update on our Kinder Morgan Canada and Trans Mountain in particular. This expansion, as I will remind you, is under long time contracts with customers who want to see the project built. The three key areas of focus for us now are the NEB-recommended order, consultation and accommodation with the first nations and the satisfaction of the BC government's five conditions. We're making progress in all three though not as quickly as we like. With respect to the NEB, we received our draft conditions in August. We think they’re manageable though we did see important changes especially around the time required to approve specific portions of the project. We're waiting to see if further process will be required by the new federal government and remain hopeful that all the work that we've done today both inside and outside the NEB process, to address stakeholder concerns will be taken into account. We're currently scheduled to receive the NEB recommended order in May, and the order and council process will follow. We continue to make good progress in meeting the consultation and accommodation obligations we have with first nations. We've added several mutual benefit agreements which bring actual support for the projects from a majority of the bands that are most directly affected by the project. On the BC five conditions, the BC government has made clear that we are not there yet but have clearly left the door open to closing the gap which we are working to do. We have this project in the backlog and we're aiming for our third quarter of 2019 completion. And with that, I will turn it over to Kim. Kim?

Thanks, Steve. Let me start with comparing against what we said last quarter, which was that we expected to end the year with approximately $300 million in coverage, and debt-to-EBITDA of 5.6 times. Now we ended the year with almost $1.2 billion in coverage which I will take you through in a moment. That's not an apples-to-apples comparison due to the change in our dividend policy. If you adjust the fourth-quarter dividend to the $0.52 per share that we expected to pay prior to the decision to reduce the dividend, we would have ended the year with approximately $297 million in coverage, and that includes absorbing over $40 million reduction in our fourth-quarter results that we did not anticipate as of the end of the third quarter to account for the Arch's bankruptcy. On the debt-to-EBITDA side, we ended the year at 5.6 as expected and I will take you through the details of the balance sheet in a moment. On the face of the gas income statement, you will see that revenue is down both for the quarter and the full year compared to the corresponding period in 2014. This quarter we've added a line to break out the cost of goods sold which you can see is down more than the decrease in revenues. As I've said the last three quarters, the change in revenue is not a good predictor of our performance as we have some businesses where revenues and expense fluctuate with commodity prices but the margin generally does not. We believe that the best indicator of our performance is the cash we generate, or DCF per share. However, for those of you who need adjusted EPS for your models, adjusted EPS without certain items is about $0.21 in the quarter, which is slightly above consensus. DCF on the second page of the number from the press release, we calculate free distributable cash flow. We generated DCF for the quarter of $1.233 billion and $4.699 billion for the year. For the quarter, DCF is down approximately $45 million versus the fourth quarter of 2014. For the full year, DCF is up $2.1 billion. The increase in the full year is largely the result of the acquisition by KMI of KMP and EPB that was completed in the fourth quarter of 2014 and so a lot of the benefits to DCF are due to the fact that the MLPs are no longer outstanding and you can see that benefit in the line of our DCF calculation entitled MLP declared distributions. For the quarter, the 4% reduction is primarily the result of our CO2 segment, which was down about $77 million. Our terminal segment was down about $20 million primarily as a result of Arch's bankruptcy and increased interest expense and preferred interest payments. Although we are not happy to be down 4% in light of the overall circumstances in the energy and capital markets, as Rich and Steve have both said, we believe this performance is very strong and demonstrates the stability of our assets. For the full year, DCF per share is probably the best way to look at our results because it takes into account the benefit of the DCF for the merger transaction, as well as the cost of the approximately 1.1 billion shares that we issued to purchase the MLPs. For the full year, DCF per share is $2.14 or an increase of approximately 7% over the $2 per share in 2014. For the quarter, DCF per share is down approximately 8% for the reasons I mentioned a moment ago with respect to DCF plus incremental shares issued to finance our projects and to reduce leverage. The $0.55 in DCF per share for the quarter and the $2.14 per share for the year results in coverage for the quarter of about $950 million and year-to-date coverage of $1.18 billion. As I said a few minutes ago, if we had paid the dividend of $0.52 in the fourth quarter, coverage would have been around $300 million just under versus our budget of $654 million. So let me give you the major components of the $350 million change versus our budget. If you utilize the commodity sensitivity metrics that we gave you last January of $10 million change in DCF for every $1 change in crude and $3 million in DCF for every $0.10 change in natural gas, the impact of our full-year results was approximately $246 million. We have additional commodity price impact of a little bit over $20 million most of which is due to deterioration and the crude to NGL ratio meaning that NGL prices deteriorated more than crude prices and we budgeted this for our constant ratio. In terms of indirect commodity price impacts, we were impacted by another $117 million due to three primary things: lower CO2 sales volumes, lower gathering and processing volumes in our midstream on our natural gas segment, and a weaker Canadian dollar so the FX impact impacting our terminal segment and our Kinder Morgan Canada segment. Total bankruptcies impacted us by over $65 million which was Arch and Alpha. So you take those items that I just went through that accounts for about – over $450 million, so well more than the total variance of about $350 million. There are lots of other moving pieces both positive and negative but the primary offsets to the $450 million were lower interest expense and CO2 and other cost savings. Now let me give you a little more granularity on where we ended up in the segments versus our budget. Natural gas pipelines ended up about 1% above its budget, as the positive impact of the Hiland transaction, better performance on the Texas intrastates, SNG, and TGP were largely offset by the impact in our midstream group of lower commodity prices and lower gathering and processing volumes. CO2 ended the year approximately 15% below its budget as we projected last quarter. This, as we have discussed, is more than our commodity price sensitivity would indicate, and it's driven by lower crude oil volumes, lower CO2 volumes, and lower capitalize overhead as a result of reduced expansion spending offset by over $40 million in cost savings. Terminals ended the year approximately 10% below its budget versus the 6% we discussed last quarter with the primary variance being the Arch's bankruptcy. The terminal segment was negatively impacted in its budget by lower coal and steel volumes again, the largest piece being the Alpha and Arch bankruptcies and also the FX impact of the weaker Canadian dollar. Products ended the year approximately 2% below its budget and the positive impact of the Double H pipeline, which was acquired in the Hiland acquisition slightly more than offset by approximately $24 million of commodity price segregation consistent with the sensitivity. Lower volumes on our KMCC pipe than we budgeted and lower margins in our Transmix business. Finally, as we discussed last quarter, KMCC was below its budget for the year by approximately $20 million due to FX. On the expense side, interest cash taxes and sustaining and CapEx all came in lower than expected, therefore positive variance versus our budget, and that was somewhat offset by higher G&A. The negative variance in G&A is driven by the Hiland acquisition and lower capitalize overhead as a result of lower expansion capital spending. On interest, the incremental interest associated with financing the Hiland transaction was more than offset by lower balance than our budget and lower rates when you take up the impact of the Hiland transaction. Finally, we expect cash taxes and sustaining CapEx; they came in lower than our budget or they were - another way, they were favorable variance. There are a couple of certain items in the quarter that I just want to highlight for you. One, we reported an estimated $1.15 billion non-cash goodwill impairment on our midstream natural gas assets. We also reported approximately $284 million in impairment on other assets primarily in our CO2 segment. These impairments were driven by the lower commodity price environment and also by lower stock prices. Let me give you this warning, if commodity and equity prices continue to fall, then there may be impairments in future quarters. We also reported as a certain item in this quarter a $200 million benefit associated with the contract buyout payments that we received on Kinder Morgan's Louisiana pipeline. And with that, I’ll turn to the balance sheet. On the balance sheet, we ended the fourth quarter with net debt of $41.2 billion based on $7.37 billion of EBITDA that gives us a debt-to-EBITDA ratio of 5.6 times, again consistent with where we thought we would end. The $41.2 billion is an increase in debt of $610 million for the full year and it’s a decrease in debt of $1.235 billion for the quarter. So let me reconcile first the quarter, $1.235 billion decrease in debt. We spent about a little under $940 million on acquisitions, expansion CapEx and contributions to equity investments. We issued equity of about $1.58 billion. The contract buyout that was received on KMLA was $200 million and we received an income tax refund of a little over $150 million, and then working capital and other items were a source of cash of about over $240 million. Now let me say that here you would expect I talked about coverage in the quarter being $950 million but that coverage is based on the $0.125 dividend of the $953 million. What we actually paid in the fourth quarter was the dividend that we declared in the third quarter, so the $0.51. And so when I'm reconciling the debt, the $0.51 dividend is what was paid in the quarter and the cash that went out the door. So you do not see the benefit in the fourth quarter yet of the reduced dividend. You will see that going forward beginning in the first quarter. For the year, the change in debt was an increase of $610 million. We spent about $6.9 billion in cash on acquisitions, expansion CapEx, and contributions to equity investments. Hiland was $3.06 billion and then we spent about $3.4 billion in expansion CapEx. Those are the major components of the $6.9 billion. We made a pension contribution of $50 million. We issued equity including the preferred of $5.4 billion. The contract filed on KMLA was $200 million. We received $347 million in income tax refund. And then we had about $400 million of coverage and other working capital items that was the source of cash. And that gets you to the $610 million increase in debt. And so with that, I'll turn it back to Rich.

Okay. And Vance, if you will come back on, we will take questions.

Let's see on CapEx and the high-grading process for the growth CapEx backlog, Rich or Steve, can you just walk through the process of how you evaluate each project in that context and what thoughts go into whether you go forward with the project or not. Related to counterparties and related to return metrics and obviously you're out of the market so the current yield shouldn't matter to you, but obviously you have some metric or hurdle rate internally. Has that changed at all over the last six to twelve months?

Yes. We've elevated our return criteria. And look, the way we've gone through our project backlog is to take out of it things that we haven't committed to that are - that don't need a current return hurdle. And I won't tell you exactly what that is, but I think a reasonable benchmark is mid-teens returns after tax. Okay. And what we're trying to do is really make sure that we're investing capital on the highest return opportunities that we have, make sure that we're fulfilling our commitments and delaying spend where it can't be delayed or deferred. And taking on partners where it makes sense for us to take on partners. I think what we've been able to do successfully over the years is originate really good returning midstream energy projects. And so because we're able to do that even though we're viewing our capital as quite finite, there are people out there who are happy to participate with us as partners and we're exploring those opportunities where those make sense. So we think our returns are adequate on separable projects that could be joint-ventured. They're quite good and we think people will be interested in joining us in those projects. We would continue to build it, own it, operate it, et cetera, but it gives us an opportunity to free up capital to deploy to higher return opportunities or to use with the balance sheet or to ultimately in the longer term return cash or increase dividends depending on what the circumstance is - what appears to be most rewarded at the time. So it's really doing economically rational things like deferring spends where you can. We flushed out some scope changes, cost savings, other things that are real improvements to the economics, finding joint venture partners where those things make sense and channeling the capital that we have to the highest returns that are in the backlog right now and potentially to some new projects so again, our capital constrained for that.

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

Yes, it's under contract and it's approved to go forward. And just again a reminder on that, that contract is - we're not taking commodity risk on that facility. Shell has signed up for a 20-year contract. They'll make this part of the LNG that's in their portfolio. So we're not taking - they're entering into an internal use agreement essentially with us on that project. They also have enough of a portfolio around the world that they don't need and it's not hinged on dependent upon non-free trade act approval. So that project is very much a go from our perspective. We do need our FERC 7C certificate and we're in that process now. We filed for it and expect to get it in roughly the second quarter - yes, okay, second quarter. And we have applied for and think we should be able to obtain non-free trade agreement authority too to take that commodity - for Shell to take that commodity to other places. So our things are proceeding very well there.

So the FTA approval is just an incremental benefit to Shell, it's not – it's not -

Right, non-FTA. Yes. They can go to Free Trade Act agreement countries as it is.

So it sounds like it's essentially a go assuming that the FERC timeline hits on the kind of the May or midyear timeframe.

That's correct, right.

That's right.

Any color or commentaries around construction cost? It presumably gets to be an easier project to give in where we are in the macro environment and labor cost and all of that good stuff.

Yes. Now it's a fair point. The construction environment for the LNG facility is improving. And we're - we are working on an EPC contract and we have plenty of interest in that. So with an EPC contract, there is nothing in this world that's turnkey, and anything that's this complex, but that allows us to shift a considerable amount of the construction risk to the contractor.

Okay. Well, that sounds like all good news. I’ll jump back in the queue for further questions. Thank you, guys.

I really appreciate the CapEx. Now my quick question there - I don't know if I missed it at some point during the call. But did you guys give an update on net and how I should be thinking about that and where it sits within the growth backup?

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

I probably just want to make sure it's still in there. And then you guys gave a lot of great clarity around counterparty details. So thanks for this, but to hop on lower end to the scale. If I aggregated counterparties that were like 10 minus or below, do you know how large that number would be as a percent of revenue? And just how I should be thinking about that?

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

And lastly, Rich maybe to get you to pontificate that I get this question all the time. Can you just maybe touch on high level what you think is going on out there like, I mean you spend roughly a month and since we had the dividend cut to reach that market expectations, but there is still like a lot of volatility. How are you thinking about what’s generally going on in our market?

Are you talking about that market in general or Kinder Morgan’s specifically?

I’m doing both of them.

Both of them. So I’m good at pontification as long as I follow Mark Twain’s old saying, making predictions is difficult particularly when they concern the future. But I think looking at where we are today, I mean I’m obviously very disappointed, you would expect and where the KMI stock prices is and the way the market has treated us post the dividend. We thought we took a great deal of uncertainty out of the equation. And as I said, the key fundamental thing is the amount of distributable cash flow we produce. And of course, valuation 101 would say that regardless of what you do with your free cash flow, your distributable cash flow, whether you dividend it out, put it in new projects as long as those are good new projects and ours are or a buyback stock or pay down debt, really should make no difference from a valuation standpoint. But clearly parts of the market are not on that same page. I believe that long-term, the fact that we have no need to access equity markets, not just for ‘16 but for the foreseeable future and that we will self-fund our capital expenditures, our growth capital, should in the long run, I think be a very solid underpinning to this company and we’re going to be able to return a lot more money to our shareholders in the long term as well as de-lever the balance sheet. I think as far as the overall market is concerned, I said in the opening remarks it seems like a chicken little, the sky is falling market. There seems to be no discrimination among based on quality or based on virtually anything it’s just if oil prices go down, sell everything in the energy sector. I think that’s a very wrong-headed short-term view, but the market is what the market is. And obviously, we believe we’re tremendously underpriced. If you look at a company that’s going to have close to $5 billion of free cash flow in the total market capital, but this level is $27 billion, $28 billion. I’m afraid to even compare that, it upsets me so much. But that’s my feeling on it, probably more than you wanted to hear. But as a larger shareholder, I can tell you it’s very frustrating.

I say congrats on the DCF number.

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

Yes. I don’t have off the top of my head breakdown on the timing on in service for the remaining $3.3 billion. I mean it’s going to be a combination. I mean we will give you updates when we get together next week about the projects and the associated in-service states and things like that when we have a conference next week.

Ted, one perspective on this, which Kim will elaborate on next week, is that predicting future outcomes is quite challenging due to various uncertainties in the market. However, we can provide some guidance. Our backlog has decreased, but it should generate a certain level of cash flow. If we are financing it ourselves, there’s no need to account for interest or equity issuance. Focus on the potential cash flow from the backlog as it is recognized. You can then consider your views on commodity prices or other factors. There should be a straightforward approach to look ahead and incorporate your perspectives on the broader markets. We'll further explore this at the investor conference next week.

Just on terminals here, we had a tough quarter. I guess thinking through to ‘16, how much of that is going to flow through, what do you have in terms of the minimum volume commitments, and how those run off annual, and maybe even over multi-year view on terminals.

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

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

On CO2 hedging for 2016 about 70% hedged at $69; in 2017 $54 to $73; 39% in '18 at $75; and 21% in '19 at $65.

I was just wondering if you could walk us through more on the high grading of the project. As far as that applies to CO2 in what prices do you guys need to see out there to deploy capital or what still makes sense in this commodity price environment? Could you help us get a sense of that.

CO2 has been subject to a comprehensive capital review as we adjust to declining commodity prices. We're allocating additional capital to CO2 with the aim of achieving very strong returns, targeting upper teens to over 20 percent after-tax on leveraged returns. This focus applies to the oil production associated with the current forward curve for this particular development. In our evaluations, we also consider the NPV15 breakeven price for crude to better understand the potential for success if we move forward with the program. As prices have decreased, we've reduced our capital expenditures and streamlined our projects. While some programs still warrant investment, we expect a lower capital expenditure number for CO2 in 2016, potentially the lowest we’ve had, yet we anticipate reasonable production from this strategy. We continuously reassess our pricing and also take into account that these programs have varying spans; for instance, we plan to execute a certain number of infills in South Iraq. These infill projects generally yield oil early on, but if their performance or market prices don't meet our expectations, we can scale back and withhold that capital. We have refined our CO2 capital strategy to remain aligned with commodity price trends, which can fluctuate daily, and we maintain the flexibility to adjust our spending as needed.

I was wondering as well about the gathering and processing business. Thoughts that you guys have as far as visibility into volumes and if you could help us things like that and where producers are, because everything is changing so rapidly so just wondering how you think about that and what risk you see to that part of it?

I’ll start and let Tom pick up with additional detail. The gathering and processing is a part of our business that really has two parts to it. I mean there is a piece of that business that is secured under transport agreements with minimum takes that look something like what you would see in a gathering agreement or a fee-based processing arrangement, which looks something like you would see in the rest of our business. The second part of that business is percentage of proceeds, kinds of business where we are more exposed to commodity price. We've picked up some of that with open owe and some of that with the Hiland acquisitions as well. So you have to kind of break it apart and we're talking about seeing if we can break that up further, quantify that further so that people can see the two parts of that business. What we’re trying to do on the percentage of proceeds part is to try to migrate that more to fee-based so we're kind of in the start of that process right now, but we do have exposure there. So then that becomes commodity price assumption-driven: what do you think commodity prices are going to be, what do you think processing spreads are going to be, and we've made some high-level assumptions in the budget including an NGL price deck that we use. And so we think we’ve calibrated that reasonably well but there is certainly variability in part two of that business as I have mentioned it. Tom, anything more?

Yes, I believe our overall volume trend will outperform our peers. Our network is situated in the best locations, but as time goes on, lower commodity prices may result in decreased volume activity. However, as Steve mentioned, many of our agreements include a significant fixed component, so the volume aspect is just one part of the overall picture.

And then just to make sure I had right as far as the capital market activity for '16. Was there no activity for equity and was that no activity on the debt side as well, did I guess that right?

We’ll go through that at the investor conference that’s generally what we are thinking.

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

I think it's important to analyze these projects individually. Some of the capital projects we undertake, which expand our existing network, are highly profitable and do not require us to seek joint venture partnerships. Many of these initiatives, such as enhancing connections or capabilities at terminals, are integral to our operations, and we can expect quick and positive returns from them. On the other hand, there are projects that present attractive market returns but may yield lower incremental returns than we desire. These are more distinct from our network and could be suitable for joint ventures. Our primary goal is to protect our debt-to-EBITDA ratio and maintain a secured investment-grade rating, which the capital expenditures from 2016 support. We will be mindful of how we allocate our finite resources, directing them toward the highest returns available. While we will pursue projects within our capabilities, we will consider joint ventures for those amenable to it, where we can attract third-party capital to help offset costs. This is our approach as we move forward.

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

Well, look I think you have to look at what the situation is when and if that occurs. Obviously in today's market if something happened, we'd love to be buying stock at this kind of ridiculous level. But that may not be the case a year or two from now. If the market's more rational, we might use that to increase the dividend. We're certainly going to be continuously mindful. Steve said that keeping our investment-grade rating and maintaining a really solid balance sheet. Yes, but just very simplistically and we outlined this in the release today. Even after we've done a revised budget reducing measurably the commodity assumptions and raising the interest rates projection in accordance with the fall recorded, we do all that and we still have $4.9 billion of DCF for the equity holders. You deduct the roughly $150 million in preferred dividend leaves you about $4.7 billion available to the common. You pay $1.1 billion in the reduced dividends that leaves to $3.6 billion. And as we've said, we've reduced our capital expenditure program to a little less than $3.3 billion. Now there is a heck of a lot of a lot of other moving parts in administration. When you just look at very simplistically the ability to fund a capital project program, we can do that. Now to extend to that $3.3 billion is something less than that, that would free up more money to either further deliver the balance sheet or return to shareholders through one of the two methods that we've talked about. So I think the real message here guys is we are self-funding now. Okay. And I got to tell you that to me that's a big relief. Nobody is affected any more than I was by the dividend cut. Okay. But the point is we are building a very solid, stable balance sheet with the ability to return an awful lot of cash to our shareholders over the next few years.

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

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

And then how do you view the probability now on the supply path and the market path in North East Iraq? You had obviously roughly secured one of those paths. What do things stand on the rest of it?

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

And then the last thing. Regarding the change in capital spending, you mentioned that much of it is due to the decline in commodity prices. So you are reducing investment in the CO2 segment and have also increased the hurdle rate. Could you elaborate on what is driving that change? It would be helpful to know how much you have raised your overall hurdle rate.

Yes. On the CO2 we'll have all the expansion capital laid out by business unit next week and you'll see what makes up that $3.3 billion. And that’s got everything in it, including assumed acquisitions. So we'll give you the full breakdown of that. And as I said a little earlier in the call, I mean you got to look at every project individually and how secure the contracts are, what the creditworthiness of the counterparty is, how secure the revenues are, whether they're upside etc. But we have been elevating what we are evaluating, investing in to kind of a mid-teens after-tax return area. And so we may be waiting to see that, right. We'll see some of those opportunities on build out of our existing network, but we're prepared to wait and see if that's what it takes to make sure that we're allocating capital to the best opportunities.

I would like to rephrase Kristina's question. How much of the revenue is exposed to credit risk, specifically regarding the potential for loss? You provided a lot of details, but can you clarify if it amounts to 1% or 2% of overall EBITDA, or is it something different? How should we approach this?

It's difficult to provide a precise answer to that question. However, you can take comfort in knowing that we have a very diverse customer base, with only a small number contributing more than 1% of our revenue. Additionally, when considering revenue, it's important to note that in cases like the Texas Intrastates, revenue fluctuates alongside the cost of goods sold and commodity prices. In such scenarios, we focus on margin.

I mean margin, Steve. If you know what I'm getting at.

You can feel assured that a relatively small group of customers contributes to 20% or 1% of our revenue, with 20 customers making up 1% or more. Among our top 25 customers, 80% have investment-grade ratings. While I don't have more specific data to provide beyond what I mentioned, I believe we measure up well against many others in our industry when considering these metrics in comparison to what others are experiencing.

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

Not specific. We talked about CO2 a little bit and answered one of the questions that came, but we had a combination of efficiency gains, I recall where we reduced scope or found a cheaper way to do things we did, cancel some projects or assume a way some previously unidentified acquisition that was probably on the order of two thirds of that number cancelled or - cancelled or suspended or just assumed away, right, that we wouldn't do as many acquisitions as we had in our previous budget expectation. So that would be the biggest chunk of it, but it is a combination of things.

But we're going to break those down, business segment by business segment at the conference next week. So you can see kind of where the changes are between where our original budget was and where we are now.

And so there is not one specific project that accounts more a majority of that?

No, no.

Regarding NGPL, with your acquisition of an additional stake, is there any capital expenditure or equity infusion planned in the budget for it? What are the plans for NGPL?

We have assumed some capital for NGPL and have several appealing expansion projects that we and our partner plan to pursue. This will be part of the gas group, but it's unlikely we will separate it out.

But in terms of an equity infusion there is nothing that seemed in there?

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

That will be on project development, no additional equity infusion?

Yes.

There are some.

Yes, there is.

There is some in there?

Yes. That's Kinder's budget.

Primarily for Rich. I have been a significant shareholder in the company since the late 90s, when you went public. The stock appears to be very undervalued, but my main focus is on dividends and return of capital. With all the factors you've mentioned and your earlier explanation about balancing capital spending with growth, I’ve done some calculations. If you maintain the promised 10% dividend increase and hadn’t faced challenges in the credit markets, we could have seen a dividend around $3 or $3.20 in five years, resulting in about an 8% yield on the initial $40 stock price. Now the stock is approximately 25% of that value. I understand you can't be too specific, but it would help to have some guidance on the balance between capital spending and the anticipated growth. For someone considering buying the stock at $12 today, if capital spending were halted, it would yield a 20% return with a $2 dividend if it were reinstated. Understanding how you’ll balance capital spending with growth is crucial for gauging potential investment returns. A more definitive outlook on the dividend over the next five years, particularly as capital spending may decline, would be greatly appreciated.

This is Kim. I think in terms of what you can expect as a dividend, that's hard to say today. I think in terms of what we - next week at the conference as Rich - we're going to show you the portfolio the backlog of the projects that we have. We're going to give you approximate multiple that we expect to earn on that. And so you - that is just the backlog that has nothing to do with our base business, but you will get a sense for how much distributable cash flow we think will be produced from that backlog. And then people can make whatever assumptions they want to make about what happens with the base business and how - where exactly we take the balance sheet and how we return capital at some point to people, whether that share repurchase or dividends or otherwise. But as - I think there is very good financial theory that says whether a company pays a dividend or doesn't pay a dividend, it does not impact the value of the firm. So we can tell you how much cash that we're going to produce from these investments. And then I think from that you can come up with what you think the value of the stock is worth.

Yes. However, if you continue to spend capital, you won't be able to distribute it and achieve the positive outcomes you mentioned. There needs to be a conclusion to this approach. It's somewhat similar to the Amazon scenario, just in a different sector. If you keep spending capital at this level, you won't have the resources to distribute as you intend. So, how do we establish some consistency, since we need to determine how to manage the balance sheet and return capital to shareholders, whether through share repurchases, dividends, or other means? I believe there is solid financial theory that indicates whether a company pays a dividend or not does not affect its overall value. We can inform you about the cash flow generated from these investments, and from that, you can estimate the worth of the stock.

What you're saying is that the value of the firm depends on the dividend policy.

No, no. It can depend on a lot of different things, but I'm looking here $6.4 billion in distributable cash flow with your current capitalization would produce that $3 dividend. So are you going to get to $6.4 billion or so billion dollars five years down the road? That’s the key is it, tell me if I'm wrong.

What we've tried to say is that we're going to have a lot of cash flow - just let me finish please, you can take what we have today which is roughly $5 billion of free cash flow. You can look at our backlog, we can give you an idea of what the expected return on that is and then you can take that number and let’s say that’s a dollar, whatever it is, per share, you can take that and add it to our present number and build up what you think the cash flow will be in 2020 or 2021 but I want to again caution you that we have not been in this business 35 years, this is the most - more headwinds, side winds, anything that I have ever seen and to sit here and give you a number in 2020 would be insulting to you and to everybody else. And what we're trying to tell you is, we've got a lot of cash flow, we're going to do that, we're going to use that in a way that makes the most sense for the company and its shareholders. And if that involves buying back shares or increasing the dividends to a level, that’s what we're going to do. We're not going to waste the dollars and the backup for that is just what Steve talked about is we're high grading, we've reduced the backlog by $3.1 billion, to the extent we reduce it further or joint venture more of the backlog, that is going to free up more cash earlier on the other end, it is going to in the long run depreciate somewhat the amount of cash we have coming out of those additional investments as a result of the backlog. So this is what we're committed to. We showed you what we generated. We're going to generate, we generate $2.14 last year and that we think is going to grow very nicely over the years.

Right but the question is will the capital expenditures at some point - in other words it is very much the Amazon story, at some point we're going to stop spending and produce larger unusually large dividends. Right now if I go back to the $40 promise you were not afraid then to talk about a 10% dividend increase at that time. So I'm assuming that that situation is still pretty much in force. It’s just that the numbers have changed for all the reasons we know, but as far as the basic business is concerned which is what I'm hanging my hat on because I haven’t sold a share either is whether to buy more shares based on the idea that that original promise which you made is still pretty much intact, and the way that promise is going to come to fruition is in the year 2021 let’s say, we won’t have the CapEx and we will be able to start distributing huge amounts of money to shareholders. I mean that's what we are all looking for I think - is that wrong or not wrong, that thinking.

I think I've answered the question and what we're trying to say is this is a very complicated world, we're generating cash flow, that cash flow we think will be increasing as time goes on and we have used this thought and we're going to look at that time as to what makes the most sense. Of course, as we finish these capital projects, we do not anticipate huge new additional capital projects but we will see what the opportunities are in those out years. The whole thing is to create value for the shareholders and if the best way to do that is distributing dividends, that’s what we're going to do. If the best way is to deal over the balance sheet, that’s what we're going to do, it’s a combination of all these factors, in this hectic market it’s just very difficult to give you some specific number you can rely on in 2020 or 2021 but I appreciate your concern and certainly we agree with you I'm the largest shareholder, I want to see all kinds of value derived by the common shareholders of this company.

Thank you.

Well, thank you very much. We appreciate you listening with us and we’ll see most of you next week in Houston. Thank you.