Kinder Morgan Inc - Class P (KMI) — Q2 2017 Earnings Call Transcript

Okay. Thank you, Natalie, and welcome to the Kinder Morgan quarterly analyst call. Before we begin, as usual, I'd like to remind you that today’s earnings releases and this call include forward-looking and financial outlook statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities Exchange Act of 1934, and applicable Canadian provincial and territorial securities laws, as well as certain non-GAAP financial measures. Before making any investment decisions we strongly encourage you to read our full disclosures on forward-looking and financial statements, and use of non-GAAP financial measures set forth at the end of our earnings releases, as well as review our latest filings with the SEC and the Canadian provincial and territorial securities 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. Let me begin the call by saying that at the end of 2015 we made a very difficult decision to reduce our dividend for the first and only time in KMI's history. We said we would work hard to strengthen our balance sheet and fund our growth CapEx from our internally generated cash flow without having to issue equity or additional debt. And that when we had made sufficient progress on those goals, we would begin to return additional value to our shareholders through some combination of dividend increases and/or stock repurchases. Since that time, we have reduced our debt by approximately $5.8 billion and funded all of our CapEx out of operating cash flow while paying a dividend of $0.50 per share per year. Today we are happy to announce multiple steps to return significant value to our shareholders. We plan to increase our dividend for 2018 by 60% from the current level of $0.50 per year to $0.80 per year beginning with the dividend payable for Q1 of 2018. We then expect to continue to increase the dividend by 25% per year in '19 and '20, resulting in a dividend of $1.19 and $1.25 in 2020. Additionally, our board today authorized a $2 billion share buyback program also expected to begin in 2018. We intend to take these steps while continuing to strengthen our balance sheet by funding all our growth capital needs at KMI out of operating cash flow without the need to issue equity or incur additional debt. We expect to maintain best-in-class coverage for our dividend, for example, about 2.5 times coverage in '18 and two times or better in '19 and '20. To sum up, we intend to fund our growth CapEx needs at KMI from internally generated cash flow and return excess cash to our shareholders through a growing dividend and share repurchases. And with that, I will turn it over to Steve.

Okay. Well, that’s the big announcement. I am going to take you through KMI performance highlights and then turn it over to Kim Dang, KMI's CFO, to take you through the financials. Following that, I will update you on KML and turn it over to Dax Sanders, CFO of KML, to give you the KML financial update, and then we will take your questions on both KMI and KML. So starting with KMI. We had a good second quarter and a good first half of the year. Performance was a little better than planned for the quarter and the first half of the year. As we said on the first quarter call, recalling that timing and expect to be essentially flat to plan for the year after adjusting for the impact of the IPO of 30% of all of our Canadian pipelines and terminals assets as a result of the IPO. Also, we have now completed the two key steps that we outlined at the beginning of the year to strengthen our balance sheet and put us in a position to return value to shareholders as Rich told you. Number one, we completed that JV of our Elba Island liquefaction project in the first quarter. That was consistent with our budget assumptions. And in this quarter, we secured acceptable financing for our Trans Mountain expansion project. With those steps now complete, we project to end 2017 with a debt to EBITDA ratio of 5.2 times versus the 5.4 we projected at the beginning of the year. It's worth noting a couple of things from the KMI perspective on KML. By creating an entity with all of Kinder Morgan's existing Canadian assets and taking that entity public, we established a business that is broader than the expansion project. These assets include our existing pipeline and terminals asset networks in Canada, including what we believe is the best merchant terminal position in the Edmonton hub. The Edmonton position is a network with facilities interconnected with each other and with Trans Mountain and third-party pipelines. We continue to expand that network with our base line terminal project which I will get into in the KML portion. The Canadian pipelines and terminals businesses produced a little under $400 million of EBITDA Canadian in 2016. The strength of this business and its opportunity to grow further creates an entity that can raise its own capital for the $6.1 billion in remaining spend on the expansion. In fact, we closed shortly after the IPO on a construction credit facility that Dax is going to take you through in a bit. So we were able to strengthen KMI's balance sheet using the IPO proceeds to pay down debt and secure an acceptable means of funding our largest expansion capital project which will benefit both KMI and KML shareholders alike. Now a few KMI business segments performance highlights for the quarter. First, the backlog currently stands at $12.2 billion. That’s an increase from last quarter. We had new project additions in gas and CO2 which outpaced projects that were placed in service primarily in the terminals segment. We continue building out this backlog which we expect will contribute significant EBITDA to the segments when complete. Overall project management performance has also been quite good, delivering results that are consistent with our investment decisions. We are also, and I would say especially in natural gas, seeing additional opportunities on the horizon across multiple fronts, whether it's producer push projects out of the Permian, additional power plant connections, export needs to Mexico and LNG as well as storage opportunities. In our natural gas segment, we saw transport volumes increase year-over-year, Q2 to Q2, by 3%. Key contributors were Mexico exports which were up 8% year-over-year, higher LNG exports coming off of our pipes, and partially offset by lower power demand. On the other hand, our gas gathering volumes were down year-over-year by 12%. Gathered gas volumes were up in Bakken but down in both Eagle Ford and Haynesville and overall we are seeing volumes flattening to slightly recovering in our key basins. Recall that our gas segment is 55% of our segment earnings before DD&A and gathering and processing is only 18% of that number. We signed an additional 280 a day of long-term firm transport agreements in the quarter, bringing the year-to-date increment to 680 a day and our total sign up of the last three and half years to 8.7 Bcf a day of which 2.4 Bcf was existing previously unsold capacity showing again that the rise of natural gas production and demand creates expansion opportunities but also adds value to the existing network. We continue to make good progress on our 1.8 Bcf a day Gulf Coast Express proposed project which goes from the Permian to a connection at Agua Dulce in South Texas with our existing Texas Intrastates system. We are not putting it in our backlog at this point but we have got a good offering to the market and we are progressing our commercial discussions towards firm commitments. We also continue to see interest in our Permian capacity on EPNG which has some very attractive low capital expansion opportunities to get more gas to Waha. The overall summary on gas is that we continue to expect long term benefit in this sector from increased LNG and Mexico exports, power and industrial demand and those should continue to drive the demand for the transportation and storage infrastructure that we own. Shifting over to our products pipeline segment, refined products volumes, NGLs and crude and condensate transport volumes were all up year-over-year. The benefits of these higher volumes were offset by some settlements, the project write-off on Plantation and the sale of our interest in Parkway pipeline last year, all of which weigh in to leave us slightly down year-over-year on the segment's earnings before DD&A basis. Getting back to the volumes, refined products volumes were up 2.2% year-over-year versus an EIA overall market growth number for April and May of 1.5%. NGL volumes are up 14% year-over-year. And in contrast to our gathered volumes, our crude and condensate transport volumes are up year-over-year on our Eagle Ford, that is our KMCC asset and our Bakken pipe. Bakken performance is due in part to the delay of DAPL; the KMCC volumes I think are an indicator of the great connectivity and superior location of that system. We have made excellent progress during the quarter on our Utopia pipeline project. Recall that we received an adverse decision on eminent domain in one of the Ohio circuit courts last year. Our team did an excellent job of acquiring the necessary right of way, including reroutes and the purchase of an existing pipeline. And so in the quarter, we finished acquiring all of the required right of way and we are now about one third complete on pipeline construction and on target for our scheduled January 1, 2018 in service. Really fine work and fine recovery by the project team on Utopia and, again, scheduled to be on time on January 1, 2018. In our terminals business, the segment earnings before DD&A were up 2% versus Q2 last year primarily as a result of contributions from projects coming on line in our liquids business which makes up about 80% of this segment. Our leasable capacity in liquids was up 2%, our utilization remained very strong at 95%. Both volumes were also up year-over-year by 4.7%, which was led by performance in pet coke and steel. Our commercial team wisely remained aggressive in keeping all of our Jones Act vessels under charter and discounting as necessary to do so. And we have all of those vessels under charter today and took delivery of two during the quarter. One at the very end of the previous quarter and one during the quarter. In CO2 we experienced a lower effective oil price compared to last year and lower oil volumes but we are on plan in this segment. We experienced record CO2 production in April and higher volumes year-over-year for the quarter Q2 this year to Q2 last year. We are also seeing promising results from our recent CO2 activation programs at Sacroc and from our Tall Cotton Residual Oil Zone development which is now producing over 2000 barrels a day. So overall, a strong quarter. Strong financial performance. Continued progress on our project execution. Completion of a key milestone in our effort to strengthen our balance sheet and position us to return value to shareholders. And with that I will turn it over to Kim Dang.

Thanks, Steve. We are declaring a dividend today of 12.5 cents per share consistent with our budget. On the performance let me hit the high points first and then I will take you through the details. I will start with the GAAP numbers and then I will move to DCF, which is the way that we look at and think about the numbers and performance. Earnings per share and adjusted earnings per share are both flat versus the second quarter of 2016. DCF per share, which is the primary way we judge our performance, is a penny lower versus the second quarter of 2016, or approximately $28 million, primarily attributable to the sale of 50% of SNG, the KML IPO transaction in which we sold a 30% interest in our Canadian assets, as well as higher sustaining CapEx and cash taxes. For the second quarter and year-to-date DCF per share is ahead of our budget but that’s largely timing with sustaining CapEx being the largest contributor. For the full year, after the impact of the KML IPO, we would expect DCF to be on budget. Taking the impact of the KML IPO into account, we expect DCF to be less than 1% below budget. On the balance sheet, we ended the quarter at 5.1 times debt to EBITDA, down from 5.3 at the end of last year and at the end of the first quarter as a result of paying down debt with the approximately $1.25 billion in net proceeds that we received from the KML IPO. Our debt balance for the second quarter came in lower than what we expected, primarily because some expansion CapEx got shifted from the first half of the year to the second half of the year. Therefore, we still expect to end the year at 5.2 times as we previously communicated. On the expansion CapEx front, we are forecasting $3.1 billion for the year. That is down from our budget of $3.2 billion. The $3.1 billion does not include any KML CapEx, including spending on Trans Mountain from June forward as we expect KML to be a self-funding entity. Because of the equity that KMI has contributed to fund the Trans Mountain project prior to the IPO, KML has the capacity to draw on a construction facility to fund its CapEx for the balance of the year. If you take a broader view, the Trans Mountain expansion has $6.1 billion in remaining spend. It's got a $4 billion revolver and so there is about $2.1 billion gap and we expect KML to be able to finance the balance itself, which Dax will take you through when he walks through KML. Now for some detail. Looking at the preliminary GAAP income statement, you will see that revenues are up by 7% on the quarter but cost of sales is up by more resulting in a $114 million reduction in gross margin. A similar phenomenon to what we saw in the first quarter of this year. The sale of 50% interest in SNG accounts for $112 million or 98% of the reduction. Therefore, if you exclude the sale, gross margin would be essentially flat which is pretty consistent with how we view our overall results for the quarter. As I said earlier, both earnings per share and adjusted earnings per share are flat for the quarter versus the comparable prior period. Net income available to common shareholders in the quarter was $337 million, or $0.15 per share, versus $333 million, also $0.15 per share in the second quarter of 2016. Net income available to common shareholders before certain items or adjusted earnings was $304 million or $0.14 per share versus the adjusted number in 2016 of $322 million, also $0.14 per share. Certain items in the first quarter of this year were a benefit of $34 million. The most significant was a reserve release on a litigation matter we settled. Certain items in the first quarter of 2016 were a net benefit of $8 million. Now I am going to turn to the second page of financials which shows our DCF for the quarter and year-to-date and is reconciled to our GAAP numbers in the earnings release. As I said earlier, DCF is the primary financial measure on which management judges its performance. We generated total DCF for the quarter of $1.022 billion versus $1.05 billion for the comparable period in 2016, down $28 million or 3%. Looking at the breakdown of the quarter-to-quarter change, segment earnings before DD&A and certain items is down $66 million. Natural gas is the largest driver, down $54 million. The SNG joint venture impact was approximately $73 million in the quarter. So absent the sale, the natural gas segment would be up slightly. Although the SNG transaction overall was dilutive to DCF, the segment impact of $73 million overstates this impact as their benefits reflect in other lines, with the primary benefit coming in interest expense as we use the proceeds from that transaction to pay down debt. The CO2 segment is down $8 million or 4%, primarily associated with lower oil production at Sacroc, primarily as we reallocated capital to projects that had higher returns but longer lead times. The terminals and products variances in the quarter are small and largely offset. The Kinder Morgan Canada variance is also small. G&A is a net benefit of $16 million quarter-to-quarter primarily as a result of the SNG sale and lower franchise taxes. Interest expense is a benefit of $43 million in the quarter versus the second quarter of 2016, as a result of the SNG joint venture transaction and the KML IPO as we use the entire net proceeds from both transactions to pay down debt. Cash taxes and sustaining CapEx are higher by about $30 million versus the second quarter of last year but we expected and budgeted both cash taxes and sustaining CapEx to be higher than last year by even more than the $30 million. So there is some timing on these items between the first half of the year and the second half of the year relative to our budget. Totaling those quarter-to-quarter variances, the segment is down $66 million, G&A is a benefit of $16 million, interest is a benefit of $43 million, and cash and sustaining a combined increase of $30 million, results in a variance of $37 million. The last piece of the variance relates to SNG. In our adjustments to convert net income to DCF, we add back JV DD&A and subtract our sustaining CapEx to more closely reflect the cash we expect to receive from our JV. Because SNG is a JV in the second quarter of 2017 versus a fully consolidated asset in the second quarter of 2016, there is approximately a $10 million benefit to JV DD&A between the two periods. The net impact of KML for the period is buried in some of the line items I have discussed because it's small, less than about $5 million when taken into account the interest benefit. DCF per share was $0.46 versus $0.47 for the first quarter of the prior year, or down a penny, all of which is associated with the DCF variance I just walked you through. The $0.46 per share results in over $740 million of excess distributable cash flow above our 12.5 cent dividend for the quarter and $1.68 billion year-to-date. As I said earlier, for the quarter and year-to-date we are ahead of our budget but for the full year we expect to be on our budget when you exclude the impact of the KML IPO. The effect of the IPO will be seen primarily in two places. One, in net income attributable to non-controlling interest which will reflect an expense for the public's 30% of net income which will be somewhat offset by interest expense which will reflect a benefit as we use the IPO proceeds to pay down debt. Including the impact of the KML IPO, we expect DCF to be less than 1% below budget. And with that, I will move on to the balance sheet. We ended the quarter with net debt of $36.6 billion and net debt to adjusted EBITDA of 5.1 times. Debt is down year-to-date $1.56 billion and it is down in the quarter $1.24 billion. To reconcile that for you, in the quarter it is pretty easy, we are down $1.24 billion of debt and the IPO proceeds were $1.25 billion. So essentially everything else nets out but to take you through some of the details, DCF was $1.022 billion as I previously mentioned. Our investment programs, expansion CapEx and contributions to equity investment was a little over $875 million. We paid dividends of $280 million and then we have working capital and other items of $129 million. Source of working capital which was primarily associated with accrued interest as most of our interest payments are made in the first and third quarters. Year-to-date we have reduced debt by $1.56 billion and so to break that down for you. We generated DCF of $2.24 billion. We had $1.64 billion in investing activity between expansion CapEx and contributions to equity investments. We received $1.25 billion in IPO proceeds. We had a little over $450 million from asset sales in JV proceeds, primarily the Elba promote, our partner's catch up of its equity contributions and the sale of some of our non-core terminals. We paid dividends of $560 million and we have working capital and other items that were a use of capital of $178 million, which were a whole host of items that include use of cash for inventory, primarily natural gas purchases. Property tax payments, a lot of which occurred in the first quarter. Debt issuance cost associated with the KML construction facility and accrued interest. So with that, I will turn it back to Steve.

Okay. Now we are going to turn to KML. I will give the update and then Dax will take you through the numbers and also a couple of key updates. So just a reminder, KML consists of all of the Kinder Morgan Canadian pipelines and terminals assets. So those include our existing Trans Mountain Pipeline system which runs for and is the only outlet for Alberta crude to a world oil market price. It also includes, of course, the Canadian $7.4 billion expansion to triple the capacity of that system. KML also includes the Puget Sound system which takes oil from the Trans Mountain Pipeline and delivers it to Northwest Washington State refinery, a market that we would expect to grow over time. KML includes the Canadian portion of the Cochin system which delivers condensate to Alberta for blending with the oil sands crude for transport. Crude comes down from the oil sands to our merchant terminal position in Edmonton, among other places, where it can move down Trans Mountain or third-party pipeline, or through one of our joint venture crude by rail facilities. We have built our Edmonton position over the last ten years and continue to expand it with our Base Line Terminal joint venture with Keyera, which is the Canadian $366 million investment to our share. That’s on time and on budget with the first tanks coming online in January of 2018. Finally, Vancouver Wharves, our multi-commodity bulk terminal in Vancouver harbor and the Gateway terminal for mineral concentrates both coming into and out of Western Canada is also part of KML. So in all, KML is comprised of two strong, existing business platforms that are integral to fulfilling the transportation, blending, and storage needs of producers and refiners. They have substantial upside associated with Trans Mountain expansion as well as other potential expansion. On the Trans Mountain project, I will remind you that in Q1 we reached a significant milestone. We increased our cost estimate about the contractual cap. The cap was $6.8 billion Canadian and our revised estimate is $7.42. That gave our shippers the right to turn back capacity. At the investor conference in January, we expressed our confidence in the market need for the project and in fact when all was said and done, all 708,000 barrels remained under long-term contract. But now with the increased cost, which includes return on the additional capital spend as well, we ended up with only 3% of the barrels turn back and those were taken up in an open season. The contracts are predominantly 20 years with one 15-year contract. So we had essentially reconfirmed the value and need for the project with a 2017 line up of shipper needs based on 2017 market conditions including oil sands conditions. Also recall that we have built in protections for the costs that are more difficult for us to estimate and control on the project. These uncapped costs associated with, among other things, the most difficult mountain and difficult urban portions of the build, if higher than shown in our cost estimate result in an adjustment to our total which includes recovery of the cost but also the project return on those costs incurred. By the same token, reduced costs flow through to the benefit of our shippers and our shippers benefit from the fact that other portions of our costs are capped. And we would absorb the overrun there, if any. We also received our environmental approval for British Columbia earlier in the year and of course our federal government approval finding that the project is in the public interest of Canada. So in the quarter we made our final investment decision of approving the project. We made a public offering that included all of Kinder Morgan's Canadian assets and we secured financing. As we are moving into project execution, we are finalizing rates with contractors, we are ordering materials, readying for construction start in September. And we are doing that with substantiated first nations support, support from the federal government on a project of vital national interest, support from the Alberta government and with our BC environmental order in hand, and with significant financing sources already secured. And with that I will turn it over to Dax.

Thanks, Steve. Before I get into the results and outlook, I want to highlight a couple of occurrences on the bank capital markets project. First, we received our initial ratings from the agencies and consistent with our expectation we received a rating of BBB from S&P and BBB high from BBRS. On the financing front, as Steve mentioned, we closed on a financing package that consists of a $4 billion base facility, a $1 billion contingent facility, and a $500 million working capital facility. All of which positions us well to access the significant portion of the capital we need to build the Trans Mountain project including accessing the Canadian pref market as we discussed on the road show. As I move into review of the results, I want to preface my comments with the caveat that while I will be offering quarter-over-quarter comparisons, those comparisons are of limited value at this point given that we are reporting a quarter where KML was owned by the public for a part of the quarter and will be compared to a quarter where it was wholly owned by KMI and during those periods part of the IPO there were shareholders loans in place that generate significant effect, most of which is unrealized interest and other items not reflective of the true earnings power of KML. Therefore, we would ask you to focus on the outlook for 2017 which you will see is consistent with what we discussed on the road show. Now moving to the results and outlook for 2017. Today we are announcing that the KML board has declared a dividend for the second quarter and an inaugural dividend for KML of $0.0571 per restricted voting share which corresponds to pro rata percentage of the $0.65 annualized we suggested on the road show, adjusted for the 32 days in the second quarter that KML went public. With respect to performance and as Kim did with KMI, I am going to walk you through summary items and then will provide incremental details starting with the GAAP numbers and moving on to DCF, which is the metric we believe is most reflective of performance. With respect to earnings and net income, earnings per restricted voting share is $0.11 for the quarter which is derived from $25 million of net income which is down from approximately $52 million of net income for the same quarter in 2016. Adjusted earnings which adjusts for certain items is $36 million compared to $46 million for the same quarter in 2016. With respect to DCF, DCF per restricted voting share was $0.083 for the quarter which is derived from total DCF for the quarter of approximately $79 million versus $86 million for the comparable period in 2016, down $7 million or approximately 8%. That provides coverage of approximately $2.8 million and reflects a payout ratio of approximately 69%, again consistent with what we talked about on the road show. Now moving to the detail. Looking at the preliminary GAAP income statement, I want to point out the unusual item that is driving almost a $27 million decrease. FX moved from a gain of $5.8 million to a loss of $16 million. That $21.8 million swing was mostly related to the revaluation of the intercompany loan between KMI and KML that were repaid at the consummation of the IPO, again consistent with the message on the road show. And the items that drove $18.5 million of that $21.8 million were classified as certain items. The remaining 3.3 of the swing not attributable to certain items and included in the variances for net income, EBITDA, and DCF, was largely attributable to the settlement of intercompany AR and AP between KMI and KML and the revaluation of U.S. dollar bank accounts at KML. Going forward, while there may be some unrealized FX associated with intercompany AR and AP, now that KML is a standalone public company, those items will be settled on a monthly basis and unrealized FX should be much less. Now let's turn to the second page of the financials. Those are DCF and are reconciled for our GAAP numbers in the earnings release. Segment EBDA before certain items was $10 million compared to Q2 2016 with the pipeline segment down approximately $11 million and the terminals segment up about a million. The largest pieces in the pipeline segment was timing and integrity expend at Cochin, OpEx at Trans Mountain, and lower revenue on Puget. At the terminals segment, we had higher Vancouver Wharves throughput and revenue offset by higher O&M at Vancouver Wharves. G&A is essentially flat. Interest cost is $4.4 million lower versus Q2 2016, primarily as a result of the repayment of the intercompany loans and greater capitalized interest associated with the project. Total certain items for the quarter were $10.5 million tax affected, with the largest piece being the intercompany FX that I mentioned. The remaining 1.3 is related to certain JV IPO costs that were booked to the Canadian business prior to the IPO. Both cash taxes and sustaining capital were essentially flat compared to the same quarter in 2016. Now moving on to some specifics for the full year 2017. We expect EBITDA for the full year 2017 including pre and post-IPO periods to be just under $400 million and we expect DCF to come in at approximately $320 million. Both of those are consistent with the $395 million and $318 million of 2016 EBITDA respectively that we highlighted during the IPO. One item to highlight. You will recall that we recognized equity ADC as part of both EBITDA and DCF which is a product of how much CapEx we spend on the project. So EBITDA and DCF will be affected by the amount and not end timing spend on the project. With that, I will move on to a few short comments on the balance sheet. From the end of the year to June 30, cash increased approximately $35 million which is mainly due to a draw on the construction debt and working capital facility that I mentioned. Other assets increased $290 million which are primarily attributable to CapEx spending. On the right-hand side on the balance sheet, debt decreased by almost $1.2 billion and that was a result of paying off the intercompany loan. As of June 30, KML had total debt of $189 million which was attributable to $190 million drawn on the construction and working capital facility. And with that, I will turn it back to Steve.

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

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

So now that the IPO is now behind you, I was wondering if you could give a little more color on the contract process that you are running. And how you decided on the IPO and anything in hindsight that you would have done differently or maybe just communicated differently?

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

And could you just give a little more color on why you decided to do this between the share buyback and the dividend raise? I know you had many trajectories that you could have followed.

We believe we are generating excess cash that surpasses the requirements for our capital projects as we build them out. This allows us the opportunity to return nearly all of that surplus cash to shareholders, which is reflected in a significant dividend increase. This is beneficial for shareholders, and we are also implementing a share repurchase program, which is somewhat rare in our industry. This approach allows us to seize opportunities for shareholder value through repurchases, instead of solely focusing on the dividend increase. We think this is a strong strategy to return capital and value to shareholders, with substantially growing dividends that are very well supported, as Rich mentioned, along with a buyback program that provides flexibility to take advantage of opportunities.

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

Sounds like a pretty good day on your side of the call. So, I guess, let's start with KML. A decent equity currency there. Clearly there is a little bit of equity funding to come but maybe it's too early and not a fair question, but where do you see that entity ultimately going to in terms of public float, size? What kind of strategic things could you do with that particular entity over time?

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

Got it. Nice answer. More detailed question. Gulf Coast Express, what is the timeline to getting that into the backlog as you see it today?

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

I have a couple of quick follow-up questions. First, regarding Jean's question about the buyback versus the dividend, I was curious about how much the current stock price and your multiple compared to peers influenced the decision to pursue a buyback. Additionally, could you share your expectations on the duration for executing the buyback? Should we expect it to be completed gradually over three years, or is it something you aim to accomplish sooner?

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

Okay. And again, we will be price-sensitive in how we do our share repurchases. So those are broad parameters I know, but I think we have given a pretty good set of guidance on a $2 billion share buyback program over this three-year period.

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

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

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

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

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

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

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

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

You said about no borrowings just for growth CapEx. Was that intended to mean through 2020?

Yes.

Okay. Do you think that’s long-term efficient or are you questioning the size of your growth capital expenditures?

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

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

Well, Steve or maybe Kim, if you want to chime in. Do you see at the end of this three-year timeframe getting to a point where you don’t really need to worry about enhancing the balance sheet? Maybe it would be more opportune into the next decade to start funding half of growth CapEx for opportunity sets, let's say seven times EBITDA with some low-cost debt.

Yes. Absolutely.

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

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

Just wanted to dig in a little bit more on the repurchases. Did you guys say what date that would start and kind of any more color you are willing to provide around what level would make sense to repurchase? Sounds like between current level is about the same.

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

I guess first question is, you previously talked about a five times target for leverage. Is that still the target and if so what do you think is the timeline to achieve it now?

Well, I think that is the target and I think we have made substantial progress towards that target which is why we felt comfortable with the dividend and share repurchase guidance that we are giving today. If you look at our debt balance at 9.30 of 2015 with the end of the last quarter before we reduced the dividend, we paid down $5.8 billion. Over $5.8 billion in debt since that period. And so now I think the deleveraging is going to come through two methods. One as EBITDA grows, as these projects come on. And two, because we are funding our projects with 100% equity because we are funding it with retained cash flow. And so we will continue to make progress towards the five times, but it's going to be a little slower in reducing that leverage than we have been to date because we are returning some value to shareholders at this point in time.

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

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

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

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

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

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

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

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

Yes. To clarify, we are currently at 5.1 times at the end of the second quarter and expect to finish the year at 5.2 times. Our debt balance is slightly lower than anticipated due to some expansion capital being pushed to the second half of the year. We aim to reach 5.2 times by the end of next year. Additionally, next year, we will include the Trans Mountain revolver and the Trans Mountain construction facility in our calculations, which means our debt to EBITDA ratios will encompass the full burden of the expansion capital expenditures. Even though we are funding all other capital expenditures entirely with equity, it will take time to reduce the ratio to 5.0.

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