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Edited Transcript of KMI earnings conference call or presentation 19-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Kinder Morgan Inc Earnings Call

TOPEKA Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Kinder Morgan Inc earnings conference call or presentation Wednesday, April 19, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kimberly Allen Dang

Kinder Morgan, Inc. - CFO, VP and Director

* Richard D. Kinder

Kinder Morgan, Inc. - Executive Chairman

* Steven J. Kean

Kinder Morgan, Inc. - CEO, President and Director

* Thomas A. Martin

Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines

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Conference Call Participants

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* Brandon Blossman

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD, Midstream Research

* Danilo Marcelo Juvane

BMO Capital Markets Equity Research - Analyst

* Darren Charles Horowitz

Raymond James & Associates, Inc., Research Division - Research Analyst

* Jean Ann Salisbury

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jeremy B. Tonet

JP Morgan Chase & Co, Research Division - Analyst

* John David Edwards

Crédit Suisse AG, Research Division - Director in United States Equities Research

* Kristina Anna Kazarian

Deutsche Bank AG, Research Division - Head of the Equity Research Team and Director

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Shneur Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Theodore Durbin

Goldman Sachs Group Inc., Research Division - VP

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the quarterly earnings conference call. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time.

And now, I'd like to turn the call over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Mr. Kinder, you may begin.

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [2]

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Okay. Thank you, Carrie, and welcome to our first quarter analyst call. As always, before we begin, I'd like to remind you that today's earnings release and this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities 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.

I'll kick this off by making a few remarks, then I'll turn it over to Steve Kean, our CEO; and Kim Dang, our CFO, to give the operational and financial update. And then we'll take any questions that you have.

I want to quickly make 2 points. First of all, this quarter's good results in terms of EBITDA and DCF, which Steve and Kim will discuss in detail, demonstrates once more the strength of the asset portfolio at KMI. We're able to generate substantial amounts of cash flow even in a challenging environment in our business. Sometimes, good, solid financial and operational success, which is made possible only by a lot of hard work by the whole team, gets overlooked by some investors. But I would argue that it's one of the critical elements to the long-term economic health of any entity, and that includes Kinder Morgan.

The second point I want to make is that Steve will update you in detail on this quarter's developments on our Elba and Trans Mountain projects, but let me say we continue to make good progress on them and on our goal of strengthening our balance sheet and thereby allowing us to return substantial value to our shareholders through some combination of dividend increases, share repurchases, additional attractive growth projects or further debt reduction. Now as I've said previously, we currently believe the best avenue for returning value is by an increased and well-covered dividend, and we expect to announce our revised dividend guidance for 2018 later this year.

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

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [3]

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All right, thanks. I'll give you a few updates on our performance and our key projects. First, we had a very good first quarter with DCF per share of $0.54, and that's better than our beginning-of-the-year guidance. Right now, we're seeing that and calling out as timing, so we're still forecasting to be on plan for the full year. But overall, strong performance for the quarter.

On our Trans Mountain project, we've made progress on the project itself and also on our effort to either joint venture the project with a partner or to include it in an IPO. On the project, we reached a really significant milestone. We increased our cost estimate, and that increase put us above the contractual cap. So the cap was CAD 6.8 billion, and our revised estimate is $7.42 billion. And that, being above the cap, gave our shippers the right to turn capacity back to us. At the investor conference in January, we expressed our confidence that the market still had a very strong need for the project. And in fact, when all was said and done, all 708,000 barrels remained under long-term contract but now at the increased tolls. And those increased tolls include our return on the additional capital that was spent. We ended up with only 3% of the barrels turned back, and those were taken up in an open season over the course of a week or 1.5 weeks. The contracts are 15 but primarily 20-year terms -- predominantly, 20-year terms. Now this is a remarkable development when you consider that these contracts were signed 5 years ago in a $90-a-barrel-oil environment and when the Canadian and U.S. dollars were at parity. A lot's changed since then, including the circumstances of many of the producers in the oil sand as well as the project cost itself. Our shippers and our commercial team worked very hard and fast to place the barrels with new customers and existing customers who wanted more as those who wanted less looked for places to assign their capacity. The message here is that even at the higher cost, the demand for the project remained strong and that's huge. We've essentially reconfirmed the value and need for the project with a 2017 lineup of shipper needs and based on 2017 market conditions.

We also received during the quarter our environmental approval from British Columbia, and we now have written agreement on the satisfaction of the B.C. 5 conditions, which were proposed -- which were put forward for heavy oil pipelines crossing the product, so good regulatory development and an extremely good commercial development as well. So that's on the project.

On the JV or IPO front, we've advanced on both tracks simultaneously, which is what we told you we would do in January. And we believe this approach provides the best opportunity for us to secure acceptable financing terms for the project. Our key considerations here are value and control of project governance. Both of these processes are well advanced, and we expect to update you by the end of the quarter on the resolution. Recall that for our plan, we assumed the JV partner picking up 50% of the capital, but we did not include anything for a promote payment, which we would expect to get, in coming up with our target 5.4x debt-to-EBITDA metric. So in other words, we can do better on that target to the extent we get the promote that we expect to get. I know everyone is interested in what the value is going to be, but we've avoided putting a marker out there for the sake of maintaining a strong negotiating position. But I'll say this, it's an attractive return project and is consistent with the 6.7x EBITDA multiple average that we have for the backlog as a whole.

As we announced earlier, we completed our Elba JV transaction in the first quarter and it was at the value that we put into plan for 2017. And that included value in excess of our capital spend, recognizing the value that we created in originating the project.

On the backlog, I'll be brief. This quarter, it stands at $11.7 billion, $300 million lower than last quarter. As usual, there are multiple moving parts, small project conditions and removals and some cost changes. But the main development is that we've placed into service our Kinder Morgan Export Terminal, a liquids terminals dock and cross-channel line project for one of our refinery customers on the ship channel, the Houston Ship Channel. We expect to update the backlog for the Trans Mountain outcome next quarter. So the project cost would now be approximately USD 5.7 billion, and the ownership level is, of course, expected to change.

One more project update before moving to a few commercial highlights. On our Utopia pipeline project, our project team has done an excellent job of acquiring right of way and finding routing alternatives where necessary in the wake of an adverse court decision last year on eminent domain in one of the Ohio circuit courts. We're pleased with our progress, and we began the tree-felling process in the first quarter. This joint venture project is under a long-term contract and is expected to be in service in January of this -- of next year.

Now a few commercial market updates, starting with the gas segment. We experienced slightly increased transmission volumes year-over-year, but gathering volumes were down. I'll start with gathering. We're generally seeing a leveling off of volumes in our key basins during the first quarter, but the comparison to first quarter last year reflects the declines that took place throughout 2016. Generally, our volumes are in line with what is observed in the basins in which we operate, although we're running a little bit ahead in our Bakken and gas assets with one exception, and that's the Haynesville where we are down on our KinderHawk asset, while the basin is flat to slightly higher. That's a function of the fact that our primary customer was not active in 2016. That's beginning to change, and we have added a new customer that's actively developing its acreage. So we expect some improvement there. Recall that our gas segment is 55% of our segment. Earnings before DD&A and gathering processing is only 18% of that number.

On the transmission, volumes were up 1% year-over-year. The winter was weak. It was weak last year, too, but we had a cold March in 2016. Power demand was down year-over-year. What I've read predicts that gas will still exceed coal as a share of power -- the power market again this year, but some gas-to-coal switching did occur on our assets in the first quarter. Also, we saw higher renewable, including California hydropower contributing to the year-over-year decline. Overcoming this, though, were exports to Mexico, which were up 16% year-over-year on our systems and now averaging 2.8 Bcf a day for the first quarter. Recall that the vast majority of our margin here is secured by reservation fees, which are not affected by usage, but the volume information helps give a view on long-term value for the capacity.

I failed to mention also that LNG exports were up on our system year-over-year by 0.5 Bcf a day. We signed up an additional 400 a day of long-term firm transportation commitments in the quarter, 100 of that was existing, but previously unsold capacity, that brings our total in the last 3 1/4 years to 8.4 Bcf of new sign-up, of which 2.2 Bcf is existing previously unsold capacity.

We recently announced 2 developments related to the Permian. First, we announced a nonbinding open season for 1.7 Bcf new-build pipeline from the Waha hub in West Texas to Agua Dulce in South Texas, our Gulf Coast Express project. Last week, DCP announced its potential participation in that project as a partner and a shipper, and we're working with them over the next 90 days or so to try to finalize that arrangement. DCP's assets in the Permian would provide good upstream connectivity, and our Texas Intrastate network will provide excellent downstream connectivity to Mexico, LNG at Corpus Christi and utility and industrial markets along the Texas Gulf Coast. Gas production is growing in the Permian. And increasingly, East Texas is becoming a premium market. I think the project makes a good deal of sense, but we're in the early days and we have not put it in the backlog.

The second development related to Permian is we have a binding open season on our EPNG system for capacity to the Waha hub. The open season package includes 150 a day of existing capacity, but it also reflects our ability to expand the system by as much as 900 a day more to move -- to meet incremental demand. The expansions would be relatively inexpensive and would again demonstrate the value of having existing infrastructure that we can build off of at attractive returns. This project would feed takeaway capacity of Waha, including the potential Gulf Coast Express pipeline in our midstream business, and we continue to work both of those opportunities over the coming weeks.

The overall summary on gas is that we continue to expect long-term benefit in this sector from increased LNG, Mexico exports, power and industrial demand, which should drive the demand for transportation, storage infrastructure for the long term.

Shifting to our products segment. Refined products volumes are up 1% year-over-year, even though we experienced some weakness in Southeast U.S. markets. Crude and condensate transportation volumes are also up 1% year-over-year, notwithstanding declines year-over-year in the Bakken and Eagle Ford basins. KMCC in particular, continues to show the benefit of its superior connectivity, both on the supply end in the Eagle Ford as well as on the market end in the Greater Houston area and holding up very well in the face of declines experienced in the Eagle Ford as a whole on a year-over-year basis.

In our Terminals business. Our liquids terminals utilization climbed to over 95% as we continue to benefit from the strong positions we've built in several liquid hub locations. And this team has been gradually migrating its business increasingly to the liquids part of the business. We're now at 80% of our segment earnings DD&A, coming from the liquids part of the business. And increasingly, our development activity is in the hub positions that we have built in Houston, Edmonton, New York and Chicago over the years.

We have kept our Jones Act vessels under charter on renewals that we've experienced, on roll overs and renewals. We had a discount to do that, but we expect to be slightly ahead of our plan on this business, and we currently have all of our vessels under charter. We continue to make good progress on our baseline terminal expansion at our Edmonton hub. And as I mentioned, we put our Kinder Morgan Export Terminal project in service on the Houston Ship Channel.

In the CO2 business, we came in slightly ahead of plan for the quarter with pricing offsetting lower crude production volumes. Also of note is that we achieved record CO2 volumes during the first quarter. Our demand was up but so were our third parties with good, strong demand for CO2 off of our system.

So again, overall, a strong quarter with strong financial performance, continued progress on our project execution and on our joint venture plans for our key projects.

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

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Kimberly Allen Dang, Kinder Morgan, Inc. - CFO, VP and Director [4]

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

Earnings per share attributable to common stockholders is up 50% in the quarter. Now it would be nice to take credit for a 50% increase, but I don't think that gives us an accurate -- that's not an accurate view of the way we perceive our performance. Adjusted earnings per share, which we've added for you on the GAAP income statement and adjust for certain items is down $0.01 a share. DCF per share, which is a primary way we judge our performance, is down 1% or $18 million versus the first quarter of 2016, all of which is attributable to the sale of a 50% interest in SNG. So after the sale, DCF per share would be flat. For the first quarter, the DCF per share of $0.54 is slightly better than our budget. And for the full year, we remain on target to generate $1.99 of DCF per share.

On the balance sheet, we ended the quarter at 5.3x debt to EBITDA, consistent with where we ended 2016 but a significant improvement versus the 5.6x in the first quarter of 2016.

Now for the details. Looking at the preliminary GAAP income statement, let me point out a couple of things to you there. You'll see that revenues were up by 7% in the quarter, but cost of sales was up by more, resulting in about $121 million reduction in gross margin. Adjusting for certain items, gross margin would actually be down slightly more. It would be down $146 million. The largest contributor to this decrease is the 50% sale -- of the 50% sale of SNG. As a result of that sale, we no longer consolidate SNG's revenue and cost of sales but keep -- but report our 50% interest in net income further down the income statement as equity earnings. Now keep in mind also that SNG did not have significant cost of sale. The impact of deconsolidating SNG was approximately $145 million reduction in gross margin for the quarter. Therefore, excluding the sale, gross margin would essentially be flat, which is consistent with how we would view our results.

Net income available for the common shareholders is $401 million or $0.18 a share versus $276 million loss or $0.12 per share -- $276 million of income, sorry, or $0.12 per share in the first quarter of 2016, resulting in $125 million or $0.06 per share increase or 45% and 50%, respectively. Net income available to common shareholders before certain items or adjusted earnings was $371 million or $0.17 a share versus the adjusted number in 2016 of $402 million or $0.18 a share. Certain items in the first quarter of this year are income of $30 million, the largest of which was associated with proceeds we received from the sale of a bankruptcy claim from one of our Natural Gas Pipelines. Certain items in the first quarter of 2016 were net expense of $132 million driven primarily by project write-off and impairment.

Now let's turn to the second page of financials, which shows our DCF for the quarter and the year and is reconciled to our GAAP numbers in the earnings release. As I said earlier, DCF is the primary financial measure on which we judge our performance. We generated total DCF for the quarter of $1.215 billion versus $1.233 billion for the comparable period in 2016, down $18 million or 1%. There are lots of moving parts, but the simple explanation I gave you earlier is true, which is that after the sale of 50% interest in SNG that occurred in the third quarter of 2016, we would be flat.

Segment EBITDA before certain items is down $90 million when you look up at the segment. That's primarily due to $113 million reduction in our Natural Gas segment. Of the $113 million reduction, $83 million is attributable to the SNG sale, and the natural gas decline is partially offset by a $26 million increase in our Terminals segment, which is associated with expansion projects coming online in the marine division and in the Gulf Coast.

G&A and interest are a benefit of $44 million in the quarter versus the first quarter of 2016, both largely as a result of the SNG transaction. In our adjustments to convert net income to DCF, we add back JV DD&A and subtract sustaining CapEx to more closely reflect the cash we expect to receive from our JV. Because SNG is a JV in the first quarter of 2017 versus a fully consolidated asset in the first quarter of 2016, there's approximately a $17 million benefit between the 2 periods in our adjustment from net income to DCF to reflect the economic impact of the SNG JV. So $90 million reduction in the segment. You add back the $17 million benefit to reflect the economic impact of the SNG transaction. You -- the $44 million reduction between interest and G&A, and that gives you a net reduction of DCF in -- of $29 million, which largely reconciles for the change of $18 million in DCF.

DCF per share was $0.54 versus $0.55 the first quarter of the prior year or down $0.01, almost all of which is associated with the DCF variance I just walked you through. This $0.54 in DCF results in $935 million of excess distributable cash flow, above our $0.125 dividend for the quarter.

As I said earlier, for the quarter, we are ahead of budget. But for the full year, we expect to be on budget, largely as a result of some timing associated with sustaining CapEx, interest and cash taxes that occur in the second, third and fourth quarter.

And with that, I'll move to the balance sheet. On the balance sheet, as I said, we ended the quarter at 5.3x net debt to EBITDA, consistent with where we ended 2016. Our budget for 2017 is that we would expect to end 2017 at 5.4x debt to EBITDA. After the first quarter performance, we're still on track to achieve that. Remember, as Steve said, the budget nor the current forecast include any proceeds from a Trans Mountain promote, which we would expect to receive. And therefore, we would expect that our actual results will improve on the 5.4x budget in the forecast.

Now reconciled for you, we ended the quarter at $37.8 billion of net debt. That's a $317 million decrease from the end of 2016. We generated DCF of $1.215 billion. We had expansion CapEx and contributions to equity investments of $773 million. We had asset sales and JV proceeds of $462 million, the largest of which was $391 million that we received from the Elba JV. We paid dividends of $280 million, and then we have working capital and other items of a little bit over $300 million. The working capital is what we would expect in the first quarter. In the first quarter, we typically see working capital associated with interest payments because we have a large portion of interest payments which occur in the first quarter, and so interest was a use of cash of $165 million in the quarter. We pay a significant amount of property tax in the first quarter. That was a use of cash of $77 million. And then bonuses get paid in the first quarter, and that was a use of cash of about $75 million. So those were the 3 primary uses of cash in the $300 million of working capital.

So with that, Steve and Rich?

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [5]

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Okay, Carrie, we'll now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Kristina Kazarian from Deutsche Bank.

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Kristina Anna Kazarian, Deutsche Bank AG, Research Division - Head of the Equity Research Team and Director [2]

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So can you guys help me a little more about how you're thinking about the new Permian project, particularly the gas takeaway pipe, how the DCP deal came about? And if you're also willing, maybe project cost and any updates on the open season?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [3]

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Yes. So I'll start with open season. It's closing shortly. Again, it's nonbinding. The DCP discussion started early, even before our announcement of the deal then continued up until -- well, they'll will be continuing on but ripened enough that they -- we did a joint announcement of their participation; and again, the rationale there is we get upstream connectivity with their processing assets and pipes in the Permian, and then we have downstream connectivity from all the market that we connect to on what we think is the best intrastate system in Texas connected to LNG, Mexico, et cetera. We're -- I think there's enthusiasm for it, but again, it's nonbinding. Producers, I think, are increasingly turning their attention to finding additional routes out of the Permian. Sometimes, that takes some time to ripen. But certainly, there is interest in it. And we'll also cultivate interest on the demand side as well. And on the demand side, one of the things that we can do and have talked to people about is we are a buyer of gas in Texas because we have a lot of sales gas customers in the state of Texas. And so one of the things we could do is buy at the inlet to this piece of pipe, and that may serve as a bit of a bridge for some of the producer markets out there. So any parts of your question I missed?

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Kristina Anna Kazarian, Deutsche Bank AG, Research Division - Head of the Equity Research Team and Director [4]

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Project cost?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [5]

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Cost, yes. We haven't come out with cost yet. But it is a 1.7 Bcf new-build project, so you're looking at north of $1 billion.

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Kristina Anna Kazarian, Deutsche Bank AG, Research Division - Head of the Equity Research Team and Director [6]

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Perfect. And then my next question is we've seen a good bump in Eagle Ford rig count recently. Can you maybe talk about how this is trending versus your original expectations? And any chance for a positive revision related to this?

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [7]

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Yes. I mean, I think it's going, I think, as we expect with the price recovery that we've seen. So I think generally what we're seeing in the basin is a bottoming out of volume, both crude and gas, really, this quarter, trending flat to slightly up starting next quarter and then probably finishing the year higher than it is today. And that's kind of where we set our plan coming into the year. And I think generally, that's how we're seeing it play out. Maybe slightly more activity than we were anticipating to this point. But I think how all that materializes, as far as actually bringing volume online versus just drilling, that still needs to be played out over the year.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [8]

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Yes. I think we build as we started. We ended the year kind of where we started with some declines early and then picking up. I think some of the developments that have been encouraging is the rig count has been up a good bit. The other thing, and these are related, is that acreage has been changing hands down there. So it's going from people who are not actively developing to people who are actively developing, and that's a positive indication for the basin, too.

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Kristina Anna Kazarian, Deutsche Bank AG, Research Division - Head of the Equity Research Team and Director [9]

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And Steve, last real quick one for me. I know you said ended 2Q for timing, and we're still waiting on FID and arranging project financing. But any other color you want to give maybe for what we should be waiting for?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [10]

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No. Those are the key things, really. I mean, we're running both of these processes simultaneously. And the reason for doing that, of course, is to get to a value point that reflects a fully negotiated deal or a fully marketed process. And it's not fully marketed or fully negotiated until it's done. And so we're not there yet, and so we haven't picked yet.

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Operator [11]

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

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Brandon Blossman, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD, Midstream Research [12]

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Let's see, probably just a couple of follow-ups on Kristina's questions, one on Gulf Coast Express. Steve, you talked quickly about some projects on El Paso, I think, on the inlet side of that pipe. So I was wondering, one, if you could describe in a little bit more detail what those projects would look like. Are we talking about reversing compressor stations or adding compression or both? And then more detail on the downstream side of that pipe. Clearly, there's a way to get volumes up and down the Texas Gulf Coast. But any comments on is there anything that needs to be done to that intrastate system or there are just plenty of unutilized capacity there?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [13]

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Okay, yes. So the open season on El Paso has 150 a day of capacity that's existing. That comes in a bit over time as contracts -- as the contract rolls off, but that's 150 without moving a muscle. We've got that capacity available, and we can do it today. We can get another 900 of expansion. And the first -- if you want to think of it this way, the first half of that roughly is relatively small CapEx. It's back-pressure valves and things like that, that we can probably do on our -- and a few pipe modifications...

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [14]

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(inaudible)

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [15]

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Yes, meter station modifications. And we can probably do that under our blanket certificate, could do that relatively quickly, and that's a nice pickup and again underscores the value of having pipe and an active basin that we can make some adjustments to. The second half of that expansion to get up to that 900 a day of incremental would require compression. So that's a little bit pricier, but again, not much. There's not significant -- a little bit of pipeline build, Tom, maybe. But it's not a significant investment. But that would require a 7c. In terms of getting -- once you get to Texas, gas will be flowing South and East primarily, East to Corpus and South to Mexico. We are expanding that network with a crossover expansion that we've got in service that we put in service in September of last year, so we've got -- and it's a network. So you've got options there, and it doesn't cost as much to expand that as needed for takeaway. But my guess is, and Tom, you can opine, there may be some expansions. If people want to take significant volumes to Houston, we may need some.

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [16]

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Yes. They want to take all at one point sold into Houston.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [17]

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That will be a problem. We'll be happy to have that problem, but...

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [18]

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Short of that, I mean, there's a lot of really just changing the direction of the flow. I mean, we compress southbound today, and a fair amount of that volume is sold to Mexico and some of that market today. So we're just letting that volume stay North. And then actually, we could pump some of that pump -- originally, it's a facility that were constructed to move gas from South Texas to Houston, so we have that capability today.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [19]

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And the other takeaway, there's other takeaway. When you got to Waha, that's a significant hub, and there is significant capacity coming online from Waha to Mexico. So that's the other value-adding component of that EPNG project.

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [20]

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I think, once again, we've said over the years how valuable it is to have a huge footprint that we have, particularly on the natural gas side. And this is just one more indicator about how valuable that is. Now project is not done yet. The open season hasn't concluded. But the fact of having all that pipe in the ground is an enormous advantage when you start talking about expansions and extensions of your system.

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Brandon Blossman, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD, Midstream Research [21]

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Great, great color. And then I'll probably just follow on, on that topic. Competitive environment, we have 3 pipes essentially, very similar paths announced in the same time period. So one, just what the competitive landscape looks like that vis-a-vis producer interest? And then related, is there any chance of moving around the project if there is demand and interest, say, earlier '19 or even late in '18? Is there something that can be done more quickly in order to satisfy some residue gas takeaway issues?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [22]

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Well, it's an intrastate project, so it's not a federal process. So if the demand is there and it's there in a hurry, we can move more quickly. Yes, it is a competitive environment, but I feel like we've got the best downstream connectivity here. And we touch all the major markets, including all the big growing markets, and I think that's a real advantage. I mean, Agua Dulce -- getting to Agua Dulce didn't use to be a very big deal. You were just in South Texas. If you're in Agua Dulce and connected to our system and you can go to Mexico or you can go to Corpus Christi or you can go to Houston, then you've really got something. Now we need to -- we're working to sell for the upstream piece, and that's where DCP, I think, is a very nice fit. But there are others out there, too, who we could coordinate with to make sure that we can get the gas to Waha. And of course, EPNG expansion fits very nicely with that. So we think we've got a very good offering. I'm sure that the other competitors would say the same thing. But I think that you look at the upstream and the downstream, and we've got a very, very nice offering.

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [23]

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And one thing I'd add, Steve, is we are -- we do see interest from some of our customers in the intrastate network actually wanting to reach back potentially all the way to Waha. So again, I think that's something that we offer in our project that our competitors don't.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [24]

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Plus, we'd like to buy some of the gas.

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Operator [25]

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Our next question is from Shneur Gershuni of UBS.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [26]

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Maybe just to sort of following up on some of the questions with respect to the Permian Gulf Coast Express. With respect to that project, with DCP potentially being all new on the project, how far away are you from getting to a commitment level that you would feel comfortable moving forward with the project? Does it get you fairly close? And then secondly, when we think about project returns, I know that the board has sort of been enforcing a mid-teens type of return hurdle. Is that something that you would need for this project to proceed? Or just given the contracted nature of a pipe like this, you would be able -- you'd be willing to accept the lower-return hurdles to move forward with the project?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [27]

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It's early to be talking about that. I mean, we've got a nonbinding open season that's closing. And I think, while there's shipper interest, certainly producer interest, this is a maturing situation as they're looking at takeaway capacity out of the Permian and their own production. And so I think, frankly, we're a ways off there in terms of maturing or ripening the project. I think we've got a good offering. I think DCP can bring volumes to it themselves. We can bring purchase requirements to it. I think there are a lot of things that are compelling about it. But I think we're a ways off. Now on returns, yes, we've been using as a starting point 15% unlevered after-tax returns. And in projects where we're building off of our network, we've been pretty effective at getting those kinds of returns. And this has some of those characteristics when you look at the downstream network and you look at upstream potentially on EPNG. On the other hand, where we have secure cash flows under long-term contracts with good credits, we've certainly talked with our business unit presidents about don't say no to those if they're -- just because they're a point or 2 off, bring them to us. Let's have a look at them and see if on a risk-adjusted basis we're comfortable with them. So it's not a hard and fast. It's a totality of the circumstances kind of evaluation.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [28]

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Okay. And just pivoting to TMX for a second here. You have the federal and B.C. approvals in hand, but there's a lot of jawboning in the upcoming B.C. elections about TMX as well, too. I guess kind of 2 questions. One, what avenues would a new government have in British Columbia to interfere with the project? And then I guess secondly, does the discussion with any JV partners -- or is it potentially suspended until after the election result is in or the discussions continue and ongoing, and it doesn't really influence this path?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [29]

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Okay. I'll go with the last question first. And so -- no, there's no suspension of any process. We're going full speed ahead on both processes here. On the B.C. election, as you pointed out, we do have our federal and also our provincial approval, and that includes the EA, and then also -- the environmental approval. And it also includes reaching agreement with British Columbia on benefits. There are 5 conditions, which are primarily benefits to B.C. as well as risk reduction associated with marine and land response. There are also many other benefits of this project to British Columbia that we think are recognized and think and hope would be taken into account. We're getting a lot of B.C. jobs here. There's economic development. There's benefits to the First Nations and the communities along the route that we've entered into mutual benefit agreements with. And we've got a lot of detailed plans and protections that we put in place and that the British Columbia and federal governments have put in place to mitigate any perceived risk from the project. Now we are -- it's also -- this is a federally sanctioned project. Now we're watching, we're certainly following developments very closely. And the B.C., the government in B.C. can certainly have an impact on the project, but it's probably a little premature for us to opine on those exact impacts at this point. We have a lot of momentum in both -- on both the federal and the provincial level from all the work that we've done and that those governments have done to address the concerns that have been raised and to make sure that there are benefits that are shared with the broader public. So we think we've got good, strong support behind us, both at the federal and provincial level.

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Shneur Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [30]

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All right. And then one final question. Last quarter, you talked about green shoots potentially emerging. Q1 seemed to have some momentum in it as well, too. But you sort of didn't change your year-end leverage target and so forth. Are you seeing these green shoots develop? Could we see you exceed your leverage targets by the end of the year or rather your EBITDA target? I was wondering if you can sort of comment on what you're seeing in terms of flows and green shoots?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [31]

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Yes. Again, we're not changing our outlook. Notwithstanding the strong first quarter performance, we're not changing our outlook for the full year. In terms of the debt-to-EBITDA metric changing, I think the main mover there is probably getting the financial arrangements in place for the Trans Mountain project. We're just a few weeks into the second quarter here, and I think there are some promising developments there. The rig count is one thing we've mentioned, our Haynesville producer becoming more active on the gathering part of it. We're happy to be up 1% year-over-year on crude and condensate and refined products volumes. But it's just a little early for us to be calling anything different on our EBITDA at this point.

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Operator [32]

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Our next question is from Ted Durbin of Goldman Sachs.

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Theodore Durbin, Goldman Sachs Group Inc., Research Division - VP [33]

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So I guess just thinking about the JV and the promote on TMX and what you just announced on Elba a little while back, is there -- are those terms that you sort of came to on Elba, a readthrough for us in terms of how you think about Trans Mountain, both from your perspective and then the way a potential partner might think about the investment in Trans Mountain?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [34]

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Yes, I don't think so. They're very different projects. As I said, the Trans Mountain return is consistent with the average return -- or the overall return in our back -- the overall multiple of EBITDA on our backlog, which is about 6.7x. So they're not -- they're really very -- they're very different projects. And so I don't think you can analogize much, except to say that we get compensated for the work that we did in originating and developing the project at Elba. And we expect, as we've done Utopia, and we'd expect the same to be true in Trans Mountain.

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Kimberly Allen Dang, Kinder Morgan, Inc. - CFO, VP and Director [35]

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Yes. The construction -- when you look at how those projects are built, the construction is different. You're going to -- it's going to take longer to construct Trans Mountain than it takes to construct Elba. Elba is a self-contained site with a signed EPC contract. And Trans Mountain, you have multiple spreads over many miles. So the projects just have different returns and different risk profiles, and so I would expect that investors, potential JV partners would take all those things into effect -- account. So I don't think you can take an Elba promote and apply it to Trans Mountain.

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [36]

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I think that's right. I would add that, of course, what we have on both projects is very strong long-term contracts with credit-worthy entities. And again, I think we just can't overemphasize on Trans Mountain the fact that we have all of these shippers who were signed up for 708,000 barrels a day, almost all of them for 20 years. And that is a very important factor, just to show we signed up on Elba for that period.

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Theodore Durbin, Goldman Sachs Group Inc., Research Division - VP [37]

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Great. And then I know this came up a lot at the Analyst Day. But just a thought that if you can't come to terms that you think are attractive for a JV partner and the promote and the things that you'd like to see. Well, let's say, the election goes south on your next month, I mean, you are still willing to walk away from the process or an IPO? And are you willing to just self-build the entire project? Or would you then move to just the IPO process? Just where your head is on all that.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [38]

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Yes. That's not a decision we're confronting yet. We fully expect that the 2-track process is going to produce a successful result for us, and so that's what we're basing our decision-making on right now.

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Theodore Durbin, Goldman Sachs Group Inc., Research Division - VP [39]

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Okay, fair enough. And then if I can do one more smaller one. The two Section 5 rate cases that you got hit earlier in the year. Just how much of an annual revenue impact would you see from those, if, let's say, those pipelines will return. We'll call it reasonable ROE as the FERC sees it. What would be the revenue impact there?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [40]

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Well, first, I'll say we feel very strongly that it was not appropriate to initiate those proceedings because not all of the facts around those assets were fully taken into account in the Section 5 process. We are also in discussions with our customers right now, and we do not expect there to be anything other than, at most, a de minimis impact on the margin for those assets.

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Operator [41]

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Our next question is from Jean Ann Salisbury of Bernstein.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [42]

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As you look at adding to your backlog, should we think of the DCP JV as an indicator of broader interest than getting into the Permian in a bigger way or just more opportunistic since you already had existing gas assets? And you'd sort of continue to focus on building out existing basin footprint?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [43]

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No. We would like to -- we have existing assets that serve the Permian, EPNG, of course, we have the line on the Texas Intrastate, although that line is fully utilized and constrained and difficult to expand. So we're already there, and we are absolutely looking to expand our presence there. I should have mentioned, too, NGPL serves the Permian and brings the gas Northbound to Chicago, and there are opportunities on that system as well to take advantage of the developments there.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [44]

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And then I don't think that this is big for you, but can you just give a sense of how much of your backlog is waiting for a FERC quorum to move forward?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [45]

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I think -- Tom, correct me on this. We got orders on the projects that were time critical already before the quorum disappeared in early in the year. And so now, I think where we are is we're not going to find a time-critical issue so long as they get quorum by midyear thereabout or...

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [46]

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Or even later.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [47]

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Even late '17. So it's not constraining us right now, Jean Ann.

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Operator [48]

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Our next question is from Danilo Juvane of BMO Capital Markets.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [49]

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Most of my questions have been hit but had a couple of follow-up questions on TMX. Within the B.C. agreement that you signed earlier this month, I think you stipulated the June-end decision time line followed by a July 2 announcement. Is that the absolute latest we will hear something? Or can you announce something prior to that?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [50]

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Yes. That was really to set a date that was out there kind of at the end of the timing, we were thinking. And so it was just a negotiated date, and it was put out there to be kind of at the end of the timing of the quorum.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [51]

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So we're going to hear something earlier than that?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [52]

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Possible.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [53]

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Okay. Secondly, within that agreement, is there any protection that you have from the potential change in political regime in the province?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [54]

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Something in the agreement?

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [55]

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Right. Meaning, if there's a change politically with the elections next month. Does the agreement change in any way, shape or form?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [56]

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No. The agreement doesn't change. The -- no. The agreement does not change.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [57]

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Okay, got you. Last but not least, just a cleanup question for me. What was the CO2 CapEx for the quarter?

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Kimberly Allen Dang, Kinder Morgan, Inc. - CFO, VP and Director [58]

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It's $112 million.

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Operator [59]

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Next question is from John Edwards of Crédit Suisse.

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John David Edwards, Crédit Suisse AG, Research Division - Director in United States Equities Research [60]

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Just real quick, a couple of quick ones here just on the real strong export volumes to Mexico this quarter. What kind of growth rate are -- is expected for the rest of the year in terms of export volumes to Mexico?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [61]

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Tom, do you have a feel for that?

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [62]

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That's a tough one. I mean, I think it really just depends on the timing of additional capacity coming online. I'm not sure I could give you a number. I mean, we should be trending up from here but not a -- I mean, a very steep climb. I think it will just continue to fully grow.

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John David Edwards, Crédit Suisse AG, Research Division - Director in United States Equities Research [63]

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Okay. And then just on the dividend. I know -- have you any more thoughts on kind of a step it up high with the slower growth or step it up not as much and grow it fast? Any kind of preliminary thoughts on dividend policy?

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [64]

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We're going to step it up high and grow it fast. Just kidding, John. Look, we're going to have more to say on that later in the year. But as we emphasize consistently, we're going to have the firepower, we believe, to significantly raise the dividend. And when we do, we're going to make certain that we -- that, that dividend is strongly covered. And one way of looking at it is we'd like to be able -- in an ordinary year to be able to fund the equity portion of our expansion CapEx out of the cash flow, which would lead to good coverage of whatever dividend we're paying. But we haven't made any detailed decisions on it. And again, as we promised, we're going to do that later this year and get back to you with our outlook for '18.

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John David Edwards, Crédit Suisse AG, Research Division - Director in United States Equities Research [65]

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Okay, great. And then just one other question on Trans Mountain. You may not be able to comment on this but in terms of the timing of the payment. I know at Analyst Day, if I recall correctly, there was discussion about having a good chunk of the promote to be paid upfront versus over the construction process. Any other data points or color you can provide on that?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [66]

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That's still consistent with our expectation.

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John David Edwards, Crédit Suisse AG, Research Division - Director in United States Equities Research [67]

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Which one, Steve?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [68]

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The upfront, getting a significant portion of the proceeds upfront.

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John David Edwards, Crédit Suisse AG, Research Division - Director in United States Equities Research [69]

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Okay, upfront.

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Operator [70]

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Our next question is from Darren Horowitz of Raymond James.

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Darren Charles Horowitz, Raymond James & Associates, Inc., Research Division - Research Analyst [71]

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Steve, just a quick question for you on Gulf Coast Express. When we put all the pieces of the puzzle together, of the 1.7 Bcf that's being marketed, inclusive of the residue gas that DCP could commit, and we can all see what that is, and the options, both upstream and downstream of the pipe that you talked about, based on what you're marketing, how much total capacity do you think is necessary to commercialize a project? And then, as you mentioned, it makes a world a sense to be a buyer of that gas, especially if basis comes back and capitalize on some regional ARPs. So how much capacity would you want to just leave open for that opportunity?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [72]

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Yes. Very early to tell again, Darren. It would be -- if the demand is there at a high-enough rate, you wouldn't have to fill the whole pipe. Tom, our purchase business is over a Bcf a day. That's the whole portfolio, right? But...

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [73]

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Yes. Probably 2.5 Bcf.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [74]

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2.5 Bcf a day. And Eagle Ford is declining. So it would be a nice -- at an attractive price, a nice way to fill in for that in the purchase part of our portfolio, in the Texas Intrastate, but too early to tell what that mix will be.

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Darren Charles Horowitz, Raymond James & Associates, Inc., Research Division - Research Analyst [75]

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Okay. Do you have a sense -- and this is my follow-up, and I'll leave it here. Do you have a sense when you look at what's being marketed out of the basin relative to residue gas, supply growth expectations, either yours or from third parties? Do you have a sense of how much takeaway capacity is actually going to be necessary?

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Thomas A. Martin, Kinder Morgan, Inc. - VP and President of Natural Gas Pipelines [76]

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I mean, I think at least 1 pipe. I mean, some analysis we see requires 2 additional pipes. So definitely enough to fill this project.

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Operator [77]

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Next question is from Jeremy Tonet of JPMorgan.

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Jeremy B. Tonet, JP Morgan Chase & Co, Research Division - Analyst [78]

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Going back to TMX for a second here. I was just wondering if you could remind us if you guys had kind of finalized whether or not the JV and IPO process, whether that would include existing assets? Or is it just the project itself? Could you just walk us through your latest thinking there?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [79]

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Yes. So it's very difficult to -- really, it's effectively impossible to separate expansion from the existing Trans Mountain system. It's effectively a twinning of that system with some line reactivations in it and common facilities at the terminals and at the dock. So really, the way we would -- the way we'd be selling this at either a JV or an IPO is with the existing system as well. And in the IPO potentially with a broader offering of our Canadian assets as well.

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Jeremy B. Tonet, JP Morgan Chase & Co, Research Division - Analyst [80]

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Got you. And just one more. As far as Gulf Express there, and congratulations on the project or the open season there. Was just curious as far as the interplay between kind of new projects and kind of returning the dividend to a higher level in the interplay. Because I assume 2018 CapEx steps down somewhat from '17, and that kind of helps you in the process of being able to lift the dividend. And so it's a great thing to win new projects, but then you see the interplay there as far as the leverage is concerned. So just wondering if you could walk us through your thoughts there.

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [81]

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I think it goes back to what Rich said earlier. We would look to have enough coverage over our dividend to be able to continue to fund the equity portion of a growth capital plan. So we're looking at -- we're going to be looking at all of that as we come up with our guidance to the latter part of this year -- in the latter part of this year.

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Operator [82]

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Next question is from Michael Blum of Wells Fargo.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [83]

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Just 2 quick follow-ups on Trans Mountain on the JV or IPO. Just what is the latest in terms of timing, in terms of when you think you'll have an announcement? And then second question, would FID come sort of concurrent with that? Or is that running on some sort of separate track?

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Steven J. Kean, Kinder Morgan, Inc. - CEO, President and Director [84]

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The timing is this quarter, and we haven't been more specific than that. We're running both processes simultaneously. And again, the point there is that we want to get ourselves to a fully negotiated on the JV side or a fully marketed on the IPO side to kind of see what our value is. We would expect that the FID would come close in time with a conclusion of those processes.

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Operator [85]

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We show no further questions at this time, speakers.

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Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman [86]

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Okay. Thank you very much, Carrie, and thanks for all of you and participating in our call, and we'll talk later.

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Operator [87]

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