Welcome to the Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today's conference is being recorded, if you have any objections you may disconnect at this time. Now, I would like to turn the meeting over to Mr. Rich Kinder, Executive Chairman of Kinder Morgan. Thank you. You may begin.

Thank you, Britney. And before we begin, as usual, I'd like to remind you that today's earnings releases by KMI and KML and this call includes forward-looking and financial outlook statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities and Exchange Act of 1934, and applicable Canadian provincial and territorial securities laws, as well as certain non-GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosures on forward-looking and financial outlook statements and use of non-GAAP financial measure set forth at the end of KMI's and KML's earnings releases, and to review our latest filings with the SEC and Canadian provincial and territorial securities commissions, for a list of important material assumptions, expectations, and risk factors that may cause actual results to differ materially from those anticipated and described in such forward-looking and financial outlook statements. In my opening statements on these calls before turning it over to Kim, Steve, Dax and the rest of the team, I always try to share with you our vision for the future and our financial strategy. On the financial front, I believe we continue to execute on our plans and our decision to sell our 70% interest in Kinder Morgan Canada and our 100% interest in the U.S. portion of the Cochin Pipeline is indicative of that execution. As you know, we are receiving a 13x multiple of EBITDA on our Cochin asset, which is well above the multiple which KMI is trading as a whole on the New York Stock Exchange. Now, we're able to use the proceeds from these sales, and Steve will talk more about this later, in a manner consistent with what we have previously indicated to maintain a strong balance sheet, expand our core assets,…

Okay. Thanks, Rich. I'm going to start with KMI, then turn it over to our President, Kim Dang, to give an update on our segment performance. Our CFO, David Michels will take you through the numbers; and Dax Sanders will update you on KML, and then we'll take your questions. So summary on KMI is this, we are adhering to the principles that we've laid out previously for you. We have a strong balance sheet having met our approximately 4.5 times debt-to-EBITDA target and with ratings upgrades now from all three ratings agencies. We are maintaining our capital discipline through our return criteria, a good track record of execution, and by self-funding our investments. We are returning value to shareholders as evidenced by the 25% year-over-year dividend increase, and we continue to find attractive growth and/or divestiture opportunities. Again, strong balance sheet, capital discipline, returning value to shareholders, and finding additional opportunities, those are the principles we operate by. During the quarter, we announced that KML had reached an agreement with Pembina Pipeline Corporation where Pembina would acquire all of the common equity of KML including KMI's 70% interest, and that KMI would sell the U.S. portion of the Cochin pipeline to Pembina for $1.546 billion. The closing of the transactions are cross conditioned and closing remains on track for a late Q4 this year or first quarter 2020. Consistent with the principles I just stated, KMI expects to use its proceeds to reduce debt to maintain our net debt-to-adjusted EBITDA ratio of approximately 4.5 times and use remaining proceeds to invest in attractive projects and/or to opportunistically repurchase KMI shares. And we said -- as we said when we announced the transaction, initially the proceeds will be used to reduce net debt before being put to these investments for…

Okay. Thanks Steve. I sound like a broken record, but natural gas had another outstanding quarter, it was up 8% this quarter. Natural gas demand this year expected to increase by approximately 4 BCF a day over 2018. And so it's been the case all year, this growth is driving volume increases on our pipes. Transport volumes in our transmission pipes is how we refer to our large diameter pipes increased by approximately 4.15 BCF a day or 13%. This marks the seventh quarter in a row on which volume exceeded the comparable prior period by 10% or more. So, if you look on our system to see where these volumes showed up, EPNG volumes were up just under 1.2 Bcf a day, primarily due to increased Permian volumes and California storage refill. TGP volumes were up 700 a day due to expansion projects. Kinder Morgan Louisiana volumes were up approximately 680 million cubic feet a day due to LNG exports. So, overall, for Kinder Morgan, deliveries for LNG exports were approximately 2.5 Bcf a day. That's an increase of almost 2 Bcf over the third quarter of 2018. CIG volumes were up 585 million cubic feet a day due to increased DJ production and coal to gas switching. GCX started flowing volumes in August and went into service at the end of September, so averaged about 325 million cubic feet a day over the quarter. GCX is currently full flowing 2 Bcf a day. And then rig volumes were up approximately 250 million cubic feet a day due to increased DJ and Powder River Basin production. On the gathering assets, volumes were up 12% or 350 million cubic feet a day, primarily driven by higher volumes in the Haynesville and in the Eagle Ford. Overall, natural gas wellhead volumes…

All right. Thanks, Kim. Today we're declaring a dividend of $0.25 per share, the same as last quarter and in line with our budget to declare $1 per share for the full year of 2019, which is a 25% increase over the $0.80 per share that we declare for 2018. KMI's adjusted earnings per share and DCF per share both grew from last year's third quarter. We generated DCF per share of $0.50, which is two times or approximately $570 million in excess of the declared dividend. In addition to the quarterly performance, our press release provides an update to our 2019 outlook. We are now expecting to end the year with adjusted EBITDA of about 3% below our budget and DCF slightly below our budget. Two discrete items that contributed to the variance were; one, the delay we experienced in placing our Elba Island facility in service; and the 501-G settlements. The Elba delay while disappointing is largely behind us now. Now that we're recognizing majority of the revenues for that project just as Steve mentioned. And the 501-G resolution, while it wasn't in our budget was a positive outcome for Kinder Morgan. So, moving on to our quarterly results. As you can see, we are using our updated format for earnings, so we hope you find this to be an improved presentation of our financials. I'll start with our GAAP performance then I'll move on to our non-GAAP performance. Revenues were down 9% from the third quarter of 2018, but the decline in cost of sales more than offset that lower revenue amount, meaning gross margin actually improved from the prior period. Some of that gross margin benefit came from non-cash losses that we experienced in the third quarter of 2018, which we treat as certain items and…

Okay. And we're going to update you on KML, progress on the transaction, as well as the financial results stats.

Thanks, Steve. Before a few brief comments on the numbers, I'll update you on where we stand on the pending sale of KML to Pembina. Consistent with previous comments, we still expect the deal will close either late in the current quarter or in the first quarter of next year. At this point, we have received early termination of the U.S. Hart-Scott-Rodino review period, which is a condition to close. The remaining conditions to close include KML shareholder and related court approvals and other regulatory approvals including approval by the Canadian Competition Bureau, which we expect will be the longest lead item. With respect to shareholder approval, the common and preferred shareholder meetings are scheduled for December 10th. As a reminder, while there will be a vote of the preferred shareholders on a proposal to exchange KML preferred, for Pembina preferred as part of the transaction, closing of the transaction itself is not dependent upon that vote or any approval of the preferred shareholders. With respect to approval by the Canadian Competition Bureau, we are proactively engaged with Pembina and the Competition Bureau to respond to requests for information in order to facilitate the bureau's review. Now moving toward the results. Today, the KML Board declared a dividend for the third quarter of 0.1625 per restricted voting share or $0.65 annualized, which is consistent with previous guidance. Earnings per restricted voting share from continuing operations for the third quarter are $0.08 and that is derived from approximately $16.6 million of income from continuing operations, which is the same as net income. Income from continuing operations is down approximately $5.6 million versus the same quarter in 2018. Looking at the largest drivers of that variance, revenue increased across most of KML's assets and was led by the contribution from the Base…

Okay. We're ready to answer questions on both entities. And as we've been doing here recently, we're going to ask that you limit your questions per person to one question with a follow-up. But if you’ve got additional unanswered questions, get back in the queue and we will get back to you. All right, Brittany, if you'd open it up.

We will now begin our question-and-answer session. [Operator Instructions] And our first question comes from Colton Bean from Tudor, Pickering, Holt & Company. Your line is now open.

Good afternoon.

Good afternoon. So, just given the backlog that you all have in place today, is there a scenario where operating cash flow is sufficient to fund both the dividend and the capital program in 2020? I guess, as a follow on, when would you expect to make decisions regarding proceeds from Cochin and PBL shares?

Okay. So, we haven't started our 2020 budget process yet. We were taking that up here right quick, but we -- so we won't know the final answer to that question. I mean this year with the dividend at the level that it was, we had what we call a self-funding gap of what's projected to be about $100 million, which means we've almost entirely funded our capital program and our JV contributions of around $2.7 billion, $2.8 billion and the dividend out of the cash that we generate. Obviously, with dividend going up next year, that could be a little tighter. But until we know exactly what we’ve got in the capital plan for next year, we don't have a specific answer. I think it's safe to say we will be largely self-funding our CapEx along with paying the increased dividend next year. On the timing, so we'll have the Cochin -- well, when the Cochin proceeds come in, we should -- one of us should probably mention, as we said when we announced the transaction, the Cochin proceeds by themselves would take our projected net debt-to-EBITDA to 4.4 times versus the 4.6 times that we talked about earlier. We'd expect that -- again as I've said, we would hold that on the balance sheet if you will and wait for the right opportunity. And when it comes to the right opportunity, we'll be looking at capital projects that we have very attractive turns -- returns at well above our cost of capital or at share repurchases. The share repurchases we will do opportunistically and not programmatically. And so, we're not talking about specific prices at which we would transact or anything like that, but we'll have the proceeds available. When it comes to the Pembina shares in particular, of course, we would expect to convert those to cash at some point. We represent -- the proceeds represent less than 5% of Pembina's trading outstanding stock. So, we think that we can convert those shares into cash in a very non-disruptive way, and we don't have to be in a hurry to do so. And then we'll deploy the capital in share repurchases as I said opportunistically.

Got it, that's helpful. And then just a quick follow-on. And so, understanding that there were impacts from field maintenance in the quarter for the EOR business, should we expect any impact at base decline rates from the reductions in the capital program?

I think that at current -- we believe that at current prices, if you think about the smaller fields, Goldsmith, Katz, and Tall Cotton, we would probably -- we're going to be managing those for free cash flow not expecting to invest considerable capital in them. That can change if oil prices change. But for right now that would be our plan on those, and we will focus our attention on SACROC and Yates. And that's where most of the oil is anyway, having most of the production in any case. And so, I would expect to see declines in the smaller fields and then we'll see what projects are available to us at the return thresholds that we've set in the two larger fields.

And our next question comes from Shneur Gershuni from UBS. Your line is now open.

Hi, good afternoon, everyone.

Good afternoon.

Steve, you had previously guided to 2.3 -- $2 billion to $3 billion worth of CapEx as kind of -- the run rate number that you've sort of been talking about. And I realize you're not through your capital program at this point or the valuation of your capital program for 2020 at this point. But I was wondering if you can talk about what drivers would bring you to the lower end versus the upper end as you contemplate the backlog? You mentioned discipline earlier. Does the slowing of commercial discussions around the third Permian pipeline potentially bring CapEx to the lower end? I'm just wondering if you can give us sort of a little bit of color of what -- how both things will move around between the upper and the lower bound of your CapEx than you've previously given?

Yeah and the short answer to your question on the Permian Pass is that yeah that would bring it toward the lower end until it ultimately gets sanctioned. So, if you think about where these projects are likely to come from, clearly we've got some in terminals and refined products, but the lion's share of the project opportunities as we look down the road are the things that aren't in the backlog right now are in the natural gas sector. And they relate to additional Permian takeaway capacity as well as feeding LNG facilities in the second wave of LNG. And as I said, mostly concentrated on -- in Texas and Louisiana and so it's the timing of those project sanctions or sanctioning FIDs that will drive our capital -- our backlog and our capital budgets in the years ahead.

Great. And then a quick clarification, you just mentioned that on a pro forma basis, this is already Colton’s question before -- on a pro forma basis for the KML-Cochin sale that you would technically end the year at 4.4 times versus 4.6 times, did that not include the sale of the Pembina shares? Is that just on the cash that's coming in and the 4.4 times would in theory be lower if you sold those shares as well too?

Yeah. That's just on the Cochin cash proceeds, and it does assume an end of the year close, which is not a certainty. As we've said, we maybe able to close as soon as the end of this quarter or early 2020, but if you make that assumption of a close in this year and the use of -- and the receipt of the $1.546 billion of U.S. Cochin proceeds alone that's where you get that number.

And our next question comes from Jeremy Tonet from JPMorgan. Your line is now open.

Hi. Good afternoon. Just wanted to pick up on the CO2 side, that was a bit low, our estimates there. I was just wondering how much CapEx does it take to keep the production flat there or the 4.5% decline rate should we expect that to continue? Any thoughts you can provide there?

Yeah. So, we don't invest in our CO2 business based on what investment level would be required to keep production flat or to grow production in aggregate. The way we invest the capital is, if the capital that we're investing and the oil that we expect to free up and sell as a result of it, if that produces a return, that clears our return criteria, then we invest. And so, we've had times when SACROC's been up year-over-year. We've had times certainly when it's been down. But we continue to find things to do at SACROC. It's just that we don't invest specifically to maintain production. As I said earlier, I mean, I think you can expect that without capital investment in the smaller fields, you would tend to see a decline there. And as I said, we're going to maintain capital discipline there and we will continue to look for the opportunities to make sense at SACROC and Yates.

Got it. And then, going over to the M&A opportunities you're seeing, it seems like there was indications of interest in some of your assets at the north of 13 times. So I was just wondering, if you could provide any more color there. Is this kind of in the FERC-regulated assets like citrus? Is this on GMP? Or kind of what's more of the thought process there? If you can monetized that something better than what you trade at, is there anything holding you back from doing that?

Well, Jeremy, we're not government on specific expression of interest that we've had. I made that point simply to again drive home as I think the Cochin transaction does also, that there's interest in individual assets at multiple of EBITDA well above where KMI as a whole is trading.

And our next question comes from Spiro Dounis from Credit Suisse. Your line is now open.

Hey, good afternoon. Maybe just following up on the M&A question. I won't ask you to may be point out specific assets. But just maybe help us think about, where the interest is coming from. Obviously, we've seen interest from private equity in the space, but now also, some strategic deals are getting done. So just curious, as you think about the -- who the potential buyers could be? Can you describe them? And is there any room or interest for you to may be sale a portion of an asset, while retaining some of the operational control of it?

We would certainly entertain selling a portion of an asset and maintaining operational control. That's a good fit with what I believe Steve and the team are doing to continue to position KMI as really good operators in every respect from safety to efficiency. And so, that's certainly something we entertain. We're not going to comment further on where the interest is from. But I think all of you know that there is a lot of money out there looking for a home in the midstream area of the energy section.

Yes, understood. And then just on Permian Pass, I appreciate the color around the customer side. Just curious, if you're seeing JV partner start to show up or express any levels of interest early on. And just a quick tag along on Permian Highway and sorry if I missed it, but is there any incremental cost associated with the delay? And is that going to be spread across the partners equally?

Yes. Taking the last one first. Yes, moderately, I would say. And, yes, it's borne by the project and all of its investors. On Permian Pass, there's definitely interest from people, shippers as well as partners or prospective partners. What I was trying to get across there is that, particularly there's no secret, as you saw, how people came out and laid out there capital plans in the producing sector, following -- as part of second quarter earnings. The growth is still there. It's maybe not growing on the same slope. And so, that naturally implies, I think, still a need, both, still need for the pipeline project, but perhaps a later in-service date and a later FID.

And our next question comes from Keith Stanley from Wolfe Research. Your line is now open.

Hi. Good afternoon. Curious, just updated views on acquisitions as part of the growth strategy, just you’re going to have a lot more financial flexibility next year, equity currencies maybe a little better on relative terms. Just updated thoughts there?

It's really no update, in the sense that we are always looking to see what makes sense. What makes sense particularly in our sector and -- but those things are very hard to project, very hard to predict and call your shots on, but we continue to leave the offense on the field.

Okay. And so I just have one follow-up on the asset sale side as well. How would you assess asset sales from here? It's a little different this time around with leverage already at your target, maybe not a clear use of sales proceeds besides buybacks. So just how would you assess asset sales given where you are financially now?

I mean, I think you look at, we would look at it the same way we'd look at any other sales proceeds. The first use of those proceeds would be to make sure that we have maintained leverage target that we've achieved. And so that's first. And then from there, it's again probably initially sits on the balance sheet and then opportunistically share repurchases or to fund our capital program. It's the same kind of order of operations that we’ve talked about on KML proceeds and other proceeds.

And our next question comes from Tristan Richardson from SunTrust. Your line is now open.

Good afternoon. Appreciate all your comments on the stringent project approval criteria and returning cash to shareholders. When you look at 2020 marking the end of your multi-year outlook period, do you guys plan on outlining a multi-year plan similar -- in a similar way or do you think about this kind of on an annual basis now?

I think, well, first of all, like if you're asking specifically about the dividend, that's a Board decision and we will be evaluating that. As we've said before, I think the right long-term assumption is to assume a dividend that grows in line, more in line with the growth in the underlying business, but I wouldn't expect a multi-year program.

Now I think we've been very clear when we gave the three-year plan and we've achieved all those objectives as we promised. And after we pay out the $1.25 next year, during the year the Board will look at what the opportunities are for the future. But I think Steve is absolutely right. We're looking at this year-to-year and not set out a multi-year plan.

But the principles will be multi-year, which is a strong balance sheet, investment in attractive returning projects and returning value to shareholders through share repurchases or dividends. Those principles will – and having a well covered dividend, those principles will occur.

Exactly right.

Very helpful. Thank you. And then just one quick follow-up on PHP, talked about being most of the way there on regulatory and right-of-way permitting, et cetera. The sort of the largest pinch points over the areas of the regulatory process that brought the delays, do you see those as sort of in the rearview mirror now in this last stretch such that they gave you that comfort to talk about the early 2021 date?

Yeah. So, good point. We've made a lot of progress lately in getting permits as well as getting our right-of-way done and where we’ve had to proceed to eminent domain, it’s something we avoid using. But as well as the second quarter court decision that we got that cleared the way for the project to proceed in large part. We still have some more work to do. We don't see anything in that work that we have to do on the permitting front that is in anyway insurmountable. In fact, we think we've already done that work. It needs to be processed now and ruled upon. But we made our plans assuming that, that process would conclude and this was our projection, not an agency's production. But we assumed things would conclude earlier, and it's taking a little longer. But I think being thoroughly reviewed thoroughly done.

[Operator Instructions] Our next question comes from Ujjwal Pradhan from Bank of America Securities. Your line is now open.

Good afternoon. Thanks for taking my question. First one on me, just in terms of thinking about your credit rating and the leverage target, given that you have a clear line of sight here into the actual proceeds and growing free cash flow, do you see any potential to lower your leverage target and maybe aim for a high BBB rating and maybe have a higher age accretion? And how your conversations have been with rating agencies in this regard? And then I have a follow-up.

Okay. Well, I'll start and then ask David or Anthony to fill – or Kim to fill in. But I think we feel good being a BBB class and getting the upgrade from BBB minus. We do evaluate whether it makes sense to improve on that target and that evaluation has so far shown that we really get very, very little cost of capital benefit and in fact, the extra deleveraging that we would do, would forestall opportunities to create shareholder value to an extent that we don't think is warranted. But David?

Well, I'll just add that in terms of our – I wouldn't add anything more to that part of your answer to what Steve just said -- provided. But I would say, in terms of recent rating agency conversations that we've had. We just got upgraded by all three just within the last year. They went to a thorough analysis on upgrading us. It's very difficult to get upgraded. So they take a very cautious approach. So I think we're in real good standing with them – with our current leverage target and our current leverage.

Got you. And Rich in your introductory comments, you talked about the environmental positives of your business especially on the natural gas side. But one area, I think was missing was your CO2 business and their related EOR although a smaller scale versus your other business. Given that you are trapping carbon dioxide underground in the process, do you think your operation qualify for ESG eligibility and any governmental incentives? And we have seen one of your competitors in the business talk about it at length, so just wanted to get some of your thoughts there?

So, you're right. We capture CO2 and we put it in the ground and it stays there. And we get valuable oil out as a consequence of that. That has been primarily geologically sourced CO2 really exclusively geologically sourced CO2. There are opportunities to potentially capture man-made CO2 and there are some tax credits to help support that activity. So far in any sizable way, we have not found it to be economic and have not found the sources of available CO2 from say, large ethanol plants, for example, to be of sufficient -- to be numerous and often of a high enough quantity for us to take full advantage -- to take advantage of that opportunity. But if you think about the long term and you think that at some point, CO2 sequestration capacity is going to be valuable, because of the carbon tax or something else, certainly, it's something that we know how to do.

And our next question comes from Christine Cho from Barclays. Your line is now open.

Good evening, everyone. So I wanted to start on, I guess, follow-up on the capital allocation. When we think about what you could potentially do in stock buybacks, should we assume that leverage stays at your targeted 4.5 times? So, like for next year, that it looks like may be your CapEx shakes out light and your net debt falls below that, that we should think that you would likely buyback stock? And what are the puts and takes to why you would maybe want to take leverage lower or higher than that? Do you think higher with potential M&A opportunities?

We don't anticipate increasing leverage in order to repurchase shares when that's -- when it’s above our target, okay? So, we expect to maintain our target as we use our share repurchase program. And as I said before, we -- the share repurchases would come opportunistically. And as I've said on that KML proceeds, we’d likely initially let those be on the balance sheet and then we'll look for the right opportunities to use it. But we're not telegraphing specific metrics or pricing that we're looking for.

Okay. And would you potentially take your leverage higher if you saw a good M&A opportunity and the rating agencies were okay with it?

If the rating agencies were okay with it, yes, that's an if, but I think it's the way -- and this is purely theoretical, okay?

Right

But the way that would work is, if you saw yourself having a very clear path back to these metrics and a rapid one and one that you could confidently execute on. And I think it would only be in those circumstances.

But let me just say that, obviously, it took us a good amount of time and a lot of work to get where we are now. And we would certainly -- that's a fundamental part of our philosophy is to maintain a strong balance sheet. And we can speculate all you want about what might happen in M&A, but let me just say that the Board is very committed to maintaining a strong balance sheet and that will certainly be a really big factor in any decision we make. And to amplify what Steve said, again, as we've said so many times over the last three years, there are four things we can do with the money and all of them benefit our shareholders. I think, we've shown by increasing the dividend, we're returning real value to the shareholders. If you take $1.25 dividend on the stock price, it's turning the bar 20, its equivalent return if you look one year out. We have the ability to, as Steve said, substantially fund our own capital projects. We have the ability to maintain a strong balance sheet and we have the ability, at some point, opportunistically, to buy back shares. So, I can assure you that the Board is going to make decisions that are in the best interest of shareholders here. We have a large amount of insider ownership on the Board. So, we're certainly going to look out for what's best for our shareholders.

And there are no further questions at this time.

Okay. Thank you very much. Have a good evening.

Thank you for your participation in today's conference. All participants may disconnect at this time.