Q2 2020 Kinder Morgan Inc Earnings Call
Welcome to the quarterly earnings conference call at this time, all participants are in listen only mode until the question and answer session of today's conference at that time, you Press Star one on your phone to ask a question.
We'd like to inform all parties at today's conference is being recorded if you have any objections you may disconnect at this time.
I'll now turn the call over to Mr., Richard Hinder executive Chairman of Tinder Morgan. Thank you.
Thank you Denise a as usual before we begin I'd like to remind you that game eyes earnings release today and this call.
Forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
The Securities Exchange Act of 1934, as well as certain non-GAAP financial measure.
Before making any investment decisions, we strongly encourage you to read our pool disclosures 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 FCC.
Four important material assumptions expectations and risk factors that may cause actual results to differ materially from those anticipated and describe as such forward looking statements.
Now I was always do on these calls let me talk briefly about our financial strategy Kinder Morgan.
Say that these are unprecedented times for the American economy is an understatement and particularly for the energy business. We faced a continued and back to go over night team together with the negative effect that buyers has had on worldwide demand for most of the products, we move through our pipelines and handle at our truck.
Yes.
So the question is what should our financial strategy be in the face of these black Swan event.
Actually in our judgment. The response is pretty similar to the approach we've been using to the last few years, we will continue to prioritize returning value to our shareholders.
While maintaining a solid investment grade balance sheet.
Specific to our balance sheet, we're fortunate to pay down.
Actually $10 billion in debt since 2015.
We're also fortunate to have assets and throw off substantial cash flow even under adverse circumstances.
We need to live within that cash flow, but funding all dividends and expansion capex from those internal from these internally generated funds.
We're doing that today.
Back to accumulate cash in excess of our dividends and our capex, even in a challenging year of 2020.
As previously announced we reduced our expected expansion budget by about 30%. This year and are also reducing our operating expenses and sustaining capex, which Stephen Kim will talk about and just a few minutes, we've raised our dividend payout and expect to do more in that regard with normal economic conditions return.
Looking beyond 2020, we believe we are operating in a maturing business segment and that our opportunities for Bible expansion projects will likely be significantly less than we have experienced over the last several years.
If that expectation Bruce I agree it will probably reduce our growth potential that allow us to husband significant cash flow that we can use to increase our dividend.
Bad debt and or buy back shares under the right conditions.
Our goal is to be disciplined in every respect that means being very careful and high grading potential capital expansion expenditures.
The bigger focus on operating our assets in the most efficient way possible.
Now most investors, we talk with weather generally positive or not on the K My story.
Leave that given our size attractive assets and relatively strong balance sheet, we will be a long term survivor that in view, they see us as a potential consolidator in the mid stream area.
Let me say that while we would never rule out a potential M&A transaction, we will not undertake such action is a detriment of our balance sheet beyond that it would have to be accretive to our distributable cash flow.
One final thought.
Sometimes like these that famous quote and Mark Twain comes to mind. He said, it's difficult to make predictions, particularly about the future.
That said I believe in this kind of environment, staying power and maintaining a long term outlook or keys to long term success and the delivery of real value to our shareholders and with that I'll turn it over to Steve.
All right. Thanks, Rich I'll give you an overview of our business, including the Corona virus situation.
An update on our Permian Highway pipeline project also provide some color on the organizational announcement that we're making today then I'll turn it over to Kim Dang to cover the outlook in segment updates and then our CFO David Michaels will take you through the financials then we'll take your questions.
At times like these that is especially important for us to keep our priorities and principles in mind priorities throughout the co. Good response has been to keep our employees safe and to keep our business is wrong. We operate infrastructure that is essential to businesses and communities across the country need to keep our assets running and we have.
To protect our employees, we instituted telecommuting for our offices and that's worked astonishingly well.
Also made changes in our field operations to enable our co workers to do their work, while maintaining appropriate physical distance in a few cases were distancing was not possible we enhanced our PE requirement. It's working all of our assets are running and we're keeping our coworkers safe while they are at work community spread has continued.
And it's affecting us, particularly in our Houston area locations, but telecommuting and the other precautions. We are taking have allowed us to maintain effective safe reliable operations, well largely keeping our co workers from contracting are spreading about as well at work.
Our financial principles remain the same first maintaining a strong balance sheet second we are maintaining our capital discipline through our return criteria a good track record of execution and by self funding our investments on that front, we evaluated all of our 2020 expansion capital projects and reduce capex by about six out.
And 60 million from our 2020 budget.
In response to the changing conditions in our markets.
We still have over $1.7 billion of expansion capital 2020 on good project investments and a backlog of 2.9 billion, 71% of which is a natural gas. We're also maintaining cost discipline. We now stand at nearly 170 million of expense and sustaining capital cost savings for 22.
20, including deferrals up from 125 that we reported to you in April.
The result of this work on our capital budget and our costs is that our projected DCF, let's just discretionary capital spend is actually improved versus our plan notwithstanding the pandemic and notwithstanding a degradation to our forecast.
With more than offset the degradation to our forecast with spending cuts in 2020.
Finally, we are returning value to shareholders with the 5% year over year dividend increase to one dollar five annualized providing an increase but well covered dividends.
Strong balance sheet capital and cost discipline and returning value to shareholders. Those are the principles, we continue to operate by.
We continue to make very good progress on our Permian Highway pipeline project, which is supported by long term contracts with a take or pay structure.
Construction is proceeding very well and we are now nearly 80% mechanically complete on the pipeline actually 79% as of this morning.
Were 97% complete on our mainline compression, we still expect to be fully in service in early 2021.
Permitting delays preconstruction and some additional land acquisition and river crossing costs have impacted returns, but we're still looking out a strong double digit unlevered. After tax return on this project. Our team has continued to overcome obstacles and the number of remaining obstacles has shrunk consider.
Rugeley, particularly in light at the Supreme Court decision to stay the injunction against the Army Corps nationwide rule 12 permitting process, but also as a result of adjustments. The team has made in routing and construction.
The other topic I wanted to touch on is the organizational.
Changes that we made today James Holland has been appointed Chief operating officer reporting to Kim.
James has a long successful history of Kinner Morgan, including most recently as president of our products pipeline group, we asked James to take on the leadership of our ongoing E.S.G. and operational excellence initiatives also we have asked James to lead our examination of cost effective changes in our organizational structure.
Our management team is in the midst of an effort to determine how we operate and is considering centralizing certain functions in order to be more efficient and effective.
We also we are already an efficient and lean organization, but we are always looking to do better.
Especially in today's challenging environment.
We believe the cost effectiveness as one of the keys to long term success in our sector, it's essential to be cost effective while also maintaining our commitment to safe and complied operations that's embedded in our values our culture and then how we put the budget together the management team is committed to these objectives.
James will help make us, but make sure that we meet them.
We expect to conclude this review concurrent with the preparation of our 2021 budget.
We also announced act Sanders will take over as president of our pipe products pipeline group Dax's had a long successful career here too has been first chair on our acquisition and divestiture our divestiture activity for over the last seven years.
More than being the corporate development Guy, though to Axis also been a key player in every significant strategic decision. We have made now he will bring his skills and experience to bear a leading a business unit and working with a great team and our products pipeline segment.
Evan Grauman will take over to access role and corporate development and he will do a great job, we won't Miss a beat and with that I'll turn it over to Kim.
Okay. Thanks, Steve.
I'll go through a review of each of the business segments as well as a high level summary of our current full year forecast.
So first starting with the business units and natural gas natural gas transport volumes were up about 3% or approximately 940000 dekatherms per day.
As a second quarter of 2019 that was driven by GC acts, which went into service last September.
TGP due to increased LNG deliveries.
Oh Gee due to heating demand in DJ basin production and volumes on our Texas Intrastate did a demand growth.
Physical deliveries to LNG facilities off of our pipelines were up over 900 per day versus Q2, 2019, but they were down significantly far says that first quarter up this year.
Exports to Mexico or flat in the second quarter, when compared to the second quarter 2019.
Deliveries to power plants were up about 6% driven by coal switching and warmer weather and LDC demand on our system was down approximately 7% industrial demand was relatively flat.
Our gathering volumes were down about 8% in the quarter compared to the second quarter of 2019.
They were down 9% compared to Q1 of this year.
Kinderhawk, which serves the haynesville and they Oh, and our Oklahoma assets were down due to the lack of drilling and the decline in existing wells volumes on our Highland system, which is in the Bakken or down due to production shutdowns in general what we're saying in the Eagle Ford in the Bakken is that volumes bottomed out in May.
June respectively, with some increase in volumes thereafter as producers it started to bring back shut in production.
And the Haynesville, which did not have the shutdowns we saw in the associated plays we expect continued volume decline. This year due to the lack of drilling how are we continue to have conversations with producers about incremental volumes and 2021, given the current natural gas price curves.
And our products pipeline segment refined products volumes were down about 31% for the quarter versus the second quarter 29 team as a result, with the pandemic and about the same percentage versus plan.
That's slightly better than the 40% that we projected for the second quarter and our Q1 call.
Hi, hymns versus our budget, we're down over 40% in April and then we saw recovery in May and again in June and so in June they were down about 24% versus our budget currently volumes and our products pipeline are down roughly a 15% and that's really depending on the market.
Crude and condensate volumes were down about 26% in the quarter.
Are we saw the largest applied and may versus April for refined products with the weakness largely carrying into Jan.
These volumes were weaker in Q2 than what we projected for you on our Q1 call largely offsetting the better refined products volumes in July we started to see some recoveries as producers have brought some shut in production back on line with a recovery in oil price.
And terminals, we experienced declines in there for a fine product throughput of about 24%.
So slightly better than what we saw in our products pipeline and that's just driven by the different markets that we serve.
However, the financial impact of the volume decline as more moderate and this segment given the primarily take or pay contract a contact contract structure.
One bright spot in the midst of the pandemic has been the demand for tankage currently we have approximately 99% of art Pankaj under contract.
And so you got to oil production was down approximately 13% over 20% of that reduction was associated with production curtailments that we instituted when prices dropped below about $20 a barrel.
The improved prices, we have restarted the majority of that production without operational issues or impacts for the reservoir.
You know two volumes were down about 31% in the quarter overall CEO to demand in southwest Colorado is at a level that we haven't seen since 2004. However, we expect to see some rebound as oil prices improve.
For the full year, we're projecting to come in slightly below the guidance. We gave you in the first quarter of approximately 8% below budget on EBITDA and approximately 10% below budget on DCF.
A number you are going to ask on the follow up calls what slightly means so.
Right now, we estimate where about 9% and 11% respectively on EBITDA and DCF.
But that implies much more accuracy and specificity than what we really haven't these highly uncertain times and das our guidance of slightly below.
The slight deterioration that we've seen since the first quarter has all been in midstream natural gas due to lower gathering volumes in the Bakken the haynesville and the Eagle Ford producer bankruptcies, and softer market fundamentals impacting our Texas intrastate business.
Our forecast for refined product demand for the balance of the year assumes volumes are down 11% to 12% in Q3 and 5% in Q4 versus our budget and that's largely unchanged from what we projected for you and our first quarter call.
For natural gas gathering volumes were projecting volumes for the second half of the year on average to be relatively flat versus what we saw in the second quarter.
This equates to down approximately 12% versus the second half of 2019 and down approximately 20% versus our budget for the second half of the here. This is a change from what we projected in Q1 and as I mentioned previously one of the drivers of our slightly lower guidance.
Continue to look for expense reductions to offset the volume and price impacts that we can realize without sacrificing safety or compliance.
Corporated in our guidance is 170 million of cost savings between Opex, Gionee and sustaining capex that Steve mentioned in his comments.
We're now projecting that year end debt to EBITDA will round up to 4.7 times due to the EBITDA deterioration.
We continue to operate in a highly uncertain and changing environment. It is difficult to predict what would what will happen certainly at the time, we announced our Q1 earnings no. One was predicting the cobot outbreak that we've seen that we're seeing in Texas, Florida, Arizona, and California, as we did last quarter table eight of the press release provides.
It was sensitivities around the biggest moving pieces of our forecasts.
That is things change you can calculate the impact on our business.
With that I'll turn it over to David Michaels.
All right. Thank you Kim.
So now as we're all aware this year's events it had a negative impact on our EBITDA and on our DCF, but as was previously in it I mentioned, we've identified capital expenditure reductions, which more than offset the DCF reduction.
As a we expect to fully fund all of our cash needs, including our capital expenditures and our dividends within our <unk> distributable cash flow.
We also have a $950 million of debt maturing in September and another 1.9 billion maturing in the first quarter of next year.
But with that said, we had over $500 million or cash on the balance sheet at the second quarter at the end of the second quarter.
And.
Undrawn $4 billion credit facility. So we have ample liquidity, even accounting for our debt maturities.
Now moving onto the quarter, we're declaring a dividend of <unk> 0.26 to $5 per share or dollar or five annualized a flat with last quarter.
Revenues were down 654 million from the second quarter of 29 team.
Driven in part by lower natural gas prices, a this quarter versus last year's quarter.
And those lower natural gas prices also drove a decline in associated cost of sales of 336 million.
So gross margin revenue less cost of sales was down $318 million, which is a better indicator of our performance relative to revenue alone.
The loss on impairments and divestitures of 1.005 billion.
Includes a 1 billion dollar impairment of our natural gas midstream business.
Which was driven by a sharp the sharp decline that we also and natural gas production activity.
Acting several of our natural gas midstream assets.
Due due largely to that impairment, our net loss attributable to Cam I was $637 million for the quarter.
Adjusted earnings, which is our non-GAAP term for net income adjusted for certain items.
And that's certainly a certain items. This quarter is comprised mainly of that impairment just discussed.
Our adjusted earnings were $381 million down 112 million compared to the second quarter 2019.
Adjusted earnings per share was 17 cents for the quarter, which is down five cents from the prior period.
Moving on to distributable cash flow performance.
Natural gas segment was down $55 million for the quarter.
The sale of coach and drove most more than half of that lower contribution.
Additionally, various gathering and processing systems experienced lower lower activity and or Tennessee gas pipe was down due to fiber, one GE impacts and mild weather.
Partially offsetting those were contributions from.
Greater contributions from Elba liquefaction and Gulf Coast Express projects.
Alex was down $80 million, driven by lower refined product volumes as well as lower crude and condensate volumes terminals was down $61 million. A this was also.
Partially driven by the sale of camel as well as lower refined product.
Coal and steel volumes.
She has to segment was down $28 million driven by lower.
Two and oil volumes, partially offset by cost savings.
Our <unk>.
General and administrative and corporate charges were higher by 5 million due to lower capitalized overhead partially offset by some lower.
Noncash pension expenses as well as the sale of Tamil.
JV DNA and in CCI. This $20 million of reductions are explained mainly by our partner sharing and the other local factions greater contributions.
And that explains the main changes in adjusted EBITDA, which was 249 million or 14, 14% lower than the second quarter of last year.
Interest expense was lower by 59 million driven by a lower floating rates benefiting our interest rate swaps as well as a lower overall debt balances partially offset by.
Lower capitalized interest.
Recall, we use the proceeds from our Tamil and coaching sales to reduce debt.
Cash taxes, lower by $46 million due to deferred tax payments at citrus plantation.
Deferral of our Texas margin tax and the sale of Cam L., which was a taxpaying entity.
Those deferrals are only to later in 2020 for the full year cash taxes are in line with our budget.
Sustaining capital was $31 million lower versus Q2 of 2019.
And total DCF of 1.001 billion is down $127 million or 11%.
DCF per share was 44 cents.
For share down six cents from last year.
So to summarize the distributable cash flow impacts.
Segments were down 224 million.
We had lower capitalized overhead of 24 million.
Greater cash pension contributions of 18 million.
Partially offset by lower interest taxes, and sustaining capital of $135 million and that gets you a just over 130 million of 127 change.
Moving onto the balance sheet, we ended the quarter at 4.5 times debt to EBITDA up for up from the 4.3, we had last quarter and at year end 2019.
Our net debt ended the quarter at 32.4 billion, which is down 622 million from year end.
And 153 million lower than last quarter.
As rich mentioned, but it's worth pointing out again or net debt has now declined by about $10 billion since the third quarter 2015.
So reconcile the quarter change in net debt.
We generated just over $1 billion, a DCF, we paid out $600 million of dividends.
We spent 500 million on growth capital on JV contributions.
And we generated $250 million of working capital a source of cash and that explains the majority of the 153 change for the quarter reconciling from year end or the lower 622 million lower net debt.
Generated $2.262 billion of distributable cash flow.
We received.
Little more than $900 million from the pending a share sale.
We paid out 1.17 billion of dividends.
We spent a billion dollars on growth capital and contributions to Jvs.
We paid $160 million of taxes on.
Deferred Trans mountain and Pembina share sales.
We bought back 50 million of came I shares and we had $150 million use.
Working capital changes and that explains the majority of the 622.
Finally, as Kim mentioned, there's still plenty of uncertainty for the remainder of the year. So as we did last quarter. We've provided a table with sensitivities to some of those assumptions that remain uncertain. So you guys can.
Model Accordingly.
Also consistent with last quarter, we we posted a supplemental slide deck to our website, which.
Provide some helpful information on our assets customers and contract mix.
With that I'll turn it back to Steve.
Alright, Thank you, yeah, and I'll remind everybody.
That as a courtesy to all the callers.
We'll limit the questions per person to one question was one follow up but if you have additional on answered questions get back into queue, and we will get back around to you.
So with that Denise if you would open it up for questions.
Thank you if you would like to ask a question. Please press star one on mute your phone and record. Your name clearly your name is required to introduce your question. If you need to withdraw your question. Please press star Q.
And our first question comes from Jeremy Tonet with JP Morgan Your line is open.
Good afternoon.
Afternoon.
Thanks for taking my question just want to start off on on the Capex comments I think are that you began to call with here and just wondering if you could provide any more color I guess, what you think oh.
Oh, Oh sustaining ray of Capex would be kind of in 21 or plus just trying to get it feel there for what the opportunity set is and how you think about that versus free cash flow and type returns you can get I think the EBITDA multiple that you guys quoted this quarter is five eight versus five six in the past. So just trying to see how this all fits together.
Yes so.
We had previously talked about being in the range and we'd been in this range for about 10 years of a $2 billion to $3 billion a year of capital expansion opportunities that would.
At a faster than we would pursue and and get along our system because the the network we have them because of the broader dynamics in U.S. energy.
Certainly what we've seen this year with Ah with everything that's happened both in energy and in broader markets is those opportunities reduced and so we've been very disciplined and reacted quickly to what we saw there and we took a substantial amount of capital out and so we're now sitting this year at 1.7, that's it.
Jeremy we don't know where that number is going to be but I think if you look at you know let's call. It. The next the next few years kind of outlook as it has it looks from standing here today.
That number looks like it doesn't get to the two to three in fact, it looks like it hangs around the level, we're seeing in 2020, maybe a little less and so but the way will generate that capital investment opportunities. The same way, we always have which is we'll go look for a investment opportunities that are attractive to our shareholder.
There's but we'll have a high hurdle on it.
Particularly in this day in time with if you're trying to build linear infrastructure you have to have margin of safety in any investment that you're thinking about making I said, we'll have a high hurdle rate give ourselves substantial headroom.
Margin for safety, a above our weighted average cost of capital it's got to be something we're confident we can deliver get permitted.
Cetera on time and on budget and as rich mentioned at the very beginning.
It's it's a it's an increasingly more difficult time to get linear infrastructure built in so all of that goes into I think guiding you to a forward view on expansion capital that's below what our historical run rate has been.
And I would add consistent with what Steve saying that of course, as I said gains cuts both ways, but it's certainly.
Helps us in terms of looking at our cash flow. If you just think of producing board a half a billion dollars or distributable cash flow and then take out a bit and a half you're left with $3 billion. The dividends at the current rate or a little less than two and a half billion. So you have several hundred million dollars in that right.
Pro forma several hundred million dollars of cash flow of self funding of the dividend.
And all of the expansion capital.
And the objective of self funding is one of the reasons that let us back really starting in.
And several years ago to elevate our return criteria.
That's very helpful. Maybe picking up on that was point riches several hundred million of free cash flow you talked about there.
That leverage kind of stepped up a little bit versus what you guys had thought about before and just wanted to confirm and there's no need for equity or anything like that you guys are still in good standing as with the agencies here and as you think about where to put those several hundred million <unk> it seems like leverage.
Leveraging would be kind of a top priority versus buybacks are all the options. Just wondering if you could update us on you know de leveraging buybacks and how that all kind of fits together, we said we continue to.
I have maintaining a strong balance sheet is one of our top priority. So we certainly wont do anything to in apparel that and we think that have living within our means are generating excess cash flow every year.
Pauses, even in the long range out.
On the credit profile.
The next question comes from Colton Bean with Tudor Pickering, Holt and company. Your line is open.
Good afternoon.
In June and its name maybe just a follow up there on the leverage side of things you noted the expectation for a more mature U.S. energy landscape on the other side of this and I think we've heard some comments from the upstream community, indicating the groups is likely to be structurally lower even if we were to return that's 50 to $60 barrel world. So as you evaluate financial policy.
That environment any updated thoughts on about four and a half times debt to EBITDA target.
We still think that the around four and a half times is a appropriate for our business and and Ah and leaves us in solid investment grade territory and so we continue to see that as or longer term objective. That's that's not change by what we're seeing what we will be a adjusting.
He is what we were just talking about which is as we go out and look at capital opportunities capital investment opportunities. We do expect those to be less and that is driven in part by what our upstream customers or thinking about doing we got a great network and we've got good de bottlenecking expansions and other things we have a a 2.9 billion.
$1 backlog, but as I said.
Running at the at the two and a half to three range is not what we're not what we're expecting or if you're seeing for the next several years.
Because of that reduced activity.
Anderson.
Just with some of the moving pieces right now on block and take away. It seems like a scenario where do you see a materially wider differential I think you've noted recently that double H is less contracted and some other assets. How do you think about the opportunity set in the event that based on take me becomes the constraints.
Yeah. So we we have seen a increased activity in interest in a in a double HR volumes are up this month versus last month.
That is a function of I think really two things I concerns about take away, but also for reasons of priority of access to double H people do want to maintain their history on the system. So we continue to see.
Barrels that might have otherwise going someplace else or they're continuing to come our way and so that's a that's one effect of People's concern around the Apple situation. We we do see the same thing that you're saying, which is we could see differentials expand tw T. I a in the Bakken. If there is a shutdown I you know we don't have any space.
Special insight into that that seems to me like.
A relatively unlikely results in the end obviously it stayed right now, but it's not that Theres no decision on the merits on it. It was just to stay so that it could be considered without causing undo harbor disruption in the market the other impacts.
From the Apple is a it is one of the outlets on our Highland crude gathering system and.
So our customers want to continue to have that outlet in addition to.
Double H and we want them to have that outlet. So they continue to move those volumes on our system. So.
We don't have any interest in seeing a shutdown as a it's a it's a about broader message for pipeline infrastructure, but but also for our business, particularly on the gathering side.
Your next question comes from Shinier Gershuni would you be S. Your line is open.
Hi, Good afternoon, everyone happy to hear if you want it safe and well congrats on the promotions.
You know maybe to start up I'll follow up on a Colton Jeremys question on the on the Capex side, you know given the difficult legal landscape right now given the fact that being piece.
Or talking about you know free cash flow positive in keeping their capex down. If you had mentioned in one of your response, it's about hanging out kind of where you're at right now on growth capital, but is there a scenario, where you know 21 or maybe into 22, we are growth capex could be as low as a billion dollars.
Or close yeah.
Close.
Okay, [laughter] up and maybe as a follow up question you your language around the guidance of slightly lower than 10%.
In terms of EBITDA, you also mentioned some green shoots as well too I'm. Just wondering if you can expand on them and if nothing changes, where you're seeing things right here or is it fair to say that your outlook for considering a dividend increase during the fourth quarter Board meeting is effectively unchanged at this point right now.
We're not changing anything from what we said in a in April it is something that will take up with all the facts in front of us when we get together in January as we normally do.
Consider the fourth quarter dividends, so no real update that's still our perspective on it and Kim I'll ask you to comment on some of the green shoots.
Yeah, I think you know and we've tried to I think we have incorporated the green shoots and to the guidance forecasts that we gave you know we saw a little bit better petroleum product demand.
And <unk> may and June.
And then what we expected.
But we have improvement built into that forecast for the balance of the year.
We've seen more leasing up our tanks on the a and the terminal side, but we also built that into our forecast for the balance of the year.
And you know in terms of the volumes on the on the GMP side, we've seen some increase in volumes in July.
And you know as a while ago I think our perspective on the balance the years is that what kind of flat to the second quarter.
Your next question comes from Spiro units with Credit Suisse. Your line is open.
Good afternoon, Hey, good afternoon, everyone. Its one of the maybe ask about 2021, and I think 2020 <unk>. We're all fair to say that might go down as a debit anomaly when we look back on it and so just thinking about returning to normal and maybe what the earnings ability to company looks like obviously took off about $600 million in the budget.
From the start of year some of that obviously is going to have a lasting impact but just how are you thinking about return to normal 21, how much of that 600 million comes back and how do you think about some of the offsetting factors between just the base business decline outside of co bid versus some of the growth projects coming online next year like Permian Express.
Yeah, So really the there is still.
A lot of uncertainty as we pointed out multiple times here, we go through a pretty.
Detailed budget review that takes a look at what how markets are shaping up and and looks at everything commercially and also looks at our costs on a bottoms up basis as well that's going to be an enhanced review on the cost side. This year and it's just hard to say right. Now now we can observe the same macro factors that you haven't some of this ties back.
Back to what we discussed.
On the capital side of things, which is the producer community is in a different situation, even though what it was in in 2016 theres not as much capital available to it there's a lot more emphasis on free cash flow that tends to.
That would tend to dampen.
Expectations would be for U.S. energy production, and we've kind of got to make up for what we lost this year before you begin to see it grow again, and so I think I think this the overall.
Everything that's happened in energy has kind of pushed the returned to growth out a couple of years and who knows beyond that right and so I think generally speaking the opportunity to deploy additional capital.
Or deploy capital at our historic levels as we've said several times now it's just not likely at this point from our perspective. So we think we're going to be looking at a lower expansion a capital spend and that has.
Pluses, but also minuses meeting that Theres EBITDA at the good returns that we set as a hurdle for our investment decisions that means that there were some EBITDA that we would have normally expected to get that we're not going to get if we're not deploying capital it at higher levels, but really I'd go back to the beginning which as we go through a pretty detailed process and in.
Setting or 2021 plan and and we're not really in a position to start commenting about 2021 yet.
Yeah not parents a couple of answer right now appreciate take a swing at it.
Steve maybe for you as well a you didn't mention be a new initiative to further streamline operations sounds very early stages, but just curious how you're thinking about the timing of when that would actually start showing up in earnings when we start seeing those savings and does this review contemplate divesting or maybe even shutting down some underperforming assets.
I would call that latter thing that's a separate consideration meeting we do look at the best or sort of divestitures from time to time, where they make sense. We think the asset is more somebody is willing to pay more for that we think it's it's worth but those I think we've done a lot of that already we're kind of we're down to fairly small pieces there.
Exercise your question about when would that show up in earnings It would show up in 2021.
The next question is from well put on with the Bank of America. Your line is open.
Good afternoon, everyone. Thanks for taking my question first one of them <unk>.
Manny and the cool commentary a rich thanks for your thoughts on on the topics in your prepared remarks.
Wanted to get your thoughts on you know given the 12 valuations for midstream assets introduce market. The smaller size, if your growth backlog and and challenges and building U.S. and stuff that you have pointed out if you were to pursue M&A, what acid or geography would be up interest.
We don't do it that way.
And I'll I'll reiterate what what rich said I mean, we've been we've worked very hard to get our balance sheet, where it is and.
Doing something that that hurts the balance sheet or to balance sheet metrics is really not something that we're interested in and so we're going to be we're gonna be we're going to jealously guard that and then also we would need to see good value in terms of DCF per share accretion as a result, what we look at as we have value.
Those things is is it in a business that we are comfortable operating.
That we had w. understand and and where we believe that we can bring some considerable value to it either in terms of cost well certainly in terms of cost synergies, but also in terms of other strategic synergies, whether those are capital or pieces of business that we could put together and make better.
And then you've got to find something that's transactable and so there's there are a number of screens that have to clear and so you can't predict it and we've said that for years now people have been projecting consolidation in our sector for I don't know six or seven years, something like that I mean people think it's it's more right now, but but we've been thinking that it is ripe for awhile. So those things remain just.
Very hard to call is something that we're interested in but it's got to meet those criteria that we laid out.
Thanks for that Steve and maybe a follow up to that again on the topic of M&A or would you be able to discuss the data.
Strategic rationale, but Kim I had to go any and all three do you feel good business.
It would seem to be profile.
We saw a renewed interest in but yeah, I give them the major independent deal.
Thats unique so really the question is do you have interest in monetizing that business and what would be the right did.
For that segment.
You know I can say just generally that course, you know we're in the business of maximizing value for our shareholders. So we we are always open to considering options there, but I'll put some context on it for you.
I mean that is a business that.
Is a niche for us.
It's something that we know how to do and how to run and adjusting his team have done really a magnificent job.
Looking hard at the capital and have actually improved the free cash flow coming from that business unit versus what was in the budget with everything that's happened.
So as a result, the cost savings and also our capital either deferrals or reductions they've just done a great job. So I I feel like we know what we're doing in that niche business. The other consideration for the other element of context to consider is that.
It's a bit of a unique business rights enhanced oil recovery a lot of that as about.
Having the pipeline infrastructure owning the CEO to which we do knowing what to do with it when you put it in the ground, it's not a shale play.
For a conventional play and so I.
I think just naturally that tends to a total to limit the market, but look we do what's in our shareholders' best interest a this is a business that we can handle well in terms of its overall part of the Kinder Morgan picture CEO are part of that business is now and you'll see this in the in the in the updated.
Investor presentation slides posted on the website is now at 3% of our segment EBITDA.
So.
I think that's the full story there.
Up next.
Justin Richardson with Suntrust. Your line is open.
Good afternoon, guys. Thanks for all the data points on what you're seeing in refined products.
Towards the end of the quarter and even more recently can you talk a little bit about what assets or geographies or sort of leading that demand rebound and any sort of what areas remain challenged.
Yeah, I'm going to ask John Slusher, He has assets really around the country to take a stab at that it is different by geography. As you imply go ahead, John sure. Our Midwest rack facilities are actually up slightly 1% above plan, our northeast racks are down 10% to play.
And our Gulf Coast assets rack assets are down 10% to plan.
And then what we're saying on the West Coast I think on the products pipelines is more like 15% and then also and some places in the southeast and it's probably around 15%, but that doesn't products.
That's great.
Thank you and just a follow up from a previous question on the review on streamlining or centralizing some functions.
I may have missed this but she is.
Is there an order of magnitude of efficiency gains or UBS quantitative cost saves you guys are targeting here.
But we're going to approached us with kind of a blank sheet of paper and we're going to get everything we can all of that process.
Looking.
Internally, our organizational structure and thinking of changes to our traditional business unit centric structure is not something we've done before so the outcome of this process is on known.
So we don't have a specific target in mind other than we're gonna do the work we're going to examine it deeply do the work from the bottoms up and we're going to make our primary criteria here, what's the thing that's going to get us the most efficiency and the most cost savings we're going to look at our outside expenditures were going to look.
At our organization, we're going to do what we need to do to deal with the challenging times that we're in.
But because it is kind of a brand new look at things.
There's not a way to quantify it now of course, we we've identified already $170 million of savings as we've all mentioned so far projected for this year about 100 million of that is just a little over 100 million of that is we believe we believe as permanent.
Or recurring a with the with the balance of it being deferrals that ultimately we will have to spend on particularly on the on the sustaining capital side. The other thing that will have as a clear objective here is the way we put our budgets together as we make sure that we adequately.
Budgets for.
Safety and compliance and our assets and so we will we will at here to that principle, along with adhering to the principle that we're going to get as much out of this process as we as we reasonably can but because it's unpredictable we haven't southern.
Great. Thank you guys very much.
The next question is from Keith Stanley with Wolfe Research. Your line is open.
Hi, good afternoon, and thanks for all the transparency I just wanted to follow up on how you're thinking about the dividend. The language in the press releases is still pretty strong on being committed to $1.25. So can you give more color on the criteria you're looking at two reasons that level potentially by.
At year end is it just refined products volumes going back to normal do you need to see midstream and other businesses start recovering and then on the balance sheet.
Is there a leverage threshold around that for example, if you were at 4.7 times next year.
Would that still be an environment, where you could do that large of a dividend step up.
Well, let me just say that Sixtyv alluded to this earlier that we haven't changed anything from the first quarter. We said at that time, we would see how the year played out and when we return to normalcy.
We are long term intentions and take that dividend up to the dollar quarter target.
That said as I said, it's almost.
Very difficult to predict what's going to happen between now and then but we tried to be very careful with the language in the earnings release.
And sort of enumerated in the factors that we're going to consider but but the thing.
The real thinking is to Asher Jay whether we ever returned to normal economic conditions and one of the advantages.
Making this decision at the January Board meeting is by that time, we will have had school access to a detail 2021 budget. Our board will be able to look at that and decide in view of that budget looking ahead of what makes the most sense.
We're clearly very cognizant of our debt to EBITDA ratio, we want to maintain strong balance sheet.
We're very happy we can self funded all of our expansion capex and the dividend and we want to thanks for sure we.
We want adequate coverage of the dividends, we want to make damn sure that once we do a deal did increase that dividend increase is permanent.
And that we're not a retracting that at some later date show.
Those are the factors that will go into it and right. Now you know this is a very complicated world is unprecedented and so unpredictable.
Would you see where we get a by next January we should know a lot more by that time.
Understood. Thank you.
Our next.
Pearce Hammond with.
Energy Your line is open.
Good afternoon, and thanks for taking my questions. My first question is what are the key final milestones to bring the Permian Highway pipeline online in early 2021.
Yeah. So it's really it's the it's the construction, which as I said as well and progress there is a an endangered species migratory birds window.
That reopens for our construction. So we have one of our spreads were standing at like 87% cleared and we're kind of standing by until we get to August one and and we are free to clear the remainder.
And and we should be able to do that based on our experienced to date, we should be able to do that.
Effectively and and with adequate mitigation those of impacts to the oak trees et cetera. So that's one we've got.
A couple of river crossings to complete a those are all underway. There is one reroute that we're doing around a river crossing.
And that process is also a well under way and so.
We think we see a pretty clear a line of sight and other is litigation around this pipeline as we said again, we're very encouraged that the Supreme Court stayed.
The injunction of all nationwide 12 permits or.
Oil and gas projects a decision that came out of the Montana Court.
That that removes stuck with that what didnt caused us to stop construction, but it removes a lot of uncertainty.
Around around the legal aspects of this the the sustainability of nationwide real 12, and so were.
We're grateful to see that the other thing I would point out in that regard is the nationwide 12 permit is something we need for certain construction activities and we have found.
A number of measures that's why I alluded to the teams work certain construction measures that will allow us to avoid impacting waters of the U.S. and to reduce the number of crossings navigable waters that we need to do so we've taken some.
We've taken some steps and some actions on our own in order to strengthen our position nationwide Little 12 is something we need as I said for certain construction activities. It's not what we need to operates so we'll get this work done we believe we'll get this work done we'll be up and running and and put it in service for our cost.
First at the end of or at the very beginning of EUR 2021.
Thanks, Steve for that comprehensive answer and then my follow up is with the Dominion sale, if their gas transmission assets to Berkshire Hathaway do you expect other utilities to do the same as the convergence theme from years ago gets unwound and do you expect to see some attractive assets potentially for sale because of this trend.
Yeah, that's up that is hard to know of course, and we don't we don't speak for the utilities on on what they do with their assets. We were we view the transaction as a a nice affirmation from a obviously a smart investors on the underlying value of midstream businesses and and and that's the main.
Take away that we took from it hard to project, whether there will be assets that come on the market.
Or.
Interest in unwinding, the convergence as you called it but certainly if the if assets that need all of those criteria that we've been talking about throughout this call were to come on we would certainly take a look out.
The next question comes from Michael Lapidus with Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking hey, guys. Thank you for taking my question I'll ask two in the in there pretty basic one any initial thoughts on perks comments on the indexation process, obviously that's been impact.
On the product pipelines business just curious for your thoughts after the perk put out the initial data and the other thing on the TGP growth project into New York, just talk about what permitting is required, especially at the state level, given new York's not always be the its place department and any anything.
Okay, Yeah, well, so starting with the the FERC out or so they came out with a proposed for comment in the industry is commenting on it.
Has commented on it of <unk> 0.09 versus the at EUR 1.23 that we have today.
There are a couple of things that.
We would observe about that I mean, one is that they kind of.
The kind of a combined isn't there a the impact of the tax allowance. We are a taxpaying entity. Unlike an MLP as a C corp, and and have been for for a while we would like them to separate that out so that we can be more specific.
About how the index outer should affect us specifically, there's some other subtleties to like a particular composition of companies that they use they used if you want the middle 80%, if you will versus the middle 50%, we think that Theres some room and we are commenting.
Do you get them to consider to consider that at or a little more carefully in it at a minimum separate the tax component out so that hopefully we can we can take advantage of our current status in that regard.
On the New York expansion.
We are eminent ask Tom to comment on any more specifics but.
We are serving New York.
The facilities that were building in our in New Jersey on land that we've acquired and so we think we have.
Hi, good situation there in terms of being able to get a this project oh properly permitted, but Tom or any other color you want to add there.
Yeah, I mean, there's really nothing unique and up to the point primary point you made is a key one steven that as its new Jersey, and we right away and so there's really nothing unique there from a permitting perspective, but when you do locally.
Got it thank you guys much appreciated.
The next is from it Christine Cho with Barclays. Your line is open.
Good evening, Thank you for taking my questions.
<unk> cash <unk> can you remind us when you don't have to pay cash taxes until India events. The corporate tax rate does go back out that there's no change in administration, let's call. It close to 35% Apple should we think that that timeline gets accelerated especially if the top back.
I'll continue to trend below your two to 3 billion dollar target range.
Right so.
We are not expected to be a cash tax payer until beyond 2026, and what I would say about that Kristine is you know.
Refining that further theres, a lot of moving parts and assumptions that go into that but from how we look at things right. Now we think that that statement of beyond 2026, we still we have some cushion in there even if we were too so we could absorb.
Don't know what tax increase would be but I mean, we have some capacity some cushion to be able to absorb a change in tax policy with that guidance. So we're still seeing beyond 2026, and actually there's some cushion there.
Okay.
And and also if its capex continues to trend Glover.
Yeah, we're doing that with our kind of revised perspective on capex.
Okay. Okay, and then I appreciate you know your comment.
About like the volume activity on double H.
Can you just remind us.
What would make dying if you want it to expand.
Double H pipeline capacity on your cell phone and how long you know any of that would take I feel like in the past. They seem you buy out with open season for you know incremental capacity, but I just didn't know if you would actually build a pipe like we've done that pumping Oh.
Yes, you're right about that and good memory as always Christine we do have an expansion. It is a pump station expansion. So it doesn't involve.
Over land.
Instruction.
And we can add a James I think it's like 15.
Comedy, Sir how many growth 35.
Oh, I'm, sorry, 35, 35000 barrels with the pump station expansion.
And then.
Oh and the timeframe.
My 12 to 18.
Thanks Kim.
The next question is from at Schuh near <unk>. Your line is open.
I just a quick follow up question in the event tax rates went up.
When we went through the whole five LNG process. It was because tax rates went down show.
I would there be a scenario where your tariffs would then go up and be able to reply to increase tariffs and just kind of curious if we could get a hole for the entire fiber when she process that we saw just two years ago.
Yeah, yeah, we'd like to be able to get that back I mean the way.
But the way we operate our pipelines as we operate them on on a fairly low cost of service basis, we do our best to keep our customer satisfied and do our best to stay out of rate cases, so it would be.
Not a common situation certainly for us to find ourselves in a position, where we would be filing for a rate increase but look we've got regulatory teams rate, making teams that that look at those.
Dynamics closely for us and if the opportunity presented itself, which certainly pursue it but our main approach is just keep our customers happy or give them a good quality of service I'm, giving some flexibility that they want and.
And try to stay away from Washington.
Alright, perfect. Thank you for that for a follow up.
And there are no other questions at this time.
Okay. Thank you Denise and thanks to all of you for joining us on the call and have a good evening and stay safe and healthy. Thank you.
Thank you and that does conclude todays conference. Thank you for participating you may disconnect. At this time speakers allow moment of silence is standby for your post conference.