Q3 2020 Kinder Morgan Inc Earnings Call
Welcome to the quarterly earnings conference call.
This time, all participants are in a listen only mode.
Question and answer session of today's conference at this time you May proceed Sir went on your phone to ask a question.
I'd like to inform all parties.
Which is being recorded if you have any objections you may disconnect. At this time I would now like to turn the conference over to Mr. Rich Kander executive Chairman of Kinder Morgan. Thank you you may begin.
Thank you Sheila before we begin as I always do I'd like to remind you that game I's earnings release today and this call include 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 gap.
Financial measures before making any investment decisions.
We strongly 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 FCC.
An important material assumptions expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward looking statements. Let me begin by saying that over the last several quarters Oxgaard of these calls with a review of our financial philosophy and strategy.
She at Kinder Morgan.
I went back and looked at what I've said over the last few quarters and the message has been very consistent and it is this we generate significant amounts of cash and we'll use that cash to fund our expansion capex needs pay our dividends and to keep our balance sheet strong and occasionally on an opportunistic basis to repurchase shares.
We will use a disciplined approach to approving any new projects and that's exactly what we're doing even in this challenging year of 2020, which I believe shows the resilience and strength of our collection of midstream assets.
Now as we look beyond this year we.
We can't predict with any accuracy, what the future will bring in terms of a return to normalcy for our economy and our lifestyle, but we are confident that came on line will continue to generate strong cash well in excess of our expansion capex needs and the funding of our current dividend that will.
Allow us to maintain a strong balance sheet and returned significant additional cash to our shareholders through increased dividends and our share repurchases.
Sure the results and outlook or that positive why is that not reflected in our stock price well I'm sure.
Well I'm certainly no expert on that subject, but it appears that many investors are not committing any bugs in the energy business without any consideration.
The unique characteristics of our midstream sector.
No we're not climate change dinars, and we recognize the growing momentum of renewables in America's energy mix.
That said there is a long runway for the products, we handled particularly natural gas for a clear eyed examination of the role of fossil fuels and energy transfer to transition.
I recommend everyone read the excellent new book, the New Bob Bob You, Let your prize winner Daniel Yergin entity details in specific terms of the need for oil that particularly natural gas in the coming decades and indicates the importance of existing energy infrastructure like ours.
Now beyond the present use of our assets our extensive pipeline infrastructure can play an important role in facilitating many of the changes being advocated to lessen global emissions.
Dave just three examples the green hydrogen becomes a reality, we could move some amount of it through our bikes. It refiners produce renewable diesel we can transport that through our product pipeline and.
And if C.C.U.S. in batches, we have more experience with moving Seo too and injecting it underground than virtually any other company in America.
In short to paraphrase Mark Twain. The rumors are our debts are greatly exaggerated and with that I'll turn it over to Steve.
All right. Thank you rich Doug.
I'll give you an overview of our business and then turn it over to our President Kim Dang to cover the outlook and segment updates our CFO, David Michaels will take you through the financials and then we'll take your questions.
Our financial principles remain the same maintaining a strong balance sheet for maintaining our capital discipline through our return criteria a good track record of execution.
They self funding our investments and on that front, we evaluated all of our 2020 expansion capital projects reduce capex by about $680 million from a 2020 budget for almost 30% that was in response to the changing conditions in our markets. We still have over 1.7 billion of expansion capital in 2000.
20 on good returning project investments, we're also maintaining cost discipline, we now.
We now stand at about $188 million of expense and sustaining capital cost savings for 2020, including deferrals, but a 118 million of that is permanent savings. We believe it was all of this work on our capital budget and our costs is that our projected DCF less discretionary capital spend is actually.
Improved versus our plan by about a $135 million to our 2020 plan at about $600 million versus our 2019 actuals all that notwithstanding the fact that we more than.
We more than offset the degradation to our DCF forecast, what spending and capital investment cuts in 2025.
Finally, we are returning value to shareholders with a 5.5% year over year dividend increase to the dollar five annualized providing an increased but well covered dividend a strong bounce.
A strong balance sheet capital and cost discipline, and returning value to our shareholders.
You'll note that we omitted the reference to getting to $1.25 dividend that we projected back in 2017 well mid.
While meeting the dollar 25 is not backing away from for further dividend increases we remain committed to paying a healthy well covered dividend. It's simply wise, we believe to preserve flexibility to return value to shareholders and the best way possible for shareholders, especially in light of a share prices the chosen eight plus percent.
Killed on a well covered dividend.
We will review dividend policy with the board following completion of our 2021 budget process.
We have accomplished something.
Sorry about that [laughter].
[laughter].
We have accomplished some important work so far doing 2020, which I believe will lead to long term distinction for our company first as Kim will cover we've been successful in advancing our Permian Highway pipeline project under very difficult circumstances, including local opposition legal and Perm.
<unk> challenges and by the way a global pandemic too.
We're distinguishing ourselves and demonstrating to our customers and partners our ability to get projects done in difficult conditions.
Second we are already an efficient operator, but we are getting more efficient and more cost effective.
We believe that as one of the keys to success in our business for the long term.
I mentioned last quarter, our management team is in the midst of an effort to examine how we are organized in how we operate we are centralizing certain functions in order to be more efficient and effective and we are making appropriate changes to how we manage and how we are staffed and I believe that we will achieve substantial savings, but just.
Finally, as always we'll be evaluating cost initiatives as part of our annual budget process, which were also in the midst of right now we'll bring those two efforts to a close in the coming weeks and incorporate the results into our 2021 guidance.
It's essentially be cost effective while also maintaining our commitment to safe and compliant operations that's embedded in our values our culture and then how we put our budget together. The management team is committed to these objectives to that commitment is also critical to our long term success.
Third we will soon be publishing our U.S.G. report, we have incorporated U.S.G. reporting and risk management into our existing management processes.
Port will explain how in the meantime, sustainability has ranked US number one in our sector for how we manage E.S.G. risk.
These things are all important to our long term success and we have the basketball significantly on all three and 2020.
So what we've been doing during the pandemic, we're completing a major new fully contracted natural gas pipeline in the face of opposition, we're expanding our gas network in Texas and it expanded our terminal capabilities in the Houston ship channel to reduce costs and capital expenditures.
Actually increasing our cash flow after capex for the year, we continue to advance the ball in E.S.G. and we're also completing organizational restructuring at the same time all this while keeping all of our assets running safely reliably and efficiently and continuing to originate new business I'm grateful for the quality of our people and the strength of our culture.
Sure two things, we probably don't emphasize enough.
One more thing there's a lot of discussion around our sector right now about ongoing energy transition I'd like to make a few points about how we participate.
First we and many objective experts as rich mentioned believed that natural gas is essential to meeting the worlds energy needs and meeting climate objectives. As it has here in the U.S.U.S. natural gas will play a significant role in our assets are well positioned to benefit from that opportunity.
More important to us is the value of what we specifically do.
Which is less about providing the commodity itself and more about providing the transportation and storage capacity or deliver ability the value of that increases the power sector as more intermittent resources I relied on for power generation.
Actual gas is clean affordable reliable and pipelines deliver that commodity by the safest most efficient most environmentally sound means we'll continue to look for additional ways to benefit from the long term energy transition, including the role of our infrastructure and firming intermittent renewable resources, which is what I just mentioned our marketing of.
Our low methane emissions performance as responsibly produced and transporting natural gas that's a good synergy between our U.S.G. performance, that's lowering our methane emissions overall and our commercial opportunities, we're distinguishing ourselves as an environmentally responsible provider and increasingly that matters to our cluster.
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Further down the road, there, maybe hydrogen blending opportunities and our natural gas pipelines and if the incentives are adequate captured man made cotwo to be transported on our COO to pipelines and used for EOA well also continue to evaluate other opportunities in the renewable sector, but as always we'll be very disciplined the G.
Yes, she is critically important and we won't forget about that we believe.
We believe the winners in our sector will have strong balance sheets low cost operations that are safe environmentally sound and the ability to get things done in difficult circumstances, as always will evolve to meet the challenges and opportunities we face.
I'll turn it over to Kim.
Great. Thanks, Steve today, I'm going to go through our view of each of our business segments as well as a high level summary of the full year forecast. So first starting with the natural gas segment transport volumes were down about 2% or approximately 575000 dekatherms per day versus the third quarter of 2000.
19, not was driven primarily by lower LNG demand competition from Canadian deliveries and lower Rockies production.
These declines were partially offset by a full quarter of volumes on our GC ex pipeline went into service last year.
Physical deliveries to LNG facilities off our pipelines were down about 700000, Dekatherms a day versus the third quarter of 2019. They were also down versus the second quarter of this year. However.
However, we have seen a recovery in those volumes and current volumes are nearing pre pandemic levels export.
Exports to Mexico are very strong in the quarter. They were up 500, a day when compared to the third quarter of 2019 and over 650 per day versus the second quarter of this year delivery.
Deliveries to power plants were up 5% driven by coal switching and warmer weather.
Our gathering volumes were down about 13% in the quarter compared to the second quarter 2019.
Gathering volumes I think the more informative comparison in the current environment as versus the second quarter of 2020, but compared to the second quarter volumes were down about 4% gender.
Kinderhawk, which serves the haynesville was down due to lack of drilling and decline in existing wells. However, we're still expecting based on conversations with customers and the forward curve on natural gas prices to see new drilling in the Haynesville and 2021.
The bright spot in the quarter with volumes on our Highland system in the Bakken, which were up approximately 30% versus the second quarter of this year.
Our natural gas projects, we completed L L, but during the quarter and the facility is now fully in service on P.H.P. or now about 97% mechanically complete and we expect to be fully in service in early 2021.
On a product pipeline segment refined products volumes were down about 16% for the quarter versus the third quarter of 2019 as a result of the continued continued pandemic impact the 16% compares to about a 14% reduction that you guys shows for the third quarter. So our volumes are slightly worse than the.
Okay, and that's primarily because jet fuel as a percentage of our total volumes is greater than it is for the IMAX.
For each month in the quarter, we did see an improvement in volumes over the prior month for October were currently expecting volumes to be off approximately 13% versus the prior year. The 13%. It's comprised of road fuels off about 5% and jet fuel approaching all 50%.
Crude and condensate volumes were down about 17% in the quarter versus 2019, but improved versus Oh, I'm by about 11% over the second quarter and.
And terminals, we experienced a decline in our refined products throughput of about 22%, but here the impact of lower volumes is mitigated by the fixed take or pay contracts that we have.
But for those of you who are trying to read through to demand I would point out that the percentage is significantly impacted by imports in the northeast in exports in the Gulf Coast.
If you look at our RAC facilities, which is probably a better gauge of whats happening with the man they were off about 11% in the quarter.
Our liquid utilization percentage, which is a more accurate predictor of the health of this business given the structure of our contracts remains high at about 96%.
If you exclude tanks out of service for acquired and stacks and utilization is 98%.
The bulk side of our business, which accounts for roughly 20% of the terminal segment earnings was impacted by weakness in coal and petroleum Coke volumes.
If you go to all production was down approximately 12% and see a two volumes sales volumes were down approximately 33%.
However, lower opex and help on oil prices more than offset the lower volumes, our team's done a tremendous job of adjusting to the current reality they've achieved cost savings both on the Opex and the capital side, they've reevaluated and cut capital projects that Didnt meet our return criteria and therefore free cash.
Well from this segment is expected to be better than budget and better than 2019.
For the full year our guidance remains the same as we gave you last quarter, we expect to be below plan by slightly more than 8% on EBITDA and slightly more than 10% on DCF and.
Embedded in this guidance is over $187 million in cost savings between DNA, Opex insane and Capex figure.
To give you a better sense of what we're projecting on fourth quarter volumes for us.
For refined products within the products pipelines segment, we're estimating volumes to be off about 10% versus the prior year on.
On crude and condensate volumes were estimating volumes to increase by approximately 5% versus what we saw in the third quarter and on natural gas gathering volumes were expecting volumes in the fourth quarter to be essentially flat with what we saw in the third.
Debt to EBITDA works that expecting to finish the year at approximately 4.6 times debt to EBITDA, so slightly better I'm on this metrics and what we told you last quarter and with that I'll turn it over to David Michael.
Thank you Kim.
Today were declaring a dividend of <unk> 0.26 to $5 per share or a dollar or five annualized which was flat with last quarter.
For our quarterly performance, our revenues were down 295 million from the third quarter of 2019, driven in part by lower natural gas prices in Q3 of this year versus Q3 of last year and those lower natural gas prices also drove a decline in associated cost of sales of $107 million.
Which partially offset the lower revenues.
Net income attributable to came I was 455 million for the quarter, 10% down from the third quarter of 2019, our adjusted earnings is a bit higher at 485 million down 5% from a from the price from the third quarter 29 teams adjust.
Adjusted earnings per share was 21 cents for the quarter down one cents from the prior period.
Moving on to DCF performance for the third quarter.
Natural gas the natural gas segment was down $8 million.
With lower contribution is driven by our sale of our Cochin pipeline, along with lower volumes on our South, Texas, and Kinderhawk gathering and processing systems.
Partially offset by contributions from Elba liquefaction and Gulf Coast expect fixed price projects coming.
Coming online.
A product segment was down 67 million driven by lower refined products volumes as well as lower crude and condensate contributions mainly due to demand impact from the pandemic as well as lower oil prices.
Our terminal segment was down 49 million driven mostly by the sale of K., a mill and the.
The terminals associated with that business as well as lower refined products coal steel and pet Coke volumes are.
She went to segment was up $5 million.
Due to lower operating costs and improved year over year realized pricing given improved Midland Cushing hedges.
More than offsetting the lower C O two demand and lower produced crude oil in that segment.
DNA and corporate charges were lower by $18 million driven by lower noncash pension expenses.
The sale of Tamil as well as cost savings.
The JV DNA and and non controlling interest items combine show a $24 million reduction driven mainly by our partner at Elba liquefaction sharing and greater contributions from that facility.
That brings us to adjusted EBITDA of 100.
125 million or 7% lower than the third quarter of 2019.
Below EBITDA interest expense was $61 million favorable versus last year.
Driven by lower floating rate, that's a little floating rates benefiting our interest rate swaps as well as lower debt balance, partially offset by lower capitalized interest.
For cash taxes were higher in the third quarter by $37 million due to deferred payments had citrus plantation in north Texas margin tax from the second quarter of 2020 into the third quarter.
For the full year cash taxes are fairly close to our budget.
The other item the main driver behind our other item a favorable $34 million was a change in the schedule of our contributions to our pension plan.
2019, we made the entire annual contribution to our pension plan in the third quarter and this year, we began making quarterly contributions.
Overall, we expect to contribute $10 million more in 2020 versus 2019 to a pension plan.
Total DCF of 1.085 billion is down 5% from the third quarter of last year and our DCF per share 48 cents is down two cents from last year.
On the balance sheet.
We ended the quarter at 4.6 times debt to EBITDA and expect the end the year at the same level.
Which is up slightly from last quarter to 4.5 times and up from 4.3 times at year end 2019.
During the quarter, we had a very nice capital markets execution.
August we issued $750 million of 10 year senior notes with a 2% coupon and $500 million of 30 year senior notes with a 3.25% coupon and those.
And those were the lowest ever achieved 10 year and 30 year issuance is a cool.
Coupons associated with those 10, and 30 year issuances, respectively for camera.
The issuances also further bolstered our already strong liquidity position.
As those proceeds more than cover the amount of debt maturing in the quarter.
So at the end of the quarter, we had an Undrawn 4 billion dollar Chris credit facility.
And and over $600 million of cash on hand.
Our net debt ended the quarter at 32.6 billion down 433 million from year end and up 189 versus last quarter.
To reconcile the quarter the quarter changes, we we generated 1.085 billion and distributable cash flow, we spend $600 million in dividends.
400 million on growth Capex, and JV contributions and had a $270 million working capital use.
And that gets you mostly to the $189 million change.
The quarter.
For the.
The change from year end.
We generate we've generated 3.347 billion of distributable cash flow.
We brought in $900 million from the pending a share sale in the first quarter.
We paid out dividends of 1.77 billion.
He spent 1.4 billion on growth capital and JV contributions.
That's $235 million on taxes associated with the Trans mountain Antamina share sales.
We bought we bought back 50 million of shares came a shares and we've had $360 million of working capital use.
Mostly interest expenses paid.
And that explains the majority of the $433 million reduction in net debt from year end.
And with that I'll turn it back to Steve.
Okay. Thanks, David So Sheila will open it up to questions and I'll remind you as we've done in the past that as a courtesy to all callers who were going to ask that you limit your questions to one question per person with one follow up. However, if you do have on answered her additional unanswered questions get back in the queue and we will come back around to you.
Okay Sheila.
Thank you we will now begin the question and answer session to ask a question. Please press star one if you need to withdraw your question Press Star Q again to ask a question. Please press star one our first question comes from Jeremy Tonet with JP Morgan Your line is open.
Yeah I knew afternoon.
Thanks, Thanks for having me, maybe just starting off with a high level question here on the pace of recovery, it's obviously difficult to tell here, but just wondering what your thoughts are if I. If you look at the GMP segment, I'm wondering where you could tell us as far as what type of activity you're seeing in the quarter and how you think that might recover over the next couple of quarters and a similar question on the price.
Demand side, what do you.
What do you seeing now when when do you think it's possible to get towards kind of pre corporate levels, just trying to get a better feel for how this could unfold over the next couple of quarters here.
Okay, Yeah fair enough I mean broadly as you heard from the numbers that Kim went through we're continuing to see month over month improvements on the refined products side of things or things bumped back up big in the second quarter and in the third quarter, it's been more gradual but we're still seeing month over month improvements, but its scratch.
Right.
Thank you.
You know, we don't have any special insight into how quickly people will return to driving are certainly starting to diesel volumes have remained fairly strong jot is a I think most people would say and I think we would we would say the jet is likely to lag, but its Jim.
But its impact on us is relatively smaller than what its volume impact is so about 12% of what we handle in our refined products business jets, but it really comes down to about a 8%.
8% of the EBITDA for those segments.
And then ER for care my overall, it's about.
Uh huh.
I'm, sorry, 12% of refined products, 3.5% of the combined refined products and terminal segments on EBITDA contribution. So one per cent for can't my overall, that's the whole of a of jet volume, so a 12% well.
12% of the total volume's up but only 8% of the EBITDA. Okay on GNP. So gradual recovery there on GNP you know as Kim said, when we look at the change versus last quarter. It's a much smaller change than what it was on a year over year basis and.
And there are I mean, I think the recovery is going to be resolved they come back in in the Bakken for example, I think the Eagleford will probably continue to lag. The Haynesville is also lagging, but we expect that.
Oh, that's going to start turning around because we do need to produce natural gas in the United States and if we're not going to produce it to meet demand if we're not going to produce it and associated gas plays.
It's going to come from the dry gas plays and the Haynesville is well positioned for that and our assets are well positioned on the dry gas plays from the Interstate standpoint on TGP for the Marcellus and Utica from the gathering standpoint, Oh, so the haynesville and very capital efficient.
Increases in production that we can achieve there. So look it's a it's a bit of a mixed bag across the GMP lot.
The GNP landscape, but that's directionally, how I would size it up.
That's very helpful. Thanks and.
Maybe just turning to California, and energy transition as you guys talked about before in California, We see good the internal combustion engine fees out plans and see greater penetration from <unk> and biodiesel and just put it all together thinking about this refineries potentially close in there how does this impact CMI or more importantly, how does came I guess response.
Onto this <unk> going forward.
Yeah. So there are pluses and minuses on I'll start with the plus side, you know as as refineries convert to.
To generate more renewable diesel we can handle renewable diesel in our pipelines, we can handle it in our in our storage tanks or we think there may be opportunities for us to develop products pipeline segments and additional facilities to handle increases and renewable diesel that come out of the developments himself.
Morning in California, It is heavily subsidized and so it will make sense for people to make those investments and we're looking for ways that we could participate. So I mean I think just broadly there are some things that we have to pay attention to in terms of being able to track renewable content, which becomes more challenging once we get over the 5%.
Level, but we can we can we can adapt and adjust to that but I think the easy way to think about it is renewable diesel looks like regular diesel and it's in our pipes in tanks.
On the on the negative side, certainly we've seen the announcement about the intent to.
Phase out we're really eliminate a internal combustion engine sales and new cars in California, a couple of points that I would make that kind of mitigate that one is not all of our volumes on our that's a P. P system moved to California, or sort of California markets. So.
So as it moves to serve Arizona as well as serving Nevada, both in the Las Vegas Reno market.
And Oh the other thing is it takes it takes a while ago, we're talking about between now and 2035. It takes about 10 to 12 years to rollover the vehicle fleet et cetera. So there are a number of things that really mitigate that impact for us on on the refined product side.
Got it thank you.
Thank you.
Our next question comes from there she loves her time with Bank of America. Your line is open.
Good afternoon, everyone.
Thanks for taking my question.
Firstly on the M. any Steve we know we have seen a wave of upstream M&A recently and.
Midstream sector appears to be prime fruit as well with recent headlines around certain GMB companies exploring sale.
You couldn't deal were to satisfy your criteria for leverage and DCF accretion.
Rich area business would she and my prior days we've seen.
We're seeing M&A.
Yeah, I get you said the really key point, there, which is it has to meet the criteria that includes meeting balance sheet.
Criteria as well as being a business that I would say generally that were already in and and that we're confident with the top right.
Some additional synergies to we can always bring cost synergies. We believe we are efficient operator, but without the fund other things that we can do look I think there are two parts to this I mean, certainly the activity that's going on in the N.T. right now I mean, I think that's a good thing for the sector and I said you know indirectly there for good thing for a midstream in the sense that you know you're getting.
Stronger you know more well capitalized players you know with plans to continue to develop ethics and they're doing it in a way that doesn't you know how.
Arm the entity going forward that thing too big of a premium for example, et cetera in midstream.
We continue to keep our eye on relative valuations with all those criteria that I mentioned that we're going to be very conservative and very disciplined about our participation there the other thing up.
The other thing I think we'll begin to see more out, but it's kind of it's on the sidelines right now is asset packages coming on the market. There was a lot of those.
Relations I think were put on hold back in.
Back in March and April and do think that we'll start to see a little bit more activity there and we're.
We're in that information flow and if we find something that's attractive to us.
As we did on a fairly small scale at the end of last year.
We'll look to to act on those so.
So not not yet really seeing it in midstream, but we think there may be some asset sales have come online later and later in the process here Kevin.
Kevin anything that you want to add to that.
No I think you covered it all very well.
Uh huh.
Got it thanks for that Steve and second question on a traditional talks on shareholder return here.
How are you winning buyback versus distribution group.
And question here is you know given the.
Given that distributions have not been rewarded recently would you see bad buybacks, maybe a better option than your current intention to raise distributions to be $1.25 per share level.
Yeah, you know I think both rich and I covered it at the at the beginning we're looking at what's the best way is to return excess cash.
Excess cash to shareholders and maintain a strong balance sheet invest in projects a good capital.
Good returns that are well above our cost of capital et cetera, and you're right I mean in the current environment security, that's yielding over 8% certainly that's the case. However, you know we're going to we're going to be thoughtful about this our board will be thoughtful about it when they deliberate onto them and makes a decision just because of dividends are out of favor now doesn't.
Mean, we shouldn't be paying them and shouldn't be a increasing and we think that that's a very valuable and reliable and steady way to return cash to our shareholders excess cash to our shareholders and we believe that you know the market from time to time appreciates that from time to time, it doesn't and I don't think we can make our decisions based on you know what is what is currently probably.
Or ties, but clearly up by saying, what we've said in the release, we're giving ourselves flexibility, which I think is is as I said is a very wise thing for us to do all the time with us.
Got it and Juicy I'll jump back in the queue.
Thank you next we'll hear from Colton Bean with Tudor Pickering, Holt and company. Your line is open.
Good afternoon appreciate the prepared remarks around energy transition in potential opportunities for the K. My asset base.
Coming at it from a slightly different angle can you speak to your philosophy on capital structure in the context of transition.
Capital structure in what sense.
Mostly thinking here in terms of the balance sheet and weather is leverage the appropriate metric is there some consideration of ratable didn't know Ivan.
Really just trying to understand if there is whether its 2030 or 20 sixsix. If there is some sort of timeline out there how you evaluate that when you look at the balance sheet.
Yeah, No no I understand look we still believe and Anthony and Tim weigh in on this as well, but we still believe that believes that the rating agencies believed that we are appropriately rated triple b flat at the around four and a half times when you look at our whole business mix.
I'll make a little bit of a broader point here I'm not the expert that you you all are than other sectors, but in my casual observation of it. It's it's funny to me that in our sector. When we talk in terms of like 2040, 50, 26 feet. You know there aren't many there aren't many businesses out there right now that can really be thinking in terms of.
That length of time for them to be in business and doing things that are.
They're they're doing today and so I think there's no. There's no pressure there to do something different on a four and a half times. When you think about that runway and when you think about the quality of our assets and and the diversity of our cash flows and the length of our contract terms the.
Increasing your replace ability of our assets. If you will I mean, the harder it is to build new infrastructure. The flipside of that is that the existing infrastructure, which we haven't had a lot of becomes more valuable all things being equal.
So I guess the short answer is no.
Got it appreciate that.
And then on the a and the Rockies pipeline network you mentioned some producer optimism in the Haynesville just given the move in strip here could you characterize recent conversations around the Rockies region, and whether that your thoughts on re contracting potentially shifted at all.
You know I'll ask Tom Martin to speak to that Tom.
Yeah, I mean, I think clearly.
You know, we're seeing less development activity in the Rockies and we are seeing a probably a year ago and so.
But that certainly will have an impact on.
Excess capacity.
In that market, but I mean I think.
You know we have.
I think in the past appropriately so I don't see those a material change to US overall, you know clearly your.
Things that we've known about them.
Contracting.
Okay.
So to Ruby you know things of that nature, we've we've considered that in our long term plan.
And I don't see that really being impacted by the current change.
Got it I appreciate that.
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Thank you. Our next question comes from Jean Stylist married with Bernstein. Your line is open.
Hi, good afternoon.
So were expected to have to match gas take away at the Permian next year, when P.H.P. and Westlake start can you remind us how much of your existing gas take away there and then your take or pay and if we should expect significant cannibalization when P.H.P. It starts next year.
The vast majority of it is under a reservation fee based contracts. So that's really the PNG.
And and GTL and their country or the hill country pipeline, which is a smaller intrastate pipeline that the two new ones that were building. So, it's mostly reservation fee or or take or pay basis. I mean, I think that the the one the one impact that we'll see or that we've started to see is that.
Is that you know with less.
With less constrained there are less there's less of the short term business that we were doing and getting nice rates for so it does have some.
Impact not to not do it.
Not to the base as much as to how some of the upside opportunities that we have been saying so there'd be some impact at the margin there Tom anything else you want to add to that.
No you covered to see thank you.
Okay. Thanks, and then just when one more about energy transition and so in a scenario, where 2035 utility at gas demand dropped significantly but to your point earlier, they still need very high availability of gas add to cover a peak daily demand how would you see contract structure.
Bruce with utilities and gas pipelines changing if at all and do you think they'll have to kind of keep contracting their maximum daily quantities are paying is the same or pay less if you can just talk a little bit about how contracts you'd think would change in that environment.
Yeah, I think you know we.
We think that within the existing tariff structures that have a you know that largely we can we can accommodate that environment and for example, and on top of that any color here that he wants to for example.
If you need the power or if we need to gas deliverability, you know for three hours every day, but you don't need it for 24 hours a day well it doesn't have to be sold that way, we can sell it on a long term basis at Max rate or at a negotiated rates and people have they pay to have the capacity available when they need to.
Paul on it that now that might mean that utilization goes down, but if somebody who contracts for in charges for our services based on the reservation of the capacity itself than you know, we think that we can and we have successfully worked through that and gotten renewals on good terms with our customers, including in California.
And you know Weve sold capacity, the merchants et cetera, who are holding it on the same idea how they can capture the upside on a on a spike for example, but we can parlay that into into term contracts. It. So we are looking at you know our there who service structures that we should.
He considering that would be more attuned to.
Variable demand from power generators, and we we may have some ideas there or we may make some proposals there including on on the storage front.
But I think we said manage within the structure we have Tom.
No I think that's right.
<unk>, we are starting to see some variable type services.
Being contracted out west, but long the long and short of it is were getting you know really good value on our capacity, whether it's all done on 24 hour basis.
Huh.
Sure Andrew we're selling you know variable services to meet the growing need.
Growing need really of capacity the backstop renewables.
Got it. So you do you do have examples where the maximum daily quite it is it's much higher than the utilization that utility. It can self pay is there any of that contract doctor.
Yeah, we do we do have some of those services that we sell a lot worse.
Well that's all for me thank you.
<unk>.
Thank you.
Our next question will come from Shinier Gershuni with you, but yes. Your line is helping.
Hi, good afternoon, everyone.
Just wanted to come back to one of the earlier questions. Unfortunately and use your question on this but just with respect to the the commentary around buybacks and the dividend.
Maybe I'm paraphrasing here, a little bit here, but you know you you added buybacks officially to your press release, which I Didnt really see last time, you talked about the increased flexibility is the right way for us to think about this on a go forward basis that there's you definitely are focused on flexibility you see where the yield is.
Today and or is it fair to conclude that you're basically looking at an option where you maybe increase the dividend at a smaller rate what that you look to pair you know pure return of capital needs to shareholders via using buybacks and so it gets sort of be a twin and now.
<unk> in January rather than you know specifically around the dividend is that the right way for us to be thinking about that as one of the options you are considering.
That two things one is that again, we will complete our budget process and talk to the board about how to look at a dividend policy for 2021, but yeah. As I said earlier Shneur. We were we are bye bye.
Talking about buybacks and of course, we've been talking about buybacks for a while we used about 575 of the board authorized a 2 billion of capacity, we did a little bit earlier this year.
For example, so that's not that's not a new message I think what's new is that we are emphasizing the flexibility, but not specifically talking about $1.25 at a time frame on $1.25. So the answer is yes on on retaining flexibility and that that is what we're trying to get across today.
Perfect and maybe as a follow up question I realize it's a little early to be talking about guidance given you're still in your budgeting process, but on the last call there was some.
Some discussion around capex potentially being as low as $1 billion for growth Capex.
You also need further emphasis on reducing costs you wouldn't believe can sort of address that in the prepared remarks as well too how its things evolved in your thinking since the second quarter do you see deeper cuts on both on the horizon just any color that you can provide and how you're thinking you know directionally.
Both operating cost from where we sit today as well is the discussion on Capex from the last call were the billion dollars came up.
Yeah. So you know we are in the middle of our process right now, but I think one thing that has emerged fairly clearly and I don't think its all that surprising, but you know we talked about being at the at the low end of the range or I'm, sorry below the historical range of two to 3 billion and hadn't responded yes. When you asked you know maybe maybe as little as 1 billion.
Right I think that's shaping up to be a pretty good assumption for 2020.
2021, because we can kind of see that we can sort of see the project slate from here and so that kind of low 1 billion dollar range is oh looks looks reasonable everything else that you mentioned is really getting worked through right now I mentioned the cost savings evaluation that weve.
On and in parallel we've been working on our budget there really are getting into the like of that as we review our business unit budgets in the coming weeks here and so all that is going to have to get folded together and it's a little more complicated than it's been in past years as you might expect because of that but still.
But still expect were going to be able to give you a guidance that might not be on the exact anniversary of when we did it last year, but we still think we can pull those together and give you some indication.
Perfect I really appreciate the color that you provided and I'll jump back in the queue to ask for a moment renewable natural gas question.
Okay.
Thank you. Our next question will come from Spiro Dounis with credit Suisse. Your line is open.
Hey, good afternoon, everyone I'm, Steve I'm curious when you go through the budget process here and go through all the assets of though the fine tooth comb again getting out at analyst day hasn't downturn changed the way you think about some of your assets and whether or not there's still core of the business I'm. Just curious if anything sort of been permanently shifted lower and thinking about.
Certain assets, maybe still carrying their weight from a free cash flow perspective does that present any disposition candidates now that maybe you didn't think about earlier in the year.
Yeah, you're going to kind of your a repeat of the way we've talked about this before but I think we've done you know we did our August their Canadian divestitures for.
A variety of reasons you saw that you know most of what we've been doing since then has been relatively small and kind of pruning to align things you know Jon Foster and his team have done a great job over the years of sort of migrating us more toward refined products hubs and him and a little bit away from these kind of islands of both.
Terminal assets, we saw some very very good bulk terminal assets, but I think we've done a good job was kinda pruning and then also the other thing that we always said, which is we are a shareholder driven company. You know there are values of here.
There there are worthwhile and our shareholders would be better off on the other side of the transaction than they were on the way and then we will consider it you know we are we are a shareholder driven company and so even if its.
Even if it's a business that we like if the value is really is really strong and robust you know, we'll we'll consider those things too.
Okay fair enough sounds like pretty consistent there and if I could just get you to apply them in natural gas price outlook and 21 I know, it's not a major driver for you, but just given your position on both the supply side and demand side. It seems like you have a pretty unique new here and I guess as we head into next year, obviously, there's supply constraints and you said you had.
Yes basins.
Imagine on demand side, we're not going to have it the same sort of an LNG cancellations that we saw this year and so that's sort of moving the other direction I'm curious just given where the price that will get now above three you know could that actually get tighter from here are you seeing enough I guess resiliency and deep gas basin and mid maybe a recovery in the Haynesville just sort of.
Offset that on the supply side.
Yeah. So supply is drifting down because of the associated gas flows and demand is going up and I'm not a commodities trader, but that looks like it's going to drive prices higher and of course, that's what we're beginning to see I think the other phenomenon, though that that has to be factored in there is that.
I don't I think that there there is a bit of a lag and reflects five or response time, you're in terms of making the switch from associated gas to the dry gas plays I think people are getting their plans together and you know we've had good conversations with.
With with customers et cetera, but I fake.
You're probably right we're like.
We are the swing supplier from a global Hunter LNG standpoint that I think earlier. This year was unusual in terms of the level of cancellations I think LNG has been growing back up I think Tom to like 7.8 Bcf a day now which is kind of in line with where it was pre co that and we've got some additional facilities that are coming on that are going to drive.
And further something's got to come in and filled out and and and it seems like that's lagging a little bit now a lot's been reflected in the price already.
But it seems like there could be some still some volatility and they do some continued upward pressure comedy thing else you want to.
0.2 that you observed.
No you covered it all I mean, it's a <unk>.
<unk> a need for dry gas development and that doesn't happen overnight and I think the demand signals.
2021 look look good and so you know we could see things fairly tight I think that at least the first half of 21.
Probably drawing down storage levels, lower certainly than we know them in recent times Oh hopes will some of that and then you know we really need to see response from the producer community through the second half.
Through the second half and 21 and beyond.
And isn't right out at all I hope, it's not the reps it's not directly.
Wasn't as directly affect us as it does the producers segment, but we do benefit from you know somebody.
Some volatility and people's need to have storage and Paul in storage or we'll get some benefit out of that I think derivatively.
Perfect. Thanks for the color guys do well.
Thank you. Our next question will come from Tristan Richardson with truly Securities. Your line is open.
Hey, good afternoon, I'm, just a quick one follow up on the whole energy transition topic, you mentioned in your prepared remarks that you guys do and have.
Evaluated more kind of renewable oriented projects, she was talking about return hurdles or or or projects that could conceivably make sense for came I.
Competitive with traditional midstream projects or.
Or do the acceptable return metrics look different just because this is a different opportunity set with the different growth profile.
Yeah. So the returns are lower and lower than what we would see in a midstream investment.
You know the argument is that there's so much capital available for those opportunities that.
Cost of capital is lower and and ultimately reflected two of them.
Equity cost of capital for companies that are directly in that business.
I don't see us gambling on a on an uplift in overall equity value because we start to make some investments in solar panels. When mills I think we're going to as I said continue to be very disciplined we've got.
We've got a lot to work with in terms of what Tom and his team can do to complement.
Renewable generation.
I mentioned marketing marketing of the fact that we are a very low emissions.
In emissions source of supply and transportation service, so things like that that don't require us to compromise on returns for our for our shareholders, but still nevertheless allow us to participate that's expenses. They have it you know in a meaningful way you. Other things are you know tax and his team as I mentioned there.
We're looking hard at that renewable diesel opportunities and I think we said look we can see returns in those businesses that are.
Nice and very consistent with and in some cases, maybe you know at the high end of some of the returns that we would get in.
In our midstream business, John Closers looking at the same thing and in his business is refined product hurdling business. So I think we're looking to participate in a way that doesn't compromise on our return criteria.
Very helpful and then.
One last one on the buyback topic in the word Flexibilities you still locked this afternoon and seems like that that's where the emphasis is but I think there's been some prescription out there in a lower growth environment that a buyback program should be programmatic pending down actually.
Probably take away from that Flexibilities that is that a fair way to think about you all his opinion on on a programmatic type of buyback plan.
Yeah, our view really hasn't changed on that opportunistic is the is the operative term and that's the way we've administered the program that's already.
Not program, but the authorization that the board has already put in place and that would we would expect that to be.
To continue that approach be opportunistic.
Our purchases.
Thank you guys very much.
Thank you. Our next question comes from Pearce Hammond with Simmons Energy Your line is open.
Good afternoon, and thanks for taking my questions, Steve How should we think about 2021 adjusted EBITDA. What do you see is the high level puts and takes around next year's outlook for candor Morgan.
I don't have one for you until we finish the budget process and look this is something that I think it happens every call, but that's the third quarter call, which is we report on the quarter and people are naturally turning their attention to the year ahead, and so are we but we're not done yet and so I think we'll save that until the until we finish that work and then we'll let people know where are we.
I think we're coming out.
Okay I understand thank you Steve and then following up on an earlier question from one of the analysts about N P M&A and kind of the big wave that we've seen do you think that that big wave ultimately places pressure on the midstream sector to consolidate or does that not play a role.
I don't think it really plays a role I think that it will it will proceed on its own course, you know people have been pointing out really for seven or eight years now that there are probably too many midstream energy companies to actually serve the market need and therefore, there should be some consolidations and and.
But it really hasn't happened in a material way other than the kind of internal consolidation if you will.
And she sees combining those sources.
Those sorts of things, but there's still a rationale for it is what I'd say and I point to all the factors I talked about in answer to the earlier question as the things that need to come together in order for us to make sense to us.
Act on particularly in these times and the particularly in these times point is that there's still a lot of.
Uncertainty out there I mean, we're not.
We're not on the other side of.
Of the downturn to U.S. energy not on the other side of the virus certainly yet and so I think there there there remains a fair degree of uncertainty out there.
Thank you.
Thank you next we'll hear from Michael Lapidus with Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking my question real easy one here, there's a lot of smaller you know one thing and a few larger ones that are in distress financial distress.
Can you talk about kind of your broad exposure to them and how much in the in the way of either contract rejection risk or or simply contract renegotiation risk presents itself and when you go into the planning process and thinking about 2021 and beyond.
Okay, Yeah, a few things on that you know for us the [noise].
We believe you know we provide essential services to these producers and so.
And so generally we have some insulation from our contract rejection, but to the extent that they and that'll vary from basin to basin, Okay. Its oh, but they if they are going to continue to produce they need to continue to get their product to market and where.
And were there providing.
Important services for their ability to do that and so that always enters into the rejection affirmation discussions and you know we've got I'd say balance if you look.
If you look now at where we are probably less than one per.
Less than 1% on a revenue basis exposed in 2022, B minus and below are still running like 75% of our revenues. This is revenues from customers that are above I think its positive is the threshold, where you might be 10, but anyway or customers.
75% are investment grade or have provided substantial credit support we have experienced about $40 million credit from producer of bankruptcies or a 2020 and again I think we're.
We have we have a number of.
A number of things.
Things that we can do that help insulate us, including calling for adequate credit support, including having assets that that provide services that are needed whether it's by the company or the debtor in possession.
Got it. Thank you guys. Thank you so much appreciate it.
Thank you.
Our next question will come from Elvira Scotto with RBC capital markets. Your line is open.
Oh good afternoon, everyone. Thanks for.
Thanks for answering all the all the questions I have a couple of follow ups.
On the upstream M&A I know you mentioned that you know <unk> in a way as more upstream merge.
You know, it's a benefit having larger better capitalized customers thoughts.
Thoughts on.
That you know this also would benefit the larger more integrated midstream company that can provide more services or have more you know think of what price do you think that that actually WEX team teams are powerful.
That works it works to the upstream consolidation working to the benefit of the integrated.
Yeah larger midstream companies, you know with larger asset Oh, yes.
Yes.
Yeah, I think I mentioned this earlier, but what I think it is good overall not just for that sector, but.
For hours as well that we're getting a producer combinations out there that are that are.
That are producing healthy companies that intend to continue to.
To produce oil and natural gas and that are coming out in good shape from those transactions are with company emerged from the other side of those transactions in good shape and I think that's I.
I think that's always helpful now.
I think it's a question of how you know they how quickly do they form the new drilling plans and and and all that sort of thing, but I think it's it's a healthy thing overall for the energy business and a at least derivatively for our sector.
Got it Okay and then just one follow up on me energy transmission question, you mentioned that the ability to use your existing assets and you talked about.
Huntington and the ability to <unk> yeah.
Pipelines, so <unk> natural gas pipeline will transport I think anywhere from 5% to 15% hydrogen plant without really much modification was required to transport more high Tech Jan.
Okay. Kim do you want to take a shot at that one.
Sure I think you know the issue with transporting more hydrogen a virus is impediment of pipes and so it can cause cracking.
In certain types of steel.
And then on the compressor or you know that the issue is certain compressor. They can handle generally compressors within the last that are manufactured within the last 20 years roughly I'm can generally handle hydrogen plants that are 10% on a compressors that are older than that.
It may require some upgrades even to handle you know the the zero to 10%.
But again, just like with the on the pipeline in front of mind.
Compressor stations handling you know they may not be able to handle current compressor station probably cannot handle you know greater plans than that 10% without some modification.
And then the only thing I'd add to that out of hours that we have to look at or think about the downstream and uses as well you know kinda power plants, which power plants can take what levels of Ah Ah hydrogen.
Thus releases et cetera, you start to you start to challenge the downstream and uses as well.
Got it great. Thanks very much.
Thank you. Our next question comes from Shinier 'cause shouldn't you be your line is helping.
Hi, Good afternoon, guys just a follow up question here yeah. The early part of the call with energy transition questions. We're a lot about the challenges of buyer asked a great question on the hydrogen side I was wondering about something that I think is more closer to home right now or more into well most of our predictive.
Little timeframe.
Specifically on the renewable natural gas.
Wondering if you can talk about whether it's something you already participating in something where you see a growth opportunity right now and being able to utilize your existing footprint to take advantage of it.
Yeah go ahead.
Okay sure and just there you know renewable natural gas right now is relatively small market, it's probably about 100 million cubic feet a day.
And you know the potential issues are that typically the supply sources, which are you know landfill stereo arms wastewater treatment plants those types of things there and how you know you can only get a small apply.
Supply from those sources and then it's also very expensive. So you know that the cost estimate that I've seen on there are 15 to $30 protect them.
So you know those are those are the issues that would have to be able to calm but it is certainly something that we're looking at and that can be shipped on our pipelines.
And we are transporting a little bit today to your question about doing it today, but it's very small but give you might also talk about.
The other hand, the size and how we define it for responsible natural gas.
Yeah on responsible natural gas you know right now.
That supplier 2019 that supply is probably 11 Bcf a day so.
So roughly 11% of the of the U.S. supply.
The way we think about it is you know that's gas that is produced process transported with the commitment to reduce methane emissions to less than 1% by 2025.
And so.
Were part of a group obviously that has made that commitment and you know the less than 1% midstream has an allocation of that less than 1% in the midstream allocation is 0.31 and.
And we are well well below that 0.3.
<unk>, 0.31% and have been for a couple of years.
And so you know we have had some customers I talk to us.
About responsible natural gas that it is and they are.
These customers are marketing inert gas to international customers.
And so it has and important to them and import.
An important to their customers and so.
I think there as you know we haven't seen a large acceptance of responsibly sourced gas, but we've had more recent conversations on that I know it seems like it could be getting importance.
Well I really appreciate the update on it. Thank you guys.
Thank you.
Thank you.
Our next question will come from <unk> paradigm with Bank of America. Your line is open.
Thanks for taking my follow ups. Your again, just a quick one on Permian hybrid it appears the pipe as progress based on the competition level.
Could be cliffs earlier into sort of this next year. So if you are able to do so in early Jan do the contracts to come gradually.
They kick in after we have done our commissioning work which is.
A gradual and somewhat unpredictable process I mean, it's a big pipe you got a lot of compressor stations on it we've got to make sure everything works et cetera, but we would expect to be in service and have those contracts go into effect as we said in early 2021.
Got it that's it that's it for me thank you.
Thank you and we are showing no further questions at this time.
All right. Thank you very much appreciate your attendance.
Thanks Keith.
That does conclude today's conference. Thank you again for your participation you may now.
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