Q2 2021 Kinder Morgan Inc Earnings Call
Welcome to the Kinder Morgan's quarterly earnings Conference call. Today's call is being recorded if you have any objections you may disconnect. At this time all lines will be in a listen only mode until the question and answer session of today's call at that time, if you would like to ask a question. Please press star followed by 1 and please make sure your phone is on mute it and record your.
<unk> company clearly when prompted I would now like to turn the call over to Mr. Rich Kinder executive Chairman of Kinder Morgan. Thank you Sir you may begin.
Thank you Missy before we begin as usual I'd like to remind you that game is 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 and Exchange Act of 1934, as well as certain non-GAAP 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 SEC for important material assumptions expectations and risk factors that may cause actual results to differ materially.
But those anticipated and described in such forward looking statements.
With that the other way let.
Let me just say that like a broken record each quarter I open our call with comments on the strong cash flow, we're generating and how we're using and intend to use that cash flow. What do you look at our cash flow for the second quarter per year to date are our projections for the full year. It's apparent that we continue to be a strong generator of cash.
Hello, It's also apparent that we continue to live comfortably within that cash flow.
Question investors should ask on a continuous basis.
As whether we are wise stewards of that cash we have said repeatedly that we would use our funds to maintain a strong balance sheet pay a good and growing dividend invest in new projects or acquisitions. When they met a relatively high return hurdle rates and opportunistically repurchase our shares this quarter, we announced 2 <unk>.
Significant acquisitions. The first was our purchase of the Stagecoach natural gas storage and pipeline assets in the northeast for approximately $1.2 billion. These assets expand our services to our customers by helping connect natural gas supply with northeast demand areas. The acquisition is immediately accretive to our shareholders and I believe.
It will be an important and profitable asset per cab for many years to come.
Our second acquisition to make an attractive platform investment in the rapidly growing renewable natural gas market by purchasing <unk> for approximately $300 million Steve.
Steve will talk about this acquisition in detail.
We believe there is a bright future for this business and other related energy transportation translation businesses that we are exploring.
Now, let me conclude with 2 important points both of these acquisitions meet our hurdle rates that I referred to earlier and both are being paid for with our internally generated cash I believe both fit within the long term financial strategy that I speak to each quarter and I can assure you that our board looks at all the alternatives and a.
Matt are completely consistent with that financial strategy and with that I'll turn it over to Steve. Okay. Thanks, Rich I'm going to make a couple of additional comments about the 2 acquisitions and then turn it over to Kim and David.
On the stagecoach.
George and transportation assets grew $1.2 billion, we closed that transaction earlier this month.
It adds 41 Bcf of certificated and pretty flexible working gas storage capacity and 185 miles of pipeline.
We're excited about this transaction for several reasons as we discussed in the first quarter call. We think storage value is going to increase over time.
Value was certainly revealed during winter storm, Yuri and we've seen that start to show up in our commercial transactions.
Storage will also become more valuable as more intermittent renewable resources are added to the grid.
The stagecoach assets are well interconnected with our Tennessee gas pipeline system as well as other third party systems and a part of the country that has constrained from an infrastructure standpoint, and frankly, where it is difficult to get new infrastructure permitted and built we're excited about this transaction and believe it will pay off nicely for our shareholders.
The second transaction, which we announced at the end of last week was.
It was accomplished by our newly formed energy transition ventures group.
Put that together in the first quarter of this year, we're acquiring and kinetics of renewable natural gas business subject to regulatory approval and a couple of other closing conditions at signing connect kinetics had secured 3 new signed development projects that we will build out over the next 18 months, resulting in.
The purchase price plus capital at.
At a less than 6 times EBITDA multiple by the time, we get to 2023 with kinetics were picking up a rare platform investment in a highly fragmented market. It gives us a nice head start on working on hundreds if not thousands of potential renewable natural natural gas project candidates in the U S.
Yes.
Few more points on this deal and several of you pointed out in your comments post announcement the value is dependent on Rins value you don't make money on the gas sales was an important exception that I'll get to in a minute.
Accordingly, the particular ramp that this business generates R. D 3 brands, which can be used to satisfy other rent obligations as well.
<unk> are for advanced Biofuels and promoting more of those in the transportation fuel market has had bipartisan support and even more support from the environmental community than conventional ethanol.
While there are some regulatory flexibility.
P. As hands there is an underlying statutory framework again with bipartisan support combined with widely acknowledged greenhouse gas benefits that further protects the value of this category of Rins in particular.
Having said that we believe we will have the opportunity to mitigate our exposure to <unk> pricing volatility based on conversations with potential customers not signed deals yet, but conversations so far there is significant interest in renewable natural gas and the so-called voluntary market there or cut these are customers who are out.
Side of the transport fuel market, who are interested in reducing their carbon footprint and we believe would transact on a long term fixed price basis.
There are also potential customers interested in sharing the risk and reward of the rins value. So we will look for appropriate ways to lock in the value of the environmental attributes on attractive terms when.
When we talked about our energy transition ventures group in the past, we've talked about transacting on attractive returns for our shareholders.
Loss leaders and not doing things for show. This deal is a great example of that and the team's short existence. So far they've acted on an attractive opportunity and they continue to work on a number of other specific project opportunities. So very good progress in a short period of time.
These 2 deals illustrate a couple of key points broader points about our business the larger deal stagecoach.
As a further investment in our existing natural gas business, where we own the largest transportation and storage network in the country.
That reflects our view that our existing business, we will need to be needed for decades to come hydrocarbons, and especially natural gas have very stubborn advantages and will play an essential role in meeting the growing need for energy around the world.
That's something we are well positioned for with our assets and especially considering our considerable connectivity with export markets, especially in natural gas, but also in refined products at the same time, we do see opportunities in the energy evolution and putting emphasis on evolution and were positioning ourselves there.
As well.
We're doing this in our base business, where our gas delivery capability provides the needed backup for renewables at far lower cost and longer duration than batteries. We're doing it in responsibly sourced that is low methane emissions natural gas we had our second such transaction this quarter, we're doing it in our refined products businesses.
<unk>, where we handle renewable transportation fuels.
And we are actively developing additional business in that part of our business as well the kinetics transaction, while relatively small positions us to develop a new business line and the renewable energy space at attractive returns and with a bit of a head start the takeaway from all of this is that we continued to see strong long.
Term value in the assets and service offerings, we have today.
While also pivoting in an appropriate and value, creating way to the faster growing parts of the energy business.
That I will turn it over to Kevin Okay. Thanks sales first I'm going to start with our business fundamentals and then I'll talk very high level about our forecast for the full year start.
Starting with our natural gas business fundamentals for the quarter transport volumes were up 4% or approximately 1.5 <unk> per day.
The second quarter of 2020, and that was driven primarily by LNG and Mexico exports and power demand on T. G. P ph from the PHP and service higher industrial and LNG demand on our Texas Intrastate system, and then higher deliveries to our <unk> LNG facility.
These increases were partially offset by lower volumes on <unk> and that David and declines in Rockies production and Fayetteville Express contract expirations physic.
Physical deliveries to LNG off of our pipelines averaged approximately 5 million times per day, that's a huge increase versus the second quarter of 2020 LNG.
LNG volumes also increased versus the first quarter of this year by approximately 8% or.
Our market share of LNG export volume is about 48%.
Exports to Mexico were up about 20% versus the second quarter of 2020, our share in Mexico volume is about 54%.
Overall deliveries to power plants were relatively flat deliveries to <unk> sales were down slightly.
While deliveries to industrial facilities were up 4%.
Our natural gas gathering volumes were down about 12% in the quarter compared to the second quarter of 'twenty.
For gathering volume so I think the more informative comparison is a sequential quarter, so compared to the first quarter of this year volumes were up about 6%.
Here, we saw nice increases and higher loan volumes, which were up about 10% and the Haynesville volumes were sports were up about 13%.
And our product pipeline segment refined products were up 37% for the quarter versus the second quarter of 'twenty volumes are also up about 17% versus the first quarter of this year. So we saw substantial improvement both year over year and quarter over quarter.
Compared to the pre pandemic levels using.
Using the second quarter of 2019 as the reference point road fuels gasoline and diesel combined are essentially flat and jet fuel is still down about 26%.
Crude and condensate volumes were up 6% in the quarter versus the second quarter of 'twenty and sequentially. They were up very slightly.
In our terminals business segment, our liquids utilization remains high.
If you exclude the tanks out of service for acquired.
Wired inspections, approximately 98% of our tanks are leased most of the revenue that we received comes from fixed monthly charges. We received per tanks under links but we do receive a marginal amount of revenue from <unk> and <unk>.
Throughput increased significantly about 22% in total on our liquids terminals.
8.6%, if you're just looking at refine products, but that still remains a little bit below 2019, or 6% on total liquids volumes, 5% when youre, just looking at gasoline and diesel.
We continue to experience some weakness in our marine tanker business, but as we said last quarter. We expect that this market will improve but it may take until late this year as the charter activity tends to lag the underlying supply and demand fundamentals.
On the bulk side volumes increased by 23% and that was driven by call in scale.
No you know realization of our largest scale customer exceeded pre pandemic levels.
<unk> export economics improved for both net and X at met and thermal coal.
In our CSS segment crude volumes were down about 9% tier 2 volumes were down about 10% year over year increase oil announce and NGL prices that offset some of the volume degradation, but if you compare to our budget. We're currently anticipating the oil volumes will exceed our budget by approximately.
5% and that's driven primarily by some nice performance on Blackrock.
2 volumes, we also expect to exceed our budget.
So overall, we are seeing increased natural gas volumes and demand from LNG and Mexico exports as well as industrial demand on the Gulf Coast, We're seeing increased gathering volumes in the Bakken and the Haynesville and nice recovery of refined products volumes.
Oil volumes are above our expectations and our CSA segment, and we're getting some price how we're still experienced some weakness in our Jones Act tankers in the Eagle Ford remains highly competitive now let me give you a very high level update of our full year forecast as we said in the release, we're currently projecting.
<unk> full year DCF of $5.4 billion.
That's above the high end of the range that we gave you last quarter. The range. We gave you last quarter was 5.1 to $5.3 billion.
The outperformance versus the high end of the range is driven by our stagecoach acquisition higher commodity prices and better refined products volumes and with that I'll turn it over to David Alright.
Alright, Thanks Kim from.
The second quarter of 2021, we're declaring a dividend of 27 per share, which is a $1.8 annualized and thats up 3% from the second quarter of 2020.
This quarter, we generated revenue of $3, 1.5 billion, which is up $590 million from the second quarter of 2020.
We also had higher cost of sales with an increase there $495 million.
So netting those 2 together gross margin was up $95 million.
This quarter. We also took an impact an impairment of our south, Texas gathering and processing assets of $1.6 billion.
So with that impact we generated a loss a net loss of $757 million per the quarter.
Looking at adjusted earnings, which is before certain items, primarily the south Texas asset impairment this quarter and the midstream goodwill impairment a year ago, we generated income of $516 million this quarter up $135 million from the second quarter of 2020.
Moving on to the segment EBITDA and distributable cash flow performance natural gas or natural gas segment was up $48 million for the quarter.
And that was up.
Primarily due to favorable margins in our Texas intrastate business greater contributions from our PHP asset, which is now in service.
And increased volumes on our Bakken gas gathering systems.
Actually offsetting those items were lower volumes on our south, Texas, and Kinder Hawk gathering and processing assets and lower contributions from SEC due to contract roll offs.
Our products segment was up $66 million driven by a nice recovery in refined product volume.
Terminals was up $17 million also driven by the nice refined product volume recovery, partially offset by lower utilization of our Jones Act tankers.
<unk> segment was down $5 million due to lower crude oil and <unk> volumes and some increased well work costs.
Those are partially offset by higher realized crude oil and NGL pricing.
Our G&A and corporate charges were lower by $7 million. This is where we benefited from our organizational efficiency savings as well as some lower noncash pension expenses, partially offset by some lower capitalized G&A costs.
Our JV DD&A category was lower by $27 million, primarily due to Ruby.
And that brings us to our adjusted EBITDA of $1.670 million, which is 7% higher than the second quarter of 2020.
Moving below EBITDA interest expense was $16 million favorable driven by lower LIBOR rates benefiting our interest rate swaps as well as a lower debt balance and lower rates on our long term debt and.
And those are partially offset by lower capitalized interest expenses versus last year.
Our cash taxes for the quarter were unfavorable $40 million, mostly due to citrus our products southeast pipeline, and Texas margin tax deferrals, which were taken in 2020.
As a result of the pandemic.
Just timing and for the full year, our cash taxes are in line with our budget.
Our sustaining capital was unfavorable $51 million for the quarter driven by.
Higher spend in our natural gas and terminals segments.
But that higher spend is in line with what we had budgeted for the quarter.
Total DCF of $1.25.
<unk> is up 2% and our DCF per share of <unk> 45.
Per share is up <unk> <unk> from last year.
On our balance sheet, we ended the quarter at 3.8 times debt to EBITDA, which is down nicely from our 4.6 times at year end.
Kim already mentioned that we updated our full year guidance, which now has DCF and EBITDA above the top end of the range that we provided in the first quarter.
Our debt to EBITDA, we expect to end the year at 4.0 times net.
It includes the acquisitions of Stagecoach, which we closed on July 9 <unk>.
And connect tricks, which we expect to close in the third quarter.
As a reminder, that debt level that our year end debt to EBITDA level has the benefits of.
Largely non recurring EBITDA generated during winter storm here earlier in the year and our longer term leverage target of around 4.5 times has not changed.
Onto reconciliation of our net debt the net debt for the quarter ended at $30 billion, almost $30.2 billion down $184.7 billion from year end and about $500 million down from Q1.
Our net debt has now declined by over $12 billion or about 30% since our peak levels.
To reconcile the change in the quarter and net debt, we generated $1.25 million of DCF, we paid out approximately $600 million of dividends.
We spent approximately $100 million of growth capital and contributions to our joint ventures, and we had a $175 million worth of working capital.
Source of cash flows primarily interest expense accruals net explains the majority of the change for the quarter.
For the change year to date.
We generated $3.354 billion of distributable cash flow, we spent $1.2 billion on dividends.
We spent $300 million in growth Capex and JV contributions we received 4.
$413 million on our <unk>.
Partial interest sale of NGL.
And we have.
Experienced a working capital use of approximately $420 million to $25 million and that explains the majority of the change for the for the year.
That completes the financial review and I'll turn it back to Steve.
Alright, let's open it up for questions and just a reminder to everyone as a courtesy to others on the call. We ask that you limit your questions to 1 and a follow up and then if you've got more get back in the queue and we will get to you.
Alright, let's open it up yes.
Yes, Sir if you would like to ask a question. Please press star followed by 1 please make sure that your phone is on mute it and record your name and company. When prompted if you wish to withdraw. Your question you can press star 2 our first question comes from Jeremy Tonet from Jpmorgan. Your line is open Sir.
Good afternoon.
None.
Going to resist the temptation to ask about <unk> and ask about 2 different questions.
Was just curious I guess with the RMG space. It seems like that's a very fragmented industry, where kinder historically has played a role in fragmented industries and being a consolidator do you see similar opportunity set here and I guess also you know it seems like there is a good amount of cash competition from private equity and those with <unk>.
You know low cost of capital to go after these types of targets. So just wondering if you could talk about the competitive landscape at this point.
Sure. It is a very fragmented market as you point out and that does create some I think some good open field running for us.
There arent as I said this is kind of a rare platform investment we don't generally comment on M&A, just because it's very hard to.
Project projected results there.
Something that we'd be open to again, if we can get the right returns, but but.
We think we've got a lot of opportunity to build this business organically.
And we think what we bring to the table in terms of competitive advantages, our existing network and our existing footprint and I would describe that.
Just in terms of the obvious physical assets the pipelines and storage that we have but also the customer access and customer contacts that we have.
That will enable us I think in some.
Decent sized chunks to develop an originated some additional business really in both categories. The voluntary market as well as the transport market. We've got good project management expertise.
We're actually looking at whether or not we can make some of the equipment that's being deployed.
In these areas and so we think we bring a lot to the table, we're getting a good team.
As part of this acquisition so we think we.
We think we can we can expand this business expanded organically and do it in a way that the returns are attractive.
Got it that's helpful. Thanks, and then maybe just shifting to the Permian.
And gas takeaway just wondering if you could update us there and thoughts. It seems you know the capacity is loose now with PHP on line westwood's seem to be on line, but if the Permian grows as some expect there could be tightness in the next couple of years 2 to 3 years, but I guess that timing really depends also on how much Mexican dimmed.
Men materializes isn't it seems like the long awaited demand started to show up here. So just wondering if you could talk about those dynamics and I guess, how do you see a Permian gas takeaway needs evolving over time.
Yeah. So we agree generally with your projection there that we do think that the Permian as it as it continues to fill up and it is a very active area again as you know.
That debt there will be a need for another yet another pipe to come out of there and.
Both our view of it as well as third party views that we that we gather on this is thats, probably mid decade, which means that you have to start the commercial conversations a couple of years or maybe a little more ahead of that.
So it's still you know we had pretty active conversations.
In that arena before.
We know who to talk to about it I wouldn't characterize those as super active right now, but we think they could.
As we get closer to a tightening of the Permian.
Got it I'll leave it there thank you.
Hi, good afternoon, everyone.
Maybe I'll start off on the on the guidance side definitely appreciate the color that you just provided from.
To Jim's question, but.
With respect to the guidance it seems like it's raised by a couple of hundred million dollars in sort of seem to indicate anything about exceeding or.
Meeting or exceeding the top end of the range I was wondering if you can just sort of expand on the drivers on the change I mean, obviously theres the stagecoach acquisition, which you mentioned.
Theres, the RMG acquisition as well, but it doesn't seem to account for all of it is it something related to better expectations in your refined products business is it on the natural gas side I'm. Just curious if you can give us a little bit of color on the.
Elements involved in the guidance update.
The 2 primary factors other than the Stagecoach acquisition.
Our improved refined products volumes from what we previously expected.
As I said.
On the product side of the business.
Road fuel is now flat with 2019.
And the second quarter this year versus Florida.
And then the other primary driver is higher commodity prices and I'm measuring those are the primary changes against the high end of the guidance of $5.3 billion.
Okay great.
And maybe as a follow up question.
Last quarter when you adjusted your guidance you had sort of.
Forward that will be re contracting and sort of.
In fact, it's sort of been thinking about the last 3 or 4 years, you've kind of have like a re contracting trend in the natural gas segment.
That's essentially resulted in lower contract changes and so forth that's been about 100 to 200 million.
On EBITDA is.
<unk> substantially over Inc.
And so all the growth related projects that you.
Youre talking about on the energy venture side and so forth.
Or any of the capital growth that you spend well we will in fact be additive to EBITDA from from this point going forward.
Just kind of curious if we're kind of done with the re contracting receptive maybe theres a little bit left but is.
Is it substantially out of the way at this point.
Yes, we do see it being lower post 2021, and and we update that as you know every January when we do our Investor Conference and we will do that again, but it is we see it as being lower in terms of the rollout post 2021.
And so the background. There is I think you know well is that you know 10 years ago or a little bit more we built a number of pipelines that were kind of point to point to point pipelines and they were built on the strength of long term contractual commitments.
Hi basis environment, and so as you get to the end of those 10 are 10, plus year contracts and they start to roll off the rolling off into a more chat.
Challenged basis environment for those particular pipes and so that has had the effect of kind of <unk>.
Masking or dampening how are we going to see at some of the I think strong underlying performance in our natural gas.
Pipeline segment. So that's what's been that's what's been going on and as I said I think we see that as being lower from here in terms of your broader question.
It is.
We invest all of our capital on our return.
Everyone at each 1 stands on its own from a return standpoint, we've been getting good returns as we show in our our performance update there.
Very attractive returns on the capital that we've deployed in terms of the overall puts and takes though.
There are puts and takes across a diversified asset portfolio like ours, and and those puts and takes and the uncertainty around them and further out periods.
Our hard enough to quantify or uncertain enough force quantified.
For me to give you a specific answer to your question about base business, then plus right and so generally what we do is give you. The best view, we can of the fundamental drivers.
Underpinning our business.
Economically and commercially.
So that our investors can make their own come to their own expectations about that future, but we don't guide beyond the current budget year or updates to the guidance. We're giving you today. So we try to provide the transparency and particularly around the roll off issue in particular, but we don't guide beyond the current year.
Just to clarify so the Rollouts will continue for multiple years or are we approaching the end of it.
There is still a couple of years to run, but theyre very modest after you get through this year quite modest okay.
Got it okay perfect.
Thank you very much really appreciate the color today.
Thank you next question comes from Spiro <unk> from Credit Suisse. Your line is open Sir.
Thank you afternoon everybody.
We'd like to start off with with gas macro if we could.
We share your all's thoughts on the environment here and what that could mean for the near and medium term specifically just curious how sustainable you think this price environment as I'm sure you're all talking to your producers and so.
Curious, what they're saying about their plans and activity for growth on the on the gas directed side of things and and is there something incremental you could be doing here on the LNG side as well to capture even more of that market and more of that growth.
Sure I mean overall and on a GAAP.
Gas the macro look on gas as you know we remain as others too bullish on U S natural gas and I think we see.
Between now and 'twenty 20 years from now.
Updated third party analysis see growth in that market of about 23, Bcf or almost 24% a pretty pretty nice long runway and a lot of that is driven by exports theres. Some industrial in there as well, but but exports are a part of that picture.
And for our business, we've tried to distinguish ourselves with our customers as a storage provider and a transport provider and a good operating partner.
To be able to.
Capture as much of that business as we can we have a very good share of that business moving through our pipes today, and we look to expand it.
The map of where those facilities are coming in is lined up very nicely with our natural gas pipeline footprint and just to put a little more context on it because.
As we look at and this is a different timeframe now 2020 to 2030 the growth that we see a natural gas happening over that 10 year period, 80% of that is Texas, and Louisiana and a lot of that is the export market and our assets are very well positioned for that.
In terms of the current natural gas pricing and the sustainability of it and how are the producers are responding to that and I'll ask Tom to come out a bit.
Yes, I mean, it's hard to predict the future, but I do think that.
Given the.
Demand growth.
Pretty pretty clear.
We're certainly going to have a tight market.
For the intermediate term, what we're saying in here on the producer side as well.
Measured response, I mean definitely we're seeing an increase in activity of the rig.
Growth has been certainly visible, but I think theres also a strong financial discipline that we're seeing in the producer community events.
I think going to make the supply side response, a bit more delay relative to what we're seeing on the demand side. So I do anticipate.
A fairly tight.
Supply demand balance here from.
For the next couple of years at least and I think that means a higher price environment.
Got it that's that's helpful. Thanks, Tom and then if we could just go back to <unk> quickly it sounded like the path forward or at least the base cases is organic growth and not necessarily M&A, although I'm sure that remains an opportunity for you and so as we're thinking about the returns on an organic growth you know I think the press release cited a less than 6 times.
Fully capitalized return on this project plus the M&A and so I think a lot of US took that to mean that organically you can do even better than that and so are we reading through it the right way or these 3 to 4 X return types of projects at some point do those get competed away I'm just curious how you're thinking about that that component.
Yeah, I don't want to get into specific returns or is it.
At least a potentially competitive environment out there, but the returns that we're seeing are attractive for how we look at other.
Other deployments of capital and the expansion context, and we make appropriate adjustments to those return hurdles based on the level of exposure to things like brands. Okay. So we need to do better where theres more risk exposure and if we got secured.
Firm long term fixed prices, we can look at that a bit differently, but they are good compensatory returns and.
We are happy to invest in these in these opportunities.
Great. That's all I had thanks, Steve Thanks, David.
Okay.
Thank you next question comes from Keith Stanley with Wolfe Research. Your line is open.
Sorry to beat a dead horse on cannot tricks.
Or are there any I just want to confirm are there any fixed price contracts in place today for the R&D sales and then.
I guess bigger picture can you talk a little more about the revenue streams for the business you mentioned the Rins can you benefit from the low carbon fuel standard just other attributes I'm trying to better understand the business.
And then last parts of that is just.
I'm, assuming most of the EBITDA from this business day Youre buying is from R&D sales and not the existing LNG business is pretty small is that fair.
I'm going to ask Anthony to answer yes.
The last part of that I think currently right now.
About 60%.
From the R&D side of the business.
And the remaining piece from LNG once the 3 development plans in <unk>.
It's closer to 90% R&D at that point in time, our LNG.
LNG is not decreasing over that point in time, it's just obviously the R&D component is increasing.
And then sorry.
Remind me Keith on your Europe.
Yes, so in other.
To capitalize on our CFS.
You need to establish a pathway.
We have an establish a pathway for SAR.
These specific facilities they are under contract locally with at transportation provider.
And G&A and generating the Rins you would have to you.
Sell that environmental attribute and tech, California establish the pathway and quite frankly in the California market is really dominated from an R&D standpoint.
Really the dairy side.
Out of the industry, because the carbon intensity score as a much lower and so there's a much greater benefit for the RMG a.
I'll take a pass.
All of that so I would think of think of it as terms of landfill as the market for it is it really is outside of the epic out of California market.
Then fixed price or variable today, yes.
So there is a certain part of the LNG offtake, which is take or pay currently.
The the RMG, that's going to be that's going to be sold into U S.
The <unk> market.
With this redevelopment plans.
Effectively at an index price.
Got it. Thanks, Thanks, a lot that was very good color.
Hi.
Second question I know the first was long winded there.
So you've positioned it pretty well that stagecoach edge to the core gas pipeline business and kinetics gives you this platform for growth and a new and exciting area.
Strategically I mean would you be open to maybe looking to selling down some of call. It your less core businesses, whether that's refined products pipelines and terminals crude or or other areas with less scale is sort of a source of funds to continue this strategy, where you're putting money into the core gas business and into.
Some of the energy ventures.
We like the portfolio of assets that we have today, having said that I mean, we.
Say, what we always say every everything is for sale at the right valuation if if someone can make more of a particular investment that we have and then we can then we will consider that if.
We did have a bit of a sell down on an N. G. P. L. We continue to operate it and continue to like our position in that asset.
But we got good value there and so we do look at those things, but I think I think we've done a good job.
Particularly in John Schlosser, the terminals business kind of pruning pruning assets to stay focused on the things that we really do well over the years, our kind of our hub positions and the like and so there's not a.
Theres not a path to sell on anything and we like this portfolio that we have today, but at the right price we would transact.
Thank you.
Thank you. Our next question comes from Tristan Richardson from tourists Securities. Your line is open Sir.
Hi, good afternoon guys.
I think it may have been pre pandemic when you lost discussed.
Possible.
Incremental investment in sackcloth expansion.
Might be more chunky type of Capex is the municipal approvals you noted.
Sort of a precursor to that type of expansion that you had discussed back then or can you sort of remind us the potential size and scope of this project.
Yes, so what we what we did that is talked about in the release today is we.
We aggregated some rights.
To do further development, we did it in a place that is geographically adjacent to the sack rock unit and we got approval to incorporate it into the unit and there.
There is advantage to that and that we think we have good insight into the geology by buying up the rights we entered it in a fairly cost effective way and.
And we have good facilities at sack rock that led us to economic expansions there so.
It's it's a nice opportunity for us and we continue to look at that as well as.
Additional incremental investments within the unit within the existing unit.
Along the way adjusted anything you want to add.
Okay.
Thanks, Steven and then.
An earlier question you talked about the gas macro but curious maybe on the midstream side I mean, obviously Kim noted that the Eagle Ford remains competitive, but you know clearly seeing improved activity at Highland.
Does the view on midstream accelerate in the second half based on on what Youre hearing from customers.
You kind of need to look asset by asset I mean.
Youre right.
<unk> got some good performance happening on the island were.
Expecting to see some incremental performance based on the gas price dynamics debt that Tom mentioned in the Haynesville as well.
Come slower than what we expected, but I think it's coming.
And then just overall on the broader picture of natural gas midstream infrastructure.
Our pipeline that work in our storage network.
Continues.
<unk> continues to attract good value coming out of.
The winter Storm for example, not just in Texas, but really along our system. We've successfully transacted for incremental and also attractive that is increasing renewal rates, particularly on our storage assets.
Especially in Texas, but also elsewhere on our system. It was a bit of a I think a wakeup call to the market generally that.
Net.
There is real value in having that delivery flexibility and real value and holding firm transport capacity. So I think just overall, we are seeing uplift if you will in that area.
Thank you Steve.
Thank you. Our next question comes from Jean Ann Salisbury with Bernstein. Your line is open.
Hi, Good afternoon, I guess I will ask line on D. C. U S. Since no 1 has yet the way I understand it the most near term opportunity is taking <unk> from Permian processing plants and putting it into your existing <unk> infrastructure for E. R. M.
Can you give some sense of just the timing of this potential opportunity EBIT basically how long does it take to install the equipment and physically connect 1 of these plants and what is the sense of urgency that you're hearing on this from processes.
Yeah, I'll start and then I'll ask Jesse to comment more specifically on the deal front.
You made the right point in your opening on the question which is that.
The near term opportunity really is long existing infrastructure and are.
Primarily processing or and also ethanol plants because of the Cotwo stream is pure or fairly pure there and so it still needs to be compressed and get it into the pipe et cetera. The other.
Other thing about it is the pipe itself right.
The other.
<unk> moves most efficiently and illiquid state, which means high pressure. So that's 800 to 2200 Psi and what that means is you're not going to repurpose a lot of gas pipe for oil pipe for that for example, when you tend to operate you know call. It 600 P. S side, maybe <unk>.
<unk> 50 on the newer gas pipes, so that that has been a barrier right.
If you've got to build new heavy wall pipe in order to get it to a place where you can sequester. It. That's a barrier you are as a valuable application of that C. O 2 and so that that does make that the near term opportunity.
So having said that I'll ask Jesse to comment on timing and.
The current deal activity.
So in the Permian there are several operators that we are in discussions with currently timing you're probably looking at 12 to 18 months. If it goes into ER. So EUR permits are in place and you can go in albeit at a lower credits.
If it's sequestration, you're looking at much longer horizon, because you'll need a class 6 well permit which are currently the EPA has authority over and you know there's only a couple of these in and in place throughout the United States. So that's probably a more of a 3 to 5 year timeframe obtaining 1.
That's current today, but any or that could be taken I would suspect within the next 12 to 18 months.
Great.
Give me a comment on this since emergency anywhere there.
Yeah, there's a lot of interest obviously the credits were were clarified earlier in the year. So they their rules of engagement are there and the economic decisions are being made so there is a lot of interest are you know they are moving.
Into the F stage in an order and equipment, yeah like I said, it's probably a good year to 18 months away.
Great and that's all for me. Thank you.
Thank you. Our next question comes from Michael from <unk> with Goldman Sachs. Your line is open Hey, Guy.
Hi, Thanks for taking my question actually 2 of them and totally unrelated from each other first of all I know you addressed the potential need for Permian takeaway, but how are you guys thinking about the need for haynesville incremental takeaway and whether you think the haynesville starting to get tightened from basically taken it out of the basin and either to the south.
East or straight down on the Gulf. That's question..1 question 2 is as a follow up 1.
Somebody earlier asked a little bit about you know the asset mix and asset disposals in Steve I think you made the comment about you know everything.
Everything for a price well, it's where does the elba fit into that because it seems like the infrastructure fund market, where others are paying pretty healthy multiples for minority Stakes in the LNG contracted LNG facilities.
Just curious is there anything that would keep elbow kind of off that table or your stake or would you kind of view that is super core to the business.
Well I'll start with elven Allentown to comment on on Haynesville. So you may recall that I could actually just I think.
Predates you covering us, but we did sell down an interest in <unk> when we were.
We were post contract, but still developing it and we did that it was a it was an attractive valuation for us and it it helps share the capital.
<unk>.
And so we've kind of done that move if you will already and and.
In terms of its how it fits in the overall portfolio.
It is kind of integrated with our broader system, we have the Elba Express pipeline.
Of which we have opportunities on as well we have the potential to do to do more at Elba in terms of storage and the like.
And it's interconnected with our S N G system and so.
It fits nicely within the portfolio of assets. We have also as you know I mean, it's under a long term contract with shell.
Which is an attractive.
Credit and sort of risk profile for us long very long term contract with shell and so it fits it fits very well and we did a partial sell down earlier as I mentioned, Tom on the Haynesville takeaway needs. So.
So I think.
Given the increase in gas prices.
The activity that we're seeing in the Haynesville actors.
A.
Real possibility that there will be additional hain.
Haynesville takeaway necessary I think to my point that I made earlier I think producers are really wanting to have sustainable prices at these at these higher levels before.
And I think living within the within their means managing their balance sheets appropriately so at all.
I think the activity is definitely increasing.
I think if we sustain this hussein see sustained gas prices.
Additional activity in the Haynesville, but will be.
3 to 5 years.
Probably closer to the 3 year timeframe, there may be a need for additional capacity out of that market.
Got it. Thank you guys much appreciate it.
Yes.
Thank you. Our next question comes from Becca Followill with U S Capital Advisors. Your line is open.
Hi, guys.
2 questions 1 minor but in the in the non recurring items, there's legal and environmental and other tax charges that you've had it back in a $28 million and it was $84 million in Q1. So 112 million can you talk about what's in there and do you expect more of that as we go into the rest of the year.
David.
This is in the nonrecurring items Becker right and if you want I can ask another question why you're looking at I think go ahead.
I can already tell.
The other side of this.
Kind of a variation on what Tristan asked.
<unk>, we've got oil prices now.
Close to $70, which is.
Probably a pretty good track of economics, I assume for that business.
Are you anticipating maybe grabbing capex back up in that business and is there any way to kind of stems from the them more significant declines that we've seen of late as you backed off on spending.
Yes. So we will we'll continue to look at that like we always have backer, which is we'll look at we look at it on an individual project basis, and we make our assumptions around crude price. It does it does uncover the potential for more projects to become economic and we've got a couple that we're working on right now at both.
<unk> and Yates debt.
Our debt are incremental and so we will continue to look for those and we've also seen.
It is true we are experiencing year over year declines in that production, but we are a 5% above our plan and that is some better performance from some of our <unk> developments as well as a lesser decline rate than what we expected on some previous developments and so.
Doing well versus our plan and continuing to invest opportunistically as we always have.
Okay, and then let me sneak 1 more in line is looking for that number is just what commodity price is assumed in guidance now.
Uh huh.
And 315.
How many dollars on credit and 350 on GAAP or the back half I think he other balance of the year.
Thank you.
Okay and on your question with regard to the certain items.
Legal and environmental reserves, that's exactly what it is just additional legal and environmental reserves in the first quarter. It was.
It was mostly.
Some legal reserves with regard to a dispute that we had that we have outstanding we're getting a little closer to settlements that we took a reserve there.
And we also took some.
Some reserve for incremental environmental.
Environmental impact.
Estimates debt cost estimates that we have.
In the second quarter in this current quarter. It was related to 2.2 of our rate case reserve item that we've adjusted with now that we have more information.
And these things are.
Hard to call and come up.
Sporadically so I don't think that these are this is something that we would anticipate.
Recurring on a regular basis, but they come up sporadically.
Great. Thank you.
Thank you. Our next question comes from Christine Cho with Barclays. Your line is open.
Hi, everyone I just have 1 question. Historically you guys have included debt repayments at your equity investments.
And your tax cut backs and as we look to 2022 I'm trying to think about and calculate free cash flow generation with the Ruby pipeline debt coming due in the first half of next year, how should we be thinking about that.
Yes, that's right Christine we typically do and we've done that in years past, where we had large known debt maturities coming due where we knew we were going to be making a contribution for our share our share of debt maturing debt unconsolidated jv's.
I think with the.
Ongoing conversations that we're having with our partner at Ruby I think the determination of what we're going to put in the budget is to be determined.
But if we if we plan to.
Yeah.
Fund our share of it it'll be part of the use of cash that we would expect for next year.
Just wanted to make the point.
Here as we've done for multiple quarters now.
We are working with our partners.
And we will be making an economic decision on this asset.
Do you have a timeframe on.
When exactly.
No we're not the only.
Person at the table, so I can't really do that.
Okay. Thanks.
Thank you. Our next question comes from Pearce Hammond with Piper Sandler Your line is open.
Yeah. Good afternoon. Thanks for taking my questions I have a great slide your tax slide 24. The details the current estimate of U S carbon capture cost with ethanol on the low end and on the high end natural gas and then a comparison with the 45 acute tax credit. That's a helpful. Slide I've. My first question is are you hearing any.
Thing in Washington, about maybe boosting the forty-five Q above that $50 a ton for non EUR.
Yes, there is some discussion around that because I think people are are.
They're excited about incentives that activity and I think people believe that part of the solution here on greenhouse gas emissions is gonna have to involve continued continued use of hydrocarbons and and also carbon capture carbon capture just generally.
Generally.
And so I think there is interest in doing that and expanding that.
As Jesse pointed out we just didn't get the final regs from the 45 <unk> and so that's out there and available to us to use today, but I think it will continue to be a part of the conversation now predicting where that will come out I will not even venture a guess.
And then Steve. Thank you for that and then as a follow up I know natural gas.
Power plants combined cycle power plants are listed on the high end of the cost cap carbon capture cost and your graphic but are you seeing interest is the phone ringing from some of the big companies like Oh, you know the big combined cycle power companies do they are they interested in Ccs.
Very preliminary conversations with 1 of our power customers.
Customers.
But I would just say very preliminary very preliminary.
But definitely more interest on debt from the ethanol.
Right.
Well, it's just more within reach on the ethanol and the and the gas processing side for the reasons that you pointed out.
Great. Thank you very much.
Thank you. Our next question comes from Michael Blum with Wells Fargo. Your line is open.
Thanks, Good afternoon, everyone.
I'm wondering just in light of the the acquisitions you've made this quarter both from the energy transition side, and obviously stagecoach just how youre thinking about where buybacks kind of fit into the mix in terms of capital allocation.
Clearly this quarter it seems like you've prioritized acquisition. So just wanted to get your thoughts on all that.
We've said repeatedly that we think we're good stewards of the cash flow, we're producing and we've said repeatedly we want to maintain a strong balance sheet. We will look for acquisitions. If they meet our targeted returns in this case both of these did and we believe we are very strategic to us.
We intend to continue to pay a good dividend or raising the dividend.
And then we'll look opportunistically at the opportunity to repurchase shares and we're looking at all those in concert.
It just depends on what the opportunities are.
Okay got it and then I guess my other question is on our stagecoach.
So you made some interesting points about why do you think storage rates are going up.
Increase over time.
The question is what is your ability to capture that in that asset what is the contract position look like roughly so that as rates do go higher you're able to capture that.
Yes. So there is the average contract life on that asset is about 3 years, it's kind of split right now about 50% of that is with utilities and end users. The other 50% is.
Predominantly producers, but include some some marketing firms as well.
And.
So that's the that's a general contractual timeframe.
But look we we can look at doing short term transactions and other things a combination of T. G. P in <unk>.
And that asset.
Unlock some other potential commercial opportunities, which are incremental to what stage coach could've done on a standalone basis.
And the rates within the.
The rates per stage coach services are market based rates as well.
Perfect. Thank you so much.
Thank you. Your next question comes from Jeremy Tonet with J P. Morgan Your line is open.
Hi, Thanks for letting me sneak 1 more in just wanted to touch on carbon sequestration real quick if.
Texas Railroad Commission is successful in say the next year or so getting primacy just wondering how you think that might impact the timelines of.
Of class 6 wells, such as what happened with Wyoming, and North Dakota, and just do you think that the wells.
Later, Kansas offshore onshore just given you know offshore being more costly, but having you know benefits such as a you know the rates with space a porch. What have you just wondering your thoughts on sequestration.
Sequestrating development.
Yes, so it will shorten up the timeframe if the Texas Railroad Commission is in charge of it.
And now there is a process.
Kind of alluded to there.
So the Texas legislature and this last session did what it needed to do to set the railroad commission off to go seek privacy, but then they have to go put their plans together and put that on file which could be this fall.
And then I don't know how long it will take the EPA necessarily to act.
But once it acts and the Railroad Commission has control of it.
I don't think theyre going to process them very quickly you know.
Jesse made the point earlier the permitting process itself is today at the EPA is just very slow now I would think that they are going to want to as a public policy matter speeded up anyway, right, but it's 5 or 6 years right now that's that doesn't work and so whether it's the epa's feeding itself up.
In order to enable more of this for its own policy objectives or whether its the railroad commission getting control of it it will get it will get sped up in terms of onshore versus offshore.
We're obviously onshore focused in and the opportunity that we have and given what our footprint of existing pipeline network is which is.
Is.
Very important a very important consideration for the reasons I said earlier adjusted do you have any other comments on onshore versus offshore yeah. I agree the surface ownership price is important but there are opportunities onshore as well where you have common ownership. So looking at both but more cost effective to do onshore at this point a common ownership between.
The surface and mineral Yep Yep.
Got it thank you.
Thank you. Our next question comes from Colton Bean with Tudor Pickering, Holt <unk> Company. Your line is open.
Just 1 on my end, so a lot of questions on the Orange and Ccs.
You look at the concentration of C O 2 in biogas coming off the landfill is there an opportunity to integrate carbon capture with landfill R&D over time.
Yeah, there's certainly an opportunity it's good it's gonna be a scale issue you know these these R&D facilities are relatively small.
At the plant themselves so depending on the growth and the size of the emission it'll be challenging but there is an opportunity.
Yes.
Thank you there are no further questions in queue at this time.
Well, thank all of you from listening to us and have a good evening.
That does conclude today's conference you may disconnect at this time and thank you for joining.