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Edited Transcript of KMI.N earnings conference call or presentation 21-Oct-20 8:30pm GMT

·56 min read

Q3 2020 Kinder Morgan Inc Earnings Call TOPEKA Oct 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Kinder Morgan Inc earnings conference call or presentation Wednesday, October 21, 2020 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Patrick Michels Kinder Morgan, Inc. - VP & CFO * Kevin P. Grahmann Kinder Morgan, Inc. - VP & Head of the Corporate Development * Kimberly Allen Dang Kinder Morgan, Inc. - President & Director * Richard D. Kinder Kinder Morgan, Inc. - Executive Chairman of the Board * Steven J. Kean Kinder Morgan, Inc. - CEO & Director * Thomas A. Martin Kinder Morgan, Inc. - VP & President of Natural Gas Pipelines ================================================================================ Conference Call Participants ================================================================================ * Colton Westbrooke Bean Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research * Elvira Scotto RBC Capital Markets, Research Division - Director & Chief Analyst * Jean Ann Salisbury Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst * Jeremy Bryan Tonet JPMorgan Chase & Co, Research Division - Senior Analyst * Michael Jay Lapides Goldman Sachs Group, Inc., Research Division - VP * Pearce Wheless Hammond Piper Sandler & Co., Research Division - Research Analyst * Shneur Z. Gershuni UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst * Spiro Michael Dounis Crédit Suisse AG, Research Division - Director * Tristan James Richardson Truist Securities, Inc., Research Division - VP * Ujjwal Pradhan BofA Merrill Lynch, Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the quarterly earnings conference call. (Operator Instructions) I would like to inform all parties that today's conference 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 Kinder, Executive Chairman of Kinder Morgan. Thank you, you may begin. -------------------------------------------------------------------------------- Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman of the Board [2] -------------------------------------------------------------------------------- Thank you, Sheila. Before we begin, as I always do, I would like to remind you that KMI'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 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 from those anticipated and described in such forward-looking statements. Let me begin by saying that over the last several quarters, I've started these calls with a review of our financial philosophy and strategy 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 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 KMI 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 return significant additional cash to our shareholders through increased dividends and our share repurchases. So if the results and outlook are that positive, why is that not reflected in our stock price? Well, I'm certainly no expert on that subject, but it appears that many investors are not committing any funds to the energy business without any consideration of the unique characteristics of our midstream sector. Now we are not climate change deniers and we recognize the growing momentum of renewables in America's energy mix. That said, there is a long runway for the products we handle, particularly natural gas. For a clear-eyed examination of the role of fossil fuels in the energy transition, I recommend everyone read the excellent new book, The New Map, by Pulitzer Prize winner, Daniel Yergin. In it, he details in specific terms the need for oil and 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. To name just 3 examples: if green hydrogen becomes a reality, we can move some amount of it through our pipes. If refiners produce renewable diesel, we can transport that through our product pipelines. And if CCUS advances, we have more experience in moving CO2 and injecting it underground than virtually any other company in America. In short, to paraphrase Mark Twain, the rumors of our debt are greatly exaggerated. And with that, I'll turn it over to Steve. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- All right. Thank you, Rich. So 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 Michels, will take you through the financials. And then we'll take your questions. Our financial principles remain the same, maintaining a strong balance sheet. We're maintaining our capital discipline through our return criteria, a good track record of execution, and by self-funding our investments. And on that front, we evaluated all of our 2020 expansion capital projects and reduced CapEx by about $680 million from our 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 2020 on good returning project investments. We're also maintaining cost discipline. We now stand at about $188 million of expense and sustaining capital cost savings for 2020, including deferrals. About $118 million of that is permanent savings, we believe. The result of this work on our capital budget and our cost is that our projected DCF less discretionary capital spend is actually improved versus our plan by about $135 million to our 2020 plan and about $600 million versus our 2019 actuals, all that notwithstanding the pandemic. We more than offset the degradation to our DCF forecast with spending and capital investment cuts in 2020. Finally, we are returning value to shareholders with a 5.5% year-over-year dividend increase to $1.05 annualized, providing an increased but well-covered dividend, 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. While meeting $1.25 is not backing away from 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 in the best way possible for shareholders, especially in light of a share price that shows an 8%-plus yield on a well-covered dividend. We will review dividend policy with the Board following completion of our 2021 budget process. We have accomplished some important work so far during 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 permit 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 is one of the keys to success in our business for the long term. As I mentioned last quarter, our management team is in the midst of an effort to examine how we are organized and 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. Additionally, as always, we'll be evaluating costs and revenues as part of our annual budget process, which we're also in the midst of right now. We'll bring those 2 efforts to a close in the coming weeks and incorporate the results into our 2021 guidance. It's essential to be cost-effective while also maintaining our commitment to safe and compliant operations. That's embedded in our values, in our culture and in how we put our budget together. The management team is committed to these objectives too, and that commitment is also critical to our long-term success. Third, we'll soon be publishing our ESG report. We have incorporated ESG reporting and risk management into our existing management processes. The report will explain how. In the meantime, Sustainalytics has ranked us #1 in our sector for how we manage ESG risk. These things are all important to our long-term success, and we have advanced the ball significantly on all 3 in 2020. So what have 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 have expanded our terminal capabilities in the Houston Ship Channel. We reduced cost and capital expenditures, actually increasing our cash flow after CapEx for the year. We continue to advance the ball on ESG. 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, 2 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, and I'd like to make a few points about how we participate. First, we and many objective experts, as Rich mentioned, believe that natural gas is essential to meeting the world's energy needs and meeting climate objectives as it has here in the U.S. U.S. natural gas will play a significant role, and 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 deliverability. The value of that increases for the power sector as more intermittent resources are relied on for power generation. Natural gas is clean, affordable and 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 in firming intermittent renewable resources, which is what I just mentioned; our marketing of our low methane emissions performance as responsibly produced than transported natural gas. That's a good synergy between our ESG 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 customers. Further down the road, there may be hydrogen-blending opportunities in our natural gas pipelines and if the incentives are adequate, captured manmade CO2 to be transported on our CO2 pipelines and used for EOR. We'll also continue to evaluate other opportunities in the renewables sector that is always will be very disciplined. The G in ESG is critically important, and we won't forget about that. We believe the winners in our sector will have strong balance sheets, low-cost operations that are safe and environmentally sound and the ability to get things done in difficult circumstances. As always, we'll evolve to meet the challenges and opportunities we face. And with that, I'll turn it over to Kim. -------------------------------------------------------------------------------- Kimberly Allen Dang, Kinder Morgan, Inc. - President & Director [4] -------------------------------------------------------------------------------- Okay. Thanks, Steve. Today, I'm going to go through a review 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 575,000 dekatherms per day versus the third quarter of 2019. And that 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 GCX pipeline that went into service last year. Physical deliveries to LNG facilities of our pipelines, they were down about 700,000 dekatherms a day versus the third quarter of 2019. They were also down versus the second quarter of this year. However, we have seen a recovery in those volumes, and current volumes are nearing pre-pandemic levels. Exports to Mexico were very strong in the quarter, and 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. 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 of 2019. And for gathering volumes, I think the more informative comparison in the current environment is versus the second quarter of 2020. So compared to the second quarter, volumes were down about 4%. 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 in 2021. The bright spot in the quarter was volumes on our Hiland system in the Bakken, which were up approximately 30% versus the second quarter of this year. On our Natural Gas projects, we completed Elba during the quarter, and the facility is now fully in service. On PHP, we're now about 97% mechanically complete, and we expect to be fully in service in early 2021. On our Products Pipelines segment, refined products volumes were down about 16% for the quarter versus the third quarter of 2019 as a result of the continued pandemic impact. The 16% compares to about a 14% reduction the EIA shows for the third quarter. So our volumes are slightly worse than the EIA, and that's primarily because jet fuel as a percentage of our total volumes is greater than it is for the EIA mix. For each month in the quarter, we did see an improvement in volumes over the prior month. For October, we're currently expecting volumes to be off approximately 13% versus the prior year. The 13% is comprised of road fuels off about 5% and jet fuel approaching off 50%. Crude and condensate volumes were down about 17% in the quarter versus 2019, but improved versus -- by about 11% over the second quarter. In Terminals, we experienced 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 than exports in the Gulf Coast. If you look at our rack facilities, which is probably a better gauge of what's happening with demand, they were off about 11% in the quarter. Our liquids utilization percentage, which is a more accurate predictor of the health of this business given the structure of our contracts, remained high at about 96%. If you exclude tanks out of service for required inspection, 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. In CO2, oil production was down approximately 12%, and CO2 sales volumes were down approximately 33%. However, lower OpEx and help on oil prices more than offset the lower volumes. Our team has done a tremendous job of adjusting to the current reality. They have achieved cost savings, both on the OpEx and the capital side. They have reevaluated and cut capital projects that didn't meet our return criteria. And therefore, free cash flow 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. Embedded in this guidance is over $187 million in cost savings between G&A, OpEx and sustaining CapEx. To give you a better sense of what we are projecting on fourth quarter volume, for refined products within the Products Pipelines segment, we're estimating volumes to be off about 10% versus the prior year. On Crude & Condensate volumes, we're estimating volumes to increase by approximately 5% versus what we saw in the third quarter. And on natural gas gathering volumes, we're expecting volumes in the fourth quarter to be essentially flat with what we saw in the third. On debt-to-EBITDA, we're expecting to finish the year at approximately 4.6x debt-to-EBITDA, so slightly better on this metric than what we told you last quarter. And with that, I'll turn it over to David Michels. -------------------------------------------------------------------------------- David Patrick Michels, Kinder Morgan, Inc. - VP & CFO [5] -------------------------------------------------------------------------------- All right. Thank you, Kim. Today, we're declaring a dividend of $0.2625 per share or $1.05 annualized, which is 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 KMI 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 the prior -- from the third quarter of 2019. Adjusted earnings per share was $0.21 for the quarter, down $0.01 from the prior period. Moving on to DCF performance for the third quarter. The Natural Gas segment was down $8 million, with lower contributions 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 Express projects coming online. Our Products segment was down $67 million driven by lower refined products volumes as well as lower Crude & Condensate contributions mainly due to demand impacts from the pandemic as well as lower oil prices. Our Terminals segment was down $49 million driven mostly by the sale of KML and the terminals associated with that business as well as the lower refined products, coal, steel and petcoke volumes. Our CO2 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 CO2 demand and lower-produced crude oil in that segment. The G&A and corporate charges were lower by $18 million driven by lower noncash pension expenses, the sale of KML as well as cost savings. The JV DD&A and noncontrolling interest items combined show a $24 million reduction driven mainly by our partner at Elba Liquefaction sharing in greater contributions from that facility. And that brings us to adjusted EBITDA of $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 rates benefiting our interest rate swaps as well as lower debt balance, partially offset by lower capitalized interest. Our cash taxes were higher in the third quarter by $37 million due to deferred payments at Citrus plantation and our 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, the favorable $34 million, was a change in the schedule of our contributions to our pension plan. In 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 our pension plan. Total DCF of $1.085 billion is down 5% from the third quarter of last year. And our DCF per share of $0.48 is down $0.02 from last year. On the balance sheet, we ended the quarter at 4.6x debt-to-EBITDA and expect to end the year at the same level, which is up slightly from last quarter at 4.5x and up from 4.3x at year-end 2019. During the quarter, we had a very nice capital markets execution. In 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 were the lowest-ever achieved 10-year and 30-year issuances -- coupons associated with those 10- and 30-year issuances respectively for KMI. 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 credit facility 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 million versus last quarter. To reconcile the quarter changes, we generated $1.085 billion of distributable cash flow. We spent $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 for the quarter. For the change from year-end, we have generated $3.347 billion of distributable cash flow. We brought in $900 million from the Pembina share sale in the first quarter. We have paid out dividends of $1.77 billion. We have spent $1.4 billion on growth capital and JV contributions. We have spent $235 million of taxes associated with the Trans Mountain and Pembina share sales. We have bought back 50 million of shares, KMI shares. And we have had $360 million of working capital use, mostly interest expense 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. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [6] -------------------------------------------------------------------------------- Okay. Thanks, David. So Sheila, we'll open it up to questions. (Operator Instructions) Okay, Sheila? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Jeremy Tonet with JPMorgan. -------------------------------------------------------------------------------- Jeremy Bryan Tonet, JPMorgan Chase & Co, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- Maybe just starting off with the high-level question here on the pace of recovery. It's obviously difficult to tell here, but just wondering what your thoughts are. If you look at the G&P segment, I'm wondering what 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 product demand side. What are you seeing now? And when do you think it's possible to get towards kind of pre-COVID levels? Just trying to get a better feel for how this could unfold over the next couple of quarters here. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Okay. Yes. Fair enough. I mean broadly, as you heard from the numbers that Kim went through, we're continuing to see month-over-month improvements in the refined products side of things. 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 it's gradual, right? And I think we don't have any special insight into how quickly people will return to driving. They're certainly starting to. Diesel volumes have remained fairly strong. Jet is, I think most people would say and I think we would say, that jet is likely to lag. 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 is jet, but it only comes down to about 8% of the EBDA for those segments. And then for KMI overall, it's about -- I'm sorry, 12% of refined products, 3.5% of the combined refined products and Terminals segments on EBDA contribution, so 1% for KMI overall. That's the whole of jet volume. So 12% of the total volumes, but only 8% of the EBDA, okay? On G&P, so gradual recovery there. On G&P, 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 there, I mean, I think the recovery is going to be -- we saw a big comeback in the Bakken, for example. I think the Eagle Ford will probably continue to lag. The Haynesville is also lagging, but we expect that 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 in 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 an Interstate standpoint on TGP for the Marcellus and Utica and from a gathering standpoint for the Haynesville and very capital-efficient increases in production that we can achieve there. So look, it's a bit of a mixed bag across the G&P landscape, but that's directionally how I would size it up. -------------------------------------------------------------------------------- Jeremy Bryan Tonet, JPMorgan Chase & Co, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- That's very helpful. And maybe just turning to California and energy transition as you guys talked about before. In California, we see the internal combustion engine phaseout plans and see greater penetration from EV and biodiesel. And just putting it all together, thinking about this, refineries potentially closing there, how does this impact KMI? Or more importantly, how does KMI, I guess, respond to this going forward? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Yes. So there are pluses and minuses on -- I'll start with the plus side. As refineries convert to generate more renewable diesel, we can handle renewable diesel in our pipelines. We can handle it in our storage tanks. We think there may be opportunities for us to develop in our Products Pipelines segment some additional facilities to handle increases in renewable diesel that come out of the developments in California. 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 can 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 adapt and adjust to that. But I think the easy way to think about it is renewable diesel looks like regular diesel when it's in our pipes and tanks. On the negative side, certainly, we've seen the announcement about the intent to phase out or really eliminate internal combustion engine sales in new cars in California. And a couple of points that I would make that kind of mitigate that, one is not all of our volumes on our SFPP system move to serve California markets. Some of it moves to serve Arizona as well as serving Nevada, both in the Las Vegas and Reno markets. And the other thing is it takes a while. I mean we're talking about between now and 2035. It takes about 10 to 12 years to roll over the vehicle fleet, et cetera. So there are a number of things that really mitigate that impact for us on the refined products side. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from Ujjwal Pradhan with Bank of America. -------------------------------------------------------------------------------- Ujjwal Pradhan, BofA Merrill Lynch, Research Division - Associate [7] -------------------------------------------------------------------------------- Firstly, on M&A, Steve, we know we have seen a wave of upstream M&A recently. And the midstream sector appears to be primed for it as well, with recent headlines around certain G&P companies exploring sale. If a deal were to satisfy your criteria for leverage and DCF accretion, which area of business would KMI prioritize pursuing M&A again? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [8] -------------------------------------------------------------------------------- Yes. I mean you said that really key point there, which is it has to meet the criteria. And that includes meeting balance sheet criteria as well as being a business that I think generally we're already in and that we're confident we can operate and we can bring some additional synergies to. We can always bring cost synergies, we believe. We are an efficient operator, but we have to find other things that we can do. Look, I think there are 2 parts of this. I mean certainly, the activity that's going on in E&P right now, I mean, I think that's a good thing for the sector and I think indirectly, therefore, a good thing for midstream in the sense that you're getting stronger, more well-capitalized players, with plans to continue to develop. I think -- and they're doing it in a way that doesn't harm the entity going forward by paying 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, and we're going to be very conservative and very disciplined about our participation there. The other thing I think we'll begin to see more of, but it's kind of, it's on the sidelines right now, is asset packages coming on the market because a lot of those evaluations, I think, were put on hold back in March and April. And I do think that we'll start to see a little bit more activity there. And we're in that information flow. And if we find something that's attractive, as we did on a fairly small scale at the end of last year, we'll look to act on those. So not yet really seeing it in midstream, but we think there may be some asset sales that come online later in the process here. Kevin, anything that you want to add to that? -------------------------------------------------------------------------------- Kevin P. Grahmann, Kinder Morgan, Inc. - VP & Head of the Corporate Development [9] -------------------------------------------------------------------------------- No, I think you covered it all very well, Steve. -------------------------------------------------------------------------------- Ujjwal Pradhan, BofA Merrill Lynch, Research Division - Associate [10] -------------------------------------------------------------------------------- Yes. Got it. And second question on -- traditional thoughts on shareholder return here, how are you weighing buyback versus distribution growth? And the question here is, given the -- given that distributions have not been awarded recently, would you say that buybacks may be a better option than your current intention to raise distributions to the $1.25 per share level? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [11] -------------------------------------------------------------------------------- Yes, I think both Rich and I covered it at the beginning. We're looking at what the best way is to return excess cash to shareholders, maintain a strong balance sheet, invest in projects at good capital -- at good returns that are well above our cost of capital, et cetera. And you're right, I mean, in the current environment, a security that's yielding over 8%. And certainly, that's the case. However, we're going to be thoughtful about this, and our Board will be thoughtful about it when they deliberate on it and make the decision. Just because dividends are out of favor now doesn't mean we shouldn't be paying them and shouldn't be increasing. And we think that that's a very valuable and reliable and steady way to return cash to our shareholder -- excess cash to our shareholders. And we believe that the market from time to time appreciates that. And from time to time, it doesn't. And I don't think we can make our decisions based on what is currently prioritized. But clearly, by saying what we said in the release, we're giving ourselves flexibility, which I think is, as I have said, it's a very wise thing for us to do in a time like this. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Next, we will hear from Colton Bean with Tudor, Pickering, Holt & Co. -------------------------------------------------------------------------------- Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [13] -------------------------------------------------------------------------------- Appreciate the prepared remarks around energy transition and potential opportunities for the KMI asset base. Coming in from a slightly different angle, can you speak to your philosophy on the capital structure in the context of transition? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [14] -------------------------------------------------------------------------------- Capital structure in what sense? -------------------------------------------------------------------------------- Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [15] -------------------------------------------------------------------------------- Mostly thinking here in terms of the balance sheet and whether is leverage the appropriate metric. Is there some consideration of ratable debt realignment? Really just trying to understand if there is, whether it's 2030 or 2060, if there is some sort of time line out there how you evaluate that when you look at the balance sheet. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [16] -------------------------------------------------------------------------------- Yes. No, no, I understand. Look, we still believe, -- and Anthony can weigh in on this as well. But we still believe and believe that the rating agencies believe that we are appropriately rated at BBB flat at the -- around 4.5x 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 all are in other sectors. But in my casual observation of it, it's funny to me that in our sector, when we talk in terms of like 2040, 2050, 2060, 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 they're doing today. And so I think there's no pressure there to do something different on the 4.5x when you think about that runway and when you think about the quality of our assets and the diversity of our cash flows and the length of our contract terms, the increasing irreplaceability of our assets, if you will. I mean the harder it is to build new infrastructure, the flip side of that is that the existing infrastructure, which we happen to have a lot of, becomes more valuable, all things being equal. And so I guess the short answer is no. -------------------------------------------------------------------------------- Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [17] -------------------------------------------------------------------------------- Got it. Appreciate that. And then on the Rockies pipeline network, you mentioned some producer optimism in the Haynesville, just given the moving strip here. Could you characterize recent conversations around the Rockies region and whether that -- your thoughts on recontracting potential has shifted at all? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [18] -------------------------------------------------------------------------------- I'll ask Tom Martin to speak to that. Tom? -------------------------------------------------------------------------------- Thomas A. Martin, Kinder Morgan, Inc. - VP & President of Natural Gas Pipelines [19] -------------------------------------------------------------------------------- Yes. I mean I think, clearly, we're seeing less development activity in the Rockies than we were seeing probably a year ago. And so that certainly will have an impact on -- of excess capacity in that market. But I mean, I think we have valued that, I think, in the past appropriately. And so I don't see that as a material change to us overall. Clearly, things that we've known about that are on the recontracting cliff, such as Ruby, things of that nature, we've considered that in our long-term plan. And I don't see that really being impacted by the current change. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from Jean Ann Salisbury with Bernstein. -------------------------------------------------------------------------------- Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [21] -------------------------------------------------------------------------------- So we're expected to have too much gas takeaway out of the Permian next year when PHP and Whistler start. Can you remind us how much of your existing gas takeaway there is under take-or-pay and if we should expect significant cannibalization when PHP starts next year? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [22] -------------------------------------------------------------------------------- The vast majority of it is under reservation fee-based contracts. So that's really EPNG and NGPL and the country -- the Hill Country pipeline, which is a smaller Intrastate pipeline than the 2 new ones that we're building. So it's mostly reservation fee- or take-or-pay based. I mean I think that the one impact that we'll see or that we've started to see is that with less constraint, there are less -- there's less of the short-term business that we were doing and getting nice rates for us. So it does have some impact, not to the base, as much as to some of the upside opportunities that we have been seeing. So there will be some impact at the margin there. Tom, anything else you want to add to that? -------------------------------------------------------------------------------- Thomas A. Martin, Kinder Morgan, Inc. - VP & President of Natural Gas Pipelines [23] -------------------------------------------------------------------------------- No. You covered it, Steve. Thank you. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [24] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [25] -------------------------------------------------------------------------------- Okay. And then just one more about energy transition. So in a scenario where 2035 utilities, gas demand dropped significantly, but to your point earlier, they still need very high availability of gas to cover peak daily demand. How would you see contract structures with utilities on gas pipeline changing, if at all? And do you think they'll have to kind of keep contracting their maximum daily quantities or paying you the same or pay you less? If you could just talk a little bit about how contracts you think would change in that environment. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [26] -------------------------------------------------------------------------------- Yes. I think -- we think that within the existing tariff structures that we have, that largely we can accommodate that environment. And for example, and I'll ask Tom to add any color here that he wants to, for example, if you need the power or if you need the gas deliverability for 3 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 on a negotiated base. And people have -- they pay to have the capacity available when they need to call on it. Now that might mean that utilization goes down. But if somebody who contracts for and charges for our services based on the reservation of the capacity itself, then 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 we've sold capacity to merchants, et cetera, who are holding it on the same idea. Now they can capture the upside on a spike, for example, but we can parlay it into term contracting. So we are looking at are there new service structures that we should be considering that would be more attuned to variable demand from power generators. And we may have some ideas there, and we may make some proposals there including on the storage front. But I think we can manage within the structure we have. Tom? -------------------------------------------------------------------------------- Thomas A. Martin, Kinder Morgan, Inc. - VP & President of Natural Gas Pipelines [27] -------------------------------------------------------------------------------- Yes, I think that's right, Steve. I mean I do -- we are starting to see some variable type services being contracted out West. But the long and short of it is we're getting really good value on our capacity, whether it's sold on a 24-hour basis and used less, or -- and/or selling variable services to meet that growing need really of capacity to backstop renewables. -------------------------------------------------------------------------------- Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [28] -------------------------------------------------------------------------------- Got it. So you do have examples where the maximum daily quantity is much higher than the utilization, but utilities can still pay you through that contract structure. -------------------------------------------------------------------------------- Thomas A. Martin, Kinder Morgan, Inc. - VP & President of Natural Gas Pipelines [29] -------------------------------------------------------------------------------- Yes, we do have some of those services that we sell out West. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Our next question will come from Shneur Gershuni with UBS. -------------------------------------------------------------------------------- Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [31] -------------------------------------------------------------------------------- Just wanted to come back to one of the earlier questions. Unfortunately, I have to use your question on this, but just with respect to the commentary around buybacks and the dividend. Maybe I'm paraphrasing here a little bit here. But you added buybacks officially to your press release, which I didn't really see last time. You've 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? Or that you look to [pair] return of capital needs to shareholders via using buybacks, and so it could sort of be a twin announcement in January rather than specifically around the dividend? Is that the right way for us to be thinking about that as one of the options you're considering? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [32] -------------------------------------------------------------------------------- Yes, 2 things. One is that again, we'll complete our budget process and then -- and talk to the Board about how to look at dividend policy for 2021. But yes, as I said earlier, Shneur, we are by talking about buybacks. And of course we've been talking about buybacks for a while. We've used about 575 million of the Board authorized 2 billion of capacity. We did a little bit earlier this year, for example. So that's not a new message. I think what's new is that we are emphasizing the flexibility by not specifically talking about $1.25 and the time frame of $1.25. So the answer is yes on retaining flexibility, and that is what we're trying to get across today. -------------------------------------------------------------------------------- Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [33] -------------------------------------------------------------------------------- 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 discussion around CapEx potentially being as low as $1 billion for growth CapEx. You also made further emphasis on reducing costs, and I believe Kim sort of addressed that in the prepared remarks as well too. How have 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 on how you're thinking directionally on both operating costs from where we sit today as well as the discussion on CapEx from the last call where the $1 billion came up. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [34] -------------------------------------------------------------------------------- Yes. So 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 is all that surprising, but we talked about being at the low end of the range -- or I'm sorry, below the historical range of $2 billion to $3 billion. And responded, yes, when you ask maybe as little as $1 billion. I think that's shaping up to be a pretty good assumption for 2021 because we can kind of see that. We can sort of see the projects slate from here. And so that kind of low $1 billion range looks reasonable. Everything else that you mentioned is really getting worked through right now. I mentioned the cost savings evaluation that we've done. And in parallel, we've been working on a budget and really are getting in the thick of that as we review our business unit budgets in the coming weeks here. And so all that's 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 expect we're going to be able to give you guidance. It might not be on the exact anniversary of when we did it last year, but still think we can pull those together and give you some indication. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question will come from Spiro Dounis with Crédit Suisse. -------------------------------------------------------------------------------- Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [36] -------------------------------------------------------------------------------- Steve, curious as you go through the budget process here and go through all the assets with the fine-toothed comb again getting out of the Analyst Day, has the downturn changed the way you think about some of your assets and whether or not there's still core of the business? Just curious if anything has 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? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [37] -------------------------------------------------------------------------------- Yes, you're going to kind of hear a repeat of the way we've talked about this before. But I think we've done -- we did our -- obviously our Canadian divestitures for a variety of reasons. You saw that most of what we've been doing since then has been relatively small and kind of pruning to align things. John Schlosser and his team has done a great job over the years of sort of migrating us more toward refined products hubs and a little bit away from these kind of islands and bulk terminal assets. We still have some very, very good bulk terminal assets, but I think we've done a good job of kind of pruning. And then I'll say the other thing that we always say, which is we are a shareholder-driven company. And if values adhere and they're worthwhile and our shareholders are going to be better off on the other side of the transaction than they were on their way in, then we will consider it. We are a shareholder-driven company. And so even if it's a business that we like, if the value is really strong and robust, we'll consider those things too. -------------------------------------------------------------------------------- Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [38] -------------------------------------------------------------------------------- Okay. Fair enough. It sounds like pretty consistent there. If I could just get you to opine on the natural gas price outlook in '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 view here. And I guess as we enter next year, obviously there's some supply constraints in the associated gas basins. I imagine on the demand side, we're not going to have the same sort of LNG cancellations that we saw this year. And so that's sort of moving in the other direction. So curious, just given where the price outlook is now above [3], could that actually get tighter from here? Are you seeing enough, I guess, resiliency in the gas basins and maybe a recovery in the Haynesville to sort of offset that on the supply side? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [39] -------------------------------------------------------------------------------- Yes. So supply is drifting down because of the associated gas plays 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 has to be factored in there is that I don't -- I think that there is a bit of a lag in reflex time or response time here in terms of making the switch from associated gas to the dry gas plays. I mean people are getting their plans together, and we've had good conversations with our customers, et cetera. But I think you're probably right. We're -- we are the swing supplier from a global LNG standpoint. But I think earlier this year was unusual in terms of the level of cancelations. I think LNG has been going back up. I think Tom, it's like 7.8 Bcf a day now, which is kind of in line with where it was pre-COVID. And we've got some additional facilities that are coming on that are going to drive demand further. Something has got to come in and fill that in, and it seems like that's lagging a little bit. Now a lot has been reflected in the price already, but it seems like there could be some still some volatility and maybe some continued upward pressure. Tom, anything else you want to point to that you observed? -------------------------------------------------------------------------------- Thomas A. Martin, Kinder Morgan, Inc. - VP & President of Natural Gas Pipelines [40] -------------------------------------------------------------------------------- No. I think you covered it all. I mean it's -- it is a need for dry gas development, and that doesn't happen overnight. And I think the demand signals for 2021 look good. And so 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 have in recent times to help fill some of that. And then we really need to see a response from the producer community for the second half of '21 and beyond. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [41] -------------------------------------------------------------------------------- I'd just point at this is -- it's not directly -- it doesn't directly affect us as it does the producer segment. But we do benefit from some volatility and people's need to have storage and pull on storage. Or we'll get some benefit out of that, I think, derivatively. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Our next question will come from Tristan Richardson with Truist Securities. -------------------------------------------------------------------------------- Tristan James Richardson, Truist Securities, Inc., Research Division - VP [43] -------------------------------------------------------------------------------- Just a quick one, a 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. Can you talk about return hurdles? Are projects that could conceivably make sense for KMI competitive with traditional midstream projects? Or do the acceptable return metrics look different, just because this is a different opportunity set with a different growth profile? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [44] -------------------------------------------------------------------------------- Yes. So the returns are lower and lower than what we would see in midstream investment. And the argument is that there's so much capital available for those opportunities, that the cost of capital is lower and ultimately reflected to the equity cost of capital for companies that are directly in that business. I don't see us gambling on an uplift in our overall equity value because we started to make some investments in solar panels or windows. I think we're going to, as I said, continue to be very disciplined. We've got a lot to work with in terms of what Tom and his team can do to complement renewable generation, as I mentioned, marketing the fact that we are a very low-emission -- methane emissions source of supply and transportation service. So things like that, that don't require us to compromise on returns for our shareholders, but still nevertheless allow us to participate and I think participating in a meaningful way. The other things are -- Dax and his team, as I mentioned, they are looking hard at renewable diesel opportunities. And I think we can look -- we can see returns in those businesses that are nice and very consistent with, and in some cases, maybe at the high end of some of the returns that we would get in our midstream business. John Schlosser is looking at the same thing in his business, his refined product terminaling business. So I think we're looking to participate in a way that, that doesn't compromise on our return criteria. -------------------------------------------------------------------------------- Tristan James Richardson, Truist Securities, Inc., Research Division - VP [45] -------------------------------------------------------------------------------- Very helpful. And then just one last one on the buyback topic, I think the word flexibility has been used to lock this afternoon, and it seems like that's where the emphasis is. I think there's been some prescription out there in a lower-growth environment that a buyback program should be programmatic, but I think that would actually probably take away from that flexibility. Is that a fair way to think about [you all's] opinion on a programmatic type of buyback plan? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [46] -------------------------------------------------------------------------------- Yes. Our view really hasn't changed on that. Opportunistic 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 to be opportunistic in our purchases. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Our next question comes from Pearce Hammond with Simmons Energy. -------------------------------------------------------------------------------- Pearce Wheless Hammond, Piper Sandler & Co., Research Division - Research Analyst [48] -------------------------------------------------------------------------------- Steve, how should we think about 2021 adjusted EBITDA? What do you see as the high-level puts and takes around next year's outlook for Kinder Morgan? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [49] -------------------------------------------------------------------------------- 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, 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 we finish that work, then we'll let people know where we think we're coming out. -------------------------------------------------------------------------------- Pearce Wheless Hammond, Piper Sandler & Co., Research Division - Research Analyst [50] -------------------------------------------------------------------------------- Okay, I understand. And then following up on an earlier question from one of the analysts about E&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? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [51] -------------------------------------------------------------------------------- I don't think it really plays a role. I think that it will proceed on its own course. People have been pointing out really for 7 or 8 years now that there are probably too many midstream energy companies to actually serve the market need, and therefore there should be some consolidation. And -- but it really hasn't happened in a material way other than the kind of internal consolidation, if you will, on [PNGTs] combining those sorts of things. But I mean there's still a rationale for it is what I'd say. And I'd point to all the factors I talked about in answer to the earlier question is the things that need to come together in order for us -- it to make sense to us to 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 on the other side of the downturn to U.S. energy, not on the other side of the virus certainly yet. And so I think there remains a fair degree of uncertainty out there. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Next, we will hear from Michael Lapides with Goldman Sachs. -------------------------------------------------------------------------------- Michael Jay Lapides, Goldman Sachs Group, Inc., Research Division - VP [53] -------------------------------------------------------------------------------- Real easy one here. There's a lot of smaller E&PS 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 way of either contract rejection risk or simply contract renegotiation risk presents itself when you're going through the planning process and thinking about 2021 and beyond? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [54] -------------------------------------------------------------------------------- Okay, yes, a few things on that. For us, we believe we provide essential services to these producers. And so generally we have some insulation from contract rejection to the extent that they -- and that will vary from basin to basin, okay? It's -- but they -- if they're going to continue to produce, they need to continue to get their product to market, and we're there providing important services for their ability to do that. And so that always enters into the rejection/affirmation discussions. And we've got, I'd say, balance. If you look now at where we are, probably less than 1% on a revenue basis exposed in 2020 to B- and below still running like 75% of our revenues. I think this is revenues from customers that are above -- I think it's [5 million] is the threshold we use. It might be [10 million]. But anyway, our customers, 75% are investment-grade or have provided substantial credit support. We have experienced about a $40 million credit hit from producer bankruptcies for 2020. And again, I think we're -- we have a number of things that we can do that help insulate us, including calling for adequate credit support, including having assets that provide services that are needed, whether it's by the company or the debtor in possession. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Our next question will come from Elvira Scotto with RBC Capital Markets. -------------------------------------------------------------------------------- Elvira Scotto, RBC Capital Markets, Research Division - Director & Chief Analyst [56] -------------------------------------------------------------------------------- I have a couple of follow-ups. On the upstream M&A, I know you mentioned that in a way as more upstreams merge to benefit having larger, better capitalized customers. What are your thoughts on -- do you think that this also would benefit the larger, more integrated midstream companies that can provide more services or have more bigger footprint? Do you think that, that actually works to your benefit? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [57] -------------------------------------------------------------------------------- It works to the -- the upstream consolidation working to the benefit of the integrated? -------------------------------------------------------------------------------- Elvira Scotto, RBC Capital Markets, Research Division - Director & Chief Analyst [58] -------------------------------------------------------------------------------- Yes, the larger midstream companies with larger asset footprints. Yes. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [59] -------------------------------------------------------------------------------- Yes. I think I mentioned this earlier, but I think it is good overall, not just for that sector but for ours as well, that we're getting producer combinations out there that are producing healthy companies that intend to continue to produce oil and natural gas and are coming out in good shape from those transactions or would company emerge from the other side of those transactions in good shape. And I think that's always helpful. Now I think it's a question of how they -- how quickly do they form their new drilling plans and all of that sort of thing. But I think it's a healthy thing overall for the energy business, and at least derivatively, for our sector. -------------------------------------------------------------------------------- Elvira Scotto, RBC Capital Markets, Research Division - Director & Chief Analyst [60] -------------------------------------------------------------------------------- Got it. Okay. And then just one follow-up on the energy transition question. You mentioned the ability to use your existing assets. And you talked about hydrogen and the ability to use your existing gas pipelines. So natural gas pipelines can transport, I think, anywhere from 5% to 15% hydrogen blend without really much modification. What would be required to transport more hydrogen? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [61] -------------------------------------------------------------------------------- Okay. Kim, do you want to take a shot at that one? -------------------------------------------------------------------------------- Kimberly Allen Dang, Kinder Morgan, Inc. - President & Director [62] -------------------------------------------------------------------------------- Sure. I think the issue with transporting more hydrogen, Elvira, is embrittlement of pipes. And so it can cause cracking in certain types of steel. And then on the compressors, the issue is, certain compressors, they can handle -- generally compressors within the last -- that are manufactured within the last 20 years roughly, can generally handle hydrogen blends that are 10% or less. Compressors that are older than that may require some upgrades even to handle the 0% to 10%. But again, just like with -- on the pipeline embrittlement, the compressor stations handle -- they may not be able to handle -- current compressor stations probably cannot handle a greater blend than the 10% without some modification. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [63] -------------------------------------------------------------------------------- And then the only thing I'd add to that, Elvira, is that we have to look at or think about the downstream end uses as well. Can the power plants, which power plants can take what levels of hydrogen, the industrial uses, et cetera. You start to challenge the downstream end uses as well. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- Our next question comes from Shneur Gershuni with UBS. -------------------------------------------------------------------------------- Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [65] -------------------------------------------------------------------------------- Just a follow-up question here. The earlier part of the call with energy transition questions were a lot about the challenges. Elvira 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 in the realm of our predictable time frame. Specifically on renewable natural gas, wondering if you can talk about whether it's something you're already participating in and something where you see a growth opportunity right now and being able to utilize your existing footprint to take advantage of? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [66] -------------------------------------------------------------------------------- Kim, go ahead. -------------------------------------------------------------------------------- Kimberly Allen Dang, Kinder Morgan, Inc. - President & Director [67] -------------------------------------------------------------------------------- Okay, sure. Shneur, renewable natural gas right now is a relatively small market. It's probably about 100 million cubic feet a day. And the potential issues are that typically the supply sources, which are landfills, dairy farms, wastewater treatment plants, those types of things are -- have -- you can only get a small supply from those sources. And then it's also very expensive. So the cost estimates that I've seen on it are $15 to $30 per dekatherm. So those are the issues that would have to be overcome, but it is certainly something that we're looking at and that can be shipped on our pipelines. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [68] -------------------------------------------------------------------------------- And we are transporting a little bit today, to your question about doing it today, but it's very small. But Kim, you might also talk about, on the other hand, the size and how we define it for responsible natural gas. -------------------------------------------------------------------------------- Kimberly Allen Dang, Kinder Morgan, Inc. - President & Director [69] -------------------------------------------------------------------------------- Yes. Our responsible natural gas right now that -- in 2019, that supply is probably 11 Bcf a day, and so roughly 11% of the U.S. supply. And the way we think about it is that's gas that is produced, processed, transported with the commitment to reduce ethane emissions still less than 1% by 2025. And so we are part of a group obviously that has made that commitment. And the less than 1% midstream has an allocation of that less than 1%, and the midstream allocation is 0.31. And we are well, well below that 0.31% and have been for a couple of years. And so we have had some customers talk to us about responsible natural gas that it is -- and they are -- these customers are marketing gas to international customers. And so it has been important to them and important to their customers. And so I think there is -- we haven't seen a large acceptance of responsibly sourced gas. But we've had more recent conversations on this, and it seems like it could be gaining in importance. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- Our next question will come from Ujjwal Pradhan with Bank of America. -------------------------------------------------------------------------------- Ujjwal Pradhan, BofA Merrill Lynch, Research Division - Associate [71] -------------------------------------------------------------------------------- Again just a quick one on Permian Highway, it appears the pipeline's progress, based on the completion model, it could be placed early into service next year. So if you are able to do so in early Jan, do the contracts kick in right away? -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [72] -------------------------------------------------------------------------------- Yes, 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. We've 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. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- And we are showing no further questions at this time. -------------------------------------------------------------------------------- Richard D. Kinder, Kinder Morgan, Inc. - Executive Chairman of the Board [74] -------------------------------------------------------------------------------- All right. Thank you very much. We appreciate your attendance. -------------------------------------------------------------------------------- Steven J. Kean, Kinder Morgan, Inc. - CEO & Director [75] -------------------------------------------------------------------------------- Thanks, all. -------------------------------------------------------------------------------- Operator [76] -------------------------------------------------------------------------------- Thank you. That does conclude today's conference. Thank you again for your participation. You may disconnect at this time.