Kinder Morgan (KMI) Q3 2020 Earnings Call Transcript

Kinder Morgan (KMI 0.27%)
Q3 2020 Earnings Call
Oct 21, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the quarterly earnings conference call. [Operator instructions] I would like to turn the conference over to Mr. Rich Kinder, executive chairman of Kinder Morgan. Thank you.

You may begin.

Rich Kinder -- Executive Chairman

Thank you, Sheila. Before we began as I always do, I'd 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 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.

Throughout the results and outlook is 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 transfer 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 three 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 with moving CO2 and injecting it underground than virtually any other company in America. In short, to paraphrase Mark Twain, the rumors of our death are greatly exaggerated. And with that, I'll turn it over to Steve.

Steve Kean -- Chief Executive Officer

All right. Thank you, Rich. I'll give you an overview of our business and then turn 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, and maintaining our capital discipline and through our return criteria, a good track record of execution, and by self-funding on 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 by $118 million of that as permanent savings. We believe the result of this work on our capital budget and our costs is that our projected DCF, less discretionary capital spend is actually improved versus our plan by about $135 million to our 2020 plan, and about $600 million versus our 2019 actuals.

All that notwithstanding the pandemic will 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 of $2.05 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 amended the reference to getting to a $1.25 dividend that we projected back in 2017 while meeting the $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 we've chosen, eight-plus percent yield on a well-covered dividend. We will review the dividend policy with the board following the 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 who'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 two 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 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 recording and risk management into our existing management processes. The report will explain how. In the meantime, Sustainalytics has ranked us number one in our sector for how we manage ESG risk. These things are all important to our long-term success, and we are advanced the ball significantly on all three in 2020.

So, what are we then 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 Terminals capabilities in the Houston ship channel. We reduce costs 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 the 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. Two things, we probably don't emphasize enough. One more thing. There's a lot of discussion around our sector right now about the 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 being the world's energy needs and meeting climate objectives as it has here in the US. US natural gas will play a significant role in our assets are well-positioned to benefit from that opportunity. More important to us is the value of what we specifically do, which is less about providing the commodity itself and more about providing the transportation and storage capacity, or 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, reliable, and pipelines deliver that commodity by the safest, most efficient, most environmentally sound, and 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. The marketing of our low methane emissions performance as responsibly produced and 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 also continue to evaluate other opportunities in the renewable sector that is always we'll 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. With that, I'll turn it over to Kim.

Kim Dang -- President

Thanks, Dave. 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 dekatherm per day versus the third quarter of 2019.

That was driven primarily by lower LNG demand competition from Canadian delivery, and lower Rockies production. These declines were partially offset by fourth-quarter volumes on our GCX pipeline that went into service last year. Physical deliveries to LNG facilities off our pipeline there 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 the pre-pandemic level. Exports to Mexico were very strong in the quarter. They were up 500 a day when compared to the third quarter of 2019, and over 650 per day versus the second quarter of this year. 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. For gathering volumes, I think the more informative comparison in the current environment versus the second quarter of 2020. So compared to the second quarter, volumes were down about 4%. Kinder Morgan which serves Haynesville was down due to lack of drilling, and decline in existing wells.

However, we're still expecting based on conversations with customers in the forward curve on natural gas prices to see new drilling in Haynesville in 2021. The bright spot in the quarter was volumes on our Highland system in the back end which were up approximately 30% versus the second quarter of this year. On our natural gas projects, we completed our elbow 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.

And our product pipeline segment, refined products volumes were down about 16% for the quarter versus the third quarter of 2019. As a result of the continued pandemic impact the 16% compares to about a 14% reduction that 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 of 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. Internals, we experienced a decline in our refined products throughput of about 22%, but here the impact of lower volumes is mitigated by the fix, 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 and 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 remains high at about 96%. If you exclude tanks out of service for required inspection utilization is 98%.

The bulk of our business which accounts for roughly 20% of the terminals segment earnings was impacted by weakness in coal and petroleum coke volumes. In CO2, all 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's done a tremendous job of adjusting to the current reality.

They've achieved cost savings both on the opex and the capital side. They've reevaluated and cut capital projects that 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 the 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're projecting on fourth-quarter volumes, for refined products within the product pipeline segment, we're estimating volumes to be off about 10% versus the prior year. On crude and condensate volumes, we're estimating volume to increase by approximately 5% versus what we saw in the third quarter, and our 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 dollars that I expect to finish the year at approximately four point six times 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 Michels -- Chief Financial Officer

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 a 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 as Q3 of last year, and was 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 are a bit higher at $485 million, down 5% from the third quarter of 2019. Adjusted earnings per share were $0.21 for the quarter, down $0.01 from the prior period. Moving on to the DCF performance for the third quarter, natural gas. The natural gas segment was down $8 million with lower contributions driven by the sale of our coaching pipeline, along with lower volumes on our South Texas in Kinderhaar gathering and processing systems, partially offset by contributions from Elbow liquefaction in Gulf Coast exposure express projects coming online.

A product segment was down $67 million driven by lower refined product volumes, as well as lower crude and currency contributions mainly due to demand impacts from the pandemic, as well as lower on oil prices. For 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 product, coal, steel, and coke volumes. For 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 non-cash pension expenses.

The sale of KML as well as cost savings. The JV DD&A and non-controlling interest items combined show a $24 million reduction driven mainly by our partner at Elba liquefaction sharing and greater contributions from that facility. That brings us to an adjusted EBITDA of $125 million, or 7% lower than the third quarter of 2019. The lower EBITDA interest expense was $61 million favorable versus last year, driven by a lower floating rate 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 in 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 favorable $34 million was the 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.

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 billion and $85 million is down 5% from the third quarter of last year, and our DCF per share $0.48 is down 40.02 from last year. On the balance sheet.

The end of the quarter at four point six times that the EBITDA and expect to end the year at the same level, which is up slightly from the last quarter of four points five times and up from four points three times 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 years and 30-year issuances coupons associated with those 10 and 30-year issuances respectively for KMI. The issuance has also further bolstered our already strong liquidity position as those proceeds more than covered 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 to $189 million versus last quarter. To reconcile the quarter to quarter changes, we have generated $1billion and $85 million in distributable cash flow, we spent $600 million on dividends, $400 million on growth capex, and JV contributions, and had a $270 million working capital use that gets you mostly to the $189 million change for the quarter. The change from year-end, we've generated $3.347 billion of distributable cash, we brought in $900 million from the Permian share sale in the first quarter. We've paid out dividends of $1.77 billion.

We've spent $1.4 billion on growth capital and JV contributions. We've spent $235 million on taxes associated with the Trans Mountain in Panama share sales, we've bought back $50 million shares, came our shares, and we've had $360 million of working capital use mostly interest expense paid. And that explains the majority of the $433 million reductions in net debt from year-end. And with that, I'll turn it back to Steve.

Steve Kean -- Chief Executive Officer

Ok. Thanks, David. So, Sheila, we will open it up to questions, and I'll remind you as we've done in the past that as a courtesy to all callers who are going to ask you, limit your questions to one question proposal and one follow up. However, if you do have unanswered, additional unanswered questions, get back in the queue and we will come back around to you.

Ok. Sheila.

Questions & Answers:

Operator

Thank you. We will now begin the Q&A session. [Operator instructions]. Our first question comes from Jeremy Tonet with JP Morgan.

Your line is open.

Jeremy Tonet -- J.P. Morgan -- Analyst

Good afternoon. Thanks for having me. 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 I --if you look at the G&P segment, I'm wondering where you could tell us as far as what type of activity you're seeing in the quarter, and how you think that might recover over the next couple of quarters. And a similar question on the pipe demand side. What are you seeing now. And when do you think it's possible to get toward pre covid levels.

Just trying to get a better feel for how this could unfold over the next couple of quarters here.

Steve Kean -- Chief Executive Officer

OK. Yeah. Fair enough. I mean broadly as you heard from the numbers that Kim went through.

We're continuing to see month over month improvements in the refined products side of things. Things have bumps 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 improvement, but it's gradual. And I think we don't have any special insight into how quickly people will return to driving.

Certainly, we start to diesel volumes that have remained fairly strong. Jet I think most people would say and I think you would 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 FD&A for those segments. And then for KMI overall it's about 12% of refined products, 3.5% of the combined refined products in Terminal segments on our contribution.

So 1% for KMI. Overall that's the whole of Jet volume. So 12% of the total volumes, but only 8% of the FD&A. Ok.

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 Bachmann 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 and associated gas plays it's going to come from the dry gas plays, and Haynesville as well-positioned for that, and our assets are well positioned on the dry gas plays from the interstate standpoint on TGP for the Marcellus and Utica 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 say about.

Jeremy Tonet -- J.P. Morgan -- Analyst

That's very helpful. Thanks. And maybe just turning to California in energy transition as you guys talked about before. In California, we see the internal combustion engine phase-out plans and see greater penetration from EV, biodiesel.

And just put it all together, I think about this. Refineries are potentially close in there. How does this impact KMI or more importantly, how does KMI respond to this going forward.

Steve Kean -- Chief Executive Officer

So, there is pluses and minuses side. 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 our products pipeline segments and additional facilities to handle increases in renewable diesel that come out of the developments in California. And in California, it is heavily subsidized, and so it will make sense for people to make those investments, and we're looking for ways that we could participate. So, I mean, I think just broadly there are some things that we have to pay attention to in terms of being able to track renewable content which becomes more challenging once we get over the 5% level. But we can adapt and adjust to that.

But I think the easy way to think about it is renewable diesel looks like regular diesel, and it's in our pipes 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. A couple of points that I would make that mitigate that.

One is, not all of our volumes on our SFPP system moved to California markets. Some of it moves to serve Arizona as, well as serving Nevada both in Las Vegas and Reno market. And the other thing is, it takes a while and we're talking about between now and 2035, it takes about 10 to 12 years to roll over the vehicle fleet, etc. So there are a number of things that really mitigate that impact for some on the refined products side.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from[Inaudible] Bank of America. Your line is open.

Unknown Speaker

Good afternoon, everyone. Thanks for taking my question. Firstly, on M&A. Steve, we know we have seen a wave of M&A recently and the midstream sector appears to be primed for it as well with recent headlines around certain you and your companies exploring.

So, if a deal were to satisfy your criteria for leverage and DCF accretion, which area business would KMI prioritize pursuing M&A.

Steve Kean -- Chief Executive Officer

Yeah. And 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 hand and that we're confident operate that we could 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 two parts of this and then certainly the activity that's going on in the ENP 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 etc. In midstream, we continue to keep our eye on relative evaluations with all those criteria that I mentioned that we're going to be very conservative and very disciplined about our participation there. The other thing I think we'll begin to see more of.

But it's on the sidelines right now is asset packages coming on the market. There's a lot of those evaluations I think were put on hold back in March, and April, and 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, do you have anything that you want to add to that.

Kevin Grahmann -- Vice President and Head of Corporate Development

No. I think you covered it all very well.

Unknown Speaker

Got it. Thanks for that Steve. And the second question on traditional tides and shareholder returns here. How are you weighing the buyback versus distribution group.

And question hearings in are given the distributions have not been divided recently. Would you say that buybacks may be a better option than your current intention to raise distributions to $1.25 per share level.

Steve Kean -- Chief Executive Officer

Yeah. I think both Rich and I covered it at the beginning. We're looking at what's the best way is to return excess cash to shareholders. Maintain a strong balance sheet invest in projects that good capital had good returns that are well above our cost of capital etc.

And you're right. I mean in the current environment of security that's yielding over 8%, certainly, that's the case. However, we're going to be thoughtful about this on our board. We'll be thinking 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, our excess cash to our shareholders, and we believe that the market from time to time appreciates that. From time to time it doesn't. And I don't think we can make our decisions based on 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 said, it's a very wise thing for us to do in a time like this.

Unknown Speaker

Got it. Thank you, Steve. I'll jump back in the queue.

Operator

Thank you. Next, you'll hear from Colton Bean with Tudor, Pickering, Holt & Co. Your line is open.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Analyst

Good afternoon. Appreciate the prepared remarks around energy transition and potential opportunities for the KMI as the base. Coming at it from a slightly different angle, can you speak to your philosophy on capital structure in the context of transition.

Steve Kean -- Chief Executive Officer

Capital structure in what sense.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Analyst

Mostly thinking here in terms of the balance sheet and whether they leverage the appropriate metric. Is there's some consideration of ratable debt. I mean, I'm really just trying to understand. If there is whether it's 2030 or 2060.

If there is some timeline out there, how you evaluate that when you look at the balance sheet.

Steve Kean -- Chief Executive Officer

Yeah. 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 Triple B flat at around four and a half times. When you look at our whole business mix, we're not making a little bit of a broader point here. I'm not the expert that you all are and other sectors. But in my casual observation that 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 a four and a half times. 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 you replaceability of our assets if you will. I mean the harder it is to build the infrastructure the flipside of that is that the existing infrastructure which we haven't had a lot of becomes more valuable. All things being equal.

And so I guess the short answer is, No.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Analyst

I'd appreciate that. And then on the Rockies pipeline network. You mentioned some producer optimism in Haynesville, I was just have given the moving strip here. Could you characterize recent conversations around the Rockies region, and whether that your thoughts on recontracting potential shifted at all.

Steve Kean -- Chief Executive Officer

I'll ask Tom Martin to speak to that. Tom.

Tom Martin -- Vice President and President, Natural Gas Pipelines

Yeah. 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 some excess capacity in that market. But I mean, I think we have to value that.

I think in the past appropriately, and so I don't see that as a material change to us. Overall, clearly, the things that we've known about recontracting Clift such as Ruby things of that nature. We've we considered that in our long term plan, and I don't see that really being impacted by the current change.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Analyst

Yes. I appreciate that.

Operator

Thank you. Our next question comes from Jean Ann Salisbury with Bernstein. Your line is open.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

Hi. Good afternoon. 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 undertaker pay.

And if we should expect significant cannibalization when PHP starts next year.

Steve Kean -- Chief Executive Officer

The vast majority of it is under the reservation fee-based contract. So that's really EPNG, and NGPL, and the hill country pipeline which is a smaller intrastate pipeline than the two new ones that we're building. So it's mostly preservation fee or takes a paid base. I mean, I think that the one impact that we'll see that we've started to see is that with fewer constraints there are less of the short-term business that we were doing and getting nice rates to flow.

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'll be some impact at the margin there. Tom, anything else you want to add to that.

Tom Martin -- Vice President and President, Natural Gas Pipelines

No. You covered it all Steve. Thank you.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

Thanks. And then just one more about the energy transition. So in a scenario where 2035 utility gas demand dropped significantly, but to your point earlier they still need very high availability of gas to cover a peak daily demand. How would you see contract structures with utilities and gas pipelines changing if at all.

Do you think they'll have to keep contracting their maximum daily quantity or to pay you the same, or pay you less? If you could just talk a little bit about how contract you'd think would change in that environment.

Steve Kean -- Chief Executive Officer

Yeah, I think -- we think that within the existing [inaudible] structures that have you know that largely we can accommodate that environment. And for example, Tom, you can add that any color here he wants to. For example, if you need the power, or if you need the gas deliverability for three hours every day, but you don't need it for 24-hours a day. Well, it doesn't have to be sold that way.

We can sell it on a long-term basis at max rate, or at a negotiated rate. 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 as somebody who contracts for and charges for our services based on the reservation that 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 etc.

who are holding it on the same idea. And they can capture the upside on a spike for example. But we can parlay that into term contracting. So we are looking at other 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.

Tom Martin -- Vice President and President, Natural Gas Pipelines

I think that's right Steve. I do. We are starting to see some variable type services being contracted out West, but with the long and short of it is we're getting really good value on our capacity whether it's old on a 24-hour basis and used less, or and or selling variable services to meet that growing need really a capacity to backstop and numerous.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

Got it. So you do have examples where the maximum daily quantity is much higher than the utilization. But utilities can still pay through that contract Dr.

Tom Martin -- Vice President and President, Natural Gas Pipelines

Yes. We do. We do have some of the services that we sell out West.

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

That's all for me. Thank you.

Operator

Thank you. Our next question will come from [inaudible] with UBS. Your line is open.

Unknown Speaker

Good afternoon, everyone. I just wanted to come back to one of the earlier question unfortunates 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 efficiently 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 definitely our focus on flexibility. You see where the yield is today and is it fair to conclude that you're basically looking at an option where you maybe increase the dividend at a smaller rate. What that you look to pair, per return of capital needs to shareholders via using buybacks.

And so it could 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.

Steve Kean -- Chief Executive Officer

There are two things. One is that again, we'll complete our budget process and talk to the board about how to look at the dividend policy for 2021. But, yes. As I said earlier, we are by talking about buybacks, and of course, we've been talking about buybacks for a while.

We've used about 575 of the board authorized civilian capacity. We did a little bit earlier this year for example. So that's not, that's not a new message. I think what's new is that we are emphasizing the flexibility by not specifically talking about a $1.25 and a timeframe on a $1.25.

So the answer is, yes on retaining flexibility, and that is what we're trying to get across today.

Unknown Speaker

Perfect. And maybe a follow-up question. I realize it's a little early to be talking about going to be a stronger bargaining process. But on the last call, there was some kick out some discussion around capex potentially being as low as a billion dollars for growth capex.

You also made further emphasis on reducing cost and that you believe can sort of address that in the prepared remarks as well. 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 cost member sick today, as well as the discussion on capex from the last call where the billion dollars came up.

Steve Kean -- Chief Executive Officer

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 it's 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 asked maybe as little as a billion, I think that's shaping up to be a pretty good assumption for 2021 because we can see that.

We need to see the projects slate from here so that low $1 billion range is what's reasonable. Everything else that you mention 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 our budget and really are getting into 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 a guide that might not be on the exact anniversary of when we did it last year, but we still think we can pull those together and give you some indication.

Unknown Speaker

Perfect. Really appreciate the color that you provided, and I'll jump back in the queue to ask, I mean the renewable natural gas question.

Operator

Thank you. Our next question will come from Spiro Dounis with Credit Suisse. Your line is open. Hey everyone.

Spiro Dounis -- Credit Suisse -- Analyst

Hey. Good day, everyone. Steve, curious as you go through the budget process here and go through all the assets with a fine-tooth comb again getting out at the Analyst Day, has the downturn changed the way you think about some of your assets and whether or not there's still the core of the business. Just curious if anything has been permanently shifted lower to thinking about certain assets may be still carrying yours away from a free cash flow perspective.

Does that present disposition candidate now that maybe you didn't think about earlier in the year.

Steve Kean -- Chief Executive Officer

I know 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 harvest of Canadian divestitures for a variety of reasons. You saw that most of what we've been doing since then has been relatively small and pruning to align things. John Schlosser and his team have done a great job over the years of sort of migrating up more toward refined products hubs and a little bit away from this high ends in both terminal assets. We saw some very, very good bulk terminal assets.

But I think we've done a good job 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 appear and they're worthwhile, and our shareholders have been better off on the other side of the transaction than they were on the way in then, we will consider it. We are a shareholder driven company, and so even if it's a business that we want to get the value is really strong and robust, we'll consider those things to get there.

Spiro Dounis -- Credit Suisse -- Analyst

Fair enough. Sounds like pretty consistent there. Maybe I'll just get you to opine on the natural gas price outlook in '21, and that'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 head into next year obviously, there's supply constraints and the associated gas basins. Imagine on the demand side, we're not going to have the same LNG cancellations that we saw this year, and so that's moving the other direction. So curious thing is it came with a price elevated now about three. Could that actually get tighter from here.

Are you seeing enough I guess resiliency in the gas basins, maybe a recovery in the Haynesville offset that on the supply side.

Steve Kean -- Chief Executive Officer

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 go prices higher and of course that's what we're beginning to see. I think the other phenomenon now 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 the associated gas to the dry gas plays, and people are getting their plans together and we've had good conversations with with with customers, etc. But I think you're probably right.

We are the swing supplier from the global LNG standpoint, and I think earlier this year was unusual in terms of the level of cancellations. I think LNG has been going back up. I think comments like 7.8 (DCF) today day now which is 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's got to come in and fill out in and it seems like that's lagging a little bit.

Now, a lot's been reflected in the price already, but it seems like there could be still some volatility and maybe some continued upward pressure. Tom, anything else you want to point to that you observed.

Tom Martin -- Vice President and President, Natural Gas Pipelines

No. I think you covered all units. So, 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 slowly 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.

Steve Kean -- Chief Executive Officer

[Inaudible] it's not direct. It's not directly -- it doesn't directly affect us as it does the producer segment, but we do benefit from some volatility in people's need to have storage, and put on storage, or we'll get some benefit out of that I think directly.

Spiro Dounis -- Credit Suisse -- Analyst

Perfect. Thanks for the color guys. Be well.

Operator

Thank you. Our next question will come from Tristan Richardson with Truist securities. Your line is open.

Tristan Richardson -- Truist Securities -- Analyst

Good afternoon. Just a quick one follow up on the whole energy transition topic. You mentioned in your prepared remarks that you guys do have evaluated more 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.

Steve Kean -- Chief Executive Officer

Yes. So the returns are lower and lower than what we would see in midstream investments. And the argument is that there's so much capital available for those opportunities that the cost of capital is lower. And ultimately reflected too in 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 start to make some investments in solar panels for 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 very low emission, methane emissions source of supply, and transportation service.

So things like that don't require a spirit of compromise on returns for our shareholders, but still, nevertheless, allow us to participate. And I think this has been in a meaningful way. The other things are, Dax and his team as I mentioned, they are looking hard at the renewable diesel opportunities and I think we can look, we can see returns in those businesses that are nice and very consistent within some cases maybe it's 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 turbine business.

I think we're looking to participate in a way that doesn't compromise on our return criteria.

Tristan Richardson -- Truist Securities -- Analyst

Very helpful. And then one last one on the buyback topic. There were flexibilities in used a lot this afternoon and seems like that's where the emphasis is. I think there has been some prescription out there in a slower growth environment that a buyback program should be programmatic.

But I think that would actually probably take away from that flexibility that a fair way to think about your opinion on a programmatic type of buyback plan.

Steve Kean -- Chief Executive Officer

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 in that 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.

Tristan Richardson -- Truist Securities -- Analyst

Thank you guys, very much.

Operator

Thank you. Our next question comes from Pearce Hammond with Simmons Energy. Your line is open.

Pearce Hammond -- Simmons Energy -- Analyst

Good afternoon, and thanks for taking my questions. 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.

Steve Kean -- Chief Executive Officer

I don't have one for you until we finish the budget process. And look at 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 say that until we -- until we finish that work and then we'll let people know where we think we're coming out.

Pearce Hammond -- Simmons Energy -- Analyst

Ok. I understand. Thank you, Steve. And then following up on an earlier question from one of the analysts about ENP, M&A 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.

Steve Kean -- Chief Executive Officer

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 seven or eight years now that there are probably too many midstream energy companies to actually serve the market need and therefore, there should be some consolidation. And -- but it really hasn't happened in a material way other than the internal consolidation if you will, MLP and GPs combining and those things.

But there's still a rationale for it is what I'd say and I'd point to all the factors I talked about an answer the earlier question is the things that need to come together in order for us to make sense to us to act on and particularly in these times. And 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 US energy. Not on the other side of the virus certainly yet.

And so I think there remains a fair degree of uncertainty after.

Pearce Hammond -- Simmons Energy -- Analyst

Thank you.

Operator

Thank you. Next, we will hear from Michael Lapides with Goldman Sachs. Your line is open.

Michael Lapides -- Goldman Sachs -- Analyst

Hey, guys. Thank you for taking my question. Really easy one here. There's a lot of smaller ENP and a few larger ones that are in distress, financial distress.

Talk about your broad exposure to them, and how much in the way you view the contract rejection risk or simply contract renegotiation risk presents itself. When you go into the planning process and thinking about 2021 and beyond.

Steve Kean -- Chief Executive Officer

Ok. Yes, a few things on that. For us that we believe we provide essential services to these producers. And so generally, we have some insulation from our contract rejection to the extent that they -- and that'll vary from based in the basin.

Ok, it's a -- If they're going to continue to produce. They need to continue to get their product to market and where they're providing important services for their ability to do that. And so that always enters into the rejection, affirmation, discussions, and we've got a balance. If you look now at where we are probably less than 1% on a revenue basis exposed in 2020 to a minus and below still running at 75% of our revenues.

These revenues from customers that are above $5 million are the pressure we use as we can. But anyway, our customers 75% of investment-grade have provided substantial credit support. We have experienced about $40 million credit here from producer bankruptcies for 2020. And again, I think where -- 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.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, guys. Thank you, Steve. Much appreciated.

Operator

Thank you. Our next question will come from Elvira Scotto with RBC Capital Markets. Your line is open.

Elvira Scotto -- RBC Capital Markets -- Analyst

Good afternoon, everyone. Thanks for answering all the other questions. I have a couple of follow-ups on the upstream M&A, I know you mentioned that it in a way as more upstream merge. It's a 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 a bigger footprint. Do you think that that actually works to your benefit.

Steve Kean -- Chief Executive Officer

That works. It works to the upstream consolidation working to the benefit of the integrated.

Elvira Scotto -- RBC Capital Markets -- Analyst

Yes. The larger midstream companies. The larger assets program.

Steve Kean -- Chief Executive Officer

Yes. I think I mentioned this earlier, but I well 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 good -- that are producing healthy companies that intend to continue to produce oil and natural gas and then are coming out in good shape from those transactions, or with company emerge on 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 quickly do they form a new drilling plan, an all that sort of thing.

But I think it's it's a healthy thing overall for the energy business, and at least derivatively for our sector.

Elvira Scotto -- RBC Capital Markets -- Analyst

Got it. Ok. And then just one follow up on the energy transition question. You mentioned the inability to use your existing assets.

And you talked about hydrogen and the ability to use your existing gas pipelines. So if natural gas pipelines can transport, I think anywhere from 5% to 15%, hydrogen bandwidth without really much modification. Will it be required to transport more hydrogen.

Steve Kean -- Chief Executive Officer

Ok. Kim, do you want to take a shot at that one.

Kim Dang -- President

Sure. I think the issue of transporting more hydrogen via is embezzlement of pipes and so it can cause cracking in certain types of steel. And then on the compressors, the issue is certain compressors. So they can handle generally compressors within the last time that are manufactured within the last 20 years roughly can generally handle hydrogen plants that are 10% fewer compressors that are older than that may require some upgrades even to handle you know the zero to 10%.

But again, just like with on the pipeline and betterment of the compressor station handle they may not be able to handle the current compressor station, probably cannot handle greater plant than the 10% without some modification.

Steve Kean -- Chief Executive Officer

And then the only thing I'd add to that are those that we have to look at things about the downstream end users as well. Can the power plants in which power plants can take what levels of hydrogen the industrial uses etc.. You start to challenge the downstream end users as well.

Elvira Scotto -- RBC Capital Markets -- Analyst

Got it. Great. Thanks, very much.

Operator

Thank you. Our next question comes from [Inaudible] with UBS. Your line is open.

Unknown Speaker

Good afternoon, guys. Just a follow-up question here. The early part of the call with energy transition questions was a lot about the challenges are ask a great question on the hydrogen side. I was wondering about something that I think is closer to home right now.

I'm more in the realm of our predictable time frame, specifically on renewable natural gas. I'm wondering if you can talk about whether it's something you 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 it.

Steve Kean -- Chief Executive Officer

Kim, go ahead.

Kim Dang -- President

Sure. 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 landfill, dairy farms, wastewater treatment plants, those types of things have you can only get a small supply from those sources, and then it's also very expensive.

The cost estimates I've seen after are $15 to $30 per decadent. 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.

Steve Kean -- Chief Executive Officer

And we are transporting a little bit today for 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.

Kim Dang -- President

Yes. Responsible natural gas right now that supplier in 2019 that supplier was probably 11 DCF a day, so roughly 11% of the US supply. In a way we think about it is that's gas that is produced, processed, transported what the conduct meant to reduce methane emissions to less than 1% by 2025. And so we're part of a group, obviously, that has made that commitment.

And the less than 1% midstream has an allocation of that less than 1% in the midstream allocation of point 31%. So we are well, well below that point 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 in there. These customers are marketing in our 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 that and it seems like it could be gaining in importance.

Unknown Speaker

Good. I really appreciate the update on it. Thank you, guys.

Steve Kean -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question will come from [Inaudible] with Bank of America. Your line is open.

Unknown Speaker

Thanks for taking the phone up here. Again, just a quick one on Permian Haiti. It appears the pipeline's progress based on the completion model could be placed earlier into service next year. So if you're able to do so in early Jan., do the contracts kick in greater.

Steve Kean -- Chief Executive Officer

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. You got a lot of compressor stations on it.

We've got to make sure everything works etc. But we would expect to be in service and have those contracts go into effect as we said in early 2021.

Unknown Speaker

Got it. That's it for me. Thank you.

Operator

Thank you. And we're showing no further questions at this time.

Rich Kinder -- Executive Chairman

All right. Thank you, very much. We appreciate your attendance.

Operator

[Operator signoff]

Duration: 69 minutes

Call participants:

Rich Kinder -- Executive Chairman

Steve Kean -- Chief Executive Officer

Kim Dang -- President

David Michels -- Chief Financial Officer

Jeremy Tonet -- J.P. Morgan -- Analyst

Unknown Speaker

Kevin Grahmann -- Vice President and Head of Corporate Development

Colton Bean -- Tudor, Pickering, Holt & Co. -- Analyst

Tom Martin -- Vice President and President, Natural Gas Pipelines

Jean Ann Salisbury -- Sanford C. Bernstein -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

Tristan Richardson -- Truist Securities -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

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