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Energy Transfer LP (NYSE:ET)
Q3 2020 Earnings Call
Nov 04, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to Energy Transfer's third-quarter earnings call.[Operator instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Tom Long, chief financial officer. Thank you, Mr.

Long, you may begin.

Tom Long -- Chief Financial Officer

Thank you, operator. Good afternoon everyone and welcome to the Energy Transfer third-quarter 2020 earnings call. We really appreciate you joining us today. I'm also joined today by Kelcy Warren, Mackie McCrea, and other members of the senior management team, who are here to help answer your questions after our prepared remarks.

Hopefully, you saw the press release we issued earlier this afternoon, as well as the slides posted to our website. As a reminder, we will be making forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.These statements are based upon our current beliefs, as well as certain assumptions and information currently available to us, and are discussed in more detail in our quarterly report on Form 10-Q for the third quarter of 2020. I'll also refer to adjusted EBITDA, distributable cash flow or DCF, and distribution coverage ratio, all of which are non-GAAP financial measures. You will find a reconciliation of our non-GAAP measures on our website.

We expect our 10-Q to be filed tomorrow, November 5. Starting with a few third quarter highlights. We generated adjusted EBITDA of $2.87 billion and DCF attributable to the partners of Energy Transfer as adjusted of $1.69 billion. And our excess cash flow after distributions was approximately $1.28 billion.

On an incurred basis, we had excess DCF of nearly$550 million after distributions of $412 million and a growth capital of approximately $730 million. We expect significant excess cash flow over the distributions and growth capital going forward. Our third-quarter adjusted EBITDA included approximately $250 million of earnings uplift, about half of which was related to one-time items. The other half was primarily from optimization activities related to our various marketing and optimization groups.

One of our core strengths and providing a significant upside to our earnings potential is our Commercial teams' ability to keep our diversified asset base highly utilized by capturing basis differentials and contango storage opportunities created from market and weather volatility. Our NGL segment continued to stand out during the third quarter, with NGL transportation volumes setting another record primarily driven by record volumes on our Mariner East and Texas NGL pipeline systems. And our fractionation volumes also reached a new high during the quarter, due to an additional ramp-up of volumes on Frac VII which went into service earlier this year. And in early September, we were pleased to announce that we completed our Lone Star Express expansion project significantly under budget and ahead of schedule.

Now, turning to our recent distribution announcement. On October 26, we announced a quarterly cash distribution of $15.25 for ET common unit, or $0.61 on an annualized basis. This distribution will be paid November 19, to unitholders of record as of the close of business on November 6. The reduction of the distribution is a proactive decision to strategically accelerate debt reduction as we continue to focus on achieving our leverage target of four to four and a half times on a rating agency basis and a solid investment-grade rating.

We expect that the distribution reduction will result in approximately $1.7 billion of additional cash flow on an annualized basis that will be directly used to pay down debt balances and maturities. This is a significant step in Energy Transfer's plan to create more financial flexibility and lessen our cash cost of capital. Once we reached our leverage target, we are looking at returning additional capital to unitholders. This will come through unit buybacks and/or distribution increases with the mix being dependent upon our analysis of market conditions at the time.

Turning to the 2020 outlook. We now expect to come in at the high end of our adjusted EBITDA guidance range as a result of better company performance. Looking more closely at our cost reduction measures which are under way in our corporate offices, as well as at our field operations. During the third quarter, we identified additional opportunities to leverage our infrastructure to drive operational efficiencies and optimize our assets, and have recognized approximately $400 million in G&A and opex savings year to date.

And for full-year 2020, we now expect to achieve cost savings of over $500 million relative to our original budget. And for our growth capital, we now expect 2020 growth capital expenditures to be less than $3.3 billion. This represents a further reduction of over $100 million from our guidance provided last quarter as a result of projects coming in under budget. Our span for the remainder of 2020 consists of several projects that we expect to be completed by year in 2020, including the next phase of Mariner East, Orbit, and other NGL export projects.

These projects will enhance our existing portfolio and provide near and long-term value. We will see a significant reduction in growth capital spend in the years ahead with our forecast of approximately$1.3 billion in 2021, and $500 million to $700 million per year in 2022, and 2023. Our evaluation process for new projects continues to be very stringent and our threshold for returns is the highest it has ever been. I'll now walk through the recent developments on our major projects.

Start -- we'll start with the Dakota Access. The appeal process with respect to the Lake Oahe litigation is ongoing. Oral arguments in the case took place earlier today. We still expect a decision from the D.C.

Circuit Court of Appeals by the end of the year. We continue to believe that our legal positions in the case are strong, and we are confident that our pipeline will continue to operate as normal. The pipeline remains in service today. And like all of our assets, we will continue to operate safely and efficiently.

We continue to move forward with the Bakken pipeline capacity optimization, and on October 15, we received regulatory approval from the Illinois Commerce Commission which was the last remaining state regulatory approval required for us to move forward with the optimization project. The initial phase of the optimization will accommodate the volume commitments made by shippers during open seasons. We now expect this additional capacity to be in service late in the third quarter of 2021. Next, the Ted Collins link is an efficient way to increase the utilization of existing assets, while providing market connectivity between our Nederland and Houston terminals.

It will ultimately allow us to transport up to 275,000 barrels per day of crude oil from West Texas and Nederland to our Houston terminal and is expected to be in service in the fourth quarter of 2021. Now on to our Mariner East system. During the third quarter, we saw the highest average quarterly volumes yet through the Mariner East pipeline system with year to date 2020, NGL volumes up 40%, over a year to date 2019. Utilization of our Mariner pipelines and our Marcus Hook terminal continued to increase leading to record amounts of propane transported through the pipeline, as well as strong butane and ethane utilization.

The system continues to demonstrate flexible optionality for shippers, including the ability to handle ethane spot cargoes, as well as provide multiple local market connections for ethane, propane, and butane. Customers at Marcus Hook are currently taking advantage of this flexibility by placing barrels for the upcoming winter season into local markets, and we are prepared to handle this demand with strategic NGL reserves at Marcus Hook. Additionally, our Mariner system will have the ability to bring natural gasoline to Marcus Hook for gasoline blending, and local consumption by early in the second quarter of 2021. We are eagerly awaiting the next significant phase of the Mariners projects, which we expect to be in service by the end of this year, with the final phase expected to be completed in the second quarter of 2021.

Also, our 50,000 barrels per day, LPG expansion at the Marcus Hook terminal is now expected to be in service in late 2020 ahead of expectations. The Mariner East system in conjunction with the Marcus Hook terminal continues to provide the most efficient transportation route for liquids in the Northeast and provides customers the optimal way to reach the best markets for their product. And we are very excited to announce Pennsylvania Access which will utilize part of our Mariner's system to bring refined products from the Midwest supply regions, there is Allegheny excess pipeline system into Pennsylvania, and to markets in the Northeast. This project will require minimal capital which is already included in our budget and will add significant revenue and synergies with our existing refined products pipeline and terminal assets.

We anticipate a fourth-quarter 2020 start-up for early volumes to be able to flow from Ohio into Pennsylvania and to upstate New York markets. As I mentioned earlier on the call, we were pleased to announce that our 24-inch, 352-mile Lone Star Express expansion was completed under budget and ahead of schedule. This project adds over 400,000 barrels per day of NGL pipeline capacity from the Permian Basin to the Lone Star Express 30-inch pipeline south of Fort Worth, Texas. LPG demand continues to remain strong, and our LPG expansion projects at Nederland will bring our total export capacity to approximately 500,000 barrels per day, further integrating our Mont Belvieu assets with our Nederland assets.

Construction of our Orbit ethane export joint venture with Satellite Petrochemical is nearing completion. This 180,000 barrels per day project will be ready for commercial service in the fourth quarter of this year, with the first ships now arriving by the end of the year for commissioning. Next, I want to take a moment to provide a renewables update. Last week, we published our 2019 community engagement report, which highlights our pipeline safety management programs, and our performance data, risk management, and emissions reduction programs.

It also covers our stakeholder outreach and community investment activities. As a company, we are committed to identifying and implementing cost-effective emission reductions, and prevention opportunities, including the reduction of our carbon footprint. As a result, we make significant investments each year in technology to reduce emissions and improve our overall operations, performance, and efficiency. Today, approximately 20% of the electrical energy we purchase originates from renewables, and we expect that will continue to grow.

We continue to actively look at renewable power deals that will allow us to increase our use of power generated by renewable sources. Additionally, we have approximately 18,000 solar panels located at Pipeline metering stations across the country. We also own a gas-fired electric generation company that uses renewable natural gas in Pennsylvania to generate electricity helping to power Pennsylvania homes. Our dual drop compressors which have a patented technology that allows for switching between electric motors and natural gas engines to drive compressors offer the industry a more efficient compression solution helping to reduce greenhouse gas emissions.

More recently, we entered into our first ever dedicated solar contract for which a 28-megawatt solar facility is currently under construction. This will deliver low cost, clean power to energy transfer under a 15 -ear power purchase agreement. And demonstrates our commitment to reducing our environmental footprint by integrating alternative energy sources when economically beneficial. We are also evaluating opportunities to better utilize our available capacity to transport CO2 in the Northeast, and are looking into the potential to bring renewable diesel into West Texas via our J.C.

Nolan Pipeline. As the energy industry continues to evolve, and customer demand for these services increases, we will look for additional ways to further integrate alternative energy sources into our business when economically beneficial. Now, let's take a closer look at our third-quarter results. Consolidated adjusted EBITDA was $2.87 billion, compared to $2.81 billion for the third quarter of 2019.

This was a result of strong performance from our NGL and refined products segment, as well as some uplift from optimization activities. DCF, a triple to the partners as adjusted was $169 billion for the third quarter, compared to $1.55 billion for the third quarter of 2019. This is primarily due to the increase in adjusted EBITDA, along with a decrease in maintenance, capital expenditures. Now turning to results by segment.

We'll start with the NGL refined products. Adjusted EBITDA was $762 million, compared to $667 million for the same period last year. This increase was primarily due to record NGL transportation and fractionation volumes, as well as higher optimization gains from the sale of NGL components at Mont Belvieu. NGL transportation volumes on our wholly owned and joint venture pipelines increased to 1.5 million barrels per day, compared to1.4 million barrels per day for the same period last year.

This increase was primarily due to the record volumes on our Mariner East Pipeline System, as well as an increased throughput on our pipelines out of the Permian Basin and North Texas regions, as a result of higher liquids production from both wholly owned and third-party gas plants. On our fractionation. Utilization rates remained high during the third quarter with average fractionation volumes increasing to 877,000 barrels per day, compared to 713,000 barrels per day for the third quarter of 2019. Looking at our crude oil segment.

Adjusted EBITDA was $631 million, compared to $726 million for the same period last year. This was primarily due to lower volumes on the Bakken pipeline, and our Texas crude pipelines as a result of lower production and reduced demand due to COVID-19, as well as a decrease in our crude oil acquisition and marketing business-related, primarily to fuel optimization opportunities. These items were partially offset by the contributions from the SemGroup assets, which we acquired in 2019, as well as an increase related to trading gains realized from contango storage positions. For midstream.

Adjusted EBITDA was $530 million, compared to $411 million for the third quarter of 2019. This was primarily due to, the recognition of $103 million related to the restructuring and assignment of certain gathering and processing contracts in the Ark-La-Tex region. In addition, operating expenses decreased by $33 million. Gathered gas volumes were 12.9 million MMBtu per day, compared to 14 million MMBtu per day for the same period last year.

Lower volumes in south Texas and North Texas were partially offset by volume growth in the Permian, as well as the addition of assets acquired in 2019 in the Mid-Continent/Panhandle region. Our interstate segment. Adjusted EBITDA was $425 million, compared to $442 million for the third quarter of 2019. This was primarily the result of a scheduled contract rate stepped down in January 2020 at our Lake Charles LNG facility, which we have referenced on previous calls this year, as well as less capacity sold on our Panhandle and trunk line systems.

These were partially offset by an increased margin from the Transwestern and Rover systems due to increased demand in firm transportation. And in our intrastate segment. Adjusted EBITDA was $203 million, compared to $235 million in the third quarter of last year, primarily due to lower revenues from pipeline optimization activities, as a result of the drop in spreads, partially offset by reduced operating cost. Beginning in 2021, we expect to have less exposure to spreads as we have locked-in additional volumes under long-term contracts with third parties.

Now moving on to capex update. For the nine months ended September 30, 2020, Energy Transfer spent slightly under $2.5 billion on organic growth projects, primarily in the NGL and refined products, and midstream segments, excluding SUN and USAC capex. And as I mentioned earlier, for full-year 2020, we now expect to spend less than $3.3 billion on organic growth, primarily in our NGL refined products and midstream segments. We're in the final stages of several significant growth projects, which will help support our future growth, and we believe that there are exciting days ahead for the partnership as we're taking meaningful actions to build, and improve our industry-leading franchise.

And we currently expect our 2021 growth capex expenditures to be approximately $1.3 billion, and growth capital in 2022 and 2023 to be between $500 million and $700 million per year. Looking briefly at our liquidity position. As of September 30, 2020, the total available liquidity under our revolving credit facility was approximately $2.65 billion, and our leverage ratio was four-point two-four times for the credit facility. And as a reminder, we have no additional maturities in 2020 and looking ahead, we have very manageable maturities of $1.4 billion in 2021, which will be more than covered with the additional retained cash flow from the reduction in distributions.

Inclusion throughout the third quarter, activity consistently improved around our Permian midstream assets across the Mariners complex, and through our NGL fractionation assets. Looking ahead, the near and long-term value that our ongoing growth projects will contribute is very clear, and we will continue to leverage our expansive footprint to drive operational efficiencies. In addition, we continue to emphasize the importance of capital discipline throughout the organization. As demonstrated by our growth capital reductions throughout 2020, we remain committed to our investment-grade rating, and our recent distribution reduction will allow us to accelerate our deleveraging strategy by immediately using excess cash to pay down debt.

In addition, our capital discipline and growth capital reductions announced throughout this year demonstrate our commitment to generating excess cash flow. Combined with Energy Transfer as best in class asset base, we believe these actions will better position the partnership for continued long-term success. Operator, please open the line up for our first question.

Questions & Answers:


Operator

Thank you. Our first question comes from Yves Siegel with Siegal Asset Management Partners. Please, proceed with your question.

Yves Siegel -- Siegal Asset Management

Thank you. Good afternoon everybody. And also, congratulations to Tom, Mackie, and Dillan for the nice recognition and promotion. I have two quick questions.

One is, obvious with Biden looking like he's going to win. How do you think that may impact the company, and maybe if you could tie that in to talking about the export market and China. So that's the first question. And then the second question, if I could is, how do you think upstream consolidation may impact the business going forward.

And when do you think we could see consolidation in the midstream space. What do you think the catalysts would be for that. Thanks. Thanks, very much.

Mackie McCrea -- Senior Management Team

Hi, Yves, this is Mackie. Thank you for the compliment. We appreciate it. We look forward to it.

But Kelcy won't go far, he'll be around. I'll start our first question, and then Tom will finish up on the second one. So I guess my standpoint as far as the election goes -- what I'm not sure we're in the same boat that it's already been decided. Certainly, that could happen.

We think it's probably still a toss-up for a whole number of reasons, but we certainly want to know in the next two or three days. But just assuming your question that Biden was to win, and we've said in the past we -- there's some uncertainty about his positions over the years. One point, he is a kind of pro-pipeline. He was always a pro-fracking and he backed off on that nice supposedly going to ban some types of fracking in mainly around federal lands.

But the positives are in a Democrat-controlled government is that the regulations will no doubt increase. So it will be much more difficult to build pipelines. To construct pipelines. To get pipelines permitted to be very time-consuming.

And so companies like ourselves. We play stand alone with our footprint throughout the country what we're doing to every significant major basin. We feel pretty good about that aspect of them winning. From the standpoint of drilling, and how it might impact federal lands.

It'll have very little to no impact on Energy Transfer, as far as the exposure we have to federal land and potential reduction or removal or frack, fracking from those lands. So, I'll reiterate, we're not sure we are on board that Biden's going to be a winner. But if he does, we'll listen to his policies and we'll make the best of it. But we feel like we're pretty positive -- pretty well positioned.

Yves Siegel -- Siegal Asset Management

What about the export market. I'm sorry. I was going to ask about the export market in China. Do you think that might improve the outlook there or maybe not?

Mackie McCrea -- Group Chief Operating Officer and Chief Commercial Officer

Yes. I don't know. We've been actively selling and very excited about bringing on our next LPG project at the end of this year. In the first part of next year, we're more than doubling our capacity and a lot of the customers that we've already signed up for a year to our five or six at least a customer from China, so, it really hasn't prohibited LPG side of the business.

We also still load crude every month to a certain Chinese company. So, we really don't anticipate that would be an impact on us, but it certainly goes without saying that Trump hasn't been a friend of China in the aspect of the feels like China is taking advantage of the U.S. over the years, and he's trying to kind of equal the playing field. So who knows a lot of info data out there around Biden in China.

And so remains to be seen how that will play out if it likes.

Yves Siegel -- Siegal Asset Management

Thank you.

Tom Long -- Chief Financial Officer

And easy as far as the upstream consolidation portion of your question. We actually feel good about that in the long term. We feel like it's going to create stronger upstream companies. Stronger balance sheet.

More opportunities for drilling. So all in all, we're very supportive of the consolidation that we're seeing occur in the upstream companies.

Yves Siegel -- Siegal Asset Management

And do you have any insight into the second half of what may push the midstream to consolidate? Any catalysts that you may see or not.

Tom Long -- Chief Financial Officer

Well, I think, yes, to answer your question as far as a catalyst. And there's probably a couple of things there. One is, what I just mentioned on the upstream side of it as far as being able to create stronger balance sheets, little more financial flexibility. But the second part of it is more of the commercial side of it.

Meaning, better utilization of available capacity across several of the products line, be the crude, NGL, Gas, etc. So we actually see that that is a positive for the midstream space, and it's something that we do anticipate will start occurring.

Yves Siegel -- Siegal Asset Management

Thanks, guys. Really nice quarter. Well done on the execution.

Mackie McCrea -- Group Chief Operating Officer and Chief Commercial Officer

Thanks, Yves.

Operator

Thank you. Our next question comes from Shneur Gershuni with UBS. Please, proceed with your question.

Shneur Gershuni -- UBS -- Analyst

Hi, Good afternoon, everyone. I wanted to echo congratulations. Yes, just let me just start off a little bit. You talked about in your prepared remarks today in the Pennsylvania access project.

Just wanted to understand or clarify a little bit here. If I have the understanding correct it is, are you effectively utilizing the Mariner East to a system, and basically partitioning it to be able to move refined product on it and all that capital is contemplated within your budgets and so forth, or is this kind of a brand new project.

Mackie McCrea -- Senior Management Team

This is Mackie, Shneur. We ask all of our business development team to look for the best utilization of our pipelines, and of course, we're doing that in Texas on crude pipelines today. We've got some great ideas and excited about those. But some of our team came up with the idea a while back that from time to time, especially during the winter months, we see kind of a blow out between Chicago and the New York markets and for refined products.

And we saw the opportunity. So yes, we will. We're in the process, and we will be converting the really the 8-inch, the Mariner one line. A portion of it into refined product service and we're very excited to bring that on hopefully here by the end of the year.

And that should provide significant upside revenue for an asset that doesn't limit us for what we can do. With the remaining portions of the Mariner system to remove -- to be able to transport all of the LPG and ethane that we have contracted. And that we're in the process of contracting additional volumes.

Shneur Gershuni -- UBS -- Analyst

Ok. So basically you're just moving the NGL onto two and two whacks in here using the original eight. Ok. That makes perfect sense.

Mackie McCrea -- Senior Management Team

That's correct.

Shneur Gershuni -- UBS -- Analyst

And then, as a follow-up question. So you're probably prepared for this, but I was wondering if we could talk about the inside baseball around the distribution side. Obviously, you've mentioned at a high level -- it's about pivoting toward accelerated leverage reduction which obviously I'll get. But I was just wanting if you can certainly share with thoughts the board discussions around what scenarios you were thinking about.

Was there a thought to cut it deeper and deliver faster? Did you preview with the rating agencies before, and is there some? Is there an expectation that some of the negative outlooks will be removed at some point? Just wondering if you can give us the blog Inside baseball discussion around it.

Tom Long -- Chief Financial Officer

Wow. Shneur that was a mouthful there. You got to it. Got through it well.

Listen, we -- it really is the deleveraging. We had -- we were on a path for deleveraging to that four to four and a half even when we had the original guidance back at the eleven to eleven point four. It's important for us to stay on that same trajectory for deleveraging and getting to that. And as far as the dialogue with the agencies that's what we continue to show them.

Our objective of moving forward. We feel like that we can. The conversations that we have with them are very constructive. They know that we're focused on deleveraging and increasing our financial flexibility.

And I think that they're obviously, very pleased with it as far as the amount. Once again, it keeps us at the same pace that we were already headed to. We've pulled all the other levers. We've completed some fantastic projects on the capex side.

So capex was already coming down just naturally. We looked at cost savings and, we think we've been doing a very, very good job on that. Like talking about on this in the prepared remarks of hitting $500 million, over $500 million for this year. So, we're pulling all the levers, and those are the type of discussions that we have internally.

When we sat down to make the decision is to continue on the same schedule we've got on deleveraging the company. that makes perfect sense.

Shneur Gershuni -- UBS -- Analyst

That makes perfect sense. And just one clarification. It's pretty impressive to hit a $500 million cost reduction exercise in one year. Just wanted to clarify that, that is fully achieved this year, or is that kind of the run rate you're at now.

And so, as we think about next year cost should trend a little bit down as you ease in a round trip those cost cuts.

Tom Long -- Chief Financial Officer

Well, when you combine it with all the great projects that we have that we've talked about were completing this year, just by nature, you're going to see opex come up. I'm referring to Mariner East, Orbit, and other smaller type projects. I think the normal run rate would probably be closer to probably $350 million. But don't think that we're not continually trying to look to achieve a higher number than that.

But if I was to guide you for going forward, I'd probably say at least the $350 million. Remember, you also are going to have inflation. Just some of the normal increases that occur when you're a company of our scale and size. But $350 million should be a good number you can use.

Shneur Gershuni -- UBS -- Analyst

When you're talking about inflation, you're adding new assets and new costs come with those assets. But on a like for like basis, you're still down about 5.

Tom Long -- Chief Financial Officer

Yes. I think that's probably a fair statement.

Shneur Gershuni -- UBS -- Analyst

Cool. Perfect. Guys, thank you very much. Really appreciate the color today and have a great day.

Mackie McCrea -- Senior Management Team

Thank you.

Operator

Thank you. Our next question comes from Jeremy Tonet with JP Morgan. Please, proceed with your question.

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

Hi, good afternoon

Tom Long -- Chief Financial Officer

Hey there.

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

I just want to look a little bit forward here, and based on your guidance and your commentary seems like there were some favorable items in 3Q that won't necessarily repeat in 4Q here. And so, just wondering if the guidance implies with 4Q EBITDA a fair run rate of what the business can do on a recurring basis. And then, when you lay around a slew of new projects that are coming into service, I'm just trying to think through how much EBITDA really steps up here, and how do you feel about the pace of deleveraging to get EPS off negative watch at the agencies. Just want to see how comfortable we should be feeling on that.

Tom Long -- Chief Financial Officer

Well, you're right. We want to make sure when we talk about the quarter that we highlighted some of the optimization activities, as well as in the midstream on some of the revenue recognition that we saw around that one contract. If you really look forward, I think it's fair to say that we have -- I want to emphasize once again, we have a great commercial team that will always be looking for opportunities for optimization. It's not necessarily something we make in at the high end.

We don't make it in the low end either. So in fairness, I would, I'd say that our guidance that we've left out there, we said at the upper end of that. I think you can really run with that from a standpoint even as you start looking out into next year. I'd like to at least hold off until we do the fourth-quarter analysis.

Fourth-quarter earnings call to discuss further with you as to 2021.

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

Got it. And maybe just come back to the last part with the agencies here. I guess how comfortable are you that EPS on the right trajectory here to be taken off negative watch. Are there really incremental actions that are needed to ensure that everything goes smoothly there.

Tom Long -- Chief Financial Officer

Well, let me just answer that. We're very comfortable. I think the conversations we have with them are very constructive, and I'd like to say that we are very comfortable with the outlook coming back up.

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

Great, thanks. And just one last one if I could pivoting over to renewables. Appreciate all the disclosure there, and just want to get a sense, appreciate capex is really diving down here. But as you look further out and you look at opportunities across your footprint be it compressors, converting to electric, and adding solar or just what type of opportunities.

How big could that be for you guys? And how does hydrogen fit into that? this is Mackie.

Mackie McCrea -- Senior Management Team

This is Mackie. Let me start out by saying it's interesting this is such a big topic now, and I guess it's our time to share. We've been doing this for a while and our lab looked on that, but we made the press release about 25 megawatts, and it wasn't a project that made sense for us, as far as a rate return project. It wasn't something we were going to participate in.

However, the power purchase agreement that we did to get the project off the ground made a lot of sense for us under very inexpensive long term electricity. So we will look for those opportunities every day. There's probably at least another 100 megawatts to 200 megawatts, both in the south part of the country and the Northeast. They'll be looking for similar type power purchases.

Once again, unless the economics change dramatically from what we've seen, we won't participate. We certainly will support it by buying cheap electricity. And we've mentioned the other things on the opening remarks that we're looking at doing around renewable diesel and carbon capture and all that. But one thing you mentioned electric compression.

We have patented this dual-drive compression system where you either run by electric motor or gas engine. And gosh, I think it's 2012 or so, we've been around for that long. And just to give an example in 2019, we emitted 1 billion less or reduced our emissions by 1 billion pounds of CO2 just do our dual drop technology. The compressors that we have throughout many parts of our system in Texas, and we would love a lot of our competitors to buy or to participate in these because they are excellent opportunities to optimize your system.

Where you're running electricity toward much more efficiently. It is much better for emissions, but also if there's any issues electricity switchover you run on gas, you don't have any downtime. So we'll continue to look to apply that technology, as well as straight-up electric compressor where it makes sense. But I'll wrap all that up with the way in a chance we'll look at renewables is that we will look at it.

We will chase it when it makes sense and meets our hurdles. We will participate, if not, we'll be a purchaser if it makes sense. From a purchasing standpoint around hydrogen, we've looked at hydrogen, and honestly, the team, the engineering team that I've talked to we've dug in over the last several months, and I'll just hit a couple of them for example we've looked at green energy. So you look at a taken wind and solar through the electrolysis process in producing hydrogen.

Our estimates are -- it's about eight times per MMBtus as the value of methane. And then, you look at great hydrogen, where you take natural gas, and introduce water. And you produce hydrogen that's still about three times the cost or value of methane. So, we can scratch our heads around hydrogen.

We know Europe is setting up billions of dollars of subsidies. And we know there's a lot of companies here talking about it and doing it. And of course, their products are big time and with their plants and pipelines, but at this point, we don't see anything close on the horizon around hydrogen. It's very corrosive to pipelines.

So we've got to fit corrosive to compression, and so that's something that we'll continue to look at if customers come up with ideas or the things change, or the government provides more subsidies where it makes sense. We'll certainly look at that. But right now, we are at as a head-scratcher.

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

Got it. That's a helpful perspective. Thank you for that.

Operator

Thank you. Our next question comes from Pearce Hammond with Simmons Energy. Please, proceed with your question.

Pearce Hammond -- Simmons Energy -- Analyst

Good afternoon. Let me extend my congrats to Tom and Mackie as well. My first question is, are you seeing any improvements in the divestiture market. And would you consider divestitures to help deliver the company?

Tom Long -- Chief Financial Officer

No. As far as the first part of your question. We're not seeing improvements still, less capital out there chasing the projects and the multiple squarely clearly come down. So our guidance to you is, there's really not anything material that we're looking at on the divestiture side as we sit here today.

Pearce Hammond -- Simmons Energy -- Analyst

Ok. Thank you, Tom. And then a follow-up question. Just from a real high level.

What is your outlook for the U.S. NGL supply next year? And then as well, what do you see a high-level outlook for LPG exports out of the U.S. next year.

Mackie McCrea -- Senior Management Team

Well, I'll start with the second part. As everybody knows, we've got about 180,000 barrels of LPG export capacity from Nederland today. We've been diligently working on adding to that and approach 500,000 barrels a day. We couldn't be more excited.

As I mentioned a little bit earlier, we've actually now sold out for at least a year, if not two years. Every slot that we have the ability to sell out other than spot slots that are available each month. Depending on how the customers utilize their capacity. So, we're incredibly excited about that.

There is an enormous market that we could sit here and roll off ten or twelve companies, I'm sorry, countries that we're dealing with that we have signed contracts with, or negotiated with around the world. So you really don't see the impact like you are on crude and in gasoline. There is an enormous market both domestically and around the world for petrochemicals. That's pretty much run our lives and the value of the products that we use every day.

So we see that as a big plus. And that's going to be a huge growth area for us not just at Nederland, but also at Marcus Hook. As we complete years and billions of dollars of projects to complete our pipelines and build out our infrastructure at Marcus Hook. So, we couldn't be more excited and anxious to kick off this next phase to become, if not the largest exporter of LPG and ethane in the country.

We're pretty darn close by the end of this year or the early part of 2021. As far as NGL's we -- that tied a lot too. Of course, drilling in West Texas is a core area for us, for our growth, and put us to a certain degree. We actually are somewhat optimistic now.

That's taking into account that you've got to hang in there. You got to hang around 40 or maybe start to grow to keep this kind of optimism. But talking to our producers, looking at just a lot of [Inaudible] out in West Texas. We do think that we'll be drilling around a lot of these areas.

We think we'll see 15% to maybe 20% growth by the end of next year. Conservatively with a lot of our producers. So we're -- I wouldn't say we're only bullish, but we're certainly optimistic that we'll see volumes grow on our systems. Our rich gas ultimately producing NGL to transport and Frac and to export or sell into the domestic markets.

Pearce Hammond -- Simmons Energy -- Analyst

Thank you Mackie for the color.

Mackie McCrea -- Senior Management Team

Sure.

Operator

Thank you. Our next question comes from Michael Lapides with Goldman Sachs. Please, proceed with your question.

Michael Lapides -- Goldman Sachs -- Analyst

Hey guys. Thank you for taking my question. And like the others, congrats on the various promotion Tom and Mackie. Real quickly, can you talk a little bit about where you think you are in the producer bankruptcy cycle? And when you look forward across the different businesses where you think the greatest risk may lie to either existing producers 35 or producers that that may be in high distress right now.

Mackie McCrea -- Senior Management Team

Yes. let me start maybe Tom can add if He would like to. But, we say this a lot. We're pretty proud of our credit for most of our customers.

We certainly have some that are out there that are a little concerning, and of course, there have been some bankruptcies already that we're dealing with. But for the most part, we don't really see anything that can happen. It's just very material, and even those bankrupted the two that does happen there are things we can do renegotiating agreements and call it to blend and extend with some other deals we may have with them in other areas. So, I wouldn't sit here and say and Tom may elaborate on this.

But I would sit here and say there's anybody really out there that gives us a great deal of concern about bankruptcies at this point.

Tom Long -- Chief Financial Officer

And I just want to echo echoes Mackie's comment. There really isn't anyone I always like to compliment our credit group. I think they do a very, very good job of monitoring all of our counterparty risks. They do a good job of mitigating the counterparty risk.

And as we sit here today, I don't have any in anyone or any concerns with any.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. And then one question on the capital of the Bakken expansion. Can you just remind us, you've got the Illinois Commerce Commission approval? How much incremental capacity you're adding. And I know you've got contracts, but the market has given lower production out of the Bakken.

And does the market actually need that capacity right now, or even in the next year.

Mackie McCrea -- Senior Management Team

Well, that remains to be seen. Certainly, we need more rigs to move back in for volume growth. Fortunately, we know that when they do move back in, we will be the pipeline of choice or the outlet of choice. So, we're always very pleased to have that situation up there.

We'll be expanding from 570,000 barrels a day to about 740,000, 750,000 barrels a day. And as you said, a large portion of that you know not the walk-up space of the large quarter that is demand charge. And so, we will receive payments regardless of where the volumes are there or not. But we're somewhat optimistic that the volumes will be there.

That volume -- that drilling will commence as long as crude hangs in there, or starts increasing early part of '21. Hopefully, all these economies get back going again sooner than later. And so, we are hopeful that production returns. But from a risk standpoint from energy transfer, those are back my demand charge agreements.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, guys. Much appreciated. Once again, congrats.

Mackie McCrea -- Senior Management Team

Thank you.

Operator

Thank you. Our next question comes from Ujjwal Pradhan with Bank of America. Please, proceed with your question.

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Good afternoon, everyone. Wanted to add my congratulations to Tom and Mackie's, Hello? I'll first begin on your 2021 capex outlook. Obviously, you have a significant number of ongoing projects except for in-service by year-end. And next year, it seems you have remaining spend on Mariner East 2 and the Ted Collins pipeline.

Outside of those two, can you talk about what forms the bulk of your $1.2 billion budget?

Tom Long -- Chief Financial Officer

Yes. I'll take off with this, and then Mackie can chime in. But I would say that it's still the NGL and refined products. Clearly, carries the majority of its 70% to 75% of midstream, brings up that the next piece.

It's down to 10% to 15% of it. And we do have, you already highlighted this, but on the crude oil side like that Ted Collins link and some of the optimization that brings up the last piece at 5% to 10%.

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks. Thanks for that Tom. And the second question on the double Access Pipeline.

And I saw the challenges that we have faced here. Appreciate the update from today's hearing. And do you think a contingency plan around what you could do under an adverse outcome from the court cases might help address all of the market concerns here? So for the illustrative purpose under a potential adverse outcome, do you believe you'll be able to operate sections of the pipe not impacted by the current permit issued, or monetize sections that are not impacted. Thank you.

Mackie McCrea -- Senior Management Team

Yes. I'll start and then Tom may add, but this Mackie again. Yes. We really don't.

We had a hearing today, and we'll continue to go through the process. But we really don't envision or see a scenario where we will take the pipeline out of service. We just don't think that's gonna happen. We were highly confident that the depot will remain in service like it has safely especially for the last three years.

And so, the real issue is that [inaudible]it has to be completed or not. And that remains to be determined as time goes on. But we're highly confident that the pipeline will continue flowing and not shut-in.

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you. And if I can just squeeze in a quick one. So the acid soft of the capex reduction this year.

It looks like that came from project cost savings. Can you talk about what items have led to that?

Mackie McCrea -- Senior Management Team

I'll start. This is Mackie. Yes. Well one of them was, we just completed our Lone Star Express, and we came in significantly under budget.

And we saw that this year was coming, but we actually realized it as we brought the pipeline online here recently. So that was some of it. We also -- a little of it has been deferred and then and then some of it is just we put it on hold because some of the producers that we were contracted with have held up drilling, and held up the need for some of the services that we were going to provide.

Tom Long -- Chief Financial Officer

Yes. There's not a whole lot more to add to that. It really is the savings. We lowered it by, we said a little over $100 million, and those are the primary drivers.

There's some other what I would call smaller, immaterial type projects. But that clearly is the driver what Mackie just went over.

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Thanks, Tom and Mackie, for the color here. Have a good day.

Mackie McCrea -- Senior Management Team

Thank you.

Operator

Thank you. Our next question comes from Jean Salisbury with Bernstein. Please, proceed with your question.

Jean Salisbury -- Bernstein Research -- Analyst

I had one more about Mariner East to NGL. Is the right way to think about that that your substitute pipe is already moving the vast majority of the available NGL. So the upside on EBITDA will mostly be from the natural gasoline that starts. But that's most of the upside that we should expect and not get more NGL volume and revenue.

Mackie McCrea -- Senior Management Team

This is Mackie. No, it is both. So as we complete Mariner 2 at the end of this year, and to act later on in 2021, we have volumes that will be coming online both transport volumes and volumes that will need to be drilled and exported, or sold in a local market. So, we will increase our NGL volumes and our throughput both for ethane to a certain degree a little bit and also for LPG.

For LPG. But the portion of the 8-inch line that we're converting that will be moving refined products. That would be brand new revenue that we have never received new business where we'll be able to benefit from the arbitrage or the spread between the Chicago market and the New York market. Really on a monthly basis, wherever the highest price for gasoline is.

We'll be able to buy directly move either direction. So we see that just almost as just another system.

Jean Salisbury -- Bernstein Research -- Analyst

That LPG that you'll pick up is meeting by rail. I guess.

Mackie McCrea -- Senior Management Team

Correct. By rail, or some volume growth.

Jean Salisbury -- Bernstein Research -- Analyst

Yes, That's very helpful. And then my second question is that I think that the early Permian expresses, like Permian Express 1 and Permian Express 2. I think those looked at as mostly five and seven-year contracts in 2013 and 2015. Can you be -- can you come in if we should be expecting some rollout from that next year.

It seems like the bids would have come from the original contracts coming off.

Mackie McCrea -- Senior Management Team

Yes. We've actually had one of those rolls off this year, and yes. Over the next couple of years, we will have several more rolling off. However, we are working on a project moving at board going to happen where we're working with another company to move barrels from Cushing that will start filling in some of the Permian Express 1 capacity of the contracts that will rollover.

So, if we're unable to roll them over at rates that work for us. We do have some volumes that we'll be filling in by at least 60,000 barrels of 65000 barrels a day with the ability to double that as the market allows. So we are -- as I said earlier that's our biggest focus and our partnership is to look at our crude capacity as the contracts rollover in and extend those contracts or chase new barrels and/or utilize some of those pipelines in a different service. that's very helpful.

Jean Salisbury -- Bernstein Research -- Analyst

That's very helpful. Thanks.

Operator

Thank you. Our next question comes from Keith Stanley with Wolfe Research. Please, proceed with your question.

Keith Stanley -- Wolfe Research -- Analyst

Hi. Thanks. First, I just want to confirm. So you're gonna have a lot of free cash flow next year after growth capex and distributions now.

So I think I know the answer, but I just want to clarify. You expect 100% of that free cash flow to go to debt repayment at this point, or is there any flexibility at all on uses of the free cash flow.

Tom Long -- Chief Financial Officer

There's always flexibility. But I will say we expect at this time for 100% of that to go toward debt paydown. It's one of those that once we get into our target range of four to four and a half, we will evaluate that further. But right now, we're focused on bringing the leverage down.

Keith Stanley -- Wolfe Research -- Analyst

Thanks. And one other quick one just -- any interest still in the preferred equity market to further accelerate deleveraging after the distribution cut.

Tom Long -- Chief Financial Officer

Yes. We will take advantage of that market when it makes economic sense. And we do feel like that's something that does accelerate it. You're exactly, right.

And we will continue to monitor that market.

Keith Stanley -- Wolfe Research -- Analyst

Great. Thank you.

Tom Long -- Chief Financial Officer

Thank you.

Operator

Thank you. Ladies and gentlemen that's all the time we have today for questions. I'd like to turn the floor back over to Tom Long for closing remarks.

Tom Long -- Chief Financial Officer

All right. Thank you. And once again, we really appreciate all of you for joining us today, and as we've mentioned today, we remain very excited about the performance of our existing asset base, as well as all of the projects that we have coming online. Thank all of you for your support.

And we look forward to talking to you in the near future.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Tom Long -- Chief Financial Officer

Yves Siegel -- Siegal Asset Management

Mackie McCrea -- Senior Management Team

Shneur Gershuni -- UBS -- Analyst

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

Pearce Hammond -- Simmons Energy -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Ujjwal Pradhan -- Bank of America Merrill Lynch -- Analyst

Jean Salisbury -- Bernstein Research -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

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