Welcome to the Quarterly Earnings Conference Call. At this time, all participants are in a listen only mode until the question and answer session of today's conference. I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Mr.
Rich Kinder, Executive Chairman of Kinder Morgan. Thank you. You may begin.
Okay. Thank you, Sheila. Before we begin, as usual, I'd like to remind you that today's earnings releases by KMI and KML and this call includes forward looking and financial outlook statements within the meaning of the Private Securities Litigation Reform Act of 1995, the Securities and Exchange Act of 1934 and applicable Canadian provincial and territorial securities laws as well as certain non GAAP financial measures. Before making any investment decision, we strongly encourage you to read our full disclosures on forward looking and financial outlook statements and use of non GAAP financial measures set forth at the end of KMI's and KML's earnings releases and to review our latest filings with the SEC and Canadian Provincial and Territorial Securities Commissions for a list of important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward looking and financial outlook statements. Before turning the call over to Steve Cain and the team, let me again offer a few thoughts regarding what I would term our financial philosophy at Kinder Morgan.
As you will hear from David Michaels, our CFO, KMI continues to generate large amounts of cash flow. In the Q2 alone, we generated over $1,100,000,000 of DCF and that cash flow is growing with both our DCF and EBITDA increasing substantially for the Q2 compared with the period same period in 2017 and in fact on a year to date comparison. So we have strong cash flow and it's growing. The task for management and the Board is to make certain that this cash is deployed wisely and productively. As you know, we are doing these things.
We're de levering our balance sheet. We're funding our expansion CapEx with internally generated funds. We have increased our dividend with further announced substantial increases targeted for both 2019 2020, and we bought back shares. As stated in our earnings release today, we intend to use KMI's share of the proceeds from the sale of the Trans Mountain pipeline, estimated approximately $2,000,000,000 to pay down debt. In my opinion, using our cash for any and all of the purposes I've mentioned benefits our shareholders, and we will continue to use that shareholder benefit analysis as the litmus test on how to deploy our future cash flow.
Let me just assure you, we will not foolishly waste our most precious asset, which is the cash we generate each and every quarter. Steve?
As usual, we will be updating you on both KMI and KML this afternoon. I'm going to start with a high level update and outlook on KMI, then turn it over to our President, Kim Tang to give you an update on our segment performance. David Michaels, our CFO will take you through the numbers. Then I'll give you a high level update on KML and Dax will take you through the numbers and a couple of other topics on KML and then we'll take your questions on both entities. We had a successful quarter on KMI and KML.
Starting with KMI, we are having a very strong year. We are well above plan for the Q2 and the first half of the year. We expect to end the year at or above our plan. Our leverage continues to go down and we are showing a 9% improvement year over year in DCF per share for the quarter. Just as importantly, what's driving much of that improvement is strong underlying fundamentals, particularly in U.
S. Natural gas where our volumes are up sharply year over year due to increasing U. S. Supply and demand, including export demand. That drives value on our underlying assets as well as creating opportunities for projects.
We expect those fundamental drivers to continue and we are benefiting from it in our transportation and our sales business. In addition to being the nation's largest transporter of natural gas, we also own and operate the largest collection of storage assets. The improving fundamentals have not yet driven up storage values, but we would expect to see that improve and contribute to our performance as well in the longer term. So very good underlying operating performance and year over year growth. We've been saying for a while now that we want our leverage metric to be at or below 5x debt to EBITDA.
We ended the 2nd quarter at 4.9x and that obviously is before closing the Trans Mountain sale at KML. Management and the Board review that proceeds KMI receives as a result of that transaction should be applied to further reduce KMI leverage, giving us greater financial strength and flexibility. We believe it should also put us well on our way to upgrade lands. Getting to where we are today required intense focus by our whole team, focus on our day to day operations and maintaining cost and capital discipline without compromising the safety of our operation. It's also the result of improving performance in our business, which Kim will take you through.
On May 29, K and L announced that we have agreed to sell the Trans Mountain pipeline and the expansion project
for CAD4.5
billion or approximately CAD2 1,000,000,000 to KMI's shares. We guided to a late Q3 or early Q4 close and agreed with the Canadian government on a restart of planning and construction activity to be funded by a government recourse only credit facility. Everything is progressing as we said that. We have obtained some of the required regulatory improvements and we're making progress on the remaining. We have set a KML shareholder meeting date of August 30 and we are still expecting that late Q3 or early Q4 close.
We are having a good year. I'll cover the negative as well on KMI. First, we continue to weigh in on the FERC tax notice of proposed rulemaking. We continue to believe that the impact of that rule, even if it stays in its current form, will be mitigated and spread over time. We still estimate that the tax only impact of the rule is about $100,000,000 annually if fully implemented.
As an aside, the NOPR is not on the agenda for the July meeting. We don't have any special insight into why we hope the commission will take and we've been urging the commission to take more time to deliberate because this is a big issue and there clearly have been unintended consequences from it. We think the design of the 501 gs form is flawed and will produce an uninformative look at the appropriate cost of service for our assets. So if that process goes forward as is, everyone needs to keep that in mind as those forms come out. 2nd, it's frustrating to see our strong fundamental economic performance this quarter overshadowed a bit by the impairment of our investment in gathering and processing assets in Oklahoma.
These are not bad assets, but they are not as well positioned as our other assets, for example, in the Bakken and the Haynesville. And we have better risk adjusted return opportunities elsewhere in the portfolio like the opportunities we're pursuing in the Permian. We will look into alternatives, appropriate alternatives with respect to these particular assets. I'll also note that the value of our gathering and processing assets in the Bakken and the Haynesville is improving, but of course you don't get to write those assets up. Notwithstanding this non cash accounting charge, we're having a very good year on the fundamental economics of our business.
And with that, I'll turn it over to Kim.
Okay. Thanks, Steve. Overall, the segments were up 8% versus the Q2 of 'seventeen, so very strong performance. Natural Gas had an outstanding quarter. Transport volumes on our large diameter pipes were up 3.5 Bcf a day, up 12%, driven by increased supply from the Permian and the DJ and growing demand in the form of exports to Mexico, increased power demand, projects placed in service and some cold weather that occurred early in quarter.
Overall, the higher utilization of our systems, a lot of which came without the need to spend significant capital, resulted in nice bottom line growth in the quarter and longer term will drive expansion opportunities as our pipes reach capacity. Gas and crude gathering volumes were up 7% 19% respectively, driven by higher production in the Bakken and the Haynesville, slightly offset by lower volumes in the Eagle Ford. On the project side, in natural gas, we had a few noteworthy developments during the quarter. Since we discussed Gulf Coast Express in this call last quarter, we've contracted the 6% of remaining capacity and the pipeline is now 100% subscribed. Right of way acquisition is in process with mainline construction anticipated to start in October of this year and in service still anticipated for October of 2019.
We announced the letter of intent with Eagle Ford and Apache to jointly pursue development of the Permian Highway project, which is an approximately 2,200,000,000 Bcf a day project to move volumes from the Permian to the Texas Gulf Coast. Apache and Eagle Claw will also be significant shippers on this type if we go forward. Finally, on our Elba liquefaction projects, we now anticipate that in service will be in the Q4 of this year, approximately a 1 quarter delay, but that impact is factored into our meet or exceed guidance for the year, which David will take you through. Our CO2 segment benefited from higher crude volumes and higher NGL and CO2 prices. Net crude oil productions are up 4% versus the Q2 of 2017.
Saccarat volumes are up 6% versus last year and are 6% above plan year to date as we continue to find ways to extend the life of this deal. Currently, we are evaluating transition zone opportunities as well as off unit opportunities that are adjacent to SACROC where we already own the mineral rights. Tall cotton volumes were up versus last year, but are below budget. For the full year, we anticipate overall crude production to be very close to plan. Our net realized crude price was relatively flat for the quarter despite a higher WTI price as the increase in the mid cush differential offset the increase in the WTI price.
For the balance of the year, we have approximately 87% of the mid cush differential head. The Dermalt business was up 3%, benefiting from liquids expansion in the Houston Ship Channel in Edmonton and the new Jones Act tankers that came online in 2017 and better volumes on the bulk side. These benefits were partially offset by weakness in the North East, particularly at our Staten Island facility that is now subject to a New York spill tax, making that facility less economic versus facilities in New Jersey. Non core divestitures as we have reoriented our business to core hub position and lower charter rates on our existing Jones Act portfolio. Bulk tonnage was up 16% in the quarter, driven primarily by coal and steel.
Liquid volume was down the liquids utilization was down approximately 4% due to the Staten Island facility I mentioned earlier. In the product segment, we saw nice performance from our refined products business. Overall refined products volumes were up 3%, well in excess of the EIA number. Here we benefited from a refinery outage in Salt Lake that positively impacted our volumes to Las Vegas. But even after accounting for that impact, volumes were still nicely above the EIA numbers.
On the crude and condensate side, volumes were up 5 Finally, on the product side, ethanol volumes were up 10% due to primarily due to expansion projects on our Southeast terminal. And with that, I'll turn it over to David Michaels to go through the numbers.
All right.
Thanks, Kim. So today, we are declaring a dividend of $0.20 per share,
which is
consistent with last quarter's declaration, our 2018 budget, as well as the plan that we laid out for investors last July. The annualized $0.80 per share is what we expect to declare for the full year and would represent a 60% increase over the $0.50 per share that we declared for 2017. Importantly, as we noted in our budget, we continue to expect that this substantial cash flow we continue to expect substantial cash flow in excess of our dividend despite that robust increase year over year. As you've already heard, KMI had an excellent second quarter. Our performance was well above our budget and last year's Q2.
For the full year, as you've already heard, we expect to meet or exceed our DCF budget. With that, I'll walk through the GAAP financials and then move to the DCF, the distributable cash flow financials which is the way we primarily evaluate our performance. On our earnings, net loss attributable to common shareholders for the quarter is $180,000,000 or a negative $0.08 per share which is a decrease of $517,000,000 in total and $0.23 per share versus the Q2 of 2017. More than all of that decrease came as a result of after tax expenses of $647,000,000 which we categorized as certain items. For those of you who follow us know we define certain items as those items that are recorded in GAAP that are non cash or occur sporadically and are not representative of our business' ongoing cash generating capability.
Certain items this quarter were driven by a $600,000,000 impairment of certain gathering and processing assets in Oklahoma, which Steve already mentioned. So looking at the earnings adjusted for those certain items, the $180,000,000 net loss would be a net income of $459,000,000 which is $155,000,000 or 51% higher than the adjusted earnings of the Q2 in 2017. Adjusted earnings per share is $0.21 or $0.07 50 percent higher than that of the Q2 last year. And moving on to DCF, DCF per share is $0.50 up $0.04 or 9% higher versus the Q2 of 2017. Total DCF of $1,117,000,000 is up $95,000,000 or 9% above last year's quarter.
This very nice increase in DCF was driven primarily by the greater contributions from our natural gas and product segments as well as favorable cash taxes partially offset by higher G and A costs, interest expense and sustaining capital. Overall, the segments were up 8% or $137,000,000 with natural gas up 11% quarter over quarter contributing $96,000,000 of that total improvement. Natural Gas segment benefited in multiple areas. Highland and Kinderhawk assets were driven by increased volumes from the Bakken and Haynesville. EPNG and NGPL benefited from Permian supply growth.
Our Texas intrastates were up on greater volumes and margin and our TGP asset was up due to expansion projects placed in service. The product segments was up $28,000,000 or 10% driven by greater contributions from Plantation, Cochin and our KMST assets. G and A is up is higher $11,000,000 due to timing of certain expenses. As you can see, we're about flat from last year on a year to date basis. Interest expense is $9,000,000 higher than the Q2 of last year driven by higher interest rates which are more than offsetting the benefit
of a lower debt balance.
Income attributable to non controlling interest is higher by $13,000,000 when you add the NCI change with the change in the NCI share of certain items and that was driven by the IPO of our Canadian assets last May. Cash taxes are a benefit of $15,000,000 driven by lower taxes due to the tax reform benefit, tax reform benefiting our subsidiary cash taxpayers. Sustaining capital was approximately $7,000,000 higher than the Q2 of last year. We budgeted for this. We budgeted for sustaining capital for 2018 to be higher than 2017 and we're actually running a bit favorable relative to plan year to date though that is expected to be offset by higher capital spending in the second half of the year.
So to summarize, the segments are up 137,000,000 offset by the 13,000,000 for non controlling interests. Cash taxes are favorable by 15,000,000 offset by $11,000,000 of higher G and A costs and $16,000,000 of the combined increase in interest expense and sustaining capital. Those items altogether sum to $112,000,000 increase in DCF versus the $95,000,000 on the page. There are other moving pieces, but that gets you the big picture. 2018 is shaping up to be a very good year.
We expect DCF for the full year to meet or exceed our budget driven by better than planned performance from our natural gas and CO2 segments, lower cash taxes and lower G and A costs, somewhat offset by the sale of our Trans Mountain assets which we expect to close later this year, higher interest expenses due again to the higher LIBOR rates and lower performance in our liquids terminal business primarily in the Northeast. And one final note, the natural gas is while natural gas is ahead of plan year to date and is expected to finish the year ahead of plan, the segment expects to be impacted relative to budget in the second half of the year by the delayed in service of our Elba Island LNG project which Ken mentioned. Moving on to the balance sheet, we ended the quarter at 4.9x debt to EBITDA which is a nice improvement from last quarter and year end which were both at 5.1x. This quarter's metric would benefit some by timing as we expect greater spend in the second half of the year relative to the first. However, we anticipate that greater spend will be more than offset by the impact from the close of the Trans Mountain sale.
Excluding the impact from the Trans Mountain sale, we would expect to end the year below our budget of 5.1x. Net debt ended the quarter at 36 point $6,000,000,000 and that includes the 50% share of the KML preferred equity at $11,000,000 lower than year end and 3 $42,000,000 lower than the end of the Q1. To reconcile the quarter change, the $342,000,000 lower net debt, we generated $1,117,000,000 of distributable cash flow. We paid out $621,000,000 of growth capital and contributions to our joint ventures. We paid out $442,000,000 of dividends and we had a working capital source of cash of $288,000,000 the largest item of which is accrued interest and that reconciles to the $342,000,000 reduction in debt for the quarter.
From year end, the $11,000,000 lower net debt to reconcile that we generated $2,003,064,000,003 of distributable cash flow. We paid out $1,266,000,000 in growth capital and contributions to our joint ventures. We paid $719,000,000 in dividend. We repurchased $250,000,000 of shares in the Q1 and we had a working capital use of cash of $118,000,000 mostly due to bonus and property tax payments in the Q1. And with that, I'll turn it back to Steve.
All right.
Thanks. So turning to KML, the big news during the quarter, of course, is the CAD4.5 billion Trans Mountain sale transaction. As we said at the time of the announcement, the sales price amounts to about CAD12 per KML share. And on top of that, we have a strong set of remaining midstream assets in an entity with very limited debt and with opportunities for continued investment and expansion as well as the potential for a strategic combination. We are laser focused right now on closing this transaction and that process is going well.
The KML Board will be reviewing the use of proceeds alternatives and we'll provide further guidance on that as we advance the transaction close, again also consistent with what we said the day we announced the transaction. As pointed out in the release, while all options are on the table, we generally don't view it as attractive to KML shareholders for us to sit on a big pile of cash while management hunts around for a transaction to use it on. So we're strongly indicating there, I think, that we're going to look for the best alternative for KML shareholders and that's what we're going to work through with the KML Board. And with that, I'll turn it over to Dax to take you through the numbers and a couple of other topics.
Thanks, Steve. Before I get into the results, I want to make a few general comments around KML. At this point, we expect the sale of Trans Mountain assets, as we have said, will close at the end of Q3 beginning of the quarter following the necessary regulatory approvals. The transaction will obviously result in significant proceeds approximately $4,200,000,000 after tax and we will update you on how we plan to use those proceeds following the KML shareholder meeting to approve the transaction. As we said in the press release, given that we're divesting of a material piece of KML, we are retracting the previous guidance that we provided and will provide updated guidance, including more granular information on the earnings power of the remaining assets around the time the transaction closes.
With respect to the future of KML, while the primary reason we set up KML which was to be a standalone entity for funding TMX is no longer relevant. KML will remain a viable company after the sale of TM closes as residual assets are strong fee based assets. Having said that, the KML board will be evaluating all of the options for KML and all of the options are on the table. Now moving towards the results. The Canadian Board declared a dividend for the Q2 of $0.1625 per restricted photo share or $0.65 annualized, which is consistent with our budget and previous guidance.
Earnings per restricted voting share for the Q3 of 2018 were approximately $0.02 derived from approximately $13,700,000 of net income, which is down approximately $11,400,000 or 45% versus the same quarter in 'seventeen. Stronger revenue associated with the baseline 10 concurrent terminal assets coming online, incremental equity at AEDC associated with Transmont spending and a one time gain associated with the sale of a small asset was offset by incremental interest expense resulting from the write off of the unamortized cost associated with the canceled Trans Mountain construction facility. In addition, in the Q2 of 2017, we recognized the foreign exchange loss associated with the intercompany loans that were settled at the time of the IPO such as the loss did not recur in 2018. Adjusted earnings which excludes certain items were approximately $54,000,000 compared to approximately 36 $1,000,000 in the same quarter of 2017.
During the
Q2, there were 3 certain items. The first was a $60,000,000 write off of the unamortized issuance cost of the canceled TransCon construction facility that I mentioned. 2nd was the roughly $3,000,000 of expenses associated with the TransCon sale and the third was a $9,000,000 gain associated with the sale of the small assets that I mentioned. Total DCF for the quarter is $91,800,000 which is up $12,400,000 from the comparable period of 2017, but unfavorable to our budget by approximately $7,000,000 That provides coverage of approximately $10,000,000 and reflects the PCF payout ratio of approximately 63%. The primary reason for the negative variance to budget was that we actually budgeted for the gain on the sale of the asset that I mentioned and that was treated in certain items.
While we normally don't budget for certain items, we did budget for this gain. However, after we achieved the gain, we decided that given the one time nature of the transaction was treated as a certain item excluded the DCF.
Looking at the components of
the DCF variance, segment EBITDA before certain items was up $19,600,000 compared to Q2 2017 with the pipeline segment up approximately $14,700,000 and the terminals segment up approximately $4,900,000 The pipeline segment was higher primarily due to higher AEDC associated with spending on the project and slightly favorable O and M. The terminal segment was higher primarily due to the baseline tanker terminal project assets coming into service and higher contract revenues and renewals at the North 40 terminal. On the baseline terminal project, we placed 6 of the 12 tanks into service during the 1st and second quarter.
We expect that 4 of the
remaining tanks will go into service in the 3rd quarter with the final 2 coming in the 4th quarter. G and A is higher by $3,300,000 was primarily the higher costs associated with being a public company. Lower interest costs and higher preferred dividends largely offset each other. Sustaining capital was unfavorable by approximately $1,800,000 compared to 20 17 with higher spending on Trans Mountain offset by lower spending
from Terminix. Cash taxes
increased by $1,500,000 over the same quarter in 2017. We were not required to make estimated cash tax payments in 2017, but did make payments
in Q2 2018. With that, I will
move on to the balance sheet comparing the year end 2017 to 6.30. Cash decreased to approximately 12,000,000 which is due to 144,000,000 of DCF excluding AEDC of $25,000,000 which is non cash, plus $247,000,000 of net borrowing proceeds, plus a $4,000,000 working capital other source of cash, offset by $322,000,000 of cash paid for expansion capital and $85,000,000 of distributions made of proceeds. Other current assets increased approximately $26,000,000 primarily
due to
an increase in prepaid property tax associated with midyear payments. PP and E increased 357,000,000 primarily due to spending on the expansion project. Deferred charges and other assets decreased approximately $60,000,000 due to the results of the light off of the unamortized debt issuance costs associated with the facility that I mentioned.
On the right hand side of
the balance sheet, total debt increased from 0 to $247,000,000 with the $247,000,000 being some of the approximately 115 and 132 line items you see. The approximately $133,000,000 is the balance of the new $500,000,000 working capital facility that replaced the canceled TMEP construction and working capital facilities and represents debt that will stay with KML following the closing of the transaction. The approximately $115,000,000 is the balance on the facility that we put in place with the government of Canada to fund construction on the project and on the government's behalf from May 31 until the transaction closed. The debt will go with the asset to the Government of Canada without a purchase price adjustment. In other words, KML will not be responsible for repayment of this debt.
Other current liabilities increased by almost $62,000,000 primarily due to an increase in PM expansion accruals as income taxes payable. Other long term liabilities increased by approximately $36,000,000 primarily due to
the receipt of Western stock premiums from shippers.
Finally, I want to offer
a couple of comments on expansion capital. On the Baseline Terminal project, we have now spent approximately $324,000,000 of our share of the 375 $1,000,000 project totaled with approximately $51,000,000 left to spend in 2018. You will note that the $375,000,000 total has been revised down from $398,000,000 primarily as a result of general condo savings. On the Trans Mountain expansion, we've spent approximately $125,000,000 as of fivethirty one, which is the date that the government started to pick up the tab and another $41,000,000 in June to government's account for total spend of approximately $1,300,000 to date as of June 30. With that,
I'll turn it back to Steve. All right.
Thanks. With that, we'll open up the line to questions on both KMI and KML.
Thank you. We will now begin the question and answer session. The first question comes from Colton Bean with Tudor, Pickering, Holt. Your line is open.
Hi, Colton.
Hi, Rich. So just to follow-up
on the comments around KML there. So following the close of the Trans Mountain sale, you've highlighted the possibility of being acquisitive in the Canadian market. Given some of the recent deals and valuations we've seen though, would you consider further divestitures if the interest is there?
Yes. Well, look, we will look at, again, all of the options. When you're talking specifically about M and A, I think there are a couple of considerations. Number 1, this is an attractive set of midstream assets and it does fit well with other entities. Number 2, we are coming out of this with very limited debt on the balance sheet, which gives us capacity even with a distribution of the proceeds.
When you say divestitures, that probably an asset divestiture probably doesn't make sense from a tax standpoint, probably doesn't make sense from a business integration standpoint. We've got a good set of relatively integrated assets remaining with the KML entity, but we'll look at all of the alternatives and including strategic combination.
Got it. Thanks for that.
And I guess just switching gears to Permian Highway. So on PHP, the base design calls for a 42 inches pipeline. You all noted the possibility of a 48 inches line.
We've seen some projects proposed with
a similar diameter with up to 5 Bcf a day of capacity. Are there any physical limitations that would prevent that level of compression on PHP or is it more a question of commercial support?
Yes, I don't know how you get to 5 Bcf on a 48 inches of pretty powered up 48 inches fully powered up 48 inches is about 2.7 inches roughly. So I'm not clear what context that's in. But look, I think on PHP, the customer sign ups and customer interest has been coming very fast. And when you think about it was just the Q4 last year that we signed up a 2 BCF pipeline project going from the Permian to our Texas intrastate system and now we're in advanced stages on a second one of similar potentially larger size. It's really incredible and I think speaks to 2 things.
1 is the robust growth in the production out of the Permian, but secondly, the value of our downstream network in terms of giving customers good alternatives to get their gas to the Houston market, power demand, petrochemical as well as LNG and Mexico exports. So we're proceeding on that. We didn't put it in the backlog. We're not ready to FID, but we think sometime in this current quarter that we're in right now, we could have more to say about that.
And so the 2.7 there, is there any work that you'd have to do on the downstream side of this, thinking more so along the Gulf Coast as you're connecting into the legacy system?
Yes, there is some. It brings a lot of gas into the network. And so there is some downstream debottlenecking that would take place to make sure that we can get that gas dished off to valuable markets.
Got it.
I guess just one last one here. So you highlighted incremental capacity sales for the Permian systems. Are you seeing any pricing power with regard to negotiated rates on either Kilometers Texas or maybe El Paso with legacy contracts roll off there?
Yes, one important distinction is. So our Texas intrastate interstate pipelines, generally doing negotiated rate transactions.
Yes, Jim. Negotiated rate transactions and really I think we are seeing both on EP and G and UPL as well opportunities to sell
very, very attractive negotiated rate deals
for at least the 2 to 3 year period until some of these other projects, take away projects come in to service and into some instances longer term than that. So a lot of demand for capacity to get out of the program.
Great. Appreciate the time.
Our next question comes from Jeremy Tonet with JPMorgan.
Just continuing with the Permian here and just want to check, is there any opportunities left on EPNG, NGPL, Texas Interstates to kind of squeeze out any other incremental capacity or are you guys kind of fully tapped out on that side?
No, we're continuing to expand on all three of those systems. We've been doing some extensive work and we are looking at others as well.
I guess, how big could
these be? Are they small or could they be notable? There's some it looks like there's some big constraints coming up. I'm just wondering how much opportunity there is.
Yes. Well, so Jeremy, starting with Texas, that's the biggest piece because if you look at the overall U. S. Market, the higher value market is on the Texas Gulf Coast now. And putting aside New England for a moment, I mean, in terms of just the absolute basis differentials, you have a depressed price in the Permian in West Texas and you have a very strong price in the Houston Ship Channel as well as the rest of the Gulf Coast because that's where all the incremental demand is.
So all the gas, including gas from the Northeast, including gas down the Gulf Coast line of NGPL, and others in the Texas Gulf Coast. And so the biggest chunk by far is the 2 Bcf project that we're actively building as well as a 2 to 2.7 Bcf project that we've got in advanced development.
Great, thanks. Yes, it seems like even ahead of those pipelines coming online, there could be some pretty big bottlenecks.
I don't know if
it's like 100 Mcf or is it bigger or smaller? Just trying to feel like how much relief could be there because there's concern that the production of gas in West Texas, if there's not enough takeaway that could impede production
growth rate?
Yes. There are continued to be bottlenecks and the infrastructure is trying to catch up to that now. And if you look at long term and all these projections are going to be subject to debate, but if you look at long term projections, there's a long term projection for a continued strong basis between the Permian and the Houston Ship Channel, and that's a consequence of just expected continued growth in oil and associated gas production. So we're trying to help our customers by debottlenecking those constraints a bit, but the growth in production continues to make those constraints and those differentials fairly persistent, which is a good thing for a company in the business of moving this stuff from place to place. And it's also a good thing that we have essentially with our assets, we wrap the part of the market that's really growing in terms of demand on the Texas Gulf Coast and even Louisiana.
That makes sense. And then I guess just looking at the balance sheet and if you are able to kind of get $2,000,000,000 of cash flow from KML to KMI, what type of target leverage are you looking for? You said you could be on an outlook for upgrade there. Would you just would you look to buyback bonds or keep cash on the balance sheet for projects? And how does this play into the buyback program?
How much have you executed there?
Yes. I think what we're telling you, of all the alternatives that Rich has talked about in terms of the use of cash, we're trying to give you some guidance here that we think the best use of that in this particular instance is to further de lever, to further reduce our leverage. And so that's what we intend to do and that's what we're telling you today.
So do you have kind
of an upside? As opposed to buybacks or something else.
Do you have a
kind of targeted leverage ratio that you're looking to get to at this point? And is the room still left on your authorized buyback program?
Jeremy, look, we KML hasn't said exactly what it's going to do with the proceeds. You've heard today that Steve said that they don't that we don't think it's a good idea to sit on cash in expectation of a hypothetical acquisition. So we're waiting on KML's decision. KMI has said once we receive whatever proceeds we receive, we're going to use to pay down debt. And so I think there is once we have the answer to that, we will update you to the extent that we change any of our leverage metrics at that time.
Today, we are not changing our 5x or better leverage
metric. But obviously, it doesn't take a genius to figure out that if you are reducing your debt by $2,000,000,000 or something in that range, that will have a material impact on the ratio.
It would be well below 5 times. It would
be well below 5 times and at that time is when we would share any resulting targets.
Thanks for that. And one last one, if
I could. The ENI arbitration ruling, is that kind of an NPV neutral event for
you guys or any more color you can share there?
I'll add more color than what we have in the press release. It's under a confidentiality arrangement. For disclosure purposes, we can state essentially what we've stated here, which is that we had a result. The result was termination of the contract, but also a substantial cash award to Gulf LNG.
Great. That's it for me. Thank you.
Our next question comes from Jean Anzal of Berenberg Bernstein. Your line is open.
Hi, there. Just a couple from me. The first one is, I've had a number of clients with concerns about your Permian Highway Pipeline Partners' ability to fund their share of the project. Could this be a possible showstopper? Or would Kinder Morgan be willing to take a larger share if it came to that assuming that customer contracts are there?
It's an attractive project to us. And so we would take a larger share of that with an issue. We don't expect it to be an issue though.
Okay. Thanks. And then now that your debt is below 5x and U. S. Oil prices and production have recovered, it seems like there's more room than in the past to sell non core assets and reshape your portfolio a bit.
When you look at your asset base, do you see a benefit in trimming in some areas where you don't have a huge presence? Or are you pretty happy with your portfolio? And perhaps even view the diversity as a benefit?
Yes. Generally, very happy with the portfolio that we have. We do continue to look at those things, so where they make sense. And John and his team in terminals have over a couple of years, they've pruned the assets to get his business lined up more toward the things that are the real hub positions as well as really strong positions in the bulk business. Tom has done a bit of that too.
I mentioned the Oklahoma G and P, that's not necessarily a divestiture, but JV or other alternatives we'll look at there. So we'll continue to look at it.
Okay. So maybe a bit about around the edges, but not a strong desire for changes?
I think that's fair.
Okay. That's all for me. Thank you.
The next question comes from Shneur Gershuni with UBS. Your line is open.
Shneur, Hi, how are you? Good.
Just a couple of questions and some of them are re asking some of the other questions that have been previously But first, let's just starting with
the TMX proceeds.
So you've clearly outlined that you're going to pay down debt. That's the first priority right now. Given the fact that it's a chunky pay down of debt, and as you said, it would be materially below. When we think about 2019, 2020 and so forth, in a scenario where operating cash flows after fully funding CapEx and the dividend, in the past, I think at the beginning in your Analyst Day this year, you had said, I think it was 5 $65,000,000 was available to buy back shares. Would that kind of be the approach that you would sort of take for 2019 and beyond that if there's cash available after funding CapEx and dividends out of operating cash flow that you would then direct it towards that?
Or would you still want to get meaningfully below the chunky paydown of debt that you're sort of indicating right now?
Well, I don't
know what you mean by chunky paydown. Paying down debt is paying down debt, Shneur. But so once we have reached our targeted level of debt, which as Kim said, we will share with you once the distribution of proceeds is finalized, then I think we can give you a clearer roadmap to where we will be in the future. But our thought on this is we are delevering. We are sprinkling the overall portfolio of the company in that respect.
And as I said in my opening remarks, that still gives us the opportunity to do all these other things, all of which benefit the shareholders. We've already plugged in anticipated substantial additional increase in dividends. We bought back $500,000,000 worth of stock. We can do more of either one of those. Obviously, we will continue to fund our expansion CapEx internally.
So it just gives us a lot more runway, I think, on a going forward basis, which we can share with you after that distribution is made.
Great. Okay. And so maybe 2 follow-up questions. First, on just sort of some follow-up on the Permian infrastructure. It sounded like you have some debottlenecking opportunities and it sounds like some could be some compression here and there and so forth that can give a couple of 100 ends a day of new capacity.
But at the same time, the plan is to bring on Golf Fest Express. You're talking about potentially PHP. I mean, how do you balance between spending capital to debottleneck for what would be addressing a short term issue versus cannibalizing a longer term issue. Can we expect that these types of debottlenecking capital projects have a much lower multiple in terms of expected returns? I'm just trying to understand kind of how you balance those type of items.
Yes. No, those are very attractive returns, but look, we don't we do both. We do both. And I think the other thing that came up in our opening remarks but I want to emphasize here is the value that having that increased production and really the increase in supply and demand that we're seeing across our network, what that does for our existing system. So even without expansion, without deploying capital, even small capital investments, we're seeing the value of existing capacity improve and increase.
People used to move on EPNG to the hub for free, right, and then aggregate for a downstream move. Now those little bits of capacity are all valuable and we're getting value for them. And so it's small projects like you say that are often done at very attractive multiples. It's bigger projects like Gulf Coast Express that are done at also attractive returns, but clearly not the multiples you can get for some of the smaller capital projects, but it's also an uplift to the value of our existing network.
Yes. And just one follow-up on that. To the extent that it is a short term opportunity because those volumes will ultimately move on Gulf Coast Express or on Permian Highway, we're taking that into account in our economics that we run to the extent that those short term opportunities require capital. As Steve said, they don't always require capital.
So just to
paraphrase, effectively, these short term projects are high return projects, but you also get operating leverage downstream from those projects, which I assume you would also have that operating leverage once Gulf Coast Express and PHB come online.
Is that the right way to characterize it? Yes, I think that's fair.
Great. And one final question, just follow-up on the pruning of assets. When you sort of think about even what has traditionally been labeled as core, are there any plans or any thoughts to further evaluate all of your segments? CO2 has always been one that investors have wondered if that's something that you're committed to in the longer term basis. Has anything changed as you've gone through this evolution over the last
2 years or 3 years?
Yes. CO2 is a good business for us. We have a scarce resource in the CO2 itself. We've got the infrastructure to get that to enhanced oil recovery fields. We own the enhanced oil recovery fields.
We also do, of course, third party sales of CO2. And we've got a good EOR team that knows how to turn that CO2 into high returns for the capital that we deploy there. We are a shareholder driven company. And whether it's little things or big things, we're going to look at what the best alternative and outcome is about for our shareholders. But I think all of those things make this a business that we're happy to hold.
Great. Thank you very much, guys. Really appreciate the color today.
The next question comes from Tom Abrams with Morgan Stanley. Your line is open.
Hi, Tom. How are you doing?
Hey, good. Thanks a lot. I just wanted to make sure I understood the Canadian
kind of
thought process because if the money stays at KML, it improves your balance sheet, if it's dividend to you, it improves your balance sheet. A part of the uncertainty is if it's used to make an acquisition, then that impacts your targeting or your debt level, if you will. And so without knowing what you're going to do with the proceeds, if you're going to go joint venture or not or something like that, you really can't indicate what your overall debt level is going to be. Is that about right?
Well, no, not exactly. So Tom, the concern that you have about, well, if the cash is diverted into some kind of an acquisition, I think you have to think about that as that's very rare. And the other thing is because corporate transactions, you can't project them, you can't predict them, they come together if they come together, only when a lot of factors come together. And that's why we're saying what we're saying. We don't think that shareholders, KML shareholders appreciate management just sitting on the cash and saying wait for me to do something with it as opposed to having the cash in hand so that they can do something with it.
And look, but as we said, all options are on the table. We're going to talk to the KML Board about it and think about the best strategic alternatives as well as the best way to use proceeds. Look, this is a significant amount of money. This is a great problem to have. It's $12 per share for KML and we want to make sure that we handle that and KML wants to make sure that it gets handled in the best way for our shareholders.
We're going to take some time to think, for example, about tax impacts on the shareholders who would receive cash or receive it in the form of buybacks, for example. There are some differences there. We want to understand those. And it's a big piece of this company, so we want to be thoughtful about it. But the good news and the very good news is that we've got a transaction that once we close it provides a substantial amount of cash and we've got a very good problem to have, which is what's the best way to deploy it.
A couple of other questions real quick ones. First, any steel tariff issues slowing procurement, slowing timelines on project?
I think we're in good shape on Gulf Coast Express. And steel is something that we're looking very closely at and we will be working very hard on making sure that we've got adequate sources of pipe for the 42 or the 48 and there is a distinction between those two diameters. There are fewer supplies for the 48 than the 42. And normally this would not be a consideration, but the steel tariffs are enough to make us spend some extra time to make sure that we've got a clear supply chain that gets that pipe to us at a predictable price and on time. And so it has an effect.
It's created uncertainty. There's no question about it. And so it's an uncertainty that we are actively managing and working on. So we're in good shape on Gulf Coast Express.
Okay. And then I want
to ask about this Jupiter crude project. And they're advertising you as one of their benefits because of connectivity to Corpus and Houston as they head down to Brownsville. But they're also looking for a joint venture partner. And I was wondering if that project appeals to you at all.
It's not one that we've talked about or thought about.
All right. And then the last
question is on the terminalling in New York. Is that something that's going to linger for the next couple of quarters at least, kind of continue to run off, if you will? And you won't have I'm asking if you'll have offsets to it, for instance, new tankers coming to the fleet or better volume somewhere else? We
have the baseline project that will be coming on. But yes, it will be lingering. Of our 3,600,000 barrels that are unutilized right now, 900,000
is just tanks that are out for repair API inspection, Leipsha 2A left,
dollars 2,000,000 of that is Staten Island and it's
all associated with a spill tax issue that was implemented a couple of
years ago that they rescinded the ability to have a rebate to us.
And so that has created a hole in our ability to release those tags.
We are 100% utilized in Houston. We're 100% utilized in Edmonton, Vancouver and in other locations. But we do have
an issue at Staten Island that we'll linger on until we can get that resolved.
And that's taken into account in our guidance for
the full year of when we say that we'll meet or exceed.
All right. Thanks a lot. Stop weakness.
Okay. Thanks.
The next question comes from Keith Stanley with Wolfe Research. Your line is open.
Hi. Good afternoon. Good afternoon. On KML, are there any hurdles or concerns or tax issues that KMI would face if
they elected to try to buy KML in
once the sale is completed? Or is that a relatively straightforward thing to do if you went that route?
Yes. I don't think there are any incremental complications associated with it. So I don't think there would be. And again, I think just to highlight what we said, all options are on the table.
Okay. Back to KMI, any material additions to the growth backlog during the quarter? The growth backlog was roughly flat when you look at projects added and projects placed in service. And again, that's without obviously the Trans Mountain change. But we continue to find good opportunities and work on good and it obviously does not include the Permian Highway Pipeline project.
We continue to find good opportunities in gas, some incremental opportunities in CO2 and some small expansion opportunities in our refined products and liquids terminals business. And one last quick clarification. Just when you say you're in good shape on GCX on the steel tariff, do you have an exemption request that I think the pipe for that project? We do. And we have an arrangement with our supplier that will resolve our ability to continue to get the pipe.
And so that's why I say I think we're going to be all right on the pipe on GCX. We've got domestic suppliers as well as it's actually more than half domestic produced pipe for GCX. And then I think we're going to be able to get we are getting the pipe from the foreign supplier.
Great. Thank you very much.
The next question comes from Darren Horowitz with Raymond James. Your line is open.
Hi, Darren. How are you doing?
Hi, Rich. I'm doing fine, and I hope the rest of the team is as well.
Steve, I apologize. I just want
to go back to the Permian Highway real quick. You mentioned the operating leverage downstream of the pipe. We can all see the opportunity either Acadia or Agua Dulce or Coastal Bend or even in the Permian. But from your perspective, what's the best ROIC for you to physically take those hydrocarbons beyond those points, those receipt points or delivery points to provide even a further increased netback to customers over the long term? And then as you guys think about capacity commitments on that line, recognizing the interest rate asset systems over 7 Bcf, you've got over 130 Bcf of storage connecting between this and possibly GCX.
How much capacity on THP do you want to have just for the Texas intrastate business under this scenario, like you said, theoretically basis could be wider for longer? Yes. So first of all, when we make the arrangements with our customers, they get downstream connectivity with that deal. Now the downstream connectivity is on our network. And look, I think the right way to think about that, Darren, is we've got about a 5 Bcf a day system there today.
And with Gulf Coast Express, we're bringing another 2 to it. And with Permian Highway, potentially another 2 on top of that or potentially more coming into that system and demand growing to soak it up. And so that puts us right at the center of the traffic between the biggest growing supply resource and the fastest growing market. And that's a good place to be in terms of enhancing our transportation values, our opportunity to purchase gas. And we do have some purchased gas on Gulf Coast Express to feed our sales business there and as well as on storage.
So it's just a good it's a very good position for us to be in.
Steve, when you guys look
at the amount of Permian supply growth converging on Waha and the impact of basis, beyond an upscale Permian Highway and GCX, how much incremental pipe capacity do
you think is necessary to
keep pace with supply growth? If you look at the projections in the Permian, there's still more to come. And what the best ways are to debottleneck and versus newbuild, I think still remains to be seen. And are people really willing yet to sign up for long term commitments that would fully commit a third pipeline? It's unclear.
But right now, we've got a pretty good looking opportunity on a second pipeline for us out of the Permian.
That's all I had. Thanks, guys.
Next question comes from Tristan Richardson with SunTrust. Your line is open.
Good afternoon, Tristan. Good evening. Just a question on the strong performance in midstream. Can you talk about new projects so far this year of course in the Bakken and prospects for further capacity issuance there? Yes.
So we have a lot
of, I think, $300,000,000 worth of projects up in the Bakken to expand our gathering
system up
there, both crude and gas. Looking at other opportunities to grow with our major producer there, Continental. And I think longer term, there's likely to be a need to have a residue outlet on the transmission side, which we are certainly trying to take a look at that as well. So a lot of growth, a lot of opportunity up there. We feel really good about our position.
Helpful. Thank you. And then just one small clarification on the PH project as you guys firm up the potential scope there. Is the timing you guys have talked about, is that independent of the diameter you end up choosing?
Yes. Yes. Yes. So it's about a year later essentially than Gulf Coast Express, so Q4 of 2020.
Thank you guys very much. Appreciate it.
The next question comes from Dennis Coleman with Bank of America Merrill Lynch. Your line is open.
Good afternoon, Dennis. Good afternoon, Rich and everybody. Thanks for taking my questions. A few really just follow ups. Starting with PHP, as you sort of move the project forward, it sounds like we can expect to hear something maybe pretty quickly moving, I guess, towards FID.
Is that sort
of what I'm hearing? Yes. And it looks like it's coming together in Q3. Now as always, it comes with the caveat that sometimes we're dependent upon the customer is going to get some a board authorization or something else. And so sometimes those schedules can drift on us.
But in terms of the demand and the seriousness of the demand, it's coming together fairly quickly in the quarter that we're sitting in.
Okay, great. And in terms of other shippers coming onto line, are they also sort of chunky shippers like your anchors where they might be asking for participation? Is that
a possibility? Potentially, there's some still there's some very big chunks still out there to get. And we would look at each of those deals individually just like we do right now. I mean, we like owning and operating this project as well as Gulf Coast Express. But on the right terms, we would consider it as we did.
Okay. Yes.
That makes sense. I guess, if I can shift to KML again and just make sure I'm again understanding all the things you're trying to convey here. When you say you're looking at all options and then you say also that the assets fit as a unit and would fit with other entities that I can't help but think an outright sale could be possible and maybe if it were, it sounds like it would be sort of an all or nothing kind of thing. Is that an accurate interpretation of some of the messaging?
All options are on the table.
Okay. But if it were well, I guess, maybe just asking in a different way. Are you seeing incoming interest on the assets?
Yes. All options are on the table. I think we're going to stick with that. Look, I think you can look around at that sector and there are some natural There's been
some transactions there as well.
Yes. And there are some natural fits and this is a good set of assets and there are expertly advised for the KML Board on that. Okay. And then, I guess, I'll just expertly advised for the KML Board on that.
Okay. Thanks for that. And then lastly, I guess, I can't resist the credit rating question. It sounds like you're optimistic working towards an upgrade and any comments you might make there on timing and conversations with rating agencies?
We have regular conversations with the agencies. They we had some conversations in advance of this call and we'll have some after the call. We think with what we're disclosing here, we should be poised for at least being eligible for an upgrade, but don't want to put anything ahead of the agency. So we'll be talking to them in the coming days.
Okay, great. I guess and then I do just have one last one. On the FERC, you made some comments there and comments that there's nothing on the July agenda. But after that, then obviously, we're about to lose a commissioner. Any thoughts on that in terms of your projects that might need FERC review or just also just on implementation of what they did in March?
Yes. So first on the projects, don't see that as an issue. They'll still have a quorum. And one thing you've really got to say about this commission is once they got the quorum in place last year, they really started processing things and moving things along very effectively and caught up on their backlog and all of that. So I think that's all positive and we'd expect that that would continue.
On what it means for the tax number, we don't know. I think there were, as we said, unintended consequences there and this is a big thing. And so we would hope that they would spend a little more time deliberating about this rather than rushing it through. And I think that would be good for the overall success of what they're trying to do, but I think that would also be good for the companies under their jurisdiction. And so we're and it's not just us, a lot of companies urging them to do that and also urging them to fix some of the things that are in the nopper as it's proposed right now.
But we will have a strategy for if it stays the way it is and we will have a strategy for if it changes or we will work for it to change. But in either case, we expect its effect, as we've said all along, to be mitigated and spread over time.
Okay. Thanks for that and thanks for all your answers.
The next question comes from Robert Catellier with CIBC. Your line is open.
Hey, Robert. Hey, good afternoon, everyone. I just had a couple
of questions on KMI and
I think I'd like to start with the credit. I just want to understand what the pro form a company's
credit profile would be. It looks like you have
a new $500,000,000 credit facility, but that might expire upon the
sale of Trans Mountain. So
if that's the case, what access to credit will you have pro form a?
We would put another one Yes, exactly. As I said, the government facility will go across. Clearly, we'll have working capital needs. And so we'll put a new facility in place at the closing and obviously the press that are outstanding as well.
Okay. And then just going back to the question about what happens upon closing. How would you weigh keeping KML as a
public company now that its original intended purpose has changed it's no longer relevant versus the advantages of simplifying the corporate structure?
Yes. That is keeping KML as a public company is absolutely one of the options. It's smaller, clearly, as you know, but it's certainly strong enough to stand on its own And it's a good business and we've got good operations. It's a business that we understand and that John and his team can get the most out of. We've got a couple of expansion opportunities we're working on.
I mean, this is very that's very much an option for us. And so it is one of the options on the table.
Okay. Thank you.
Thank you.
The next question comes from Robert Kwan with RBC Capital Markets. Your line is open.
So it's clear you want to upstream the cash that you get on the sale up to KMI. I'm just wondering though if that happens, is it kind of definitive from your side that the cash would also be paid out on the restricted voters? Or do you see a potential scenario where KMI gets the cash, but the cash is held, say, for the restricted voters but not paid out?
No, no. The way that structure works is both sets of shareholders are treated precisely the same.
Okay.
Just turning to guidance, understandably, you're withdrawing it just with all the timing issues. But if you just drill down to the underlying assets, terminals, Cochin, has anything changed in terms of tracking against the original guidance for those assets specifically?
Yes, Robert, what I would say is there shouldn't be a meaningful change based on what we've walked you through since the IPO with residual assets. But as you can appreciate, we're obviously divesting of half of the company. The majority of the employees, including a lot of the shared services employees are going. We've got a cost allocation methodology that's going. And so we're having to sort of reconstitute the expense structure and everything.
So but again, we wouldn't expect that there's a meaningful change in the overall earning power of the assets they're saying.
Got it. And just the last question related to that. There was a reference you are withdrawing things like EBITDA and DCF guidance, but also the expected declared dividends. Is that just because you're contemplating a potential special or maybe on the other side, if the residual assets become the going concern, is there potentially you decide to right size the dividend just for what you've got that's remaining?
Yes. I think we would put that in the bucket of we'll decide
what we're going to do and update guidance at the time once we've made the suit.
That's great. Thank you very much. The
next question comes from Christine Cho with Barclays. Your line is open.
Hi, Christine. How are you doing? Good. How are you, Rich? Good.
So I have some housekeeping questions. You guys talked earlier in Q and A about some flat capacity in Staten Island until there is a resolution. Can you just get into what the potential resolutions are?
There's a number of resolutions from cold idling it to leasing it
out to a specific customer to shutting it down. And we're evaluating all of those.
It has a very small earnings impact overall, but it does have a meaningful impact on the utilization. Okay.
And then what drove the 1 quarter delay in the Elba in service date? And should we assume that all subsequent trains are delayed by the same timing?
Yes. First of all, some context here. So, Train 1, once they're 10 trains total, Train 1, once it's in service attracts about 70% of the revenue. And so there's all I'm saying, Christine, is it's a little bit less of an issue for the subsequent trains, but we still expect in Q3 of 2019 to be done with the entire project. The reason for the delay right now is kind of multi factor.
There was a delay in getting the units assembled and then delivered to the site, and we had some construction delays as well. We've been active in our involvement with our EPC contractor who has also been active in trying to address those. And we think we have the issues identified and in hand. But we definitely are experiencing a 1 quarter delay. So we still expect to get this done.
It's under budget. We've got contingency remaining. It's still going to be a very economic project for us and our partners, but we have had this 1 quarter delay.
Okay. And then can you remind us for the unhedged portion of your crude production Q2, is that fully exposed to the Midland basis?
No. So in 2018, we have 87% of the mid Cush spread hedged.
Okay. And then the 13% is not?
And then the 13% of Mid Cush is not, right.
Okay. And then last question. In the event that you it sounds like you guys are in okay shape for Gulf Coast Express. But in the event that you don't get a waiver for this deal for the Permian Highway Pipeline, should we think that the pipeline eats the cost or is the tariff going to be adjusted? How should we think about that?
Yes. First of all, it's not necessarily seeking a waiver in order to do it. It's really more making a decision about where we're going to get the pipe and making sure we've got a clear path to get it, not relying on a State Department waiver of our ability to get the pipe or get the steel for that. We are working on making sure that our cost estimate is adequate and to make sure that we're fully protected. It is a competitive market though, and so there is some limit on the ability to try to negotiate a pass through arrangement with shippers.
I see. Okay, great. Thank you.
The next question comes from Tom Abrams with Morgan Stanley. Your line is open.
Welcome back, Tom. Yes, welcome back. I just wanted to suggest that if
you do close down Staten Island, I think that place could use a really massive water park.
I wanted to ask though if
you on IMO 2020, if you had any preliminary thoughts on how your vessels might respond to that?
Our vessels are don't burn that type of fuel oil. It's all ultra low sulfur diesel and there's no impact on our business there.
Great. Thanks
a lot. That was it.
The next question comes from Douglas Christopher with D. A. Davidson. Your line is open.
Thank you
very much for taking my question. When we look at KMI and we see its recovery as a leader in the midstream and the volumes and the profits and
you talked about your great attributes of the company being
the strategically positioned fee based assets, predictable cash flows. It seems like the CO2 business, you live with all the you live with downside and we don't realize the upside. Can you just add a little more color, help us understand why it makes sense to remain involved in that business? Thanks.
Sure. Part of that business is so look at let's start with our overall segment earnings before DD and A. CO2 makes up on a budgeted basis for 2018 about 11% of that. Of that 11%, that's split 47% between source and transportation, which looks a little bit more like a midstream business. That's where we're moving the CO2 into the market for our use, but also for the use of our 3rd party customers who are involved in enhanced oil recovery.
That leaves 7% to COR. As I said earlier, there is very economically recoverable oil out there at today's prices and even prices that are much lower than today's price. The only way you can get that out is with CO2. We've got the CO2 and we've got the fields and we've got the EOR expertise. So it's an opportunity we kind of integrated forward into, if you will.
We started with the pipeline and then we added an enhanced oil recovery field. We did good returns in the business. It's a business that we understand we hedge in order to make those cash flows more predictable for our investors. So it has more of a stable and predictable cash flow. Our production is very predictable there.
We come within 1% or 1.5 percent of what we budget every year. And as I said earlier, notwithstanding all those good attributes, we are a shareholder driven company. And if we found the right opportunity, somebody was willing to pay us a sufficient amount and it was in the best interest of our shareholders, we'd obviously evaluate that. But for now, we're happy to hold it as well.
Thank you very much. That was helpful.
And we're showing no further questions at this time.
Okay. Well, Sheila, thank you very much, and thanks to everybody for listening to a rather lengthy call. We appreciate your attention.
This concludes today's conference. Thank you for participating. You may disconnect at this time.