Morgan's Quarterly Earnings Conference Call. Today's call is being recorded. If you have any objections, you may disconnect at this time. All lines will be open. I would now like to turn the call over to Mr.
Rich Kinder, Executive Chairman of Kinder Morgan. Be open.
Thank you, Missy. Before we begin, as usual, I'd like to remind you that KMI's earnings release today and this call will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities will be subject to the exchange act of 1934 as well as certain non GAAP financial measures. Before making any investment decisions, we strongly encourage you to read our full disclosure will be recorded. Thank you. Thank you.
Thank you. Thank you. Our next question comes from the line of David. Thank you. Thank you.
Our next question comes from the line of David. Thank you. Thank you. Will be recorded for important material assumptions, expectations and risk factors that may cause actual results to differ materially from those anticipated and described in such forward will be subject to comments on the strong cash flow we're generating and how we're using and intend to use that cash flow. Whether you look at our cash flow for the Q2, will It's also apparent that we continue to live comfortably within that cash flow.
The question investors should ask on a continuous basis will It's whether we are wise stewards of that cash. We have said repeatedly that we would use our funds to maintain a strong balance sheet, will pay a good and growing dividend, invest in new projects or acquisitions when they met our relatively high return hurdle rates and will be subject to the purchase of the company's business. We will be conducting a number of key initiatives to will be subject to our customers by helping connect natural gas supply with Northeast demand areas. The acquisition is immediately accretive to our shareholders, and I believe it will be an important will be subject to the financial results and profitable asset for KMI for many years to come. Our second acquisition is to make an attractive platform investment in the rapidly growing will Renewable natural gas market by purchasing Kinetrex for approximately $300,000,000 Steve will talk about this acquisition in detail.
We believe there is a bright future for this business and other related energy transition businesses that we are exploring. Will Now let me conclude with 2 important points. Both of these acquisitions meet our hurdle rates that I referred to earlier and both are being paid for with our internally generated cash. I believe both fit within the long term I believe both fit within the long term financial strategy that I speak to each quarter and I can assure you that our Board looks will be subject to the financial strategy. And with that, I'll turn it over to Steve.
Okay. Thanks, Rich. I'm I'm going to make a couple of additional comments about the 2 acquisitions and then turn over to Kim and David. On the Stagecoach storage and will We closed that transaction earlier this month. It adds 41 Bcf of certificated will be in pretty flexible working gas storage capacity and 185 miles of pipeline.
We're excited about this transaction for several reasons. As we discussed in the Q1 call, we think storage value is going to increase over time. Its value was certainly revealed during winter storm Yuri, And we've seen that start to show up in our commercial transactions. Storage will also become more valuable as more intermittent renewable resources are added to the grid. Will be in a part of the country that is constrained from an infrastructure standpoint and frankly where it is difficult to get new infrastructure permitted and built.
We're excited about this transaction and believe it will pay off nicely for our shareholders. The second transaction, which we announced at the end of last week, will accomplished by our newly formed Energy Transition Ventures Group. We put that together in the Q1 of this year. We're acquiring Kinetrix, Our renewable natural gas business subject to regulatory approval and a couple of other closing conditions. At signing, Conetrics had secured 3 will be subject to new signed development projects that we will build out over the next 18 months, resulting in a purchase price plus capital at a less than 6 will be subject to the next question.
With Conetrics, we're picking up a rare platform investment will be in a highly fragmented market. It gives us a nice head start on working on 100, if not 1,000 of potential will be subject to the next question. Renewable natural gas project candidates in the U. S. A few more points on this deal.
As several of you pointed out in your will be subject to the comments post announcement. The value is dependent on RINs value. You don't make money on the gas sale, with an important exception will get to in a minute. Importantly, the particular RINs that this business generates are D3 RINs, which can be used to satisfy will be subject to other RINs obligations as well. D3s are for advanced biofuels and promoting more of those in the transportation fuel market will have bipartisan support and even more support from the environmental community than conventional ethanol.
While there is some regulatory flexibility in EPA's will There is an underlying statutory framework, again with bipartisan support combined with widely acknowledged will be subject to the will be subject to the opportunity to mitigate our exposure to RINs pricing volatility. Based on conversations with potential customers, not signed deals yet, will The conversation so far, there is significant interest in renewable natural gas in the so called voluntary market. These are customers who are outside of the transport fuel market who are interested in reducing their carbon footprint and we believe would transact on a long term fixed price will be in the same space. There are also potential customers interested in sharing the risk and reward of the RIN's value. So we will look for appropriate ways lock in the value of the environmental attributes on attractive terms.
When we talked about our Energy Transition Ventures will In the past, we've talked about transacting on attractive returns for our shareholders, not lost leaders and not doing things for show. Will This deal is a great example of that. In the team's short existence so far, they've acted on an attractive opportunity and they continue to work on a number of other specific project opportunities. So very good progress in a short period of time. These two fields illustrate a couple of key points, broader points about our business.
The larger deal, Stagecoach, is a further investment in our existing natural gas will
be subject
to the business where we own the largest transportation and storage network in the country. That reflects our view that our existing business will be needed for decades to come. Hydrocarbons and especially natural gas have very stubborn advantages and will play an essential role will be in meeting the growing need for energy around the world. That's something we are well positioned for with our assets and especially considering our will the same time, we do see opportunities in the energy evolution by putting emphasis on evolution, and we're positioning ourselves there as well. We're doing this in will will be subject to the future than batteries.
We're doing it in responsibly sourced, that is low methane emissions, natural gas. We had our 2nd such transaction this quarter. We're doing it in our refined products businesses where we handle renewable transportation fuels, and we are actively developing additional business will be in that part of our business as well. The Conetrix transaction, while relatively small, positions us to develop a new business line in the renewable energy space at attractive returns and with a bit of a head start. The takeaway from all of this is that we continue to see strong long term value in the assets and service offerings we have today, while also pivoting in an appropriate and value creating way to the faster growing parts of the energy business.
And with that, I'll turn it over to Kim.
Okay. Thanks, Steve. First, I'm going to start with our business fundamentals, And then I'll talk very high level about our forecast for the full year. Starting with the natural gas business fundamentals for the quarter, Transport volumes were up 4% or approximately 1.5 dekatherms per day versus the Q2 of 2020. And that was driven primarily by LNG, Mexico exports and power demand on TGP, the PHP in service, will higher industrial and LNG demand on our Texas Intrastate system and then higher deliveries to our Elba Express LNG facility.
These increases were partially offset by lower volumes on CIG and that's due to declines in Rockies production and say it Bill Express contract expirations. Will Physical deliveries to LNG off of our pipelines averaged approximately 5,000,000 dekatherms per day. That's a huge increase versus the second will be recorded. LNG volumes also increased versus the Q1 of this year by approximately 8%. Will be subject to the Q2 of 2020.
Our share of Mexico volumes is about 54%. Overall, deliveries to power Relatively flat, delivery to LDCs were down slightly, while deliveries to industrial facilities were up 4%. Our natural gas gathering volumes were down about 12% in the quarter compared to the Q2 of 2020. For gathering will I think the more informative comparison is the sequential quarter. So compared to the Q1 of this year, volumes were up about 6%.
And here we saw nice increases in Highland volumes, which were up about 10% and the Haynesville volumes, which were up about 13%. In our product pipeline segment, refined products were up 37% for the quarter versus the Q2 of 2020. Will Volumes are also up about 17% versus the Q1 of this year. So we saw substantial improvement both year over year and quarter over quarter. Compared to the pre pandemic levels, and we're using the Q2 of 2019 as the reference point, will Road fuels and that's gasoline and diesel combined are essentially flat and jet fuel is still down about 26%.
Will Crude and condensate volumes were up 6% in the quarter versus the Q2 of 2020 and sequentially, they were up very will In our terminals business segment, our liquids utilization remains high. If you exclude the tanks out of service for will be required inspections. Approximately 98% of our tanks are leased. Most of the revenue that we receive comes from Fixed monthly charges we receive for tanks under lease, but we do receive a marginal amount of revenue from throughput. We saw will Throughput increased significantly, about 22% in total on our liquids terminals, 26% if you're just looking at refined products.
But that still remains a little bit below 2019, up 6% on total liquids volumes, 5% when you're just looking at gasoline and diesel. We continue to experience some weakness in our marine tanker business. But as we said last quarter, we expect that this market will improve, but it may take until late this year will as the charter activity tends to lag the underlying supply and demand fundamentals. On the bulk side, volumes increase by 23% and that was driven by coal and steel. Mill utilization of our largest steel customer exceeded will will In the CO2 segment, crude volumes were down about 9%.
CO2 volumes were down about 10% year over year. Will Increased oil and NGL prices should offset some of the volume degradation. But if you compare to our budget, will be Primarily by some nice performance on SockRock. CO2 volumes, we also expect to exceed our budget. So overall, we're seeing increased natural gas volumes and demand from LNG and Mexico exports as well as industrial demand on the will Gulf Coast, we're seeing increased gathering volumes in the Bakken and the Haynesville and nice recovery of refined products volume.
Will. Crude oil volumes are above our expectations in our CO2 segment and we're getting some price help. We're still experiencing some weakness will be subject to our full year forecast. As we said in the release, we're currently projecting full year DCF of $5,400,000,000 will That's above the high end of the range that we gave you last quarter. The range we gave you last quarter was $5,100,000,000 to $5,300,000,000 The out performance versus the high end of the range is driven by our Stagecoach acquisition, higher commodity prices and better refined products volumes.
And with that, I'll turn it over to Damon.
All right. Thanks, Kim. For the Q2 of 2021, we're declaring a dividend of $0.27 will be subject to the Q2 of 2020. This quarter, we generated revenue of $3,150,000,000 which is up $590,000,000 from the second will be in the Q4 of 2020. We also had higher cost of sales with an increase there of 495,000,000 will Adding those 2 together, gross margin was up $95,000,000 This quarter, we also took an impairment of our South Texas gathering and processing assets of 1 be subject to the impact of the year.
So with that impact, we generated a loss, a net loss of $757,000,000
for the quarter.
Looking at adjusted earnings, which is before certain items, primarily the South Texas asset impairment this quarter will and the midstream goodwill impairment a year ago, we generated income of $516,000,000 this quarter, be up $135,000,000 from the Q2 of 2020. Moving on to the segment EBITDA and distributable cash flow performance. Will Natural Gas, our natural gas segment was up $48,000,000 for the quarter, and that was up primarily due to favorable margins in our Texas intrastate business, will greater contributions from our PHP asset, which is now in service, and increased volumes on our Bakken gas gathering systems. Will Partially offsetting those items were lower volumes on our South Texas and Kinder Hawk gathering and processing assets and lower contributions from FEP due to contract roll offs. Our product segment was up $66,000,000 driven by a nice recovery in refined product volume.
Terminals was up $17,000,000 also driven by the nice refined product volume recovery, partially offset by lower utilization of our Jones Act tankers. Will Our CO2 segment was down $5,000,000 due to lower crude oil and CO2 volumes and some increased well work will be Those are partially offset by higher realized crude oil and NGL pricing. Our G and A and corporate charges were lower by $7,000,000 This is where we benefited from our organizational efficiency savings as well as some lower non cash pension expenses, partially offset by some lower capitalized G and A costs. Our JV DD and A category was lower by $27,000,000 primarily due will be subject to Ruby. And that brings us to our adjusted EBITDA of $1,670,000,000 which is 7% higher than the Q2 of 2020.
Will Moving below EBITDA, interest expense was $16,000,000 favorable, driven by our lower LIBOR rates benefiting our interest rate swaps as well as a lower debt balance and lower rates on our long term debt. And those are partially offset by lower capitalized interest expenses versus last year.
Our
cash taxes for the quarter were unfavorable will be $40,000,000 mostly due to citrus, our products, Southeast Pipeline and Texas margin tax deferrals, which were taken in 2020 will be recorded as a result of the pandemic, just timing and for the full year, our cash taxes are in line with our budget. Will Our sustaining capital was unfavorable $51,000,000 for the quarter, driven by higher spend in our natural gas, CO2 and terminals will be subject to the Q1 of 2019. But that higher spend is in line with what we had budgeted for the quarter. Our total DCF of $1,025,000,000 is up 2% will Our DCF per share of $0.45 per share is up 0 point 0 $1 from last year. On our balance sheet, we ended the quarter at 3.8 times debt to will EBITDA, which is down nicely from will For debt to EBITDA, we expect to end the year at 4.0 times.
And that includes the acquisitions of Stagecoach, which we closed on July 9th will and Connectrix, which we expect
to close in the Q3.
As a reminder that that level that our year end debt to EBITDA level will have the benefit of the largely non recurring EBITDA generated during winter storm Yuri earlier in the year. And our longer term leverage target of around 4.5 times has not be changed. On to reconciliation of our net debt. The net debt for the quarter ended at $30,000,000,000 almost $30,200,000,000 down 1,847,000,000,000 from year end and about $500,000,000 down from Q1. Our net debt has now declined by over will be $12,000,000,000 or about 30% since our peak levels.
To reconcile the change in the quarter in net debt, We generated $1,025,000,000 of PCF. We paid out approximately $600,000,000 of dividends. We spent approximately $100,000,000 of growth will be subject to capital and contributions to our joint ventures. And we had $175,000,000 of working capital will
be subject to the source of cash flows, primarily interest expense accrual.
That explains the majority of the change for the quarter. For the change year to date, will be recorded. We generated $3,354,000,000 of distributable cash flow. We spent $1,200,000,000 We've spent $300,000,000 on growth CapEx and JV contributions. We received $413,000,000
will be subject to the question and answer session.
And we have experienced a working capital use of Approximately $425,000,000 And that explains the majority of the change for the year. That completes the financial review, and I will turn it back to Steve.
All right. Missy, let's open it up for questions. And just a reminder to everyone as a courtesy to others on the call, we ask that you limit Your questions to one and a follow-up. And then if you've got more, get back in the queue and we will get to you. All right, Missy.
Let's open it up.
Yes, sir. Our first question comes from Jeremy Tonet from JPMorgan. Your line is open, sir.
Will Good afternoon. Good afternoon. I'm going to resist the temptation to ask about TCUS and ask about 2 different questions. I was just Curious, I guess, with the RNG space, it seems like that's a very fragmented industry where Kinder historically has played will Roll in fragmented industries and being a consolidator. Do you see a similar opportunity set here?
And I guess also, it seems like there is a good amount of will be subject to the competition from private equity and those with very low cost of capital to go after these type of targets. Just wondering if you could talk about the competitive landscape at point.
Sure. It is a very fragmented market, as you point out, and that does create some, I think, some good open fields running will For us, there aren't as I said, this is kind of a rare platform investment. We don't generally comment on M and A just because it's very hard to will project results there. It's something that we'd be open to again if we can get the right returns. Will But we think we've got a lot of opportunity to build this business organically.
And we think what we bring to the table in terms of competitive advantage is will Our existing network and our existing footprint, and I would describe that not just in terms of the obvious physical assets, the pipelines and storage that we have, will also, the customer access and customer context that we have that will enable us, I think, in some will be Decent sized chunks to develop and originate some additional business really in both categories, the voluntary market as well as the transport market. We've got good project management expertise. We're actually looking at whether or not we can make some of the equipment that's being deployed will be in these areas. And so we think we bring a lot to the table. We're getting a good team as part of this acquisition.
So we think We can expand this business, expand it organically and do it in a way that the returns are attractive.
Got it. That's helpful. Thanks. And then maybe just shifting to the Permian and gas takeaway. Just wondering if you could update us there on thoughts.
It seems the Capacity is loose now with PHP online, Whistler is soon to be online. But if the Permian grows as some expect, there could be tightness In the next couple of years, 2 to 3 years, but I guess that timing really depends also on how much Mexican demand materializes. It seems will The long awaited demand started to show up here. So just wondering if you could talk about those dynamics and I guess how you see Permian gas takeaway needs evolving over time.
Yes. So we agree generally with your projection there that we do think that the Permian, as it continues to fill up and it is a very active will be again, as you know, that there will be a need for yet another pipe to come out of there. And will Both our view of it as well as 3rd party views that we gather on this is that's probably mid decade, will be open. Which means that you have to start the commercial conversations a couple of years or maybe a little more ahead of that. So it's still will We had pretty active conversations in that arena before.
We know who to talk to about it. Will I wouldn't characterize those as super active right now, but we think they could as we get closer to tightening up the Permian.
Got it. I'll leave it there. Thank you.
Thank you. Our next question comes from Shneur Gershuni from UBS. Your line is open,
will Hi, good afternoon, everyone. Maybe I'll start off on the guidance side. I Definitely appreciate the color that you just provided to Jim's question. But with respect to the guidance, it seems like it's raised by a couple of 100,000,000 and you sort of seem will indicating about exceeding or meeting or exceeding the top end of the range. I was wondering if you can just sort of expand on the drivers on the change.
I mean, obviously, there's the Stagecoach acquisition, which you mentioned. There's the RNG acquisition as well, but it doesn't seem to account for all of it. Will Is it something related to better expectations in your refined products business? Is it on the natural gas side? I'm just curious if you can give us a little bit of color on will The elements involved in the guidance update.
Yes. The two primary factors other than the Stagecoach acquisition will be Our improved refined products volumes from what we previously expected. And as we said, on the product side of the business, will road fuel is now flat with 2019 compared to Q2 of this year will be closed. And then the other primary driver is higher commodity prices. And I'm measuring those are the primary changes will against the high end of the guidance, the $5,300,000,000
Okay, great. And maybe as a follow-up question, will Last quarter when you adjusted your guidance, you'd sort of pulled forward the ruby recontracting. And sort of in fact, I've sort of been thinking about the last will 3 or 4 years, you've kind of had like a re contracting trend in the natural gas segment that's essentially resulted in lower contract ranges and so forth. It's been about $200,000,000 a year drag on EBITDA. Is that now substantially over?
And so all the growth related projects that will be subject to the financial results. You're talking about on the energy venture side and so forth, or any of the capital growth that you spend will in fact be be additive to EBITDA from this point going forward. Just kind of curious if we're kind of done with the recontracting resets, if maybe there's a little bit left, but will Is it substantially out of the way at this point?
Yes. We do see it being lower post 2021, will And we update that as you know every January when we do our investor conference and we'll do that again. Will We see it as being lower in terms of the roll off post 2021. And so the background there is, I think you know well, is that will 10 years ago or a little bit more, we built a number of pipelines that were kind of point to point pipelines and they were built on the strength of long term contractual commitments in a very high basis environment. And so as you get to the end of those 10 or 10 plus year will contracts and they start to roll off.
They're rolling off into a more challenged basis environment for those particular pipes. And so that will Has had the effect of kind of masking or dampening, however you want to see it, some of the, I think, strong underlying performance in our natural gas will Pipeline segment. So that's what's been going on. And as I said, I think we see that as being lower from here. In terms of your broader question, it is we've invested all of our capital on a return.
Everyone Each one stands on its own from a return standpoint. We've been getting good returns as we show in our performance update there, very attractive returns on the capital We've deployed. In terms of the overall puts and takes though, there are puts and takes across a diversified asset portfolio like ours. Will push. And those puts and takes and the uncertainty around them in further out periods are hard enough to quantify or uncertain enough will be quantified for me to give you a specific answer to your question about base business than plus, right?
And so generally, what we do is give you the best view we will be open. So that our investors can make their own come to their own expectations about that future. But we don't guide beyond the current budget will be subject to the guidance like we're giving you today. So we try to provide the transparency and particularly around will The roll off issue in particular, but we don't guide beyond the current year.
Just to clarify, so the roll offs will continue for
will Couple of years or are we approaching the end of it?
There is still a couple of years to run, but they're very modest after you get through this year, Quite modest.
Okay. Got it. Okay, perfect. Thank you very much. Really appreciate the color today.
Thank you. Next question from Spiro Dounis from Credit Suisse. Your line is open, sir.
Thank you. Good afternoon, everybody. We'd like to start off with gas macro, if we could. Will We appreciate your all thoughts on the environment here and what that could be in for the near and medium term. Specifically, just curious how sustainable you think this price environment is.
I'm sure you're all talking to your will be reduced. And so curious what they're saying about their plans and activity for growth on the gas direct side of things. And And is there something incremental you could be doing here on the LNG side as well to capture even more of that market and more of that growth?
Will Sure. I mean overall on gas, the macro look on gas is we remain as others do bullish on U. S. Natural gas. And I think we see between now 20 years from now updated third party analysis see growth in that Market of about 23 Bcf or almost 24%, a pretty nice long runway.
And a lot of that is driven by exports. Will There's some industrial in there as well, but exports are a part of that picture. And for our business, We've tried to distinguish ourselves with our customers as a storage provider and a transport provider and a good operating partner to be able to will capture as much of that business as we can. We have a very good share of that business moving through our pipes today, and we look to expand it. And The map of where those facilities are coming in is lined up very nicely with our natural gas pipeline footprint.
And will Just to put a little more context on it. As we look at, and this is a different time frame now, 2020 to 2,030, the growth that we see in natural gas happening over that will be in the 10 year period. 80% of that is Texas and Louisiana, and a lot of that is the export market, and our assets are very well be positioned for that. In terms of the current natural gas pricing and the sustainability of it will And how producers are responding to that, I'll ask Tom to comment
a bit. Yes, I mean,
it's hard to predict the future, but I mean, I do think that Given that the demand growth seems pretty clear that we're certainly going to have a will be a tight market, at least for the intermediate term. What we're seeing and hearing on the producer side is will be a measured response. I mean, definitely, we're seeing an increase in activity. The rig growth has been certainly will be visible, but I think there's also a strong financial discipline that we're seeing in the producer community that's will I think going to make the supply side response a bit more delayed relative to what we're seeing on the demand side. So I do anticipate a fairly tight will supply demand balance here for the next couple of years at least, and I think that means a higher price environment.
Got it. That's helpful. Thanks, Tom. And then if we could just go back to Kinetrex quickly, it sounds like the path forward At least the base case is organic growth and not necessarily M and A, although I'm sure that remains an opportunity for you. And so as we're thinking about the returns on organic growth, I think The press release cited a less than 6 times fully capitalized return on this project, plus the M and A.
And so I think A lot of us took that to mean that organically, you can do even better than that. And so we're reading through it the right way. Are these 3 to 4x will be in the next few years. At some point, do those get competed away? I'm just curious how you're thinking about that component.
Yes. I Don't want to get into specific returns. There is at least a potentially competitive environment out there. But the returns that we're seeing are attractive will for how we look at other deployments of capital in the expansion context, and we make appropriate adjustment to those return hurdles based will be placed on the level of exposure to things like rents, okay? So we need to do better where there's more rents exposure.
And if we got secured firm long term fixed We can look at that a bit differently. But they are good compensatory returns and We are happy to invest in these opportunities.
Great. That's all I had. Thanks, Steve. Thanks, Neem.
Open. Thank
you. Next question comes from Keith Stanley with Wolfe Research. Your line is open.
Will Sorry to beat a dead horse on Connectrix. Are there any I just want to confirm, are there any fixed price in place today for the RNG sales. And then I guess bigger picture, can you talk a little more about the revenue streams for the business? You mentioned the RINs. Can you benefit from the low carbon fuel standard?
Just other attributes and trying to better understand the business. And then last part to that is just will I'm assuming most of the EBITDA from this business that you're buying is from RNG sales and the existing LNG business is pretty small. Is that fair?
I would ask Anthony to answer. Yes.
On the last part of that, I think currently right now, about 60% is from the RNG side of the business and the remaining piece from LNG. Once the 3 development plants will In service, it's closer to 90% RNG at that point in time. LNG is not decreasing over that It's just obviously the RNG component is increasing. And then sorry, remind me Keith on your will Yes. So in order to capitalize on LCFS, you need to establish a pathway.
We haven't established a
will
will be a rotation provider and generating the RINs. You would have to sell that environmental attribute will into California, establish the pathway. And quite frankly, the California market is really dominated from an RNG will standpoint by really the dairy side of the industry because the carbon intensity scores are much lower and so there's Much greater benefit for the RNG for LCFS as a result of that. So I would think of it as terms of will Landfill is the market for it is really is outside of
the California market. And then fixed price are variable today?
Yes.
So there's a certain part of the LNG offtake, which is take or pay currently. The RNG that's going to be sold into the CNG market with the 3 development plants will is effectively at an index price.
Got it. Thanks a lot. That was Very good color. Second question, I know the first was long winded there. So you positioned it pretty well that Stagecoach adds The core gas pipeline business and Kinetrix gives you this platform for growth in a new and exciting area.
Will Strategically, I mean, would you be open to maybe looking to selling down some of, call it, your less core businesses, whether that's Refined products pipelines and terminals, crude or other areas with less scale as sort of a source of funds to continue this strategy where you're be putting money into the core gas business and into some of the energy ventures.
We like the portfolio of assets that we have today. Having said that, I mean, we say what we always say. Everything is for sale at the right valuation. If someone can make more of investment that we have, then we can, then we'll consider that. If we did a bit of a sell down on MGPL, we continue to operate it and will continue to like our position in that asset, but we got good value there.
And so we do look at those things. But I think we've done a good job, particularly in John Slosher, the terminals business, kind of pruning assets to stay focused on the things that we really do well Over the years are kind of our hub positions and the like. And so there's not a path to sell on anything. Will be subject to
the comes from Tristan Richardson from Truist Securities. Your line is open, sir.
Hi, good afternoon, guys. I think it may have been pre pandemic when you last discussed possible incremental investment in SACROC expansion That might be more chunky type of CapEx. Is
the municipal approvals you noted
will Sort of a precursor to that type of expansion that you had discussed back then? Or can you sort of remind us the potential size and scope of this project?
Yes. So what we did that is talked about in the release today is we aggregated will some rights, to do further development. We did it in a place that is geographically adjacent to the SACROC unit, and We got approval to incorporate it into the unit and there's advantage to that in that we think we have good insight into will We entered in a fairly cost effective way, and we have good facilities at SACROC that let us do will So it's a nice opportunity for us, and we continue to look at that as well as will additional incremental investments within the unit within the existing unit will be open along the way. Jesse, anything you want to add?
Thank you. Okay. Thanks, Stephen. And then in In
an earlier question, you talked about the gas macro, but curious maybe on the midstream side. I mean, obviously, Kim noted that the Eagle Ford remains competitive, but will Clearly seeing improved activity at Highland. Does the view on midstream accelerate into the second half based on what you're hearing
Todd, you kind of need to look asset by asset. I mean, you're right. Will We've got some good performance happening on Highland. We're expecting to see some incremental performance based on the gas price dynamics that Tom will be subject to the same period in the Haynesville as well. That's come slower than what we expected, but I think it's coming.
And then just overall, will On the broader picture, natural gas midstream infrastructure, our pipeline network and our storage network, will continue to attract good value coming out of the winter storm, for example, not just in Texas, but really along our system. We've will Successfully transacted for incremental and also attractive, that is increasing renewal rates, particularly on our storage assets, will especially in Texas, but also elsewhere on our system. It was a bit of a, I think, a wake up call to the market generally that there is real value And having that delivery flexibility and real value in holding firm transport capacity. So I think just overall, we are seeing uplift, if will
Thank
you. Our next question comes from Jeanine Salisbury with Bernstein. Your line is open.
Hi, good afternoon. I guess I will ask one on CCUS since no one has yet. The way I understand it, the most Near term opportunity is taking CO2 from Permian processing plants and putting it into your existing CO2 infrastructure for EOR. Can you give some sense will Just the timing of this potential opportunity, basically how long does it take to install the equipment and physically connect one of these plants and what is the sense of urgency that you're hearing on this from processes.
Yes. I'll start and then I'll ask Jesse to comment more specifically on the deal front. You made the right point in your opening on the question, which is that the near term opportunity really is long existing will be impacted by the infrastructure and primarily processing and also ethanol plants because the CO2 will be in the stream is pure or fairly pure there. And so it still needs to be compressed and get it into the pipe, etcetera. The other The thing about it is the pipe itself, right?
The CO2 moves most efficiently in a liquid stay, which means high pressure. So that's 1800 to 2,200 PSI. And what that means is you're not going to repurpose a lot of gas pipe or oil pipe for that, for example, will When you tend to operate and call it 600 PSI to maybe 14.50 on the newer gas pipes. Will So that is then a barrier, right? If you've got to build new heavy wall pipe in order to will get it to a place where you can sequester it.
That's a barrier. EOR is a valuable application of that CO2. And so that does take that the near term opportunity. So having said that, I'll ask Jesse to comment on timing and
current deal activity. So in the Permian, there are several operators that we are in discussions with currently. Timing, you're probably looking at 12 to 18 months If it goes into EOR. So EOR permits are in place and you can go in, albeit at a lower credit. If it's
sequestration, you're looking
at much longer horizon
because you'll need a class will You're looking at much longer horizon because you'll need a Class 6 well permit, which currently the EPA has authority over. And there's only a couple of these in place throughout the United States. So that's probably more of 3 to 5 year timeframe obtaining 1. That's current today. But any OR that could be taken, I would suspect within will next 12 to 18 months.
Great. And can you comment on the sense of urgency any further or?
Will Yes. There's a lot of interest. Obviously, the credits were clarified earlier in the year. Will So the rules of engagement are there and the economic decisions are being made. So there is a lot of interest.
Moving will be subject to the FID stage and ordering equipment. Like I said, it's probably a good year to 18 will.
Great. That's all for me. Thank you.
Thank you. Our next question comes from Michael Lapides go to Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking my question. Actually, 2 of them and totally unrelated from each other. First of all, I know will You addressed the potential need for Permian takeaway, but how are you guys thinking about the need for Haynesville incremental takeaway? And whether you think the Haynesville will Starting to get tight from basically taking it out of the basin and either to the Southeast or straight down on the Gulf.
That's question will And 2 is a follow-up one. Somebody earlier asked a little bit about the asset mix and asset disposals. And Steve, I think you made the comment about No, everything for a price. Well, it's where does Elba fit into that? Because it seems like The infrastructure funds market or others are paying pretty healthy multiples for minority stakes will be in contracted LNG facilities.
So just curious, is there anything that would keep Elba kind of off will That table or your stake, or do you kind of view that as super core to the business?
Well, I'll start with Elvin Al's town to comment on Haynesville. So You may recall that actually this I think predates you covering us, but we did sell down an interest in Elkmont when we were will be posted on the call. Post contract, but still developing it. We did that. It was an attractive valuation for us, and it It helps share the capital burden.
And so we've kind of done that move, if you will, already. Will be open. And in terms of its how it fits in the overall portfolio, it is will It's kind of integrated with our broader system. We have the Elva Express pipeline, which we have opportunities on as well. We have the potential to do more at Alba in terms of storage and the like, and it's interconnected with our SNG system.
And so it fits nicely be within the portfolio of assets we have. Also, as you know, I mean, it's under a long term contract with Shell, will be open, which is an attractive credit and sort of risk profile for us, long very long term contract with Shell. And so It fits very well, and we did a partial sell down earlier, as I mentioned. Tom, on the Haynesville takeaway need.
Yes. So I think will be open. Given the increase in gas prices and the activity that we're seeing in the Haynesville Act, there's a will There will be a possibility that there will be additional Haynesville takeaway necessary. I think to my point That I made earlier, I think producers are really wanting to have sustainable prices at these higher levels before and they're I think living will be within their means, managing their balance sheet appropriately. So I don't think the activity is definitely increasing.
But I think if we sustain will see sustained gas prices and additional activity in the Haynesville, but will be 3 to 5 years, will Probably closer to the 3 year time frame. There may be a need for additional capacity out of that market.
Got it. Thank you, guys. Much appreciated.
Thank you. Our next question comes from Becca Followill with U. S. Capital Advisor. Your line is open.
Hi, guys. Two questions. One, minor, but in the non recurring items, there's legal and environmental and other tax charges that you got it back in of $28,000,000 and it was $84,000,000 in Q1, so $112,000,000 Can you talk about what's will Do you expect more of that as we go into the rest of the year?
This is in the nonrecurring items, Becca.
Will Right. And if you want, I can ask another question while you're looking at it. Go ahead. Okay. I can already tell, in your shoes.
The other side is It's kind of a variation on what Tristan asked is, so CO2, we've got oil prices now back close to $70 which is always pretty attractive economics, I assume, for that business. Are you anticipating maybe grabbing CapEx back up in that business? And is there any way to kind of stem some of the more significant declines that we've seen of late as you backed off on spending?
Will Yes. So we will continue to look at that like we always have Becca, which is we look at on an individual project basis and we make our assumptions around crude pipe. It does uncover the potential for more projects to become will be economic and we've got a couple that we're working on right now at both SACROC and Yates that are incremental. Will be recorded. And so we'll continue to look for those.
We've also seen it's true, we are experiencing year over year declines in that production. Will We are 5% above our plan and that is better performance from some of our SACRAC developments as well as a lesser decline rate than what we expected will be subject to the changes in the business. And so doing well versus our plan and continuing to invest opportunistically as we always have.
Okay. And then let me sneak one more in while he's looking for that number. It's just what commodity price is assumed in guidance now?
$70 and $3.50 So $70 on crude and $3.50 on gas for the back half of the year.
For the balance of the year.
Got you. Will
Okay. And on your questions with regard to the certain items, legal and environmental reserves, that's exactly what it is, will additional legal and environmental reserves. In the Q1, it was mostly some legal reserves with regard to a dispute that we had We have outstanding. We're getting a little closer to settlement, so we took a reserve there. And we also took some reserve for will incremental environmental impact, estimates that cost estimates that we have.
In the Q2, in this current quarter, it was related to a rate case reserve item that we've adjusted now that we have more information. And these things are will hard to call and come up sporadically. So I don't think that these are this is something that we'd anticipate will be recurring on a regular basis, but they come up sporadically.
Great. Thank you.
Thank you. Our next question comes from Christine Cho with Barclays. Your line is open.
Hi, everyone. I just have one question. Will Historically, you guys have included debt repayments at your equity investments, in your CapEx. Will And as we look to 2022 and try to think about and calculate free cash flow generation, with the Ruby pipeline debt coming due in first will be closed next year. How should we be thinking
about that?
Yes. That's right, Christine. We typically do. And we've done that in the years past where we had large I think with the ongoing conversations that we're having with our partner at Ruby, I think The determination of what we're going to put in the budget is to be determined. But if we plan to will fund our share of it.
It will
be part of the use of cash that
we expect for next year.
I just want to make the point will be As we've done for multiple quarters now, we are working with our partners, and we will be making an economic decision on this asset.
Do you have a time frame on when exactly?
No, we're not the only person at the table. So, I can't believe that.
Okay. Thanks.
Thank you. Our next question comes from Pierce Hammond with Piper Sandler. Your line is open.
Yes, good afternoon. Thanks for taking my questions. You have a great slide in your deck, Slide 24 that details the current estimated U. S. Carbon capture cost With ethanol on the low end and on the high end natural gas and then a comparison with the 45Q tax credit, That's a helpful slide.
My first question is, are you hearing anything in Washington about maybe boosting the 45Q above that will dollars a ton for non EOR.
Yeah. There is some discussion around that because I think people are will be excited about incenting that activity. And I think people believe that part of the solution here on greenhouse gas emissions is will have to involve continued use of hydrocarbons and also carbon capture, carbon capture just will generally. And so I think there is interest in doing that and expanding that. Will As Jesse pointed out, we just did get the final regs on the 45Q, and so that's out there and available to us to use today.
But I think it will continue to be a part of the conversation, not predicting where that will come out. I will not even venture a guess.
And then Steve, thank you for that. And as a follow-up, I know natural gas power plants, combined cycle power plants are listed on the high end of the cost, carbon capture cost And your graphic, but are you seeing interest? Is the phone ringing from some of the big companies like the big combined will cycle power companies, do they are they interested in CCS?
Very preliminary conversations with one of our power will Customers, but I would just say very preliminary.
But definitely more interest on the from the ethanol will
Well, it's just more within reach on the ethanol and the gas processing side for the reasons that you pointed out.
Great. Thank you very much.
Thank you. Next question comes from Michael Blum with Wells Fargo. Your line is open.
Will Thanks. Good afternoon, everyone. I'm wondering just in light of the acquisitions you've made this quarter, both on the energy transition side and obviously Stagecoach. Just how you're thinking about where buybacks kind of fit into the mix in terms of capital will be subject to the execution. And clearly, this quarter, it seems like you prioritized acquisitions.
So just want to get your thoughts on all that.
Will We've said repeatedly that we think we're good stewards of the cash flow we're producing. And we've said repeatedly We want to maintain a strong balance sheet. We will look for acquisitions if they meet our targeted returns. In this case, both of these did and we believe are very strategic to us. We intend to continue to pay a good dividend or raising will The dividend.
And then we'll look opportunistically at the opportunity to repurchase shares. And we're looking at all those in concert. Will And so it just depends on what the opportunities are.
Okay. Got it. And then I guess my other question is on Stagecoach. Will So you made some interesting points about why you think storage rates are going to increase over time. My question is, what is your ability going to be to capture that in that asset?
What does the contract position look like roughly so that will As rates do go higher, are you able to capture that? Thanks.
Yes. So there's the average contract life on that asset is about 3 years. It's kind of split right now. About 50% of that is with utilities and end users. The other 50% is predominantly producers, but includes will be subject to some marketing firms as well.
And so that's the general contractual timeframe. Will But look, we can look at doing short term transactions and other things, a combination of TGP and that asset will unlock some other potential commercial opportunities, which are incremental to what STAGECOACH could have done on a standalone basis. And the rates within the rates for Stagecoach Services are market based rates as well.
Perfect. Thank you so much.
Thank you. Next question comes from Jeremy Tonet with JPMorgan. Your line is open.
Will All
right. Thanks for letting me sneak one more in. Just wanted to touch on carbon sequestration real quick. If Texas Railroad Commission is successful in say the will So getting primacy, just wondering how you think that might impact the timelines of Class 6 wells such as what happened with Wyoming and North Dakota? And just do you will think that the wells, there's a greater chance that it's offshore, onshore, just given offshore being more costly, but having benefits such as will The rights with space, ports, what have you.
So just wondering your thoughts on sequestration development.
Yes. So it will shorten up the time will The Texas Railroad Commission is in charge of it. And now there's a process kind of alluded to there. Will So the Texas legislature in this last session did what it needed to do to set the Railroad Commission up to go seek primacy. But then They have to go put their plan together and put that on file, which could be this fall.
And then I don't know how long it will take the EPA necessarily to act. But once it acts and the Railroad Commission has control of it, I think they're going to process it very quickly. Will Yes. Cassie made the point earlier, the permitting process itself is today at the EPA is just very slow. I would think that they are going to want to, as a public policy matter, speed it up anyway, right?
But it's 5 or 6 years right now. That doesn't work. Will be subject to the question. And so whether it's the EPA speeding itself up in order to enable more of this for its own policy objectives or whether it's the Railroad Commission getting control of it, will get sped up. In terms of onshore versus offshore, we're obviously onshore focused in the opportunity will be subject
to the
will be for the reasons I said earlier. But Jesse, do you have any other comments on onshore versus offshore?
Yes, I agree. The surface ownership price is important, There are opportunities onshore as well where you have common ownership. So looking at both, but more cost effective to do onshore at this point.
The common ownership between the surface and
the metal.
Got it. Thank you.
Thank you. Our next question comes from Colton Bean with Tudor, Pickering, Holt and Company. Your line is open.
Thanks. Just one on my end. So a lot of questions on RNG will As we look at the concentration of CO2 and biogas coming off the landfill, is there an opportunity to integrate carbon capture
will Yes, there's certainly an opportunity. It's going to be a scale issue. These RNG facilities are relatively small at the plant themselves. So depending on the growth and the size will be challenging, but there is an opportunity.
Will will That does conclude today's conference. You may disconnect at this time and thank you for