Kinder Morgan Inc - Class P (KMI) — Q2 2016 Earnings Call Transcript

Okay, thank you, Laura, and welcome to our call. As always before we begin, I'd like to remind you that today’s earnings release and this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities and Exchange Act of 1934, as well as certain non-GAAP financial measures. We encourage you to read our full disclosure on forward-looking statements and use of non-GAAP financial measures set forth at the end of our earnings release, as well as review our latest filings with the SEC for a list of risk factors that may cause actual results to differ materially from those in such forward-looking statements. Now let me begin by just making a very few introductory comments before turning the call over to our CEO, Steve Kean, and our CFO, Kim Dang. First of all, the operating results for both the second quarter and year-to-date are very consistent with Kim's guidance, which she shared with you on our Q1 call and which were in our Q1 earnings release. And I think this demonstrates once more that our assets are consistent generators of strong cash flow, even in these times of volatility. Several specific events have happened since our last call, mostly positive. First of all, the National Energy Board of Canada recommended approval of our Trans Mountain Expansion Project. This is an important step, but we still need an order in council and that decision is expected in December of this year. We also entered into joint ventures, as you know, with Southern Company on our SNG natural gas system and with Riverstone on our Utopia pipeline project, and have also divested approximately $175 million of non-core assets. These steps allow us to significantly improve our balance sheet with the expectation of now ending this year 2016, at about 5.3 times debt-to-EBITDA, which is an improvement from the 5.5 times budgeted. In addition, we’re also reducing our future need for expansion CapEx, and all of this is getting us measurably closer to being able to return significant additional cash to our shareholders through either increasing the dividend or buying back shares. I can assure you we will continue on this right path, as we work to maintain and strengthen our balance sheet, while at the same time preparing to deliver increased value to our shareholders. And with that I'll turn it over to Steve.

All right, thanks. I’m going to update on capital and counterparty credit and then hit on some additional segment highlights and returns that we're seeing. On the capital update, we've been talking for several quarters now about high grading the backlog and how we do that. That consists of making sure that we're attending to our balance sheet, but also ensuring that we grow our DCF per share through investments that we're making at attractive returns and that we’re now funding out of the excess cash flow that we generate, without needing to access the capital market. The high grading includes select joint ventures on assets and projects. The Utopia JV shows that we can originate high-value mid-stream projects that are valued by investors. On SNG, we're entering a JV with our largest customer in a transaction which brings value to that asset, through specifically identified opportunities and is accretive in the medium-term. We've trimmed some projects from the backlog where they don't make sense from a return standpoint or in today's commodity price environment. Now, we've also made scope and cost savings improvements and in some cases deferred costs on projects that we're proceeding with. One example of this improvement is in the gas group in this quarter and part of the reduction in the backlog is due to this. We renegotiated a contract with a customer, as a result of that renegotiation was a reduction in our capital spend for that project, boosted return, and accelerated the end service date of a portion of the revenues. And we freed up some capacity that we believe we can resell. Meanwhile, the customer got the benefit of a lower cost longer-term deferred payment. We're going to continue to work on additional opportunities within our backlog and in addition to our current projects. The result of these efforts is a backlog which now has an EBITDA multiple of 6.5 times, CapEx excluding CO2 projects which tend to have higher returns but are more commodity price sensitive. We now expect to spend discretionary capital of $2.8 billion in 2016, which is down from $2.9 billion last quarter that we estimated for the year, and down $500 million from what was planned for the year. Our backlog is now $13.5 billion, down from $14.1 billion and that's a function of projects going into service, the Utopia JV, the project renegotiation that I mentioned, and that is against some project revision. So in short, we are making good progress. We're doing what we told you we would do. And that progress is on the balance sheet, as well as positioning us to grow our DCF per share. On customer credit, we continue our extreme focus throughout our commercial and corporate organizations. In the past quarter, credit defaults amounted to about 0.3% of budgeted revenue annualized, and most of that is associated with the Peabody bankruptcy that took place in the first two weeks of the quarter. Without that, we would be well under 0.1%. And again, putting our situation in perspective, we're a broadly diversified midstream company. We’ve got a strong and diversified customer base, which includes integrated energy majors, utilities and end-users. So the credit picture is stabilizing. Now for some of the segment highlights and trends, overall when I compare it to a year-over-year basis, the segment earnings before DD&A and certain items was down $31 million or 2% from Q2 of 2015 to Q2 of ’16. CO2 by itself is down $59 million, due to lower prices primarily, and lower production. Even though CO2 is making plans due to some price improvements and good performance on the cost-saving side as well. Compared to the same quarter last year, gas is down 1%, while terminals and products are up 4% and 8% respectively, so broad themes on our year-over-year performance. Number one, we continue to see strong demand for natural gas across our network. Transport volumes are up 5% year-over-year, we're getting good terms on storage, transportation, and sales renewals in our business. Power burn on our pipes is up 8% year-over-year and recall the power burn was up 16% from Q2 of ’14 to ’15, so there is strong compounding work coming from the power sector. For the first time ever, gas is making up a larger share of the fuel for power generation than coal. That's been true year-to-date for 2016, and if I look back to 2015 in the most recent quarter, 35% of generation came from gas, versus 27% from coal. Gas exports are up on our respective fields. Exports to Mexico have grown to 3.3 Bcf per day, and three-quarters of that volume moved on Kinder Morgan sites. We continue to believe and we're seeing that the need for natural gas transportation and storage service is growing as the demand in the power generation sector and industrial sectors continues to grow, along with export demand from Mexico and LNG. The products pipelines are benefiting year-over-year from higher volumes on KMCC and Quotient and the startup of the second splitter units in the Houston Ship Channel. In terminals, we're seeing the benefit of new liquids capacity coming online as liquids make up a little better than three-quarters of our segments earnings before DD&A in this business. And we're also seeing increased utilization in on-site, so more capacity online and higher overall utilization of that capacity. The second quarter was a record-setting quarter for throughput on our liquids terminals. On the bulk side, while coal volumes are down year-over-year, other coal volumes are partially offsetting that decline, particularly in petcoke and metals. We also renewed our steel handling arrangement with Deepwater for 10 years with some value enhancements in that new deal. Overall, the bulk part of the business is seeing higher year-over-year change to be explained by the coal banks. The negative affecting the business on a year-over-year basis are, of course, lower commodity prices, which affect us directly and the enhanced oil recovery part of CO2 and indirectly in our gathered volumes of gas and crude condensates. And even with oil prices and gas prices that are lower year-over-year by 18% and 26% respectively, we're showing durable performance from our portfolio. Lastly, an update on our Trans Mountain Expansion, this continues to be a two-steps-forward, one-step-back development. I’ll start with the fundamentals, while we consistently hear from our producer customers in Canada that they’re counting on this project to get built. Putting the recent fires aside in Alberta, production continues to grow, and takeaway capacity projects continue to be behind the demand. Oil prices have hurt Alberta for sure, so from the perspective of our expansion the supply and demand fundamentals for takeaway capacity are good. For the best of the federal review process as Rich mentioned, we have our NEB recommendation finding the project to be in the public interest, and the federal government’s undertaking its further consultation process with the objective of final decision in December of this year. We’ve made great progress with communities along the route and have agreements to support from a majority of the most directly affected first nations to date. We are actively engaged with the BC government on the satisfaction of their five conditions and we are making very good progress there. We’re going to be actively working with contractors over the summer on the always challenging work on cost and final steps for the project. Finally before turning over to Kim for the financials, I’m going to point out, as you probably noticed, the release is in a slightly different format than usual. What we’re doing is showing GAAP measures with equal or greater prominence further recent SEC guidance in public companies. As always, we’ll continue to show you all the numbers including the non-GAAP measures that we did. In our management of business, but this is a format we’ll show in times going forward. With that, I’ll turn it over to Kim.

Okay, thanks, Steve. Let me start by reiterating three overall financial points as Rich mentioned today is that we believe you should take away from this call. Number one, as Rich said, our full year guidance has not changed from the updated guidance that we gave you last quarter. We continue to expect that EBITDA will be about 3% below budget and DCF would be approximately 4% below budget. Being consistent with the guidance we gave you last quarter, this guidance does not include the impact of the SNG JV, which we anticipate will close in the late third or early fourth quarter. Secondly, we expect to end the year at 5.3 times debt-to-EBITDA, which is down from our budget guidance and the guidance we gave you last quarter, largely as a result of our balance sheet improvement efforts. When you annualize the EBITDA impact from the SNG transaction, we expect that the full year impact would be slightly higher than the 5.3 times. And third, our debt-to-EBITDA target remains around five times, and once we’ve reached that level, we will decide how to return value to shareholders, but we’re not committing to specifics at this time. On our dividend today, we declared a dividend of $12.5 per share consistent with our budget and the guidance we provided in December of last year. Looking at our GAAP income statement, we will see that revenues are down significantly. As I have said in many quarters, we do not believe that revenue or the changes in revenues are necessarily good predictors of our performance. We have some businesses where revenues and expenses fluctuate with commodity prices, but margin generally does not, which is why you also see a large change in the cost of sales during the quarter. In addition, our GAAP numbers could be impacted by non-cash, non-recurring accounting entries or what we call certain items. So if you turn to the second page of numbers, which shows our DCF for the quarter and year-to-date, I believe you’ll get a better picture of our performance. We generated total DCF for the quarter of $1.05 billion versus $1.095 billion for the comparable period in 2015. Therefore, total DCF was down about $45 million or 4%. The segments were down approximately $31 million or 2% with the $59 million decrease in CO2 offsetting increases in terminals and products. The $31 million decrease in the segment was partially offset by a $23 million decrease in G&A and interest expense. In net-out the $39 million increase in our preferred stock dividends you get a DCF earnings of $47 million versus the $45 million that we show on the page. There are a bunch of other moving parts, so that gives you the main one. DCF per share was $0.47 in the quarter versus $0.50 for the second quarter of last year or down $0.03. With about $0.02 associated with the DCF earnings that I just walked you through and about a $0.01 due to the additional shares that we issued during 2015 to finance our growth projects and maintain our balance sheet. Therefore, despite an approximately 20% decline in commodity prices versus the second quarter of last year, our performance was down approximately 4%. We believe these results demonstrate the resiliency of our cash flows generated by a large, diversified platform, primarily fee-based assets. Certain items in the quarter were relatively small, income of approximately $8 million, but let me describe a couple of them that you wouldn't have seen before so you make sure you know what they are. We had contract early termination revenue which is $39 million of income that is associated with a customer buying out its sourced contracts on one of our Texas intrastate storage fields. We also had $21 million in legal and environmental reserves and that was primarily related to the settlement of our over 10-year litigation matter with the City of San Diego. Now let me give you a little bit more granularity on our expected performance for the full year versus our budget. We expect natural gas pipelines to come in approximately 2% below its budget, primarily as a result of the lower volumes in our midstream groups and 4.5 months delay in service on our EEC, SNG pipeline expansion as a result of the delay in receiving our FERC certificate. CO2 is expected to end the year on its budget, and essentially here what's happening is we have some price help and cost savings that are offsetting a little bit lower oil and CO2 volumes that we budgeted. We currently expect terminals to end the year about 4% below its budget, primarily due to the impact of the coal bankruptcy. We expect products to end the year approximately 5% below its budget, due to lower crude and condensate volumes on KMCC, Double H and Double Eagle, lower rates on our SFPP pipeline, and the sale of our corporate pipeline. Right now, we are projecting KMC to be essentially on budget. On the expense side, interest, cash taxes, G&A and sustaining CapEx on a combined basis are expected to come in positive versus budget or said another way, generate a favorable variance, primarily as a result of lower interest. And with that I will move to the balance sheet. On the balance sheet, we ended the quarter with $41.3 million in debt that is an increase in debt of about $97 million since the end of last year and it's a decrease in debt versus where we ended the first quarter of about $234 million. So, let me reconcile that for you. DCF in the quarter, as I mentioned a moment ago, was $1.05 billion. We spent about a little under $870 million on expansion CapEx and contributions to equity investments. We distributed or paid dividends of about $279 million. We received proceeds from asset divestitures and JVs of about $220 million and then working capital and other items contributed a source of cash of about $110 million. Year-to-date, we generated $2.28 billion in distributable cash flow. We spent about $1.88 billion on expansion capital, acquisitions, and contributions to equity investments with the only significant acquisition being the acquisition of the BP Terminal in the first quarter. We paid dividends of $558 million, had proceeds from asset divestitures and JVs of $220 million and then we had working capital used of about $160 million, adjusted to the $97 million increase in debt year-to-date. We ended the quarter at about 5.6 times debt-to-EBITDA, which is consistent with where we ended last year and consistent with where we ended the first quarter. As we've mentioned a couple of times on the call, we expect to end the year at 5.3 times debt-to-EBITDA. So with that, I’ll turn it back to Rich.

Okay. And Laura if you'll open the lines we will take any questions that may arise.

I apologize for asking again, but I've received many inquiries. Could you help me summarize the type of asset that might be considered for joint venturing? We previously discussed Elba, and what are your thoughts on the timeline for that? Additionally, TMX is the largest standalone project we have in the backlog. Are you open to exploring any options regarding this project?

We've refrained from discussing specific joint ventures beyond what we initially mentioned when we outlined our plans for the year, primarily for competitive reasons. We don’t want to be tied to any particular deals due to various commercial and competitive factors regarding the parties we're involved with. Therefore, we're not disclosing the complete list of potential opportunities we are considering. However, it’s fair to say that we will evaluate just about any separable items in our backlog that we believe can generate good value and where we can achieve returns and promotion. Many items in our backlog are integral to our current network and asset base, which makes them more challenging to work with. Additionally, part of our strategy has been to maintain flexibility in our projects. So far this year, we have successfully reduced our debt-to-EBITDA ratio to 5.3, surpassing our expectations for the year's end. While I can't provide a detailed list of potential opportunities, I can share the general characteristics of what we are considering and highlight the progress we've made.

That's helpful. On TMX, can you remind me what the next step would be if we get the order of council in December?

So there is another process going on which is the BC environmental assessment or the environmental certificate I guess you would call it, which we believe will be close to time to when the federal decision comes out; maybe it lags by a month or so, that's another requirement. And again we're working through the BC condition five process, which is the premier statement of conditions that she would like to see in order to sanction a project, and we are making good progress on those negotiations.

And then last one for me, it's an asset-level one, can you talk a little bit more about the gathered volume number, was this kind of in line with what you guys were thinking post-1Q, especially in Eagle Ford, and then the same thing on that increase in power demand number being up so much?

Yes, I would say first on the gathered volumes, we made some good progress during this quarter and maybe a little bit during the last quarter in terms of timing and with signed picture stuff I think 6 with existing shippers at 7 with the new shipper were kind of incentive agreements to try to bring volumes to our system above the contract minimum. So we lost some volumes on our Eagle Ford system that we're now getting back by entering into these arrangements. So it's probably a little bit worse than what we would have been shooting or hoping for but I think we've taken the right steps during the quarter to get some volumes and send them back on the system. And so I look for improvements there. Yes. And then on power, we were watching to kind of see how power generation would play out. I think I'll say and Tom Martin is here too, a little surprised to the upside on the year-over-year improvement when you think about how big of a link we had last year. Now if you look at the year-to-date number it is not quite as strong because we had that weak winter and so Q1 was actually down a bit. But if you look down on a Q2-to-Q2 basis after having a very robust growth from '14 to '15, we saw growth on top of that of 8% and here I am just talking about our system. So 8% on top of that 16% that we saw before which I think is very strong and I think bodes well. We had another data point there as we had five of our six biggest days for power generation on the SNG system happen in the last 45 days; five of the six biggest.

I just wanted to clarify I guess your response to Kristina's question about new JVing your assets, so if I want to understand the backlog correctly if there is a project that's basically a brownfield expansion to an existing asset that makes it more difficult to pull off the JV but not impossible, but more likely to happen on something that is more discrete, is that a fair way to think about it?

That is a good way to think about it.

And then if I remember your call from last week, you've sort of indicated that BS and GS that steel effect that you took an operating asset and then entered into a JV that seemed more of a one-off type of thing and not to really think about that on a go-forward basis, does that imply to your CO2 business or is that one segment that you would actually consider JVing or outright selling?

Yes, as we said last week, I mean in general it's not going to make a lot of sense for us in general to be selling interest and I've been running assets that tends to be an expensive way to raise capital. I would characterize that as a somewhat unique opportunity in the SNG case, because what we had there is our largest customer, a great power market in the Southeast U.S. and some specifically identified and agreed to opportunities that we can jointly pursue in this JV that again is somewhat unusual for such a transaction that would actually make the sale of an interest in an existing asset accretive in the medium-term. So I think that the fairly unique situation. We've had a few others that are somewhat exceptional, and it's either a case where the customer on the asset or a third-party has a much higher value or places a higher strategic value on the underlying assets. Parkway was an example there were some others during the quarter. We sold a small Transmix facility, which we were essentially just doing spot business through and really not making much of anything on it, we had a third-party who was interested in doing more with that asset. And so again I think those are exceptional cases but where we see them, we go get them.

Okay. If I can follow-up with some financial-related questions, I guess first of all the credit market has been a lot more generous on issuers lately versus a couple of months ago. Had there if any thoughts to pre-funding some of the upcoming maturities? And I was wondering if you can also walk us through the delta on maintenance CapEx kind of seems like. Is it seasonal or is this part of your efforts to continue taking some cost out of this structure?

Sure. On the debt side, you’re right. I mean, we could issue tidier bonds right now it’s up 4%, so very attractive market. But we do not have any need to access capital markets during 2016. We will continue to evaluate whether it might make economic sense to pre-fund 2017. Obviously, we’re going to be getting proceeds from the SNG transaction, and we'll take that into account as well. On the CapEx, it is sustaining CapEx so we’re going to coming we think probably about within 1% of our budget on sustaining CapEx. And so it’s really we are running at a positive variance year-to-date versus our budget, but that’s almost entirely timing.

Yes. So it is timing of the work, we still plan to do the work. We are getting some cost savings, but we also plan to get the cost savings. So it’s relatively modest beyond what we budgeted for. And as always the work that we’ve identified that we’re doing for compliance and safety, we are focused on getting done and will get done in the year.

Okay. And one final question if I may, it may be an offline question. The CO2 business, how much of a benefit are you getting from the hedges this year? Is that something that you’re able to quantify relative to your budgeted guidance?

It’s about $265 million.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes, I'm not necessarily expecting an ongoing decline rate, what we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are maybe not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes that may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing, in many of these agreements and we're not meeting the volumes associated with that, and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

Yes, I believe that it is more advantageous to focus on increasing volumes rather than just collecting deficiency fees. We are collaborating with our customers to achieve this. The additional volume provides more value than simply receiving the deficiency fees, and we aim to work on the deal to secure that incremental volume, which we believe will benefit us and the producing parties.

Is that volume moving? I am sorry was that volume moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of 220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate, what we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shells in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are may be not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, I think in a broad brush we've got deficiency to be that of our employing in many of these agreements and we're not meeting the volumes associated with that and so anything that we can do and tie incremental volumes incrementally. And get a fee that is downstream we get additional value it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

Yes, I believe it is more beneficial to focus on increasing volumes rather than simply collecting deficiency fees. We are collaborating with our customers because higher volumes provide additional value compared to just receiving those fees. We will continue to negotiate deals to achieve this incremental volume, which we feel is advantageous for all parties involved.

Is that volume is moving? I am sorry was that volume is moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate. What we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are maybe not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing in many of these agreements and we're not meeting the volumes associated with that, and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

Yes, I believe it's more beneficial to focus on increasing volumes rather than just collecting deficiency fees. We are collaborating with our customers because the volumes generate additional value compared to merely receiving the deficiency fees. Our goal is to finalize the deal and achieve incremental volume, which we believe will be advantageous for us and the producing parties.

Is that volume is moving? I am sorry was that volume moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate. What we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are maybe not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing in many of these agreements and we're not meeting the volumes associated with that and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

Yes, I believe it's more beneficial to achieve higher volumes rather than simply receiving deficiency fees. We are collaborating with our customers because increased volume provides additional value beyond just collecting those fees. Our focus will be on negotiating deals that generate more volume, which we think will be advantageous for us and the producing parties.

Is that volume is moving? I am sorry was that volume moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate, what we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are maybe not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing in many of these agreements and we're not meeting the volumes associated with that, and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

Yes, I believe it is preferable to focus on increasing volumes rather than just receiving deficiency fees. We are collaborating with our customers because the additional volume provides greater value than merely collecting those fees. Our goal is to negotiate deals that yield more volume, which we believe will benefit both us and the producing parties.

Is that volume is moving? I am sorry was that volume moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate. What we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order, and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are maybe not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing in many of these agreements and we're not meeting the volumes associated with that and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

I believe it is more beneficial to focus on increasing volumes rather than just receiving deficiency fees. We are collaborating with our customers because the additional volume provides greater value than merely collecting deficiency fees. Our aim is to negotiate deals that yield incremental volumes, which we believe will benefit us and the producing parties.

Is that volume is moving? I am sorry was that volume moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate. What we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are may be not give the exact rates but may be talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing in many of these agreements and we're not meeting the volumes associated with that and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.

Yes, I believe it's better to prioritize increasing volumes rather than just receiving deficiency fees. We are collaborating with our customers because higher volumes create additional value beyond just the fees. We will focus on the deal to achieve more volume, which we believe will benefit us and the producing parties.

Is that volume is moving? I am sorry was that volume moving back to your systems that had been going different directions or you actually been incentivizing producers to produce volume that they may have chosen not to based on just making the deficiency?

I would just probably bring in volume back to our system that they have been going out to other places.

Just a follow-up on that last question so at this level of $220 million or so the investment in your oil business, what's your view of what ongoing decline rate we should expect going forward on your oil volumes?

Yes not necessarily expecting an ongoing decline rate, what we do in this business is we're looking at deploying capital that gives us an attractive return on the incremental barrels that we are producing that is associated with that capital spend and so that's kind of how we look at each of our investments here. We don't aim to necessarily look for higher returns, keep production flat or grow it slightly; we really make those decisions on each individual capital and investment in the development programs that we spend money on CO2.

Okay, thanks. And then just had a follow-up, can you just remind me if you have all the approvals that you need from Shell in order to start construction on Elba in the third quarter?

We have our contract with Shell. We have a FERC 7C certificate that we received in June, June 1, and what we're waiting on to proceed there is we've got to get through the rehearing process and rehearings were filed I guess 30 days after we got our certificate. So, there is the hearing process that we're going through now that should take 60 days from the date of that filing and we still need that, we've got to get through that process with all the smaller permits we're waiting on.

And those are permitting.

Yes, those are eminent.

Okay. And as far as from Shell’s perspective they are aligned with the timing with you guys?

I don't know what you mean by aligned with the timing, but it is a requirement for this project that we get a final FERC order, and that includes not just the 7C but also the rehearing and the permitting process.

Just a couple of quick follow-ups, Steve you talked about the incentives agreement that you’d able to reach on the gathered volume side, great to see those volumes coming back to the system. Can you give any more color around I guess what types of agreements those are, maybe not give the exact rates but maybe talk about additional opportunities on top of what you have already captured as far as the magnitude of potential volumes as to may come back in the back half of the year?

Yes, I mean the, in a broad brush we've got deficiency agreements with our employing in many of these agreements and we're not meeting the volumes associated with that and so anything that we can do to tie incremental volumes to incrementally and get a fee that is downstream, we get additional value, it makes sense to work around that deficiency, so I think that's sort of the general construct I am getting in doing more.