Ladies and gentlemen, thank you for standing by, and welcome to the Altus Midstream Second Quarter 2020 Earnings Conference Call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today to Mr. Patrick Cassidy, Director of Investor Relations. Thank you. Please go ahead, sir.

Good afternoon, and thank you for joining us on Altus Midstream Company's Second Quarter 2020 Financial and Operational Results Conference Call. We will begin the call with an overview by Altus Midstream's CEO and President, Clay Bretches; and Ben Rodgers, CFO, will summarize our financial performance and outlook. Our prepared remarks will be approximately 15 minutes in length with the remainder of the call allotted for Q&A. Remarks during the call may also refer to the Altus Midstream investor presentation, which can be found on our Investor Relations website at altusmidstream.com/investors. On today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the investor presentation posted yesterday on the Investor Relations website previously noted. Finally, I'd like to remind everyone that today's discussions will contain forward-looking estimates and assumptions based on our current views and reasonable expectations. However, a number of factors could cause actual results to differ materially from what we discuss today. A full disclaimer is located with the investor presentation on our website. With that, I will turn the call over to Clay.

Good afternoon, and thank you for joining Altus on its second quarter 2020 conference call. I want to begin by noting that we continue to operate under newly established safety protocols to prevent the spread of the coronavirus. The impact on staff and operations to date has been minimal, with office staff working remotely, and field staff following best practices for minimizing contact with one another. I recognize the inconveniences and additional burden this can create, particularly for field personnel wearing full face mask and 100-degree West Texas heat. However, these practices are necessary to operate safely and protect our team, families, and neighbors. And I want to thank our team members for their diligence in these efforts. On today's call, will provide an update on our assets, beginning with our joint venture pipeline projects, then move on to gathering and processing with Ben Rodgers reviewing our financial performance for the second quarter and updating guidance for the remainder of 2020 and the full year 2021. Altus holds interest in 4 joint venture pipeline projects that move oil, gas and natural gas liquids from the Permian Basin to markets on the Gulf Coast. Three of these projects are currently in service: Gulf Coast Express, Shin Oak and EPIC Crude with the fourth Permian Highway under construction and on schedule for start-up in early 2021. I'll begin with the Gulf Coast Express natural gas pipeline, which is operated by Kinder Morgan and fully supported by minimum volume commitments. GCX continues to make steady contributions to our quarterly results as the MVCs provide for minimal fluctuations in adjusted EBITDA. Moving on to the Shin Oak natural gas liquids pipeline. Second quarter volumes were impacted by reduced drilling activity and production curtailments in the Permian Basin. Low NGL prices, which led to some…

Thank you, Clay. In my prepared remarks, I will briefly review our financial results for second quarter, comment on our liquidity position, which is stronger than many may realize and conclude with updated guidance for 2020 and our current outlook for 2021. As noted in the press release issued yesterday, Altus reported second quarter net income including noncontrolling interest of $18 million. This included approximately $11 million related to an unrealized embedded derivative loss, which reflects technical accounting revaluation of the embedded derivative in our preferred units at the end of the quarter. Excluding this and other items, Altus generated second quarter adjusted EBITDA of approximately $44 million. This performance, while down from the preceding quarter reflects the strength of our JV pipeline projects as adjusted EBITDA was only down approximately 6%, while gathering volumes were down nearly 25%. The gathering volume decline is related primarily to voluntary production curtailments at Alpine High as well as the unscheduled maintenance Clay discussed. Approximately 75% of second quarter volumes consisted of rich gas. With the current commodity price outlook, we expect gathered volumes to increase this quarter as the majority of curtailed production at Alpine High is back online. Capital investment in midstream infrastructure during the quarter was approximately $74 million, nearly all of which is attributable to the Permian Highway pipeline, the only JV pipeline project not currently in service. Capital for gathering and processing infrastructure for the second quarter was $2 million. Including our gross proportionate share of capital in equity method interests, which is how we guide to growth capital investments, 2020 second quarter capital totaled $89 million. Before moving on to guidance, I want to highlight the company's strong financial standing. Our credit facility extends through November of 2023 and has investment-grade like covenants. In January, this facility…

[Operator Instructions] I show our first question comes from Spiro Dounis from Credit Suisse. Please go ahead.

Hey guys, This is Chad on for Spiro. Just starting off, based on commentary in the release, it seems like the dividend commencement is being pushed out in favor of debt pay down. Could you provide a little more color on how you're thinking about prioritizing delevering in the future? And are you open to taking down the preferreds?

Thanks for the question. So it's going to be a fluid situation. I think if we're looking into the future as we sit right now, obviously, becoming free cash flow positive in the beginning of next year when PHP comes online. We want to make sure that our leverage levels are very manageable, as you can see in our investor presentation that we've outlined. The crossover for the right time to take out the preferred we've talked about in the past has been at the end of 2021. So it's kind of late 2021, early '22 in terms of the MOIC and IRR threshold. Very manageable 7% distribution rate right now. And we'll look to different financing alternatives starting next year on the preferred as well. So a lot goes into play. I mean, Clay talked about some asset sales. Obviously, that helps fund predominantly the remaining portion of our CapEx, which is PHP. And with declining volumes in the on the G&P side, we're still having conversations for third party, but that's not in our guidance for next year. We've got to take that into consideration as well as you think about funding any opportunities. So it's going to be fluid. I just think as we sit here today, with the backdrop, it's more prudent to make sure you have manageable leverage both through the credit facility as well as through the preferred. And we're not taking a dividend off the table. We just need to make sure that when we do it, it can be a sustainable distribution to shareholders.

Okay. Understood. That's helpful. And then just switching gears a bit. You mentioned the fuel switching costs. And I know you mentioned we'll get a little more of a update on the magnitude of those cost reductions in the future. But is there anything that you could point to just to sort of get a high level sense about what benefits could look like?

Yes. Spiro, this is Clay Bretches. And on the benefits, there's a program that you can participate in, and we are in which you can elect to go off of the grid and go to our gas-fired compression. And in so doing, that allows us to reap the benefits from the higher prices in the ERCOT market. So that's something that you can't put a hard line on as far as what that value is going to be. And it depends on how hot is it going to be in the state of Texas during the months of July, August and September. Based on historical prices, we've seen a pretty good benefit from that. And we believe that that's going to have a benefit, but it's something that we'll just have to be able to quantify once it occurs. So we won't be able to give you guidance on that. We'll just have to wait and see how that looks. Now in terms of operating cost, and the electric powered compression versus the gas-fired compression, it's much cheaper to operate. And we believe that, that is going to be somewhere between 10% to 20%. And again, we'll be able to see this in real-time and quantify that for you because we're running them side by side. So right now, we have the electric-powered compression, but we also have some gas-fired compression out there of equal size. So we'll be able to make that comparison. And again, quantify that in the future months. And that's why we didn't try to do it for this particular call and give you those numbers. Those are numbers that we'll be able to identify in the next call and give you an idea on the O&M cost as well as what we believe is going to be a good number for us to latch on to in terms of the savings across the peak demand times and the peak pricing times in ERCOT in the heat of the summer. Does that answer your question?

Yes. It does.

It's a long way of saying more to come, but we but we should be able to give you some better numbers at the next call.

Okay, understood. Thanks.

Thank you. [Operator Instructions] I show no further questions in the queue at this time. I would like to turn the call over to Mr. Clay Bretches, President and CEO, for closing remarks.

Thank you, operator, and thank you all for dialing into our call today. I'd like to leave you with the following thoughts about Altus Midstream. Our outlook is improving. We've provided updated guidance for 2020 and an early look into 2021. We remain confident in our ability to become free cash flow positive next year, which will be driven by having all of our JV pipelines in service. Progress on the Permian highway is the primary reason for this confidence. The operator has noted that it's nearly 80% mechanically complete, with mainline compression 97% complete. We have also made significant progress reducing cost. We believe further cost reductions can be captured with the shift to electric power, which will also enhance emissions reduction. We will continue to pursue other sources of revenue, including third-party gathering and processing and finding other work for underutilized assets. I look forward to keeping you apprised of our progress. Now I will return the call to the operator.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.