Crestwood Equity Partners LP
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Good morning and welcome to this morning’s conference call to discuss Crestwood Equity Partners’ First Quarter 2017 Financial and Operating Results. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today’s call. Please refer to the company’s latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, and distributable cash flow will be discussed. Reconciliations to the more comparable GAAP measures are included in the news release issued this morning. Joining us today with prepared remarks are Chairman, President and Chief Executive Officer, Bob Phillips, and Senior Vice President and Chief Financial Officer, Robert Halpin. Additional members of the senior management team will be available for the question and answer session with Crestwood’s current analysts following the prepared remarks. Today’s call is being recorded. At this time, I will turn the call over to Mr. Bob Phillips.

[Robert Phillips:]

Thank you, operator and good morning to all of, and thanks for joining us today on first quarter update and some announcements about really exciting projects in the Bakken and in the Delaware-Permian. So let me start with a quick note on the first quarter results adjusted EBITDA of $91 million right on top of our internal budget and consistent with our guidance that translates into distribution coverage of 1.4 times and leverage ratio of 3.9 times for the quarter. So very pleased to have another quarter of good solid consistent performance out of our assets hitting our financial targets for both coverage and leverage. It was just a year ago that we announced the sale of half of our Northeast storage and pipeline business in the dry Marcellus to Con Ed for approximately $1 billion and paid down about 40% of our long-term health we’ve made a lot of progress in the last year. And I’m please to declare that Crestwood is now financially healthy. We have a competitive cost of capital. We’ve got greatly improved access to the capital markets as our team improved earlier this quarter. Our commercial teams are very active in the Marcellus, the Bakken and the Delaware-Permian. Our growth project backlog is now steadily rebuilding to the level at it was several years ago. And our project management teams are bringing projects in on-time on schedule and under budget. And I’m very pleased to see that the fundamentals are improving across our entire portfolio in gas, oil and natural gas liquid. So as a result, I have a lot more confidence today than in the past two years at the downturn that all of these changes have and will position Crestwood to capitalize on a very attractive set of organic opportunities around our portfolio to get us back to a resumption of distribution growth in 2018 and generate a lot of value for our unitholders. So, we’re very pleased with where we are going into the second quarter of this year. Before highlighting our capital projects that are underway now, and talking a little bit about the new announcements, I want to briefly highlight the activity by segment for the first quarter to just show how much the business fundamentals have improved across the portfolio. During the first quarter, the big story at Crestwood it that our G&P segment or gathering and processing assets are back. Fundamentals look good, prices look better, producers are stronger and break evens are lower. And that’s a really good set of conditions for our most important business segment gathering and processing. We see fundamental growth across all of these assets over a period of time, particularly up in the Bakken, we had record volumes on the Arrow system in the Bakken, as producers accelerated well completions and volumes are operating in a very high range to capacity. So we are aggressively expanding this system up there and we will talk more about that later. Also in the Delaware Permian, we are seeing more well connections, more bigger well completions, accelerating volumes in the Delaware Permian. And so we are pushing to close out the existing projects we have announced and complete commercially new projects to get those on the board as well and we think that’s coming in the very near-term. So I want to highlight some of the assets that don’t get a lot of air time or shelf space to let you know that volumes are stabilizing across the entire G&P segment. Let me start with the Powder River Basin Niobrara, where Chesapeake has been running two rigs on our Jackalope system and they have been having great success delineating their acreage and testing new formations. And they are actually -- they have been quite public about how pleased they are with the results there. So, I’ll leave it up to you to go do the research on Chesapeake’s website with the new wells that they are bringing on at better results than I think they expected and we did too. But this is clearly an area that Chesapeake has coined as their next oil growth asset and we think it’s clear and there is industry support for the fact that break evens are down to the $35 to $45 a barrel range on the Powder River Basin Niobrara play, which includes Turner apartment, Sussex and others in a stack formation. So we couldn’t be more pleased with how things have gone with the Chesapeake in the last month, a quarter or so since we redid that long-term contract. Clearly this is an asset that has long-term option value in the Crestwood portfolio and we think it’s pretty underappreciated right now. So, hope to follow the success of Chesapeake over the next several quarters and see some real value contribution from PRB Niobrara. In the southwest Marcellus, our net gathering -- Antero gathering system, Antero did complete four ducts in the first quarter and they plan to connect an additional -- complete an additional nine ducts in the second quarter. Volumes on that system have leveled off. Antero still has some gas shut in from the completions of the first quarter ducts. So I think it’s going to be a while before we see the full benefit of all the duct completions and bringing all the existing volumes back on course their drilling new existing pads that have already been connected and or drilling wells on existing pads where there is existing production. So no additional capital cost for us to get the benefit of those new volumes and we expect to exit the year around 400 million a day or maybe a little over 400 million a day depending upon how strong those new wells come in. So, pretty pleased with the volumetric and operating expense performance of our Antero gathering system. And finally, in the Barnett, Bluestone our new producer has been running a very active work over program, consistent with what we are seeing from other producers in the Barnett as well these very inexpensive work over programs are high return, expenses for the producers. And we are continuing to see volumes over and above our estimates work over program led to a 4% volume increase over the fourth quarter and the first quarter. And when combined with the 20% increase in gas pricing that’s contributing to higher margins on that business due to that percentage of index fixed fee combination, contract structure that we entered into with Bluestone last year when they acquired those assets out of the Quicksilver bankruptcy. I can just tell you both volumetrically operating costs and margin wise this Barnett asset both dry as well as rich is contributing more than we thought it was going to. It’s outperforming our expectations in the budget and we expect volumes to levelize there continue to see improved performance from those wells due to that new operator Bluestone. They are very good at what they good in the work over area. Now turning to our stores and transportation segment, it had a great quarter, relatively speaking as well. As I said April 21st marked the one year anniversary of the joint venture with Con Ed that not only fixed our balance sheet, but also formed the basis of a partnership, business partnership with the leading gas utility in the Northeast market. And we think and we've said this many times before, but I continue to believe the real benefit of that transaction was creating that partnership with Con Ed that has totally repositioned Stagecoach as a vital link to all of the new downstream takeaway projects coming from that region. And we think Con Ed gives us commercial, financial and operational advantage when negotiating with both producers as well as other Northeast utility customers and some of the project operators or sponsors in the area. So we continue believe strongly in the long-term upside potential of the Northeast gas markets with prices improving, producers are starting to drill more bring volumes back on. This is pushing the need for announced infrastructure projects to move forward and new projects to be developed and we’re right in the middle of that producers in and around our assets have increased their 2017 capital programs by approximately 70% that's going to create a lot of gas production forecast in north of up 10% year-over-year. This gas needs a path to the market and our asset footprint and the connectivity that we have and the services that we provide to both producer as well as utility customers has created the premier pipeline hub that allows many of these utilities access that incredible supply base that starting to kick back up again. So we like working with Con Ed, they're great partners, as we continue to monitor market conditions and remain very encouraged about the recent approval of some of those announced Northeast infrastructure projects. And I think we're actually going to deliver on our expectations for that joint venture fairly soon. A quick comment on the COLT Hub, again a little bit of a repositioning story before I discuss the MSL business. But during the quarter COLT again exceeded our expectations by generating almost $10 million worth of adjusted EBITDA. Our optimization team has done a great job of capturing new spot business, Crestwood crude services, our internal crude marketing team continues to do a great job of utilizing excess capacity there both pipeline as well as storage and rail loading. And so we are really pleased with the performance in the first quarter. And it kind a proves our theory that COLT is located in the right place, it has access to a lot of supply, the connection to dapple we think is going to further improve accessibility to supply and give us more customers to provide pipeline storage and rail-loading services for. So the dapple connection is complete, line field operations have begun I think that's well known. We expect dapple to kick-off in the third maybe early, second or may early third quarter of this year. So lot of activity starting to generate around COLT in anticipation of that being a place that people want to position their barrels to go into the dapple markets. And finally to our MSL or our NGL segment. Another tough first quarter with I think John said yesterday the third warmest HDD on record certainly impacted actual demand for propane. Refinery markets were tight during the quarter so that impacted butane a little bit, impacting really our entire value chain from where we access the supplies in the Marcellus Utica region to our truck rail combination, truck rail in the other areas relying upon our uniquely positioned and irreplaceable NGL storage in the Northeast. The lack of demand for propane and butane really just kind of push down demand for services and push down margins frankly as well. Volumes are slightly lower, margins generally held up about as well as they could under a market like that. I give our team on the trade desk in the Kansas City a lot of credit for keeping the thing going through another tough winter, surely we won't have three bad winners in a row. But we are gearing up for what we think is going to be an outstanding field season starting here in April. And we got a lot of firepower in that business got some really smart young people that have their finger on the pulse of the NGL business. We don’t think anything is broken we just think that sometimes you got to tough your way through a bad winter and this was another example of that two winters in a row. We think the business is well positioned to serve growing NGL supplies from the Marcellus, Utica and that’s really the center of our universe for that NGL business and we’re very optimistic we’re going to get it back on track to make a better contribution in the second half of the year and prepare us for the winter of ‘17 and ‘18. One final note as we have been developing our large scale projects in the Bakken and in the Delaware, Permian NGLs are playing a key component in both of those. We saw that we announced a gas processing plant in the Bakken. Historically we do not market at the NGLs up there we will be marketing NGLs at least at some point in time as volumes increase. Same thing in the Delaware Permian, we think that our NGL business is going to give us competitive advantage with our producer customers. And so I think that’s going to be a real differentiator in our ability to maximize and optimize these gas gathering, processing and NGL marketing assets that we’re putting together in the Bakken and the Delaware Permian. So don’t give up quite yet on that segment we think it’s got a lot to contribute going forward. That concludes the review of the quarter, simply put we outperformed on the G&P and the S&T budgets offset by a little bit weaker MSL. But I’ve got a lot of optimism and confidence that that team is going to continue to contribute both in their core NGL propane, butane marketing business to the Northeast customers as well as really being a differentiator and our ability to structure products and services in the Bakken and the Delaware Permian for our producer customers. So I think that’s it from me very pleased heightened confidence across the entire portfolio, really excited about our financial condition, our balance sheet, our access to capital, cost of capital and we have found that even with a relatively elevated cost of capital on our equity given the fact that we don’t have IDRs. We are net-net competitive with the kind of project investment opportunities that we’re seeing in the Bakken, the Delaware and certainly in the Marcellus to come. So very pleased how we’re positioned, want to reemphasize again that we’re confirming guidance here, which Robert will talk about, but that we had a good quarter and we got a lot of exciting things happening in the portfolio today. So with that I’ll turn it over to Robert.

[Robert Halpin:]

Thank you, Bob. Before I get into the numbers I’d also like to reiterate Bob’s enthusiasm we’re off to a great start in 2017. Our base business is stabilized, new activity is picking up across many of our systems and our commercial teams continue to have success, identifying and capturing very solid organic growth opportunities around our portfolio. Given our first quarter results and the strong fundamentals across the operating segments as we look into the second half of the year, we are confident that we are well on our way to achieving our 2017 guidance targets that we outlined back in February. So let’s turn to the first quarter results. During the first quarter adjusted EBITDA totaled $91 million compared to $120 million in the first quarter of 2016. I would note that the quarter-over-quarter decline in cash flow is a result of the contribution of our Northeast storage and pipeline assets through our Stagecoach joint venture with Con Edison. Distributable cash flow for the quarter was $59 million compared to $79 million in the first quarter of 2016, again reflective of the deconsolidation of Stagecoach. For the first quarter of 2017 we declared a distribution of $0.60 to our common unitholders, driving distribution coverage for the quarter at 1.4 times or 1.1 times if our Class A preferred units were currently paying cash distributions. Maintaining excess DCF coverage continues to be a key strategy of ours in 2017 as we conservatively make future investment and financing decisions for future growth opportunities. Now for a review of our segment results, in our gathering and processing segment, segment EBITDA totaled $67 million in the first quarter of 2017 compared to $67 million in the first quarter of 2016. Segment EBITDA was flat year-over-year as record gathering volumes on the Bakken system offset some of the declines some of our larger natural gas systems. Our G&P segment has absolutely turned the corner and has a strong outlook for the remainder of 2017, with volume growth expected to cross every major gathering system in the portfolio. We have rigs active across our Bakken, our Delaware Permian and our Powder River Basin systems. Antero is actively completing their ducts ahead of schedule in the Marcellus and Bluestone is continuing to execute an aggressive work over program all of which will lead to volumetric growth through the remainder of the year. In our storage and transportation segment, segment EBITDA totaled $17 million in the first quarter of 2017, compared to $51 million in the first quarter of 2016. First quarter 2017 segment EBITDA reflects Crestwood’s 35% share of Stagecoach joint venture earnings. During the first quarter of 2017, natural gas storage and transportation volumes averaged 2 Bcf a day that compared to 1.7 Bcf a day in the first quarter of 2016. First quarter 2017 volumes increased 17% from the first quarter of ‘16, primarily as a result of increase northeast transportation volumes on our North South and MARC I pipelines as improving gas prices drove increased production from producers around the system. In our marketing supply and logistics segment, segment EBITDA totaled $17 million in the first quarter of 2017 compared to $17 million in the first quarter of 2016. Similarly to the first quarter of 2016, our first quarter of 2017 segment EBITDA was negatively impacted by unseasonably warm weather, adversely impacting propane and transportation related demand as well as driving a backward dated NGL pricing on propane inventory. Now moving to the expenses, our O&M and G&A expenses net of non-cash unit based compensation decreased by $8 million or 12% when compared to the first quarter of 2016. While a portion of these cost reductions were attributable to the formation of the Stagecoach joint venture. I am very pleased with Crestwood’s ongoing discipline for holding our cost reductions by doing more with less, while still delivering first-in-class customer service and safety. Now turning to the balance sheet, as of March 31, 2017, Crestwood had approximately $1.6 billion of debt outstanding, including $1.2 billion of fixed rate Senior Notes and $382 million in outstanding borrowings under our $1.5 billion revolving credit facility. In March 2017, Crestwood opportunistically issued $500 million of 5.75% unsecured Senior Notes due 2025 in a private offering. The net proceeds from the offering along with borrowing under Crestwood’s credit facility were used to redeem all of the outstanding 6% Senior Notes due 2020 and 6.125% senior notes due 2022. This issuance allowed Crestwood to push its nearest senior note maturity to 2023 and will result in approximately $6 million of annual interest expense savings. Crestwood’s leverage ratio was approximately 3.9 times, as of March 31, 2017. Additionally during the quarter, Crestwood filed two registration statements with the SEC, one to update our existing equity shelf registration and the other to reinstate our ATM shelf registration. Both documents are now effective with the SEC and at our disposable. And as we have stated many times, our 2017 capital needs are fully financed through available liquidity and capital commitments that we have already secured through our regional joint venture relationships. So while we do not have any near term requirement for equity capital, we believe it is prudent to keep these tools available to Crestwood as we continue to pursue multiple capital projects and maintain our commitment to maintaining 2017 leverage in the 4 to 4.5 times range. As we look out to the second half for the year, I am very pleased with how Crestwood’s assets are positioned and the improved business fundamentals across our three operating segments. We are back in execution mode and have high quality projects that will come in service during 2017. The Nautilus system is ahead of schedule and will begin contributing cash flow toward the end of the second quarter and our new Arrow processing plant is targeted to be in service during the fourth quarter of 2017. As we invest capital, Crestwood remains 100% committed to achieving our targeted distribution coverage and leverage goals that we outlined at the beginning of the year. Now with a solid quarter completed in line with our expectation, Crestwood remains on track to achieve its 2017 guidance targets and is very well positioned to begin DCF growth in 2018. We look forward to updating you on progress as we continue to execute throughout the year. And with that I'll turn it back to Bob for a couple of closing remarks.

[Robert Phillips:]

Thanks, Robert. And want to give you all a quick project update particularly in the Bakken and Delaware Permian and let you know that Heath Deneke the President of our Pipeline Services Group and his commercial guys are here to answer any questions that you all might have. I'm going to give you an overview and leave a lot of the details to the Q&A. Because there is a lot of exciting things going on out there. So just to set the background for the Bakken, as you know by reading the press release, we hit record gathering volumes on the Arrow system during the quarter all reached a high 83,000 barrels a day and averaged just right at 70,000 barrels a day for the quarter. So we had a lot of activity with producers bringing on multi-well pads and these wells are significantly above the IP rates that we have been used to over the past several years. We did connect 26 wells in the quarter and going to expect to connect another 40 to 45 wells during the second quarter. So on track to continue to grow volumes putting that in context, we had 70 wells in our guidance for the year. It kind of looks like we're in the 90 to 100 range for 2017 anything above 70 wells connected is probably upside to our cash flow projections and our guidance. Now a lot of things happening in the Bakken, recent IPO with [indiscernible]. I know many investors are starting to sharpen the pencils and look at the region again. Our Arrow system, which is located on the e Fort Berthold Indian Reservation is really second to none in terms of core acreage in the Bakken. I want to remind you what we've said for several quarters that Woodmack estimates FBIR break evens are approximately $37 a barrel. AURs are now above 900,000 barrels of oil equivalent and drilling and completion cost are now below $7 million. So these are very competitive wells and as a result we're seeing a pickup in activity, producers on our system are improving recoveries better due to better well design, lower well cost. And so they're really getting exceptional returns right now in the current commodity price environment. Producers have accelerated their activity, and as a result the Arrow system is not only our largest cash flow contributor right now, but will be for the entire year and probably in '18 as well. Due to the unprecedented acceleration of activity we have accelerated our expansion projects we announced the number back in the fourth quarter or as a part of our 2017 guidance we're announcing new plans today, primarily we're going to be building and are in the process of building a 30 million a day processing plant, which we've named the Bear Den Plant. That will be essentially initially a topping plant, we're going now let Health talk about that. Now he and his team are building that out, but it has the possibility of being expanded significantly in 2018 to handle even more gas. This will improve flow assurance for our producers, improve competitive netbacks and give us the ability to have confidence that we can handle the increased production volumes, which we expect on the Arrow system and in the area surrounding the reservation. The capital project will be about $115 million, but build estimates are in the 5 to 6 times range. So it's going to be very accretive to cash flow almost immediately when we put that plant in service sometime in the fourth quarter of '17. And again that is not in our current capital or cash flow guidance. So we see that as positive upside and if we continue to see improvement in commodity prices we should expect volumes to accelerate forward at an even faster pace in late 2017 and '18. So we're getting ready for increased volumes with an expansion of our capacity. Moving down to the Delaware Permian real quickly, another place where a lots happening in a very short period of time, similar to our Arrow Bakken acreage Woodmack estimates that producer break evens on the acreage dedicated to us kind of across the entire region from the shell Nautilus system down south to the Willow Lake system where our producers are Concho and Mewbourne up to the northern part of the basin, break evens in the $38 per barrel range. And recent forecast at least well results that we've seen show us area of stack pay of almost 9,000 feet of resource potential. So not only are we beginning to see higher IP rates and accelerated drilling activity, but the need for 50 years of infrastructure to come out of this small, but prolific region. To put that in perspective the midland basin has stack pay of about 2,200 feet the scoop stack is about 700 feet and the Eagle Ford is about 500 feet. So in the area where we are building gathering and processing, we’ve got about 9,000 feet of stack resource potential. I want to point out that recently Exxon Mobile and Marathon made big acquisitions around our Willow Lake assets and we have gathering agreements with those companies and our commercial teams are doing a great job to evaluate the opportunities associated with those big major acquisitions. And layout long-term infrastructure for what’s obviously going to be an important oil and gas development program for Exxon Mobile and Marathon. So looking forward to that developing. On the Texas side, we’re nearing completion of the build out of the initial phase of the Nautilus gas gathering system for Shale and Loving and Ward County as Robert mentioned coming in ahead of schedule and under budget so we appreciate the job our project management team is doing there. Shale is running about 5 rigs around the system right now. And so we expect to have significant gas on the in-service date and to see that gas volume grow throughout the year expecting the Nautilus system to be a good solid contributor to Crestwood in the second half of the year. So, to kind of put Delaware Permian, in perspective when you kind of think about the bookings to our strategic opportunity set, we’ve got 100,000 acres dedicated by Shale on the southern roughly 100,000 acres dedicated by Concho and Mewbourne on the north end. Big acquisitions both in the middle as well as up on the north side by Exxon Mobile and Marathon around the Willow Lake. So we’re pretty excited about how we use our current 300 miles of gathering line and 300 million a day of capacity. Across that 200,000 acres to leverage that into a much more prolific infrastructure footprint for both gathering as well as processing. Commercial teams are doing a great job, they’re really active out there, we’re responding to a lot of RFPs and we’ve been in project development and commercial negotiations in a lot of areas. I’ll let Heath kind of talk about where we’ve recently come out on the exploration of our exclusivity and reimbursement agreement with an anchor customer there. I think all-in-all due to continued delays by the customer’s development plan, we just felt like it was best to go ahead and move forward with our long-term plans of linking our Shell Nautilus system with our Willow Lake gathering and coming up with a supper system header there with appropriately located processing. And not wait any longer on what had the potential to be a large system now looks like it maybe a smaller system. But inevitably we feel like we are in great shape competitively to provide service for that customer just not going to be the anchor system to the entire regional infrastructure strategy for Crestwood. So Heath I’ll let you pick up on that. And I think kind of with that background, operator, we are ready to go to questions just summarizing really good quarter, consistent stabilized volumes and some very exciting growth opportunities. New capital project, rebuilding the backlog and getting Crestwood back to where we wanted to be again and doing it in a very financially responsible manner. So, with that operator turn it back to you for Q&A.

[Operator:]

Thank you. [Operator instructions] Our first question is coming from JR Weston of Raymond James. Please proceed with your question.

[JR Weston:]

Hi, good morning everyone, quite a run down there at the end as far as all the growth opportunities available to you. I guess start with the Arrow system just kind of a quick question comparing the outlook there now for the asset compared to 2017 guidance. I appreciate the commentary on 40 to 45 well connections in the second quarter. Just kind of wondering when you are looking at the 90 to 100 well connections for the year compared to the guidance of about 70 it’s probably a difficult question to answer, but is there any way you can quantify the magnitude and the impact of the additional 20 or 30 well connects. And just what that might be for the segment in 2017 compared to the guidance?

[Robert Halpin:]

Yes, hey JR this is Robert, appreciate the question. I think the way we would characterize it today is as we talked about we’ve got 70 well completions expected in our 2017 guidance. We expect to have 70 wells completed by close to the end of the second quarter. We’re clearly trending well ahead of schedule obviously timing of the incremental connects through the second half of the year is a big driver of that. The asset in the guidance range is kind of $90 million to $100 million asset and I think based on kind of preliminary expectations, depending upon timing could be plus 10% to 20% depending upon the timing of those completions.

[JR Weston:]

Okay, great that’s really helpful. I guess kind of related to that the announcement on Bear Den, saw in the release kind of being considered Phase 1 in the project and then in the prepared commentary you talked about the expansion capabilities. Just wondering if there’s any more color you could provide about the potential there in terms of the phases or the different asset additions and operational capability you guys would be adding. And just kind of in general what else you can say about the prospects for scaling up the plant. Is there may be a well completions number we should be looking at in terms of how to think about 2018 and beyond or is there a different way to look at it?

[Heath Deneke:]

Yes hi this is Heath Deneke, I’ll take that one. Yes as we mentioned the Arrow Phase 1 project is really about getting a processing plant in service in 2017 to meet the increasing well production or well connection activity that we’re anticipating into 2017. When it comes online we anticipate it to be full. And so we’re very actively working now on a Phase 2 project that we think to be in service as early as third quarter or maybe fourth quarter of 2018. From a capacity standpoint that’s still something that we’re evaluating we do have some third party opportunities to process gas, but as you look at the system today we set a new gas record of $55 million a day. That is in excess of what we have from a third party opportunity to process. So when you think about going into 2018 we’re going to have the capacity on the system to do close to $100 million a day of gas gathering. Not sure that the production volumes will hit that level but that kind of give you the booking in terms of what the opportunity set is. We believe over the course of the next several years that we could get gas well north or certainly approaching the 100,000 a day range and for us to be able to control and that we make sure we have a great best possible netbacks for producers and you can look at almost an expansion to that order of magnitude.

[JR Weston:]

Okay, perfect, very helpful there. I guess last one from me just switching gears to marketing supply and logistics appreciate the prepared commentary again, couple of tough ventures in a row and pretty similar year-over-year performance overall. Just kind of wondering if you could still would offer that commentary in terms of what was going on in propane and butane markets and just back with NGL pricing as you mentioned in the release? And is there any way we can get a sense for what type of quarter the segment might do in a kind of a normal winter weather environment? And then I guess to the extent are you willing to go into this type of details, how the quarter compared to what you were budgeting for the segment for the first quarter of 2017?

[Robert Phillips:]

Well, let me handle it first and give Bill Gautreaux who runs that business a chance to kind of think about how he wants to respond to that. The fourth quarter was a $26 million, $27 million quarter by comparison to $16 million quarter here. And the fourth quarter I think was more emblematic of both reasonably strong actual weather demand, reasonable volatility in prices and reasonable margins for stored inventory. And that really is kind of the business that we operate in. So if we had add a first quarter like our fourth quarter, we would have actually exceeded our budget. And so I think that fourth quarter of ‘16 kind of reminds me of what a good quarter should be in a normal winter, but we should have two of those instead one. And so the quarter obviously got cut short and in early February there was an almost historic flip flop of the market into a record backwardation right in the middle of what otherwise was supposed to be a strong winter. And that created inventory valuation issues that everybody in the industry faced not just us. And I know that there have been some other NGL companies out there that had significantly greater challenges than we did. Our NGL business works and it works well for what we try to do and what we can handle as a company. And I have a tremendous amount of confidence in it going forward that our NGL business will be a differentiator in some of these rich gas plays like Delaware Permian and the Bakken. Where we are going to basically begin to self-perform as oppose to rely on third parties to process fractionate and sell our natural gas liquids. It’s vital to us that we provide flow assurance to our customers and to a certain extent that we improve netbacks given our ability to do so. So one of the big strategic moves that we are doing here at Crestwood is to get that NGL team much more involved in the infrastructure opportunities so that we can improve netbacks and guarantee flow assurance to our customers. And with that Bill I’ll let you kind to handle what happened from your perspective in the quarter.

[Bill Gautreaux:]

Thanks, Bob. Yes, JR I think what -- I agree with what Bob said, I mean the fourth quarter was about $28 million, we would have been -- we planned on probably about a $23 million first quarter we’re better and we came in at $17 million. So that was about $6 million below what we have expected and really primarily attributing that some of that to weather and some of that to the backwardation that kind of clipped our inventory in February. The two pressures there really primarily around the value that you get for a proprietary positions and storage. If you have really weak weather, in this case two years in a row. So it does two things kind of effects the appetite of people to pay the premium for that storage product, the local market storage product coming off a mild winter. And then once you are in storage if you have a mild winter, you generally end up getting a lesser overall margin on your sales just really the base is differential you end up selling it in the winter. As far as the backwardation the thing that was unique about that that we are looking at as a potential trend in the future was just the impact of our export volumes today as being way more significant than it used to be and what that does to rapid inventory draws. And so even though we have mild weak demand for propane in the U.S. we were exporting at record levels both propane and butane and that created a very counter intuitive backwardation in February. And then immediately following that people buying exports, started rolling their cargos to April and May. And so the backwardation coming rapidly and then it just completely came out in a few days. And it also created an interesting dynamic going forward in April and May because those cargos were rolled. Those are the main pressures on the business.

[Robert Phillips:]

Hey, let’s move on to the next question. We got a pretty good line up of Q&A here.

[Operator:]

Our next question comes from Jerren Holder of Goldman Sachs. Please proceed with your question.

[Jerren Holder:]

Thanks, good morning. Maybe starting off with equity earnings, so at least the adjusted EBITDA from unconsolidated affiliates, there was a decline versus the fourth quarter. And I guess Stagecoach should not have been perhaps a driver of that decline, it’s about like 20%, I guess why was there a decline fourth quarter to first quarter in that business?

[Robert Halpin:]

Yes, hey James, it’s Robert. I think the primary answer, we had a small exposure in the press release, but we had about a $3.5 million deferred revenue recognition on our Jackalope joint venture that was unanticipated for the quarter. Where we had actual cash payments under the minimum volume commitments that we received, but actually didn’t recognize revenues associated with that which was a transition from the way we can’t afford in the fourth quarter. So that’s the primary -- one of the primary drivers.

[Robert Phillips:]

So the way we look at it is the 91 slide by 3.5 yes, we'll get that back, we got the cash, we'll get the earnings back in the future.

[Jerren Holder:]

Got it, okay. And then perhaps moving on to CapEx and financing obviously the CapEx budget has gone up quite a bit originally you guys were saying no need for equity, but EBITDA guidance is unchanged. So looks like higher leverage if you're going to debt finance it. How are we thinking about I guess financing the 2017 CapEx budget given the increase?

[Robert Halpin:]

Yes, I think as we talked about today with these additional Bear Den plant revising our capital guidance to $225 million to $250 million. When we provided our initial outlook at the beginning of the year, we obviously put a fairly wide range of 4 to 4.5 times. I think there as part of that we have generally contemplated some of the potential execution plans we had around the portfolio including potential expansions in the Bakken. I think with our coverage ratio expectations at 1.2 to 1.4 times and the timing of our capital outlook, the capital commitments we have around some of our joint ventures particularly in the Delaware where we're spending capital this covered by our partners. I think we still feel very comfortable and our need -- in our plans to finance our projects without requirements access the equity markets and delivering full year leverage ratios in line with our targets. I think as we talked about, I mean, as we continue to execute, we did have the two shelf registration statements go effective. So we have those at our disposal, but I think at this point we're still very committed to fully financing our plan as we outlined in meeting our objectives of 4 to 4.5 times.

[Jerren Holder:]

And perhaps last one on the Bakken plant, you guys mentioned 5 to 6 times total returns. That sort of implies with $2 per Mcf if I'm just using the processing capacity, is that the right way to think about it? And do you guys have like minimum volume commitments or anything else like that on that plant?

[Heath Deneke:]

Yes, this is Heath I'll take that. So yes, I mean, ballpark wise just the cost of doing business up in the Bakken is a little more expensive than what you would see in West Texas as an example. So I think your math is close to correct on what the weighted average fees would look like. However the real story is around the netbacks and the ability to get net NGLs to market at a more attractive rates than what we have seen in the past. So I think when you factor all that in together that's how you get down to the 6x type level. and of course it's going to be a very accretive expansion with Phase 2 we're building the pipeline to accommodate all the future anticipated processing needs. So it’s going to be a lot more cost effective as we continue to expand the Arrow system.

[Robert Phillips:]

Just to be clear on that Jerren we're upsizing the pipe of the [indiscernible] and we are expecting to be able to expand the processing facility overtime. We're in a hurry right now because we've got record volumes on the system and we've got to get that plan in place to provide flow assurance to our customers. But Heath is right, the economics improve significantly as you expand the plant because we've already paid so much for an upsize pipe to be able to move all that production. We'll have the ability to move all of our Arrow production to that plant site if we want to or need to at some point in time.

[Heath Deneke:]

And Jerren to the second part of your question around NBC let me just kind of answer it this way, the way that our contracts work out there; we actually purchase and own the gas at the well head. So we effectively process our own gas so to speak. And as we mentioned, we have total production today in and around 50,000 a day of gas expected to grow materially here over the course of the next year or two. So the way that we're thinking about this is that that 30 million a day plant will effectively be base loaded from day one. And the incremental spare capacity or spare increased volumes will effectively go to third party processing contracts in the area. And then as Bob said as we have led to the size and the scope of Phase 2 and potentially Phase 3 processing we'll make that we have a line of sight on keeping our volumes full and leveraging the third party contracts as needed to serve the needs above and beyond those levels.

[Robert Phillips:]

Jerren we need to go on to the next question. Thanks for those, okay. Shneur you're up.

[Shneur Gershuni:]

Hi, good morning guys. Just a couple of quick follow-up questions to some of the questions that have been asked, just to confirm sort of back and forth about the 5 to 6 times return expectation. Is that the final return expectation once you add more capacity to it? Or it's 5 to 6 times and then anything brownfield that you add afterwards could actually have a lower multiple on it or higher return I guess laid out? Or I am just trying to understand how to think about the phases in the returns?

[Heath Deneke:]

I think Phase 1, when you look at it on an annualized basis, just take 2018 for example, we think that we will be somewhere in the 6 times range maybe a little bit sub-6 depending on the NGL margins. When we think about Phase 2, we do believe that that will push it significantly, the overall build multiple for the project certainly further south into the 5 maybe even sub-5 times build multiple range. So very accretive project.

[Shneur Gershuni:]

Okay, great. And then a second question COLT was okay, but Dapple isn’t online yet. When you presenting your guidance what are you modeling for the sequential impact, when I think about four quarters with respect to the Dapple coming online.

[Heath Deneke:]

I think fair question, I’ll take it and then Rob you may want to add some color on it. But in general I mean we did have a quarter in the first quarter, it exceeded our expectations. I think that what we weren’t anticipating was a continued healthy demand for the crude by rail loading. I think we moved more than 45% more than what we have under take or pay style contracts. Some of that we do believe will erode as Dapple comes online, but as it does, so we will -- the revenues that we expect to on the Dapple system will increase. So just as a reminder, for the first quarter I think close to I’d say 45% to maybe a little bit higher percent of our revenues or gross margins off of the COLT Hub really weren’t about rail loading it was about pipeline connection, storage and kind of transitioning to the strategy we talked about last year a really making a major supplier hub out of this facility. So when we kind of think about the rest of the year, I don’t think we are necessarily predicting or counting on having the kind of quarter we had in the first quarter it may come down a little bit more than what we had in original guidance. But we feel even more confident there is probably more upside on the rail loading than probably what we had contemplated for 2017, even post Dapple.

[Shneur Gershuni:]

And just switching to the northeast for a second, quick questions here. Your duct outline or your duct completion outline for this year, I mean is that been recently reinforced by Antero and have they talked about when they would bring a rig on to the acreage?

[Heath Deneke:]

Yeah, I mean the ducts are being -- I mean they are completing the wells. So we have I think four more wells I think they are being completed in the second quarter, we still have 9 on the schedule for the second half of 2017. So they are definitely moving forward on completing the ducts. If anything they are probably going to accelerate for what we had in the time in original plan. As far as new rig activity I think we continue to look at where gas prices are and certainly look at how the basis differentials are improving in that region. We know that the wells are very economic in and around our green bar area and we are optimistic that they will eventually move a rig or two in the area. But as far as 2017 is concerned haven’t seen them announce or nor have they indicated a plan of moving rigs in 2017. But we get off to ‘18 and ‘19 assuming kind of current strip, we would expect them at some point in time to mobilize and bring a few rigs in the region.

[Shneur Gershuni:]

When you think about their breakeven economic or the return economics on the acreage that you have dedicated from them. How does that compared to the acreage they have dedicated to their midstream partner? Are you competitive, are you lower just if you can give some color around that?

[Heath Deneke:]

I think when you think about it, what Antero refers to is our super rich area is probably a little better from a breakeven standpoint, but I’d say about half of the eastern edge or the western AOD and the half of the western edge of our eastern AOD are very comparable in terms of what the breakeven returns are. So -- and again we have well over 800 plus locations in that area and we think that it’s just a matter of time before Antero comes and puts couple of rigs in our system.

[Robert Phillips:]

Just to add a footnote. Given the opportunity Shneur there is always been a misconception that all of our eastern acreage is dry gas and it’s just not true, not even close to being true. Probably two thirds of the gas that we gather goes to Sherwood for processing just like all the gas on the western AOD, which is gathered by their own subsidiary. So, we have always had economic acreage over there and plenty of capacity, I don’t suspect we’ll ever have to spend another dollar of capital, our operating cost are very, very low and are rights you are very competitive to what they charge themselves. So the only issue is whether or not they have extra capital to be able to drill existing acreage that’s already connected and fully functional. And as market prices improved we think we get closer to that it’s a pretty option in our portfolio.

[Jerren Holder:]

That makes total sense. And then with Mariner East II coming online there was originally pieces that could be a negative for you but if I remember correctly I think that you may have taken some space on that, is that in fact correct? And how do you think about ME II impacting that business out there?

[Robert Phillips:]

That is a fact that we do have space on ME II we have 10,000 barrels a day of space, at least at this point in time it appears that the pipeline will be in service by the end of the year. And we think that that’s going to tend the balance the markets and provide home for a lot of the new NGLs that are being developed in the Marcellus, Utica and have to be exported to balance that markets. So all-in-all we see ME II as a positive allowing more NGLs to reach markets hook and get exported and if that happens then prices should stabilize, improve and we should see increased supplies and increasing supplies are good for us.

[Shneur Gershuni:]

All right perfect, thank you very much guys. Really appreciate the color.

[Robert Phillips:]

Sure.

[Operator:]

Our next question comes from Andrew Burd of JP Morgan. Please proceed with your question.

[Andrew Burd:]

Hi, good morning. Just one clarification question, Robert you talked about being on pace for full year guidance in DCF does this reiteration apply to the segment level EBITDA guidance as well?

[Robert Halpin:]

I think Andy to be -- I mean when you look at it on a full year basis and look at first quarter results, I think that you can extrapolate forward the directional impact of kind of the pluses and minuses in the first quarter that that generally there is offsetting positives to get you to the same spot. So we’ll come back with better clarification on that, but I think that that’s a good directional look at it.

[Andrew Burd:]

Awesome thanks.

[Operator:]

Our next question comes from Selman Akyol of Nicolas Stifel. Please proceed with your question.

[Selman Akyol:]

Good morning. Just a couple of quick ones from me, first of all appreciate you highlighting the anniversary day with Con Ed and it’s the time I think you guys talked about additional marketing opportunities. Can you talk about where that stands and what your outlook is for that?

[Robert Phillips:]

Yeah, Mark Mitchell is our Senior Vice President that runs that joint venture with Con Ed, he works with them every day and is an expert in the Northeast gas markets. So I’d like to give him a chance to kind of highlight a few of the really exciting opportunities we have going on out there.

[Mark Mitchell:]

Yes, thank you. With as Bob mentioned earlier on the call, the increase in commodity prices in the region and the commensurate increase in production that kind of in combination with the progress we’re seeing on the infrastructure development projects that are connected to our system. Providing us with a number of opportunities through the facility that we have in place to expand and get the production to the downstream markets.

[Selman Akyol:]

Okay. And then just you guys certainly highlighted a number of projects coming online it looks like very attractive multiples. Can you just talk as you think about longer term what you think about the hurdles are for resuming distribution growth?

[Robert Phillips:]

Yes I think as we’ve talked about we’re pretty focused on execution in 2017, we’ve got a good little track record establishing of highly attractive return, very manageable growth projects with our Nautilus system. Moving forward very nicely, expect that to go in service, ahead of schedule and under budget, we announced the Bear Den plant today, we’re actively at work executing on that and a nice return that will be significantly additive to 2018. I think there are more to come over the course of this year, and I think as we’ve stated we’re increasingly focused on delivering our long-term coverage metrics at 1.2 times or higher after the preferred go cash pay and maintaining our balance sheet at four times or less. And we’re confident that we can achieve that in the 2018 timeframe with some built-in distribution growth potential with that timeframe. So no specifics at this point, but I think that as we continue to execute on our plan we’ll give greater clarity and visibility to our execution around that.

[Selman Akyol:]

Appreciate the time, thanks.

[Operator:]

Ladies and gentlemen we’ve reached the end of our question and answer session. I would like to turn the call back over to Mr. Bob Phillips for closing remarks.

[Robert Phillips:]

Thanks operator, appreciate everybody hanging on, I know enterprise starts shortly. So again thanks everybody for joining this morning. The team is pretty excited about the quarter performance and the progress on all the projects particularly the ones that we haven’t completed yet and haven’t announced, which hopefully will be a steady flow of new projects throughout the rest of the year. So with that we’ll close the call and look forward to talking with you after the second quarter. Thanks.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.