Crestwood Equity Partners LP
Q3 2017 Earnings Call Transcript

Published: 31 Oct 2017

[Operator:]

Good morning, and welcome to this morning's conference call to discuss Crestwood Equity Partners' Third 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 most 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 Executive Vice President and Chief Financial Officer, Robert Halpin; and Executive Vice President and Chief Operating Officer, Heath Deneke. 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. [Operator Instructions] At this time, I will turn the call over to Bob Phillips.

[Bob Phillips:]

Thanks, Devin and good morning to all our investors and thank you all for joining us early. We have a number of positive things to talk about this morning. I'm happy to lead it off and then turn it over to Robert Halpin, our CFO to cover the quarterly results and to Heath Deneke, our Chief Operating Officer to give you an exciting update about the many projects that we have going cross the country. So let me kick it off with four or five really key highlights of the quarter. Things that I would like to draw out for you. The first is growing volumes, Crestwood delivered another solid quarter based on strong year-over-year and consecutive quarter gathering and processing segment volume growth. We saw increases across the Board in our portfolio with natural gas, crude oil and water volumes up 10%, 58% and 38% respectively over the same period last year. Gathering volumes I might point out are now up three consecutive quarters in a row. And oil gathering volumes are up four consecutive quarters in a row. The drivers of the G&P segment or the Arrow system in the Bakken that's our biggest EBITDA contributor. The Willow Lake and Nautilus Systems in the Delaware Permian these are our newest systems and in the early stages of expansion so much more to come there. In our Southwest Marcellus system, which is our largest gas gathering system by volume, as well as our Barnett systems, which are our second largest gas gathering systems by volume. And I would like to point out that the Barnett Systems have remained relatively flat year-over-year with only a 2% decrease showing we think a very impressive low PDP decline rate for those assets. So wanted to point that out and remind people that very first asset, we started the Company with is still making a significant contribution to Crestwood. The second topic is low operating costs, I want to remind everybody that cutting our operating cost a couple years ago was really the first big step that we have here at Crestwood to get ready for the lower-for-longer environment that we live in today. We continue even through the third quarter, reducing our operating costs year-over-year despite clearly higher volumes and a growing portfolio. So that's not easy to do and I want to compliment our teams because of that. When you adjust for stock-based compensation, our year-to-date 2017 total expenses, which were O&M and G&A were $21 million lower or about 12% below the same year-to-date period in 2016. That's quite a fee and again something that we're very committed to. As we've previously discussed with you, we've taken a lot of cost out of our Transportation business and assets like COLT in some of our older gathering systems over the past several quarters. And again I want to congratulate our operating teams and the management team on their commitment to safe and low cost operations. This is a culture that you need in a recovery of a cycle to differentiate companies like Crestwood from others. It drives better operating margins and makes us more competitive in the field for new business. The third highlight is strong financial metrics. We posted yet another quarter of very healthy leverage in coverage ratios in the third quarter. And we're on track to hit our increased full year 2017 earnings guidance. The third quarter leverage at 4.1x positions us to maintain conservative leverage for our ongoing capital program in the Bakken and the Delaware Permian. Our third quarter coverage of 1.2x is net of paying cash distributions to our preferred unitholders for the first time. And in the aggregate, we continue to generate significant excess cash flow above distributions, which we’re reinvesting in growth projects. So as a result, we're very comfortable with our distribution and with our coverage ratio targets for 2017 and 2018 and even more confident in our ability to drive DCF per unit higher in the future. With respect to full year 2017 guidance in the fourth quarter, we're already seeing active drilling, more well connects, continued ramp-up in volumes in our G&P segment. Our northeast Stagecoach assets are well positioned for a cold winter. And our Marketing, Supply and Logistics, NGL team has full inventory of hedged NGLs across our platform and they're waiting for cold winter as well. So we're excited about the fourth quarter and confident about our ability to close out the year right at guidance. The fourth and maybe most important highlight, that I would like to point out to you is the improved long-term capital efficiency of Crestwood and particularly compared to a lot of our competitors out there. We're very pleased to announce a divestiture of our U.S. Salt business for $225 million to Kissner USA Holdings. Salt as you may know is a business that we have had in the portfolio for a number of years and it generated about $20 million in cash flow in 2016. This sale was a part of Crestwood’s ongoing strategy to rationalize our portfolio. To identify non-core assets divest those assets at good market multiples and redeploy the sales proceeds into our Bakken and Delaware Permian capital programs. U.S. Salt was a very good business for us and it's been a stable source of cash flow for a number of years but clearly, it was an outlier operationally and it did have very high maintenance capital requirements. I want to commend the U.S. Salt employees and management team for the great job that they did for us over a number of years. They really created a good business and Kissner is getting a good business but the sales price to Crestwood was a strong premium to our current price to DCF valuation. And we expect that with redeployment of the proceeds the transaction will be 3% to 5% accretive to our DCF per unit by 2019. So this is a really important step for us. Now finally, the transaction of selling U.S. Salt officially puts Crestwood into the self-funding mode. Along with almost $9 million of excess cash flow in the third quarter and almost $150 million of excess cash flow in the past five quarters, we're reinvesting heavily in our high return growth projects in the Bakken and in the Delaware Permian. And Crestwood is well positioned to self-fund our growth going forward, that's a sizable amount of reinvested cash flow and significantly larger on a relative basis than some of our competitors out there. So the Salt divestiture means importantly that we will not have to access the equity markets to fund our 2018 capital program and this will be a key driver in our ability to increase DCF per unit over the next couple of years. So a quick summary before I close, I wanted to recap the steps that we've taken to position Crestwood to fully finance our growth projects and grow DCF without dilution to our existing unitholders. First as you know, we delevered Crestwood’s balance sheet and right-sized our distribution earlier than most in our peer group. We did that in the first half of 2016. Then we affirmed strategic partnerships in our high growth basins to help finance our projects. And last year we – earlier this year we pushed out debt maturities to 2023 to give us a lot of financial flexibility. Now we've had five straight quarters of excess cash flow that we're reinvesting in our projects. And finally we've made the deal to sell U.S. Salt a non-core asset and reinvest those proceeds into our project backlog. Importantly, the growth projects in our growing backlog are largely extensions of existing systems where the volumes exist or we have clear line of sight to when they are going to be developed. And Heath is going to give you quite an update on those projects. So this is our growth strategy at Crestwood and while it's not unique to Crestwood, I think we're executing on the strategy as well as anybody in our peer group. And with that, I’ll turn it over to Robert for a third quarter review and then he will give you a detailed update on the key assets and capital projects. Robert?

[Robert Halpin:]

Thank you, Bob. I'm very pleased with our third quarter results and with where Crestwood is now positioned to close out this year and heading into 2018. During the third quarter, adjusted EBITDA totaled $96 million, compared to $103 million in the third quarter of 2016. Distributable cash flow for the third quarter was $50 million, which is net of our first quarterly cash distribution to our Class A preferred unitholders. For the third quarter 2017, we declared a distribution of $0.60 to our common unitholders driving distribution coverage for the quarter at 1.2x. Crestwood remains committed to maintaining our coverage ratio at 1.2x or above. In our Gathering and Processing segment, segment EBITDA totaled $70 million in the third quarter of 2017 or a 9% increase when compared to $64 million in the third quarter of 2016. Segment EBITDA increased as a result of sequential volume growth over the second quarter driven by a 7% increase in Bakken oil volumes and a 22% increase in Southwest Marcellus gas volumes. In our Storage and Transportation segment, segment EBITDA totaled $13 million in the third quarter of 2017, compared to $25 million in the third quarter of 2016. Segment EBITDA decreased primarily as a result of lower year-over-year EBITDA contribution from our COLT Hub asset. In our Marketing, Supply and Logistics segment, segment EBITDA totaled $14 million in the third quarter of 2017, compared to $17 million in the third quarter 2016. Crestwood is encouraged by improving seasonal fundamentals for propane and butane during the fourth quarter of 2017 and expect the NGL marketing and logistics business to exit the year within its segment guidance range. Now moving to expenses. O&M and G&A expenses, net of non-cash unit based compensation increased $4 million compared to the third quarter of 2016. This increase was a result of a $3 million property tax refund at our West Coast facility that substantially reduced O&M in the third quarter of 2016, as well as some incremental relocation costs incurred in the third quarter of 2017 in connection with recently moving our corporate offices in Houston and Kansas City. Now turning to the balance sheet. As of September 30, Crestwood had approximately $1.6 billion of debt outstanding, including $1.2 billion of fixed rate senior notes and $444 million in outstanding borrowings under our $1.5 billion revolving credit facility. Our leverage ratio was 4.1x as of September 30, 2017. As we continue to highlight each quarter conservative leverage and coverage metrics are at the forefront of our financial strategy as we manage our business and finance our capital program. In 2017, we are on track to invest approximately $240 million to $250 million in capital projects and to-date we have been successful in funding these projects without a major equity offering. During the third quarter, we issued approximately $10.6 million of equity through our ATM program to manage our leverage ratio to our targets. However, with the completion of the U.S. Salt divestiture, we do not anticipate issuing any incremental equity, ATM or otherwise to fund our current 2017 and 2018 capital needs as leverage ratio of pro forma for the U.S. Salt transaction as of 9/30/2017 is approximately 3.8x. Additionally during the third quarter, through our Delaware Basin joint venture with First Reserve, we put into place a JV level revolving credit facility with an aggregate commitment of $150 million. The facility is secured by the JV assets and its non-recourse to the JV partners, CEQP and First Reserve. The purpose of this facility is to provide greater flexibility in the execution of our Delaware Basin capital program, as well as to enhance project returns through a conservative mix of equity and debt capital funding. The Crestwood has posted solid year-to-date results and we’ve put the necessary funding sources in place to fund our growth capital for 2017 and 2018, without any reliance on the capital markets. With that, I'll now turn it over to Heath to update you on our key capital projects currently underway.

[Heath Deneke:]

Thanks Robert. So Crestwood performed very well operationally again this quarter. And we continue to make great progress on capital projects in our high growth areas. And as Bob mentioned, our volumes continue to grow across our key asset positions during the third quarter. And we have a lot of positive momentum going into the fourth quarter to complete the year. So this morning I’ll focus my remarks on activity in the Delaware Basin, the Powder River Basin and then I'll conclude in the Bakken. So starting in the Delaware Basin, as previously announced we closed the equity option agreement with Shell Midstream on October 16 and this will complete Shell’s purchase of a 50% ownership interest in the Nautilus gas gathering system. Currently Shell is operating two rigs on the system and we are actively working on expansions to meet Shell’s 2018 drilling plans. We’ve enjoyed a great relationship with Shell and we continue to look forward to working closely with Shell Midstream to further expand our footprint in the Delaware Basin. So, just to the west in Orla, Texas, Crestwood has started construction of our 200 million a day cryo plan and the Orla Express Pipeline that we integrate to Willow Lake System in Eddy County, New Mexico with our Reeves, Loving and Ward County footprint in Texas. Site prep for the plant is complete now and all major equipment and construction contracts have been awarded. For this one we will remain on track to complete the Orla plant and Orla Express Pipeline by July 1 of next year and well within the $170 million capital budget. As previously announced, Crestwood contributed its Willow Lake assets to the Permian First Reserve joint venture at a valuation of $151 million. And this value will be credited as part of Crestwood’s share of capital requirements for the Orla expansion program. So in September, we also we completed an expansion of the Willow Lake processing facility. Now that will increase our processing capacity up to 85 million a day. This allows us to continue to grow volumes in Eddy County while we wait on the Orla project to be complete. So in addition to expanding our Delaware Basin gas gathering and processing footprint, our commercial teams have continue to make excellent progress on developing our crude and water related organic growth opportunities. These opportunities exist or with the existing customers and new customers alongside our G&P footprint in Texas and New Mexico. As we've experienced in the Bakken with our Arrow system, we see a lot of synergies and competitive advantages in providing pre-product services for our customers and we expect that to be the case in the Delaware Basin as well. This is particularly true given the high produced water cut in the Delaware Permian, relative to other basins as well as the varying degrees of crude and condensate quality that exists across the productive stack formations in the basin. So, while we're not ready to share specifics this morning, we're making great progress commercially on crude and water opportunities and believe our pre-product strategy will drive significant growth in the Delaware Basin going forward. Now shifting north to the Powder River Basin, I will continue to be very excited about Chesapeake and other operators recent drilling results in both the Turner and Sussex formations as well as increasing drilling activity levels that are in and around the Jackalope footprint. Chesapeake recently added a third rig on our acreage and they have continued to say publicly that they desire to bring on a fourth rig early next year. So Chesapeake continues to test multiple formations across their large acreage position. We see tremendous results, we’ve seen recent wells that have produced peak initial production rates of 2,600 to 29 barrels of oil equivalent per day at which are about 20% to 50% natural gas. So as you expect Chesapeake is growing increasingly bullish and they revised public forecasts, indicate growth in volumes in just under 15,000 barrels of oil equivalent today to approximately 35,000 barrels of oil equivalent probably end of 2019. So based on these projections provided by Chesapeake, our Jackalope gas gathering and processing volumes would more than double in the next two years, assuming Chesapeake hits their forecast. So as a reminder, the Jackalope System and the Bucking Horse plant is very well positioned to handle the expected Chesapeake volume growth through 2019 with very minor capital improvements. So beyond that, we are currently working closely with Williams, our 50/50 joint venture partner to evaluate future system expansion opportunities for Chesapeake and surrounding third-party opportunities in the basin. So while currently we don't, we don’t have material capital dollars allocated to the Powder River for these future expansions. We are the increasing activity and results that we're seeing from Chesapeake and another in the basin is a very positive and something that we are continuing to monitor closely as the basin is further developed. So with that, let's shift gears now and talk about the Bakken. As Bob mentioned, our Bakken assets is currently the largest EBITDA contributor in our portfolio and is very well positioned for sustained volume growth in the coming years with more than a decade of remaining economic drilling inventory at current activity levels and current commodity pricing. So, I'll get into here in a bit, we are also expanding the Midstream value chains that we own in control to include gas processing downstream NGL marketing and logistics and additional produced water disposal services which will further add to our growth outlook on the Arrow system in the coming years. Back to the volumes, our volumes in the third quarter continue to be impressive with crude oil increasing by 58%, our natural gas increasing 8% and water increasing 38% over the third quarter of 2016. The year-to-date on the Arrow system, we connected 79 wells and we expect to connect an additional 20 to 25 wells in the fourth quarter. We're currently in discussions with our producers for their 2018 drilling and completion plans. And we currently expect well connects in 2018 to be comparable somewhere in the 90 to 110 range. At this level of activity, we would expect all volume growth to be approximately 20% to 25% during 2018. During the third quarter of 2017 from a capital standpoint, Crestwood invested approximately $36 million of capital to expand our natural gas and water handling capabilities to meet this increased producer activity and for the initial construction of the Bear Den processing plant. So the Bear Den plant is a two-phase processing expansion project that will provide our customers greater flow assurance and competitive netbacks for increasing production volumes. As we previously announced and discussed, Phase 1 includes a 30 million a day, intermediate processing solution that's sized to process volumes above our current third-party firm and then interruptible contracts of 55 million a day. It also includes an approximate 30 mile, 20 inch gas pipeline that will connect the Arrow systems to the Bear Den facility location. I'm happy to report the pipeline is now complete and we're nearing the mechanical completion of the initial plan with commercial operations now expected to begin in the coming weeks. So, to-date Crestwood has invested approximately $90 million on Phase 1 and we continue to expect the total capital investment in Phase 1 to be well within the budgeted levels of approximately $115 million. As we also discussed in our release this morning, we are beginning to move forward on the Phase 2 expansion plans, which will add 120 million a day of processing capacity to the Bear Den location. This plant addition will further enhance flow assurance and netbacks for Arrow producers when our current third-party contract expires in the third quarter of 2019. When combined the Phase 1 and Phase 2 projects are supported economically by gas volume levels that are currently available on the Arrow system and will provide incremental capacity to meet our customer's robust growth outlook. So upon final approvals and completion of the Phase 2 project during the second half of 2019, Crestwood expects a combined Bear Den Phase 1 and Phase 2 project, the run rate build multiples to be in the 5 times to 6 times range, with significant further upside as system volumes continue to grow from there. Similar to Bear Den Phase 1, Crestwood’s Marketing, Supply and Logistics team will utilize its extensive NGL platform, including its Bakken truck and rail fleet along with the COLT Hub asset, to market NGL’s produced from the Bear Den facility, the Phase 2 facility. Additionally, Crestwood is considering several long-term NGL infrastructure solutions that will further enhance the optionality and realize netbacks on the Arrow system for NGLs. Those solutions may include participating in a new long haul NGL pipeline that will be built out of the Bakken region or a construction of a new fractionation facility at the Bear Den plant location with a new best purity product pipe-to-rail solution, which will connect to the COLT Hub via pipeline. The press release evaluating the timing the cost of these options with a focus on creating maximum flow assurance and generating the highest netback for producers along the Arrow system. So with that again, I'm very pleased with the progress we're making both commercially and operationally. We have very attractive high return projects, the organic projects underway that we've been able to prudently finance. We are extremely focused on execution and bringing each project into service safely, on-time and under budget but our ultimate goal of generating distributable cash flow for our unitholders. So with that operator, I think we're ready to open up the line for questions.

[Operator:]

Thank you. And we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of J.R. Weston with Raymond James. Please proceed with your question.

[J.R. Weston:]

Hi, good morning, congrats on the quarter and the asset sale announcement. With the deal announced today and in the commentary about not needing equity for the balance of 2017 and 2018, I think that’s definitely something the market is going to appreciate. Just kind of within that context though, can you talk a little bit about the outlook for 2018 growth CapEx. And then if you can't get into the specifics, is there any color on kind of the remaining CapEx for the projects like primarily Orla and Bear Den just to kind of help us getting the ballpark there.

[Bob Phillips:]

J.R., this is Bob. There's kind of three parts to that question. I think the ones you're most interested in or what the 2018 plan looks like and when we're going to come out with guidance. So Robert’s going to speak to that first and then secondly, a highlight of this call is the high return character of the projects that we have in our current inventory in those that we are developing and I want Heath to talk about that. And then finally, I think there's a third question in there somewhat strategy or policy and that is to the extent we have excess cash flow next year what we think we're going to do about it. And after Robert and Heath talk to you about their aspects of the question, I'll come back and answer that third question. So Robert, kick off the 2018 plan and guidance.

[Robert Halpin:]

Sure, and thanks J.R. and I think that we are in the final stages of working through our 2018 plan. We will be presenting that to the board here in the coming weeks and then we really finalizing feedback from all of our producers and other customers through the remainder of the fourth quarter. Consistent with last year, I think we would expect to be in position to give official guidance to the market with our fourth quarter call, it is beginning of 2018. Directionally, I think what we've communicated and we're still confident in and in the capital program in 2018 that looks fairly similar to our capital program in 2017. And then I think that our commentary around the U.S. Salt transaction and our needs for equity is in line with that. And that we feel very confident for what the balance sheet is positioned today at 3.8 times pro forma for the sale and have a lot of running room to go execute our plan in front of us without any reliance on the capital markets at all. So, I think that's directionally what we’ve prepared to get today and I'll hand it to Heath to talk about the projects and returns specifically.

[Heath Deneke:]

Yes, I think in – just kind of hitting the two that you highlighted on the Orla side as we said, the total program we would expect to come in at or below the $170 million range. And so we're kind of in execution mode with the construction starting now have awarded off the contracts, we have a pretty good line of sight on those costs coming in as expected. And again with $150 million credit that we have from First Reserve, the vast majority of all of those capital dollars are going to be provided by our partner First Reserve. Moving over to Bear Den, as we said $115 million is the total expected costs for the Phase 1 plant in the Bear Den pipeline. So we are again tracking well within budget on that as well. And then when we get to Phase 2, we haven’t provided specific capital guidance on Phase 2. What I would tell you is we would be looking at roughly $180 million if we approve the current scope that we're evaluating and the bulk of that will be spent in the late half of 2018 and into 2019.

[Bob Phillips:]

So J.R., just to wrap that up I think there's clearly a strategy question and that is once we get into 2018. Notwithstanding the fact that we don't have to access the equity capital markets to finance our 2018 plan or at least that's where we see it today as we're rolling up the 2018 plan. I think the question is what do we do with the excess cash flow, so again let me go back to the comment that I made early on and that is we're very pleased to be in a self-funding mode at Crestwood, it's a very unique position for us. We're not a large company therefore it doesn't take a lot to move the needle. And if we can get a year or two of substantial growth capital projects at very high returns under our belt without having to access the capital markets that is a huge driver to DCF per unit and gives us all sorts of optionality going forward. Secondly, want to highlight that these are the highest return projects that Heath and I've seen in a while. And the reason for that specifically is there are extensions of existing assets that we own or we have very clear line of sight or visibility to the volumes. So we're not having to discount the projects or extend capital programs to try to capture or compete for additional volumes. When we're talking about the Bakken and the Delaware Permian, this is a lot of acreage, really good acreage, really good producers, long-term contracts just waiting on the development program. And we're building out the infrastructure in advance of those volumes coming based on those volumes coming. So these are high return projects on a relative basis and we've talked publicly about build multiples of 5 times to 6 times but I can guarantee you when those projects come in on budget or under budget, on-schedule or ahead of schedule as we showed with the Shell Nautilus system. And we will show in the Bakken and on the Orla, we will be in great position to drive DCF per unit assuming that we self-finance those. And so, I like the financial flexibility that we have and the fact that we are totally self-funded here for the next few quarters and have the optionality of even doing more, if our great commercial teams come up with more opportunities in those areas. But we don't have those built into the plan but we feel very comfortable being in a self-funding mode. And I guess the final step is as we look at our 2018, we have pretty good visibility to what the volume growth will be, what the cash flow is and what the distributable cash flow is. And I think Robert and I would tell you that until we give guidance, we won't know for certain but we're at least comfortable that we're going to have material excess cash flow next year. And our plan right now is to reinvest that cash flow at these high-return projects because as we do the math that’s the best way for us to drive DCF per unit growth for our investors. And I’ll leave it with that.

[J.R. Weston:]

Very comprehensive answer. Thank you. I guess, maybe just kind of one follow-up, as you mentioned reinvestment and the optionality that you guys have, two areas where you’ve identified even further growth potential with the CPJV and the potential for blending or for water handling, and then also as you talked about another release today in the call, the downstream NGL solution. Just kind of wondering if you think at this time that a good amount of those projects as well could be self-funded, and then just kind of any additional commentary on the growth opportunities as well would be very helpful.

[Robert Halpin:]

Yes. I’ll start this off and Robert you can speak to the self-funding nature. I think what we’ve positioned ourselves for Crestwood both in the Bakken, the Permian, the Powder River and in the Marcellus which we haven't spent a lot of time talking about is really have a diverse set of portfolio of what we think are high-return growth projects. We're not going to do them all, but we have the luxury of being highly selective to make sure we're investing and allocating our capital to the basins that we have, the highest rates of return available to us on a risk adjusted basis. So I think what we're trying to communicate is we think about the Permian, whether it's continuing to fill up and expand our gas gathering and processing, having synergistic expansions into the water and crude services, taking the Arrow system and going further down the value chain on the NGL segments as well as into additional produced water that’s currently provided by third parties, continuing to expand our gas gathering and processing footprint in the Powder River Basin with some complimentary crude gathering opportunities that we think exist or taking our network of assets up in the Marcellus and helping to further debottleneck the basin that will allow producers in that in the Northeast Pennsylvania area to continue to drill and develop. Yes, we're very well positioned in each of those bases to have a high degree of growth opportunity sets. And as we think about establishing which of these projects that we want to take on, we're very mindful of how we're going to finance and make sure that we're driving DCF per unit growth. So I don't think we plan on getting over our skis and putting more capital work than we think that we have to, to be able to generate that DCF per unit growth, and we had an extensive amount of projects that we can choose from. Robert, do you want to –

[Bob Phillips:]

Yes, the other – the only other color that I would add and Heath somewhat alluded to this, but a handful of those projects whether its water opportunities or other expansions around Orla, in the Delaware and Permian, we have strategic joint ventures with financial partners in lot of those areas. So in terms of reliance up on CEQP as a funding mechanism, we have built-in financial partners to help in funding those – specific to some of those assets. It’d just be the only incremental color I would add.

[J.R. Weston:]

Appreciate all that. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Andrew Burd with JPMorgan. Please proceed with your question.

[Andrew Burd:]

Hi. Good morning, Bob. I appreciate the comments on DCF per unit growth and bias towards reinvestment. Good to hear. My questions are mostly Bakken related. The first one, rate crude volume growth on the gas side, what drove those curtailments, and did you enter the fourth quarter still curtailed?

[Robert Halpin:]

Yes. What drove our curtailments is we've been limited by our third-party processing agreement. Well, there’s actually two, the primary constraint has been our third-party processing. We currently have about 55 million a day of which about 50 million a day is interruptible. And due to system constraints as well as just allocated curtailments, that's really kind of held back our available volumes on the system. So when we think about getting Phase 1 in service, we think that 30 million a day addition combined with the firm nature of the third-party agreement that we expect the curtailments to largely be alleviated. We also have some ongoing debottlenecking projects on the system that will help reduce pressures, and we think with that reduced some pressures, we also will see some additional volume growth from our existing connecting wells.

[Andrew Burd:]

Great. And then of the 30 million cubic feet per day at Bear Den 1, what utilization do you expect when that plant enter service in a few weeks?

[Robert Halpin:]

100%. It will – as soon as that facility comes online, we will base load that plant and then we will swing on our third-party contract.

[Andrew Burd:]

Okay. Great. And then can you remind us when the acreage dedication for the Arrow acreage expires and how that's factoring into the development process for Bear Den Phase 2? And also maybe there's been a little bit of acreage – not a little, but a lot of acreage changing hands at Arrow in the last six months. Is there any chat with – chatting going on with the new producers on Arrow to extend or modify those contracts to suit kind of different drilling needs potentially?

[Robert Halpin:]

Yes, absolutely. Look, the vast majority of the contracts when we announced Phase 1, we got long-term contract extensions for majority of our producer customers, many of which were ought to 10 years or most of which were ought to 10 years currently. We think about the new shippers that have bought our Halcon position as well as Whiting position. We have been meeting with them, we are knee deep in their planning efforts. I think we're very optimistic. They put – both of those companies put a lot of capital in order to acquire the position and they both have indicated a strong desire to get more active in drilling and developing the remaining locations that they have associated with those positions. So I think the combination of having long-term contracts, dedicated contracts with our existing customers with additional capital coming into that acreage position, drill and develop the acreage, it certainly leads us and got us very excited about continuing forward with Phase 2. Now having said that, if you look at the available crude volumes that we have on the system today, not what we gathered during the third quarter, but what we think is behind by currently getting flared, currently getting used for fuel at the well pad, you take a step back and look at that volume level. If you – once we have Phase 2 in service would come in what we see is current available volumes that supports both the Phase 1 and Phase 2 investment decisions. But when Phase 2 goes in service, we think immediately we will generate about a 6 tons build multiple on that project. And then of course with getting our process capacity and aggregate up to $150 million a day, we've got a lot of ample running room to continue to grow if aero production continues to increase at the rates that we expect it to. But I just want to make a point economically, our existing available production we have around our system we think supports the economic investment in the Phase 1 and Phase 2.

[Andrew Burd:]

That’s a great answer. Look, just final follow-up question or housekeeping, the first of two is the mark-to-market of commodity derivatives, this quarter was a lot higher than in the past. Is this just that the big propane moved this summer or is there something different about this winter heating season? I know there – something as you know Robert kind of reiterated that that you remained well positioned to hit within the range, just wondering about that number for the third quarter specifically.

[Steven Dougherty:]

Yes. This is Steven Dougherty, Chief Accounting Officer. So, yes, we saw a pretty significant rise in propane prices from June 30 to September 30. And so that mark-to-market loss that we recorded during the quarter was primarily related to those fixed price positions that we had related to the sale of our NGL inventory that we currently have in storage right now. So that were – even though it's a non-cash mark-to-market loss we will windup recognizing gains related to that when we sell that inventory here in fourth quarter or first quarter.

[Andrew Burd:]

Right. Great. And then final question. Just can you explain any unique tax considerations for the U.S. Salt sale? And will there be any tax burden if the CEQP level when that is included in the $225 million? And also when does that sale close? Thanks.

[Robert Halpin:]

So related to the tax item related to it we are anticipating that there will be a sizable taxable gain associated with that transaction when it closes here which is anticipated from quarter-to-quarter. That will impact our CEQP unitholders, primarily some of our legacy, Inergy unitholders that converted over to CEQP when we merged companies.

[Bob Phillips:]

Andy, this is Bob. Will Moore completed transaction, oversee has been working on for quite a while. Will, you have any comments you want to – or color you want to give on Salt?

[Will Moore:]

I think I’ll just comment. I'm just saying there won't a tax impact at the CEQP level, only there’s a tax [indiscernible] individual older levels. And then some of that $225 million proceeds will come in around that. We've got some cleanup on working capital to maintain capital item, but we’ll expect to receive all those proceeds.

[Robert Halpin:]

And one last thing to note is for unitholders that have purchased the CEQP units here in 2017 or any unitholders that purchased units here between now and the closing day, there will not be a sizable taxable gain associated with those units. Only for our legacy Inergy unitholders that would be primarily be impacted.

[Andrew Burd:]

Great. Thanks very much. Nice quarter.

[Operator:]

Thank you. Our next question comes from the line of Selman Akyol with Stifel. Please proceed with your questions.

[Selman Akyol:]

Thank you. So I guess just starting off on the gathered volumes. If I look at those sequentially, they increased pretty nicely, but I would have thought you’ve seen a larger step up in your EBITDA, again, I'm looking at Q2 compared to Q3. Is there anything there I should be aware of?

[Robert Halpin:]

No, I don't think so, Selman. I think it's – obviously the mix makes a difference in terms of where the volumes come from and how the structure comes from. But I think that it’s a fairly clean quarter growth here flows and I think directionally headed into the future we expect to achieve similar results in similar step ups in cash flow.

[Selman Akyol:]

Got you. And then also on Bear Den plant as you guys did more marketing of those, yes, right there. Are you guys going to – you have a hedging policy already in place on that or could you guys – can you just elaborate how you’re going to handle I guess the commodity exposure coming out of that?

[Heath Deneke:]

Yes. So the way that our contracts work with our producers, we sell the NGLs on a percent of proceeds basis. So we are not taking any direct commodity exposure when we're clearing the NGLs. So there will be opportunities from time to time for our risk because they do nationwide to put on positions to further enhance the premiums that we’ll have on the barrels for ourselves as well as for our producer customers, but we're going to – as we manage the current couple of 100,000 barrels a day across the nation, we're going to be very conservative and are going to speculate on absolutely commodity prices.

[Selman Akyol:]

All right. Appreciate it. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

[Ned Baramov:]

Good morning.

[Bob Phillips:]

Good morning.

[Ned Baramov:]

I had a quick question on volume decline in Barnett. They seem to have resumed after several quarters of year-over-year growth. So could you maybe talk about what has changed in terms of activity on the acreage you serve that has led to these declines in the third quarter and maybe if you could provide your thoughts on future drilling activity in the region? Thank you.

[Heath Deneke:]

Yes, I think we have seen some slight decline in our volumes in the Barnett system. As you would expect we did have some new wells that were bought online early in the year in the alliance here at the dry gas area. But I think that the real story there is that you're seeing our decline rates are really – they’re not as steep as you would expect from just say for additional declining reservoir. And a lot of that is due to BlueStone’s continued progress and recompleting wells and cleaning up wells and optimizing gas flow systems and what have you do, it’s kind of head off those natural decline. So I think we're largely speaking, I guess, we’re maybe a couple percent decline rates. I think going forward we would expect them to continue to beat the average in terms of offsetting declines without drilling incremental wells. Now I will tell you that we do have substantial drilling inventory both in the dry and the wet gas areas of the Barnett. I think we're kind of at the cusp if you will of those wells being economic. We think there is a potential for us to perhaps provide some drilling incentives that the kind of get us over the hump to spur incremental activity. And we'll look at that those opportunities in 2018 and 2019 as well. But I think largely speaking in the Barnett, we expect again to have relatively flat to slightly declining volumes without any incremental well activity for that – certainly for the next few years.

[Ned Baramov:]

It’s helpful. And then in regards to your annual maintenance CapEx budget, I think in your prepared remarks you mentioned that the U.S. Salt business had a high maintenance CapEx requirement. So given the field of that change your annual maintenance CapEx budget at Crestwood?

[Robert Halpin:]

It won’t change for 2017 obviously with mid late fourth quarter expected to close. It will have an impact clearly on 2018. We've disclosed in our 2017 guidance $20 million to $25 million of annual maintenance CapEx I think we still feel pretty comfortable that we're going to be right in the middle of that range. And yes, we've kind of talked about this asset has between $3 million to $5 million a year of kind of annual maintenance CapEx associated with it. You’ll see that impact in 2018 and beyond.

[Ned Baramov:]

Great. Thank you. That’s all I had.

[Operator:]

Thank you. There are no further questions at this time. I’d like to turn the floor back over to Mr. Phillips for closing comments.

[Bob Phillips:]

Thank you, Devin. Just to wrap up I want to highlight again the fact that we’re very pleased to be in a self-funding mode for our capital program. Secondly, we think we've got some of the best capital growth projects in our peer group right now, primarily because we have very clear visibility to the volumes that support those projects. So as we build out these systems as we provide more services to our customers, as we insure against disruptions and curtailments from third-party downstream service providers, we are adding to the quality of our cash flow, and that is one of our goals in this program. At the same time, very clear to us that as we're financing these projects on a low cost low risk basis, we're also going to be driving DCF per unit over the next couple of years. And as we get into that position, then the company will have more flexibility, they either continue to reinvest in these great projects that the teams are developing or if market valuations warrant we can begin to return some of that excess cash flow to our unitholders. But that's a question for 2018 and probably the second half of 2018. The good news is we're very much on track to get there and I think we're going to be in a very inviable position once we get to the middle part of next year. With a lot of new projects coming on adding to cash flow and adding to DCF, and continuing to drive the very conservative balance sheet that we've put together over the last couple of years with all of hard work that we've been through. So very proud of the team and the job that they're doing, very proud of the employees out in the field that continue to keep costs down, keep margins up, and keep customer service at the high as possible level. So we're excited about where we are and appreciate all of you joining us this morning for the Q&A. And with that operator, we’ll close the call for today and look forward to talking to you all after the fourth quarter.

[Operator:]

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