Crestwood Equity Partners LP
Q4 2017 Earnings Call Transcript

Published: 20 Feb 2018

[Operator:]

Good morning, and welcome to today’s conference call to discuss Crestwood Equity Partners' Fourth Quarter 2017 Financial and Operating results and 2018 growth outlook. 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 for those 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, Kevin and good morning to all our investors and Thanks for joining us. 2017 was a very good year for Crestwood and we believe that 2018 will be an even better year as we build on the momentum that we have in the business and the strong fundamentals that surround many of the assets in our portfolio. I want to talk about several themes early on, before I turn it over to Robert and Heath to go over the results as well as an update on the project. First is execution. I think at Crestwood, the 2017 theme was execution of our business plan. Across the board, I'm proud of our organization's performance and I want to thank our employees and our business partners for delivering great results for our investors. We generated adjusted EBITDA of $395 million last year, achieving the upper range of our increased guidance, which was $380 million to $400 million. Our project management teams did a great job of bringing into service the Delaware Basin Nautilus gathering system and the Bakken Bear Den processing plant, both under budget as well as without any safety incidents. During the year, our commercial and operating teams were recognized by several institutions throughout the industry, EnergyPoint, the North Dakota Petroleum Council and the EPA in various degrees as a best-in-class midstream operator. We were acknowledged and recognized for customer service, community and environmental responsibility and transportation safety. But most importantly, Crestwood generated a 10% total return for our unitholders in 2017 versus a negative 6.5% return for our peer group on the Alerian. And we think that shows that our ability to execute in this market is beginning to be recognized by investors. The second theme I want to talk about is unitholder alignment. While safety continues to be our top operating priority at Crestwood, generating value for our investors is absolutely our No 1, goal. Crestwood is proud of our alignment of interest with our unitholders. As you'll recall, we completed simplification several years ago. We have no incentive distribution rights and a very clean corporate structure. Our management team, Board of Directors and First Reserve, our general partner, collectively own about 30% of the common LP units and First Reserve, has been and continues to be a very committed general partner. As a JV partner, as you know, First Reserve has committed approximately $500 million of new capital to support the growth of our Delaware Permian business and I think that further highlights the strong long-term commitment that First Reserve has to Crestwood. The next theme for 2017 and 2018 is financial discipline. As you know, we communicated to you in 2017 and will continue, going forward, to communicate how important financial discipline and financial strength are. These are the core principles as we manage our business. Today, Crestwood offers investors a very attractive balance sheet with growth potential. We're committed to long-term leverage ratio of 4.0 time or below and a strong distribution coverage of 1.2 times or above. These metrics are our guidelines as we manage our very conservative capital structure and make important investment decisions about how to grow our business going forward. The third theme is self-funded growth. I know that's been somewhat of a catchphrase throughout the industry, but at Crestwood, it really is important and it really is true. Our backlog of high-quality organic growth opportunities in the Bakken, the Delaware Permian, the Powder River Basin and over the long term, in the Northeast Marcellus has never been stronger. We currently estimate that our current committed growth projects will generate well over $120 million of incremental EBITDA by 2021. Cash flow generated from these growth projects will more than offset the modest declines that we are currently seeing and expect from our legacy natural gas assets in the Southwest Marcellus, the Barnett and the Fayetteville. Our 2018 capital program does not require any additional public equity issuance to execute on the plan due to the proceeds from the divestiture of our US Salt business, which we determined to be a non-core business for our traditional midstream activities, and received a very good purchase price of $225 million in the fourth quarter of 2017. That transaction, along with the balance sheet flexibility that we built over time, provides plenty of liquidity for us to carry out our 2018 capital program. So in 2018, we are expecting another great year as we continue to deliver solid results quarter after quarter and execute on our visible, accretive long-term growth projects. Personally, I see the five year plan and note that as new projects come online and cash flows ramp, we continue to gain increased confidence in the cash profile of our business and, therefore, we expect meaningful DCF growth over the next several years. As the current forecast stands, I think we'll be in a very good position to begin resuming distribution growth in the second half of 2018, as we messaged earlier in 2017. So with that background, I'm very pleased with where Crestwood is today. I'm happy to turn it over to Robert for the fourth quarter review and more details about our 2018 plan, and then to Heath to give you an update on our assets and our projects. Robert?

[Robert Halpin:]

Thank you, Bob. I am also very pleased with Crestwood's performance and execution in 2017 and absolutely expect it to continue that growth momentum out in the 2018. I will first discuss our fourth quarter results, before providing our 2018 financial outlook. During the fourth quarter, adjusted EBITDA totaled $111 million compared to $126 million in the fourth quarter of 2016. Distributable cash flow available to common unitholders for the fourth quarter was $57 million and that number net of our quarterly cash distribution to our Class A preferred unitholders. This is the second quarter that we have paid our Class A preferred distributions in cash. For the fourth quarter 2017, we declared a distribution of $0.60 to our common unitholders, driving distribution coverage for the quarter at a very healthy 1.35 times. In our Gathering and Processing segment, segment EBITDA totaled $74 million in the fourth quarter 2017, which represents a 20% increase compared to $62 million in the fourth quarter of 2016. Segment EBITDA increased during the quarter due to volume growth of 26% on a per barrel oil equivalent bases in the Bakken, 161% in the Delaware Basin, 44% in the Powder River Basin and 36% in the Southwest Marcellus. In our Storage and Transportation segment, segment EBITDA totaled $21 million in the fourth quarter 2017 compared to $34 million in the fourth quarter 2016. Segment EBITDA decreased primarily as a result of lower year-over-year EBITDA contribution at the COLT Hub. In our Marketing, Supply and Logistics segment, segment EBITDA totaled $25 million in the fourth quarter 2017 compared to $22 million in the fourth quarter of 2016. During the fourth quarter 2017, Crestwood completed the divestiture of US Salt LLC for approximately $225 million. US Salt contributed $23 million of segment EBITDA for the full year 2017. Now moving to expenses. Combined O&M and G&A expenses for the full year were down 9% or $20 million. We continue to be proud of our disciplined management of expenses across our organization, while still maintaining first-rate customer service, and most importantly, safety as a top priority. Now moving to the balance sheet. As of December 31, Crestwood had approximately $1.5 billion of debt outstanding $1.2 billion of fixed rate senior notes and $318 million in outstanding borrowings, under our $1.5 billion revolving credit facility. Crestwood closed out 2017 with a leverage ratio of 4.1 times. So all in all, in great shape from a balance sheet and liquidity standpoint to keep executing on our organic growth plans going forward. Now looking forward into 2018. We expect adjusted EBITDA to be in the range of $390 million to $420 million and distributable cash flow to be in the range of $195 million to $225 million. At the midpoint, our adjusted EBITDA range implies a 10% increase over 2017 results adjusted for the sale of US Salt and for our distributable cash flow range, 2018 reflects the first full year of cash payments on our Series A preferreds. At these ranges, we would expect our full year distribution coverage ratio to be in the 1.2 times to 1.3 times range and our full year leverage ratio to fall between 4.0 times and 4.5 times. We expect to invest in a range of $250 million to $300 million on growth capital projects in the 2018 timeframe around our core growth assets in the Bakken, the Delaware Basin and the Powder River Basin. Heath will provide additional color on our 2018 CapEx during his comments. And finally, we expect maintenance capital spending to be in the range of $15 million to $20 million. In 2017, Crestwood delivered results at the upper end of our increased financial guidance for adjusted EBITDA and distributable cash flow and achieved our long-term targets for leverage and coverage through solid execution and improved fundamentals across our asset base. We expect 2018 will be no different. Crestwood remains committed to maintaining our targeted distribution coverage and leverage goals, as we execute our organic growth projects and our 2018 capital program is fully funded with excess cash flow, revolver borrowings and capital commitments from our joint venture partners. Under our current plans, we do not expect to access the equity markets in 2018. As we bring our highly accretive organic capital projects online, we anticipate significant cash flow ramps in the latter half of 2018 and full year 2019. Based on our current leverage and coverage forecast, we believe Crestwood will be in position to further evaluate our distribution policy in the second half of 2018, as we continue to focus on increasing returns of capital to our unitholders. With that, I will turn it over to Heath to provide additional detail on our key projects underway and our business outlook in 2018.

[Heath Deneke:]

Thanks Robert. Good morning, everyone. So as evidenced in this mornings release, Crestwood delivered really strong operational performance in 2017. Our operating teams in the sale did a great job managing and optimizing our assets, as volumes continue to climb across majority of our systems. Our project management teams did an incredible job getting two large projects in service, at Arrow and in the Permian, both on time and under budget. And finally, our commercial teams continued to advance our growth backlog in the Bakken, the Delaware Permian and the Powder River Basin. We're very fortunate to have some of the best employees in the business on our team and I'm confident that we'll continue our strong momentum going in to 2018. So this year will be another very active year for Crestwood, as we plan to invest $250 million to $300 million in high-quality organic projects, that we believe will further expand our service offerings into very attractive basins. The approximate allocation of our 2018 capital program, of course, net to our joint venture partners consideration will be approximately 80% in the Bakken, 15% in the Delaware Basin and 5% in the Powder River. Then shifting to the Arrow system, the Arrow system in the Bakken emerged as a key growth asset for Crestwood in 2017, as we expanded our gathering systems as well as our producers made tremendous gains in drilling and completion efficiency and overall well performance. Arrow systems generated approximately $120 million of cash flow in 2017, but based on our producers latest volume forecast, we expect Arrow's cash flow contribution will grow at a 15%-plus cumulative annual growth rate through 2022. In order to achieve that growth, we are expanding our gathering, compression, gas processing, produced water handling and disposal systems to meet our producers' long-term development plans. On the Arrow system we have well over 1,000 remaining drilling locations and our producers continue to outperform historical type curves on all three product streams that we handle. The Arrow system debottlenecking the projects, both on the crude, natural gas and water systems are currently underway and we expect meaningful gathering volume growth in the second half of 2018, as many of those system expansions are completed. Additionally, we are actively investing in self-performing natural gas processing for the Arrow system. The Bear Den processing plant is a two-phase project that will provide a $150 million of combined processing capacity when complete. As a reminder, Phase 1 consisted of around 30 million a day RJT unit that was placed in service in the fourth quarter of 2017. The Phase 1 was an expedited processing solution that was developed to capture gas volumes in excess of a third-party processing agreements, which was previously being flared. Our project management operating teams did an amazing job bringing Phase 1 into service during the fourth quarter 2017 at a cost of $100 million, which was approximately $15 million under budget. The Phase 1 plan is now operating at very high utilization levels and it is expected to remain full across 2018 and into 2019. So shifting to Phase 2. Phase 2 of the Bear Den plant will add an additional 120 million a day cryogenic processing facility, and a mainline compressor station that will enable us to process 100% of the gas gathered along the Arrow system. We're near the finish line on our permitting, engineering and procurement activities for Phase 2 and we expect to begin construction in the coming months and expect to place the project in service by the third quarter of 2019. So now you get our portfolio Bakken projects offer extremely attractive total project returns, with a sub four times overall build multiple when the full expansion program is complete. But these projects will drive very meaningful and very accretive cash flow growth for Crestwood into 2018, 2019, and certainly, beyond. In the Delaware Basin, Crestwood is also building a competitive scale by fully integrating our gathering systems and adding processing capacity to our 50/50 joint venture with First Reserve. On July 1, 2018, we expect to place our Orla processing plant in service, which will provide an additional $200 million per day of processing capacity to serve customers on the Willow Lake and the Nautilus system. We also plan have both the Orla Express pipeline, which is a 33-mile, 20 inch high-pressure line, connecting the existing Willow Lake system in New Mexico to the Orla plant and the Nautilus-to-Orla Pipeline, which is a 28-mile, 20-inch high pressure line, connecting the Nautilus System to the Orla plant is expected to be in service by July 1 of 2018 as well. Now when complete, Crestwood will have among the largest integrated gas gathering and processing footprint in the basin, expanding more than two million acres across the Northern and Southern Delaware. We believe the sheer size and scale of the Delaware footprint will lead to multiple processing expansion opportunities, and potentially synergistic downstream opportunities to develop liquids and gas infrastructure. Additionally, we're making great progress on our plans to develop a large-scale produced water gathering and disposal system and we continue to pursue future crude oil gathering and terminalling services around our Delaware footprint. We look forward to updating you as we make further commercial progress on these opportunities. Now shifting to the Powder River Basin. During the fourth quarter, our gathering volumes on the Jackalope system increased by approximately 45% due to increased rig activity and strong overall well performance. The Chesapeake Energy is currently operating three rigs on our footprint and have stated plans to add a fourth rig and may be a fifth during the first half of 2018. As a result, we continue to expect meaningful volume growth throughout 2018 and beyond and remain very optimistic about Fayetteville River Basin's long-term growth outlook. Chesapeake, and other producers are showing tremendous well results, exceeding early type curve expectations across multiple formations, including the Turner, the Mowry, the Niobrara and the Sussex formations. Based on recent well results, Chesapeake has advertised well economics that Rob although has seen in the Permian basin, with greater than 100% IRRs and $55 oil prices, with breakeven dipping into the mid-$20 per barrel range. Crestwood is projecting an overall 80% year-over-year increase in oil production in the Powder River during 2018 and expect to drive production to more than 200,000 barrels of oil equivalent per day by 2022. So this production ramp would equate to approximately 500 million a day of rich gas production in 2022, as compared to the 70 million a day of gas gathered during the fourth quarter of 2017. So with this robust growth outlook, Crestwood is working closely with Chesapeake and other third-party producers in the area to further develop gathering system and processing expansion plans necessary to meet future production growth in 2019 and beyond. These near-term expansion opportunities include the expansion of the Jackalope gas gathering system, the addition of a new 200 million a day cryogenic processing facility as well as the potential development of a new crude gathering and terminalling system in the region to serve the oil production on our acreage footprint. Quickly around our other assets. Beginning in the third quarter 2018, our Northeast Marcellus will benefit from the 5% cash distribution step-up provision, related to the Stagecoach Gas Services joint venture agreement with Consolidated Edison and we continue to work with our producers and end users to develop future pipeline expansion opportunities. Staying in the Northeast. Our Northeast NGL business is expected to benefit from colder-than-normal winter weather in the first quarter of 2018, which has increased demand for propane and butane market and logistic services. Additionally, Crestwood expects the MS&L segment to benefit from increasing marketing and transportation volumes through Crestwood's expanding processing capabilities in the Bakken, in the Delaware Basin region, as that segment continues to add value and complement our G&P business. So before opening the line for questions, I wanted to reiterate how pleased we are with our results in 2017 and I believe we are extremely well positioned to continue delivering great results in 2018 and beyond. We have a very attractive, high-return organic projects underway in multiple basins, which are all prudently financed. Our commercial teams continue to prove out the near- and long-term growth potential of our assets within our core basin and the overall ability to compete for Greenfield projects. We're now in a position where growth in our core basins more than offsetting the modest declines in our legacy natural gas prices. And finally, I wanted to reiterate that we are very and extremely focused on executing and bringing each project into service, safely, on-time and under budget with a clear goal of generating long-term value for our unitholders. So with that, operator, we are ready to open up the line for questions.

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from J.R. Weston from Raymond James. Your line is now live.

[J.R. Weston:]

Hi, congrats on the quarter. Just wanted to start with Arrow. I think the largest contributor of 2018 EBITDA. Prior guidance was that you expected well connections in 2018 to be comparable year-over-year versus 2017 in the 90 to 110 range. I think that would equate to a 20% to 25% volume growth, if I remember correctly. And just kind of wondering if you could talk about the well connection assumptions that you have at the high and low end of the ranges for 2018 guidance? Just trying to get a little bit better handle on the upper and lower end of the guidance range for the year.

[Heath Deneke:]

Okay. Bob, I'll take the stab at it. Rob, you can jump in with the specific volumes. I do think 2018, again, we have multiple projects underway and so we think our well connect program. We've been working very proactively with our customers to make sure that they don't put wells online, that frankly our system can't handle. So I think we're going to see a little bit muted well connect activity in 2018 for that purpose, with a good chunk of those well connects that otherwise would have come in online in 2018, they would shift into 2019. So I think that's a big picture answer, but I do think that we believe we'll see 80-plus well connects per year, on average, with over 10 years of inventory at that level. Robert, you want to take the volume?

[Robert Halpin:]

Yes, I would expand on Heath's commentary a little bit. I think that really the big deliver as it relates to our range for overall guidance as well as our range for the G&P segment and Arrow, specifically, is driven around the debottlenecking of our system, the in service date of Bear Den 2 which will be in the first half of 2019 and working closely with our producers between now and then to ensure that when they do bring wells online throughout the year that we've got adequate capacity to ramp volumes. As a couple of anecdotes, I do think this is an important year for execution on the project front. We expect on a volumetric basis to see material uplift year-over-year on gas and water, as that's where the greatest amount of constraint currently exists, with roughly 40% to 45% uplift in volumetric throughput year-over-year on those two streams. On an aggregate cash flow basis for the year, because of the full year contribution of Bear Den Phase 1, with our outlook for well connects and the debottlenecking systems, we're looking at roughly 35% to 40% uplift in overall cash flow year-over-year from our Arrow system.

[Bob Phillips:]

J.R. this is Bob. Let me just kind of wrap that up and remind you that this is a robust and growing system for all three products, gas, crude and water. We expect all three products' average volumes to be up pretty significantly year-over-year. It's also a year of execution for us, as we have these various projects and much of the new volume will be waiting on planned expansions, downstream connect expansions, additional saltwater disposal expansions, all of which are underway right now. The general theme for Arrow, is our margin is expanding significantly and that is a combination of both volume growth as well as we're now processing a significant amount of the volume, which we didn't process in 2017. Our Bear Den plant wasn't placed in service until December 1, so when you think about 2017 versus 2018 or 2018 versus 2017, we'll have a full year of processing in Bear Den plant that will be a big boost to overall margin increases. So just would appreciate you and all the other analysts to work with Josh and Elizabeth, and get a better handle on how we model out 2018 versus 2017. It's not a function of the number of well connects, because frankly, the wells are outperforming type curves substantially, year after year. It's really more of getting a good handle on the volumetric expectations for the three phases and then adding that significant and important component of us processing the gas, instead of one of processing the gas. And then you'll do the same thing in 2019, when Bear Den 2 comes in service and that's when we'll take all the gas and will be processing it, and you'll see another big incremental increase in margin just from the additional processing services and by the way, don't forget, we're marketing that gas in those NGLs and we make something now on that too, which we didn't before. So it's a fairly full year-over-year comparison and I wouldn't get too hung up on well connect assumptions. We know that the producers have an aggressive development plan for all parts of the system. We're working closely with them to make sure that when they drill a well, they we can bring it on and we're not increasing gas flaring on the system and on the reservation. So just be aware that there's a lot of assumptions that are changing, they're all good and what you'll see is a significant increase in margin.

[J.R. Weston:]

Okay, great, thank you. Definitely very helpful perspective on Arrow. I guess, maybe still just trying to search for kind of a little bit more color into the higher and lower end of the EBITDA guidance range for the year? Maybe switching gears to Marketing, Supply and Logistics, I don't know if maybe you can comment on the impact of the weather that we saw so far in winter 2017, 2018? And how that compares on a year-over-year basis versus what you saw in the first quarter of 2017? And then I guess, what's built into the budget for the fourth quarter of 2018 versus the quarter that we just came through?

[Bob Phillips:]

Well, let me first ask if John Pall's on the phone from Kansas City, and while he's – if he is, while he's organizing his thoughts on that, Robert could you just kind of touch on some of the assumptions?

[Robert Halpin:]

Yes, I would suggest that the – while first quarter is obviously not in the books yet, we did get a good blast of winter here to start out the year and I think the business is well positioned now into the first quarter, relative to the range that we put out as part of our guidance. We've guided at $50 million to $55 million annually for the MSL segment, I think we feel pretty rock solid in that number. Obviously, that number is a bit down from prior years and I think that largely reflective of the overall market environment, but feel very, very confident in the team's position and execution towards that plan today. Year-over-year comparisons, in the first quarter of 2017, we had an adverse impact associated with backwardation in the market. Don't expect that in 2018, with where we're positioned now. And so I think, all in all the directional commentary, I would give you is feeling very good in these early days of 2018 about how the business is positioned. How we're working out of our inventory cycle and the prices we're realizing on that. So I'll leave at that for now.

[Bob Phillips:]

John, are you on? Okay, guess, we didn't get him. Heath, do you want to add anything commercially? I know you've been working shoulder-to-shoulder with those guys, particularly around the Bakken and the Delaware Permian where we're processing more and handling a lot more liquids and they're putting that material away for us at good values, and it's extending the value chain for us.

[Heath Deneke:]

Yes, it is. And certainly, the part of the guidance for 2018 does include handling of our Bear Den NGLs, which is a decent sized book of business out of the Bakken. And we hope to continue to grow, as we get into 2019. Likewise, there's a lot of future opportunities we think in the Permian as we kind of ramp up and bring our 200 million a day cryo online. We're going to be handling the – a fair amount of liquids and given the sheer size of our footprint we'll expect to have a lot more, but again, we'll provide some downstream synergies we think to develop some NGL infrastructure.

[J.R. Weston:]

Thorough answers, thank you.

[Operator:]

Thank you. Our next question is coming from Shneur Gershuni from UBS. Your line is now live.

[Shneur Gershuni:]

Hi, good morning, everyone. Just a couple of questions, some big picture, some smaller or more micro in nature. But starting off, you guys have made a lot of progress over the last two years. You're talking now about a potential resumption of distribution growth in the second half of 2018. Have there been any thoughts towards balancing that with buybacks, sort of taking down the unit count to offset some of the growth to maintain some of the high coverage ratios that you have? Just kind of wondering how you're thinking about the total return of capital process as you move forward.

[Robert Halpin:]

Yes, Shneur, this is Robert. I'll take that question. I think it really starts with what our core strategy has been that I think we've been very clear on, and that is our core strategy is to execute around the highly accretive organic projects in our portfolio with absolute commitment to maintaining 4.0x or less on the leverage side and 1.2x or greater on the coverage side. As we guided today, we've got $250 million to $300 million of organic spend in 2018. 80% of that around are Bakken with high visibility to cash flow ramps in the second half of 2018 and early – and full year 2019. And with all those factors, we expect a pretty material uptick in cash flow heading into the back half of this year and into 2019. I think Crestwood remains absolutely focused, has a master limited partnership, in generating value to our unitholders over the long term, and a big component of that being through return of capital either in the form of distribution or other. And so I think, really, our commitment is first and foremost to executing on our business plan, utilizing our excess distributable cash flow and liquidity that we have to avoid any equity issuance and execute on that plan on a self-funded basis. And then I think as we position ourselves into the second half of the year, we think we'll be in very strong position to evaluate the distribution as a form of increasing returns of capital to our unitholders. But obviously, quarter-to-quarter, we evaluate that and look at all options out there. And so I think no hard, fast commitment. Our real commitment is on maintaining our financial strength; executing on our organic project, which I think we all believe generates the greatest amount of long-term value; and then, focus on finding ways to increase returns of capital towards the second half of this year.

[Shneur Gershuni:]

I guess, what created the question was the Slide 23 in your deck about where you're trading on a price distributable cash flow basis relative to peers. And so it kind of seemed that buybacks might be something that you might want to consider, but what you said makes sense. And the next question, there's been a lot of talk about NGL takeaway out of the Bakken. You've heard of some big pipeline announcements as well as talk about railing to the West Coast and so forth. It would seem that you hold a lot of cards and have some optionality as a result. Is there a way for you to our participate in it? Is your plan to potentially going to be connected to some of these options? Could you participate in some of these projects through JVs where you contribute the capitals and plans and so forth? I was just wondering if you could sort of talk about your cards.

[Heath Deneke:]

Yes. So this is Heath here. I mean, I do think we have a lot of optionality. I think our number one focus is to kind of get the best netbacks that we can for our producers. As a reminder, we do participate in the proceeds and related NGL sales. So we definitely – the more optionally we have, the lower the cost of transportation and fractionation services, the better. So we are focused at Arrow. We've got phase – during Phase 1, as we mentioned, we are using our optionality both to local markets and to the West Coast to move NGLs around. And we expect when Phase II comes online, we will have a pipeline solution. We're very excited about the types of fees and services that we're seeing out in the marketplace today. So regardless of whether or not we directly invest in one of those NGL solutions, we definitely will benefit among the Arrow system. I mean, keep in mind, the biggest picture here is volumetric growth. And the better the netbacks, the more volumes we're going to be able to bring on in the system.

[Shneur Gershuni:]

Right, that makes sense. And then finally, just one question about the quarter. Gathering volumes were up big in the Powder River Basin. Can you give us some color as to what's driving that? Is it operating leverage? Is there some unique activity going on? Just any color would be helpful.

[Heath Deneke:]

I just think it's the sheer economic performance of these – of the wells that Chesapeake and others are bringing online. I mean, they've definitely increased rig count. We got a bunch of well connects towards the back half of the year that contributed to that volume growth. But if you kind of look in our investor deck and some of the commentary, I mean, we're really kind of poised for some tremendous growth. I think we exited the fourth quarter somewhere around 70 million a day. And again, we're – you have to put your own handicap in around Chesapeake's plans. At least what they've advertised, you could see those volumes growing to close to 500 million a day by 2022. So certainly, when you look into 2018, with three rigs going to four, maybe five, we consider – we think we'll be basically fully utilizing our gathering and processing capacity that we have installed, which is about 120 million a day, planned 150 million of gathering capacity. So that's what I kind of expect for 2018. And as I mentioned, we're working with Williams, our joint venture partner, and our producer customers to go ahead and start planning for the next wave of expansion infrastructure that will need to be brought online during the middle part of 2019.

[Bob Phillips:]

Hi, Shneur, this is Bob. Before you get off the phone, let me just do a quick follow-up on your first question. And I appreciate you bringing out Slide 23 in our new deck. And there's no doubt that Crestwood's undervalued relative to our peer group, and we're not happy about that. But there's not a lot that we can do to control that other than continue to execute quarter after quarter and show a plan and then – and deliver on our promises. What the slides intended to do is not show how undervalued we are, but show that Crestwood checks all the boxes in terms of what MLP investors are looking forward today as we understand it. You probably talk to more MLP investors than we do so you'd have a better idea. But as we look at the industry today, low leverage, high coverage, no IDRs, being self-funded on your capital plan – not necessarily all of it, but some of it, a meaningful amount of it. In our case, in 2018, it's all of it, and then significant insider ownership, those are the elements of what we think are very attractive MLP investment going forward. I don't know that adding stock buyback to that box necessarily improves our valuation automatically relative to the peer group, but it is certainly something we'll consider. But we do think that these five elements are the key elements that the investors we talk to are looking for in 2018 and beyond.

[Shneur Gershuni:]

Great, appreciate the color. Thank you, Bob.

[Operator:]

Thank you. Our next question today is coming from Andrew Burd from J.P. Morgan. Please proceed with your question.

[Andrew Burd:]

Hi, good morning. As a follow-up for Heath on the Arrow well connection, the Bakken. Heath, you mentioned the 80-plus well connects on average underlie that 15% to 20% EBITDA CAGR number. Question is, what type of annual investment do you expect will be required to support those – your more well connects? And I do appreciate that your customers pay for the well connects, so I guess, it would be gathering expansions.

[Heath Deneke:]

Yes. I mean, I think if you go back and look at 2017 when we really first started kind of debottlenecking the system and bringing own processing through the middle part of 2019, we think, in aggregate, we'll invest close to $350 million, which when you look at the expected growth coming out of that asset for like an annualized fourth quarter of 2019, we expect that to be sub-4x build multiples when our program is complete. And just to provide a little bit more context around the well connects, you just brought it up again. I mean, I think again in 2018, we've got a lot of produced water that is behind the pipe today that is waiting on some of these debottlenecking projects. We still have some flaring that's occurring on the reservation. We've knocked a good chunk of that out, and we do have some localized pressure issues that's we're trying to debottleneck. And so I think that's why we're kind of underemphasizing well connects. It's really more about getting our system expansion projects delivered on time and on budget, and that's really what's going to make Arrow a successful year. So when you think about the level around what's in our base case assumptions, I think we have maybe close to 60 well connects, I think, in 2018 in our base case. I think if our pipes come on sooner, I think that number can kind of pick up considerably. If our pipes are a bit delayed, then we might see that well connect number come down a little bit. But again, the biggest driver for 2019 is simply going to be debottlenecking our water and our gas gathering system.

[Andrew Burd:]

Thank you. That's helpful color. Switching gears to the Marketing segment. It looked like the adjusted EBITDA was down a bit year-over-year in the fourth quarter, a little more than just the U.S. Salt's lost earnings in December. So I guess the first question is, was there anything at play year-over-year there? And the second related question is how should we think about the $50 million to $55 million EBITDA guidance range for the segment in the context of future years? And what are the key main drivers that could impact that $50 million to $55 million up or down? Thanks.

[Bob Phillips:]

Andy, let me start while Robert is looking at the numbers. Several things happened in MSL last year other than U.S. Salt. Let me draw your attention first to our transportation business. That's a really big part of the business. Historically, in 2013, 2014 and to a certain extent in 2015, that business was operating at a very profitable level. We had a lot of equipment, and all that equipment was moving. We had drivers, and it was a pretty robust business. Starting in 2016, as prices came down, demand for that business started to move the other direction. We recognized that in 2016. We put a program in place in 2017. I think we started talking about it as early as the second quarter of 2017. And we significantly cut the cost associated with that transportation business. We cut about half of our fleet out. We made some organizational changes. We rerouted – we got better lane efficiency and just generally, an overall cut cost. But we couldn't cut cost as fast as the revenues came down because of the contraction of the business. And then the resulting competition amongst other truck and transportation businesses, that we're experiencing essentially the same thing in the areas that we operate, which were Northeast, Mid-Continent and West Coast. Now we have continued to work on our transportation business. We've moved equipment around. We continue to reorganize and cut both fixed cost as well as variable cost, and so I think we're at a point where transportation as an element of MSL – and it is an important element just like rail. I think we've got those costs down about as low as they could possibly get. Now we need to aggressively seek more margin opportunities and wait for new opportunities to arise, where we can use our traditional MSL model, which is truck, rail, storage, terminal and sales, to expand that business. I'm not certain that that's necessarily going to happen in a big way in 2018, but we do think relatively, and on the margin, it is going to improve. I think that's what Robert was talking about. Robert, do you want to put some numbers on that?

[Robert Halpin:]

Yes. I think first, to your question on year-over-year performance for the fourth quarter, I think, actually, we recorded an uptick quarter over – year-over-year for the fourth quarter. We did about $25 million in the MSL segment in the fourth quarter of 2017 compared to $22 million in the fourth quarter of 2016. And also, keep in mind that that $25 million, as you pointed out, Andy, does exclude about $2 million contribution from U.S. Salt following the sale – completion of that sale. So net-net, there's about a 20% uptick year-over-year for the segment specifically. I think some of the adjustments we made longer – looking out into the future, as Bob alluded to, are centered around repositioning that segment to capture our highest-margin opportunities on a third-party services basis, but also to be a lot more focused on self- performing around our other asset footprint across our portfolio. So as Heath mentioned in his remarks, a growing focus on servicing our processing assets, we've got substantial liquids coming off and marketing around that and generating incremental fee opportunities down the value chain. So I think the magnitude – or the direction of earnings, the kind of $50 million to $55 million for the segment in 2018 going forward, I think the quality of that certainly up, it's tremendously as it's – a lot of visibility into volumes around our owned asset. And I think that we still see a good baseline around that level going forward with opportunities for, call it, 3% to 5% kind of annual growth over the next five years if we can continue to expand around our growing business on the gathering side and look for incremental ways to service it through the marketing fees.

[Andrew Burd:]

Great, thanks. And just to clarify, the year-over-year decline number that I quoted was net of unrealized hedging. But the question was answered nonetheless. My final question on Tres Palacios; what did it earn this year? And where do you see that potentially going over the next few years? I don't know if the evolving Gulf Coast gas markets potentially improve the outlook for that asset. Thank you.

[Bob Phillips:]

Yes, Robert. Yes, I'll start kind of where we're headed with Tres. Robert, you can kind of fill the numbers. But – basically, we still see a lot of upside opportunity around Tres. We have been experiencing year-over-year – kind of going back to 2015 into 2016 and 2017, year-over-year, we're increasing the actual storage values, getting higher fees with the recontracting as we kind of rolled our portfolio year-over-year. We're starting to see a lot more interest from the LNG export facilities and Freeport and nearby that are desperately looking for high deliverability storage, injection and withdrawal service to try to help balance their LNG facility needs going forward. We're certainly seeing the power generation demand in Mexico kind of pick up and create kind of some peaking markets. And we've seen some pretty high volatility during the peak winter that we experienced down here in the Houston area. So I think all things being told, things are kind of looking up. We continue to believe that there will be additional infrastructure opportunity out of Tres, both on the gas and the liquid side, gas being driven by further robbing Tres' access, if you will, to markets around the Houston Ship area as well as the Agua Dulce region. And it will provide a key balancing service, both between the power generation peaks in the summer as well as kind of helping the LNGs deal with the operational realities of moving gas around the system. So Robert, do you want to add anything to that?

[Robert Halpin:]

Yes. I think if you get the numbers, Andy, it was about a $6 million 2017 contribution net to our 50% interest, which is quarter-to-quarter – fourth quarter 2017 to fourth quarter 2016 is about a 25% uptick.

[Bob Phillips:]

And that was – Andy, that was – just to be clear, that was based on volume growth, about 20% year-over-year. But also, as Heath said, it was based on increasing storage values. And therefore, at least, we held the line on margin, if not started to increase, transactional margin across the facility. We still think that facility is uniquely located to really benefit from a big uptick in LNG business, and we think we're starting to see it play out in the market that way.

[Andrew Burd:]

Thanks. Nice quarter.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from Kyle May from Capital One Securities. Please proceed with your question.

[Kyle May:]

Hey, good morning, everybody. Just a quick one for me. In your presentation, you got a comment on the Powder River Basin that your assets may reach capacity in second half of 2018 or early 2019. So wondering if you could maybe expand on your earlier comments about the potential for expansion of your assets with the JV there.

[Heath Deneke:]

Yes. As I said in my remarks, I mean, we will be approaching the capacity. We have a small compression-related expansion that we can get our Bucking Horse plant up to 140 million a day. But really after that, we're going to have to step into a fairly sizable new plant to kind of handle the anticipated volumes. So we're in early stage of planning. I think we're doing our diligence and working with our producers to kind of precisely time the need for that expansion and how we may most cost effectively kind of step into it. If you look at our current offices with these volume projections that we would step into a 200 million a day plant, that would be online sometime in the mid- to late 2019 time. We have not FID-ed that yet, but that is something that we're working on closely with our producers. And again, that's largely driven by Chesapeake volumes. But in and around that footprint, we've got a lot of third-party producers that are trying to ramp up activity as well. And so when you look at our gathering system having built out for scale, the ability to kind of efficiently drop in another 200 million a day plant, we think we've got some really competitive rates and services that we can uniquely offer kind of that Southern Converse County area. And then beyond that, virtually all of the crude oil today is being trucked away to local markets. We think it's going to be much more efficient to do that via pipe, like most basins. I think the volumes have been – up to this point, have been relatively too low to support a build-out of a gathering system. But when you look at the kind of ramp-up again, we think it's going to be very cost-effective for us to offer up some pipeline service – gathering service, if you will, as well as utilize our terminal that we have just outside of Douglas to kind of bring together volumes into and get into the pipeline network. We think all that will generate even further netback enhancements for our producers, and we're excited about being able to offer that. A lot of those crude systems will be laid in the same ditch as the gas system, so I think that gives us the scale and kind of the unique advantage to compete there as well. And then finally, the other thing I wanted to touch on is NGLs. When we think about aggregating our Bakken barrels, most of the pipeline outlook is going to come through the Powder River as well, and we're pretty excited about leveraging our scale there to get the most attractive rate that we can to be competitive, both in the – up in the Bakken as well as the Powder River.

[Kyle May:]

Okay, thanks for that. And one more for me. When we look at Slide 8 that shows your outlook for various basins, it looks like the Powder River Basin, you got nice growth in 2018, but then basically flattening off in the beginning of 2019. What are the factors you're looking at there? And as we think about Chesapeake ramping up, is there a – or could we see a potential bias higher?

[Heath Deneke:]

Yes. I think all you're seeing here is simply us filling up the Bucking Horse plant, and then it – we're kind of showing that we're capacity constrained. And that's just the way we run our business here. Until we actually sanction an FID a plant, we don't put anticipated growth into our plan. So this is something that we're going to be diligent in here over the next, call it, two months. And when we make a final investment decision, we'll be sure to announce it. But we're very much excited about the ramp-up, and I think you can look in Chesapeake's investor deck. I mean, this is Page 1 material for them. They're very excited about it. And when you look at the locations and the delineation that they've done to date, I mean, these economics are among the best in their entire portfolio. So we really do expect them to kind of ramp up along the lines of what they're saying publicly. And again, I can't understate the third-party acreage and development opportunities in and around that footprint. So definitely – I definitely think you'll see a lot more growth in 2019 and beyond out of the Powder.

[Bob Phillips:]

Kyle, this is Bob. You raised a good point. I'd like to highlight it for the listeners. We have not been in a habit over the years of just throwing out capital projects to show that our backlog's bigger than the other guys' backlog. We have become very conservative over the last couple of years, very disciplined financially with our balance sheet. We work closely with our partners. We have joint venture partnerships in every major region other than the Bakken, which we own 100%. This region is a partnership with Williams. We work very closely with Williams. And we're working very closely with Chesapeake to try to stay in front of their development program. They will tell you that this is probably the best part of their entire portfolio and the one that they're going to focus on growing the most over the next couple of years. So when we get to a level of confidence, we being Crestwood and our partner, Williams, we'll sanction a project. We'll underwrite that based upon their drilling results and their future drilling plans, they’re moving a fourth rig in, we’re going to see exponential growth in volumes because of that. We think we'll build the plant up faster, but we've just simply not been in a habit of adding large-scale capital projects to our backlog just to show people how big the backlog is. I think we've got plenty of visibility on capital projects that are accretive. The DCF per unit over the next couple of years, when we get to that one and it should be some time in 2018, we'll add that project and we'll show the level of accretion expected and the level of volume growth. So I appreciate you bringing that up. We spend a lot of time talking about future projects, and we have a lot of them. We just don't tend to put them out for public consumption until we're absolutely certain we're going to move forward. And of course, that's a joint decision with our good partner, Williams, on that.

[Kyle May:]

Okay, great. Well, thanks for all the color guys. I really appreciate it.

[Operator:]

Thank you. Our next question today is coming from Ned Baramov from Well Fargo. Your line is now live.

[Ned Baramov:]

Good morning. Just had a couple of housekeeping items. One is on the Con Edison step-up in the distribution in the third quarter of 2018. I was just wondering if that's – if Crestwood actually gets two full quarters from that. Or is it just the fourth quarter of 2018 that the increase in the distribution is realized?

[Robert Halpin:]

It's for two full quarters, Ned. So third quarter, fourth quarter.

[Ned Baramov:]

Okay, great. And then my second housekeeping item, on the Marcellus MVCs. So those expire in 2018. But it seems that guidance reflects payments on actual volumes and not the $450 million of MVCs. I was just wondering if that's due to adjustments based on prior year overages. Or is it just conservative among – on your part?

[Robert Halpin:]

No, it’s based on our expectation around the contract and volumetric throughput. As I think we've discussed, as it relates to our Southwest Marcellus position, we haven't ever billed a deficiency payment or collected a deficiency payment because of the volumetric trend, and I think that's continued in 2018. So what we've laid out and what we expect is – throughput times rate, is that's in line with kind of the contracts state.

[Ned Baramov:]

Okay, got it. And actually one more, if I may, on Bear Den Phase 2. I believe the slides point to an investment of $195 million, whereas the press release says $185 million. Could you just help me reconcile the two numbers? Thank you.

[Robert Halpin:]

Yes. I think $195 million is the correct number there. Now again, that's fully loaded with a lot of contingency. And as you kind of saw in our previous Phase 1 results, we're able to bring that down by 15% or so. So I think at this point, we like to hang on to my engineers, like to hang on to contingency. So that's probably fully loaded at the $195 million. And again, we expect to be able to bring that project in a little bit less than that.

[Ned Baramov:]

Great. Thanks, guys.

[Operator:]

Thank you. We’ve reached the end of our question-and-answer session. I'll turn the floor back over to Mr. Phillips for any further or closing remarks.

[Bob Phillips:]

Thanks, and thanks to all the guys that called in to ask really good questions. I think you're touching on the right points. Let me just highlight the four, five themes of 2017 and 2018 because they haven’t changed; number one is always operational safety. That's our top priority here. Regulatory compliance, environmental stewardship, these are all parts of the way we operate in the business and why we think our footprint is expanding successfully in so many different active basins. Number two, execution, you saw the project execution in 2017. Heath has described how important project execution is in 2018 to unleash a lot of behind pipe volumes, water, gas and crude, in the Bakken, saving the Delaware Permian. Got that Orla plant coming on mid-year; critically important for our Northern Eddy County, Northern Delaware Permian producers to have that extra plant capacity. We know that they want to drill more aggressively. The wells are coming in bigger than we thought. Execution on the Orla Express and Orla plant is critically important to us. Unitholder alignment, I'll take you back to that Slide 23 that one of the guys pointed out. We think we check all the boxes, and Crestwood has become a very attractive investment opportunity given our visible growth potential in the portfolio. Financial discipline, I want to compliment Robert and the team on how well they've done over the past couple of years to reposition us financially and at the same time, reposition us competitively. We have key joint ventures in the regions where we think we're going to have growth. And then specifically, self-funded growth in 2018; no reason to believe that, that concept doesn't extend into 2019 as well, but we do think that we will be in a position not only to redeploy excess growth into the portfolio, but, at the same time, begin to deliver value back to our investors by increasing distributions as we reach the second half of the year and have more clarity and visibility about our 2019 plan. So just stay focused on how we execute against those primary themes, and I think you'll have a good handle on how Crestwood's going to do in 2018. With that, operator, we thank you for your time and look forward to talking to all of you at some of the Investor Conferences coming up. I think the team will be at many of those. We've got a new deck that's going up today. Is that right, Elizabeth?

[Elizabeth Suman:]

Yes.

[Bob Phillips:]

Or has – is up now. A lot of new material in there, and we're happy to answer your questions if you'll call in. So Josh and Elizabeth and IR team are ready to talk about that and give you more color around it. Thanks again to all of our employees and our business partners for a great 2017, and we're excited about 2018. With that, operator, we'll call a wrap.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.