Crestwood Equity Partners LP
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good morning, and welcome to this morning’s conference call to discuss Crestwood Equity Partners’ Third Quarter 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 Senior Vice President and Chief Financial Officer, Robert Halpin. Additional members of the Senior Management team will be available for the question-and-answer session with Crestwood’s current analysts following the prepared remarks. Today’s call is being recorded. [Operator Instructions] At this time, I will turn the call over to Mr. Bob Phillips.

[Robert Phillips:]

Thanks, operator. Good morning and thanks to all of you for joining us, we know it's early. We've got a lot of great things to talk about this morning, certainly want to discuss the third quarter results and dive a little deeper into the growing opportunity said in front of Crestwood. I think it's evident by now that our turnaround story has been nothing short of amazing. And we're clearly beginning to benefit from the strategic positioning in all the steps that we've completed. Earlier in the year, let me just remind you of some of those and highlight some of our year-to-date 2016 accomplishments reminding that we settle the quicksilver bankruptcy brought in a new producer in BlueStone. The Barnett assets are now beginning to show growing contributions, they're really an important part of our portfolio going forward. We formed a joint venture with Con Ed around our North East assets, so use the proceeds there about a $1 billion, we paid down about 40% of our debt and got our leverage ratio below four times in absolutely critical point in the strategic repositioning strategy. We improved our coverage ratio and you'll see it at about 1.8 this quarter and we continue to want to keep it in that range. As we go through 2017, we think that is a very important part of the overall Crestwood investment story. Right now investors want to have confidence in our distribution and they certainly do with that kind of coverage ratio. Recently, we signed a very important deal with Shell, which is not only important as a big entry into the Southern Delaware Permian. But it's an indicator as to how well Crestwood is a midstream operator as thought of in this business. Shell screened a lot of potential midstream operators in our commercial operating and technical services team, one that or be and we are set to build a very long term critical piece of infrastructure for Shell and what we think and what they tell us is one of their most important North American asset. So, that's important to us. And illustrates where we are as a midstream operator. We're customer service oriented a professional group of individuals with the ability to develop Greenfield projects in growing place like the Delaware Permian. We're financing that with a 50/50 joint venture with First Reserve their Fund XIII, its new capital. It's another indication of the support of our general partners and larger shareholder, another indication of available capital that we have. Robert in the finance team have done a good job of structuring that financing so that it's very flexible for us as we build out these important Delaware Permian assets. And then finally, just recently and Heath's going to talk about this. I think you all know we settled a longstanding contract dispute with Chesapeake with our Partners Williams in the 50/50 Powder River joint venture basin, Powder River basin joint venture I should say. This is a very important next step for us as well it sets a floor under the EBITDA contribution of that assets and really shows where we got some significant upside potential in the portfolio. We think Chesapeake was really clear on their Analyst Day and their earnings announcement yesterday that they are very dedicated and committed to this this area. They think it's going to be their new number one all play in their portfolio and we're going to be the beneficiary of that. And I want you to talk to Heath about the developments around that because we're pretty excited. And finally, I need to mention that our Arrow system is back again and volumes are back up after a couple of sideways quarters or slow quarters, largely having to do with lower prices and some producer issues up there. But again, Robert will point out that that is a big contributor to our portfolio. Has a tremendous amount of growth potential in 2017. So, with all that, certainly we're not out of the woods yet, as an industry it's still a challenging year given continued commodity price uncertainty. But Crestwood is in a very strong position. We got an exceptional balance sheet, a lot of flexibility, very strong substantial distribution coverage and a growing backlog of near term accretive growth projects that we're going to be able to -- very well and make these projects and investments accretive to DCF. So, with that, let me just highlight where we are now, we had a very solid third quarter. Robert's going to give you the details on that. I think we're well positioned across the entire portfolio. We're a very strong fourth quarter and it gives us a lot of confidence and we're going to close the year and meet or beat our guidance and our cost estimates. Our commercial teams across the entire portfolio are starting to put together some big wins. We got the wind at our back now. Now that we fixed our balance sheet, we got financial capability to go out and aggressively compete for new business. It's showing up in the Delaware basin, but we got a lot of good opportunities in the other regions as well. And those are going to drive cash flow growth through the back half of '17 and well into 2018. So, that's our plan. The joint venture with First Reserve Fund XIII is a very important element to our overall financial flexibility. And again it shows strong commitment from our general partner and largest shareholder. Our G&P assets have performed very well, showed a big increase in contribution for the quarter and underlying all that is a huge improvement in our customer credit risk and we'll mention some of those. But I can tell you as with financial health of our producers on the G&P segment improve, we're beginning to see their outlook improve and that's going to lead to more drilling and development in the fourth quarter of this year and for 2017. So, a lot of positive vibes on the 2017 outlook do largely to the improving financial health of our customers in that G&P segment. And as I said we expect to finish the year very strong with a solid fourth quarter, representing full-year results that will be right in line with our original guidance and so here we are after a kind of taken a year off, we're back to meeting expectations and delivering on our forecast. So, we're very pleased with how the portfolio and the team have operated so far this year. I'm going to provide some brief remarks on the third quarter and the let Robert go into more detail in his section. We did deliver adjusted EBITDA at a $104 million that exceeded consensus estimates and again puts us well on track to achieve guidance. We're going to have a bigger fourth quarter. So, you can do the math but we're very comfortable with roughly the midpoint of our guidance range. Driving this strong cash flow in the quarter, I'll highlight our continuing ability to reduce operating costs, and these are permanent reductions as Doc can tell you, he's our chief accounting officer and he's the number one cost -- in the company. And so, we not only have taken a lot of cost out of our cost structure. But these are permanent institutional cost cuts. And year-to-date, expenses are down about an 11% which again is a true testament to the great job that our operations team has done to capture incremental cost savings out there. Largely through improved maintenance practices, strategic purchasing, lower employee cost to a certain extent but just to a more efficient organization overall. And as I said we think these are permanent cost reductions. Now, to the big commercial win starting in the Delaware Basin. First in the northern portion up in Eddy County, New Mexico, it was our early entry into the Delaware Basin. We got in up there back in 2011 with a dry gas gathering system purchase and we have since converted that into a rich gas region with a processing plant capability. The Willow Lake system as we call it had an impressive third quarter with volumes doubling from the second quarter of '16. And importantly it generated almost $4 million here in EBITDA, $3.6 million directly attributable to that asset compared to about 400,000 in the same period last year. So, year-over-year growth and annualized growth is improving dramatically. That's run rate EBITDA of around $15 million with a cumulative investment on those assets of little over $65 million that implies about a 4.5 times build multiple. And that's the target for some of the investments that we have in that region. I remind you that it's a highly competitive basin but our commercial team has done a great job of gathering up operators in that area. Operators as you know, are targeting the Wolfcamp and the Bone Spring and that we got a mix of both going into our processing plant there. But we're really impressed with recent results from offset operators in those two formations are showing average 24 hour RP rates of about 2.4, a 2400 barrels of all equivalent per day in and around the system. So, we're running relatively full, we know that we've got increased activity on the way that's going to drive additional volume growth. So, we're looking at expansion options there and looking to do something pretty aggressively to make sure that we're staying ahead of our producers. So, if you Willow Lake is part of the growth story going forward. Moving down into the Southern portion of the Delaware Basin on the Texas side, we're looking to repeat the success we had at Willow Lake, with the Shell deal. Our commercial teams have been working very hard as you know really for the last couple of years. We've been working hard with producers to customize and design unique gathering assets to handle the unique type of production that's coming from that region. But we're going to see substantial growth there over the next year or so. The recent project announcement with SWEPI, which is an affiliate of Shell, Shell Western E&P as a latest example of our ability to capture what we think will be very accretive, hot quality long term Greenfield projects in one of the hottest and best economic resource place in North America right now. Not to mention as I said earlier, I'm very proud of the relationship that we're building with Shell which is a major clearly investment grade counter party world class operator. And as I've said publicly time and time again, very committed to the development of this sec reach out with the next several years. This is a 20 year contract and a 50 year gathering system that we're building down there for Shell. So, we're really pleased to be partnering with Shell. In every aspect of developing that play and we think that Shell is our anchor, there's going to be other producer opportunities in the region and around the area approximate to that gathering system that will benefit us in we're all on the same page for that. Under the deal that we have with Shell, we're going to build about 230 miles of low and high pressure system on approximately 100,000 acres that are dedicated to the contract. They have a much larger acreage position in the entire region with this 100,000 acres has been carved out and dedicated to this agreement for development over the next several years. So, that's where the priority is. They will have wells waiting on us when we complete the system and put it in service in July of next year. And so, those wells will come on immediately and we're excited that that deal will be accretive right off the back for us. And as we've said publicly, we expect to that have non-list system as we're calling it in service by the end of June of next year. Making great progress in the area of right-of-way engineering surveys, most of the long lead time procurement has been ordered, contracts have been signed, we are embracing the Shell operating principles in the build out of this system and were really excited about taking our operating and construction experience that we learnt in the Marcellus on Antero and the Bakken around the Arrow system. To this area, and really building out a nice system for Shell on-time on-budget. Additionally in the region, we continue to work with other operators, including some big operators under exclusivity and reimbursement agreements around what we're calling our rig system. And so, Reeves County gathering system it's in the area adjacent to the SWEPI system. And based on current discussions, where we are from a design standpoint, we anticipate formal project approvals in the fourth quarter of this year and execution of agreements and announcements sometime in the first half of next year. As we ramp up and build out our projects in the Delaware basin, we’re committed to maintaining our balance sheet strength that we resolved with the Con Ed deal and the big pay down in debt and keep our leverage targets at about four times cash flow. As you know, we recently announced a long term joint venture with First Reserve to finance our activities in the Delaware Permian, alignment of interest with our public union holders and the commitment and support of our general partner. The joint venture which was approved by Crestwood conflicts committee comprised of three independent directors is First Reserve’s latest fund, its fund 13, its $3.4 billion fund which closed in 2015. They’re excited about the Delaware Permian and First Reserve has done a lot of work out there so they know the area. Both Crestwood and First Reserve will commit initially $250 million of capital into that JV for the build out of the [Novellus] system and then the rig system once we sign it up that will roll into it as well. And we’re all focused on aggressively building a much broader footprint for First Reserve and Crestwood. And we do that both parties will scale up the commitment to that joint venture as new investment opportunities materialize. And again, I couldn’t be more excited and pray out for the support of my long term partner they were there back in the summer of 2010 when we started and they’re still with us today and really excited about what we’re doing at Crestwood and particularly what we’re doing the Delaware Permian. Quickly I’ll on the other regions because they were all good contributors, Bakken, Barnett, Powder River basin, we’ve seen a substantial improvement in credit profile and therefore a major shift in producer development plans and a positive uptick in outlook going forward and we think that’s going to have a big impact on our 2017. In the Bakken we mentioned in the press release that our rents in Ed Con resources emerge from their pre-package bankruptcy. During the restructuring process I think we made this public that Ed Con certainly limited it’s drilling activity and in addition to that they shut-in lot of the volumes as well during pre-package bankruptcy process. As of October they announced that they emerge from bankruptcy in September and as of October they had returned all of their shut-in wells to full production. So, the system is now flowing at 70,000 barrels a day of crude of 50 million a day of natural gas and 30,000 barrels a day of water. So, we’re back to the kind of the level of our all-time highs again. Importantly in the fourth quarter we expect the producers really to supercharge their completion in connection activity, we’ve got 25 wells sided to connect to the aero system in the fourth quarter of this year and initial 2017 plans from our producers are starting to look really, really attractive for us. So we are excited about Arrow. In the Barnett as we mentioned Heath and the commercial team did a great job in transitioning from quick silver to BlueStone which I want to compliment. They are a great operator. They really work hard at incrementalizing the production there and they have done a great job not only bringing back all of the shut-in wells to full production which resulted in a 4% quarter-over-quarter increase in volume. But we have watched first hand as these guys really baby these wells to get more production out of them lower operating expenses. So they are here to stay. They are good partners. They work hard. They are great operators. And they are very committed to revitalizing the resource base there at the low price they got into it so don't kid yourself the Barnett is not dead. Lot of these guys getting in to the Barnett are getting in at much lower prices and that's going to make their development economics a lot better. I will point out that new gathering contract – gathering and processing agreement we have with BlueStone does have a combined fix and a percentage of proceeds element to it. So the combination of the increased volumes and the increased natural gas prices led to a very impressive 34% increase quarter-over-quarter in EBITDA from the Barnett assets. So, we’re pleased, I think those volumes have stabilized they’re going up with higher prices and we’re going to get a bigger share then probably we thought we were going to of the margin due to the percentage of proceeds element of the contract. Moving to the Powder River Basin again, really pleased with the latest commentary from Chesapeake, their renewed excitement for the basin, working with our partner Williams, Williams was very collaborative in this process, the three of us Crestwood, Williams and Chesapeake really sat down and worked hard to get this situation resolved, get it behind and get Chesapeake back to drilling again and that’s where we are. It’s a new 20 year contract replaces the old cost to service, I think many of you know that was probably the last cost to service agreement they had in their portfolio. We now have a fixed fee structure with minimum annual revenue guarantees, I stress that minimum revenue guarantees over the next five to seven years. Heath can give you more color on it, but we think it really rocks in and kind of where we’re right now with the tremendous amount of upside. At their recent Investor Day Chesapeake indicated plans to add one or two rigs maybe as early as November of this year, but certainly at the beginning of 2017 with the potential to grow production there to more than 100,000 barrels a day of oil equivalent from about 10,000 barrels a day today over the next five to seven years and it’s all about technology. We’ve heard this and seen this in other basins, they’re proving it with the multiple stat pays that they have tremendous resource in their large acreage position way over 300,000 acres and we now know that the play is economic to develop at sub $40 per barrel breakeven prices. So, we’re really excited. And as we finished the year, we continue to have some small wins in all areas of our portfolio, some of these are going to take longer but the outlook is positive and the funding minerals are improving. Certainly, I want to point out that our northeast storage and transport assets which had kind of a modest third quarter are poised for a very strong fourth quarter given the expectation for colder weather or just to return to normal weather same thing for our northeast NGL marketing business full of NGL of propane and butane inventory at good prices and we are well positioned, we have got a great platform for NGL sales up there in the northeast. So stagecoach will do better in NGL marketing and logistics again well positioned realized additional margin opportunities in the fourth and first quarter assuming normalized weather conditions which we think are around the corner. And I guess before turning it over to Robert, again I want to highlight that the Crestwood’s turnaround story is probably pretty evident for you right now from a re-positioning standpoint so we don't spend a whole lot more time on what we have done in the past. But I do want to highlight some of our current goals and objectives. Our operations teams continue to post great quarterly results and they are doing it safely, compliantly with a tremendous amount of attention to environmental stewardship and I know that we are committed across our entire portfolio to great safety, great regulatory compliance and great environmental stewardship. It's never been more important than it is today and those are the operating principles that we operate by but I want to continue to point out those guys do a great job not only in their safety and operational reliability performance but as well they continue to exceed the cost reduction goals that we set for them quarter-after-quarter, year-after-year it's not lost on me that the credit strength of our customer base has substantially improved. We just simply don't have any issues there like we did a year ago. Producer sentiments is improving across all of our assets and you will see that as we rollout our 2017 plan here in the next couple of months and we are beginning the new play and this is exciting for us. The Delaware Permian has the potential to be the biggest individual shale play that we are involved in over the next several years we have a growing backlog of deal opportunities Shale Willow Lake was a great first investment and we are going to incrementally expand that. Shale is a great anchor tenant on the southern portion of the Delaware basin and we are going to build around that. That's going to be successful force. Other deals that we have invested a lot of engineering and design time over the next – over the last year or two are going to play out over the next year or two and I think at the end of the day we are going to wind up with a really sizable set of midstream assets that are critically important to the long term development of those very economic reserves. So we are excited about that. And I think I have taken more than my time Robert. So with that I will turn it over to you and you can talk about the details of the third quarter.

[Robert Halpin:]

Thank you, Bob and good morning to everybody. I am very pleased to report our third quarter financial results. During the quarter Crestwood continued to execute our business plan to optimize volumes across all of our systems manage and reduce operating cost and maintain financial discipline and balance sheet strength. For the third quarter adjusted EBITDA totaled $104 million compared to $134 million in the third quarter of 2015. Distributable cash flow totaled $75 million compared to $92 million in the third quarter of 2015 and our financial results for the third quarter 2016 reflects Crestwood's 35% share of stagecoaches earnings that began in June of 2016. For the third quarter 2016 we declared a distribution of $0.60 to our common unit holders driving distribution coverage for the quarter at 1.8x or 1.5x if our class A preferred units were currently paying cash distributions. We are committed to providing unit holder strong distribution coverage and conservative balance sheet metrics going forward as a core part of our strategy. Now for a review of our segment results. In our gathering and processing segment, segment EBITDA totaled $66 million in the third quarter 2016 compared to $65 million in the third quarter of 2015. Strong operating performance in Arrow, Barnett, the Delaware Permian and the Powder River Basin Niobrara highlighted the quarter for the gathering and processing segment despite being partially offset by continued natural volume declines in the Southwest Marcellus Fayetteville systems. Across many of our systems we are seeing significant improvements in fundamentals and producers sentiments. Sequentially third quarter EBITDA in the Permian increased over 100%, Barnett increased over 34%, Arrow increased over 5% and well performance in the Powder River Basin continues to exceed our internal tight curves. In our storage and transportation segment, segment EBITDA totaled $25 million in the third quarter 2016 compared to $50 million in the third quarter of 2015. The primary driver as I said of the year-over-year decrease in segment EBITDA is the deconsolidation of our Stagecoach joint venture with Con Edison the third quarter 2016 reflects the first full quarter in which Crestwood's results reflect Crestwood's 35% share of earnings from that joint venture. During the third quarter 2016 natural gas storage and transportation volumes averaged 1.8 Bcf a day compared to 1.9 Bcf a day in the third quarter of 2015 and 1.5 Bcf a day in the second quarter of 2016. Third quarter 2016 volumes increased 19% sequentially as a result of Marcellus producers completing new wells and returning existing wells to full production in response to improving natural gas pricing and volumes at Tres Palacios facility increased as a result of higher customer utilization driven by increased gulf coast and Mexican gas demand. In our marketing supply and logistics segment, segment EBITDA settled $18 million in the third quarter 2016 compared to $28 million in the third quarter of 2015. Segment EBITDA declined year-over-year primarily due to the significant out-performance in our third quarter 2015 results. Third quarter 2016 earnings reflected lower trucking contributions during the quarter as a result of lower NGL demand in the northeast. As Bob mentioned our northeast NGL business is very well positioned today to capture meaningful additional margin opportunities in the fourth quarter of 2016 and first quarter of 2017 assuming a more normalized winner compared to last year's historically warm temperatures across the country. Now turning to the expense side. Year-to-date through September 30, 2016 our operating and maintenance expenses and our G&A expenses net of unit based compensation and other significant costs are down $21 million or 11% versus year-to-date 2015. For full year 2016, Crestwood will significantly exceed our goals of additional $10 million in cost reduction. The discipline management of our cost structure in the face of commodity price volatility was a top priority across our operations and as Bob said we are all very proud of our team's efforts to significantly exceed our cost reduction targets without reducing or sacrificing safety compliance or quality of service to our customers. Now turning to the balance sheet

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from the line of Andrew Burd with J.P. Morgan, please proceed with your question.

[Andrew Burd:]

Hi, good morning. First question on Willow Lake, you obviously posted a great quarter and utilization is very strong there. Bob you talked a little bit about future expansions there based on conversations with customers, do you think you will need a second processing plan or is a gathering or if could expand on that a little bit?

[Heath Deneke:]

Yes. Hi, Heath Deneke. I will take that. Yes. I mean the short answer is we do envision needing both additional gathering and processing for that system. As you know we are running forward on a run rate about 15 million a year of EBITDA but that’s pretty much fully utilized in the capacity that we have available. We have a little bit of room there. But there is really a lot of real estate that are dedicated to us under existing contracts and with just a handful of rigs and I think we are going to need a fairly substantial increase in capacity to support that. So, pretty excited about the growth in around that system in Eddy County.

[Andrew Burd:]

Great and I think during the prepare remarks Bob you said kind of four and half range type of build multiples for that Willow Lake, did I hear correctly that that's kind of the target ballpark that you are targeting for these Delaware projects?

[Robert Phillips:]

Yes, I think that's about right. I mean some deals we will gravitate little north of that some deals little south of that. But I think that was just highlighting the fact that we are able to – we are putting most of our time in developing Greenfield projects. We are not out there buying 15 to 20 times cash flow type assets, we are going to work in a fashion way building it and having to doing so. So I think we just wanted to highlight that as the type of build multiple that we think we can generate out in basin.

[Andrew Burd:]

Great and just curious why isn't processing a part of the plan for those two projects?

[Robert Phillips:]

I am sorry for the -- oh yes. Well it's just hasn't been announced that it's part of those product share, I mean I think right now what we are focused on is building out pretty massive well head gathering system. That's what we have been focused on. Obviously once you get the footprint if you put our Willow Lake system our rig system and our SWEPI system together, look on the map it's currently one of the largest systems out there. It covers the best rocks, the best real estate, the best country in the Delaware basin and so with that there is obviously going to be needs for processing. We are going to be in a really good competitive position to put an additional processing plants as well as other down streams facilities for crude and water. So I wouldn't take it there is not going to be opportunities that come out of it. I think what we have announced with the SWEPI system is a pretty large gas gathering system for all of their operative positions with rigs that's going to cover over 400,000 acres from an aerial standpoint. And Willow Lake you talked about together again you’re going to have a pretty massive system to future crosses and needs there.

[Andrew Burd:]

Okay and I know that obviously SWEPI is still pending on the dedication there, but is that acreage dedicated to third parties or is that just undedicated for now? Just trying to get a sense of how?

[Robert Phillips:]

Andrew, I see that you are confused about this issue so let me make sure that you and everybody else is not confused. If you go back to the day that we announced the SWEPI deal, Western announced a cash processing contract with Shell either the same day or the day before. Those two deals match. The initial processing from the gas that we are going to gather is going to be processed by Western at their Ramsay plant. Go back and find that press release and where they announced a new contract it really wasn't an amendment of an existing contract but it was an additional dedication that they didn't have before its volume limited other than that it's not really our business to discuss Shell's processing arrangements with third parties. We are the gatherer of choice. We are going to provide with this gathering system multiple outlets for Shell to get their gas processed at existing plants. But what Heath was explaining was we are hopeful that overtime as the volumes grow there will be a right time and a right place to us to build additional processing when the producers need it. We just simply are not in the habit of building spec projects like a lot of other guys are. We have got to build these projects on a truly accretive basis and that's part of our investment pieces going forward out here. We have such an aerial extent dedicated to us when you add 100,000 acres on the Shell dedication the potential 400,000 acres on the rigs dedication and 100,000 plus acres on the Willow Lake dedication as Heath said we have got 600,000 plus acres in the core of the core of the northern and southern Delaware basin. Today we provide a little bit of processing plus we are connecting our customers to existing plants, but overtime based on our volumetric estimates assuming that the producers develop the properties on the schedule that they have given us and we are talking about we see the need for additional processing capacity and we are going to be very competitive when we get to that point.

[Andrew Burd:]

Okay. Yes that's answers my question at the acreages currently dedicated to another party for processing, great. And so kind of switching gears to NGL marketing it seems like it's looking a little bit brighter for the fourth quarter, are there any kind of specific drivers for that optimism on the year-over-year basis? Is it just weather or something else there?

[Robert Phillips:]

Bill Gautreaux you want to take that question?

[William Gautreaux:]

Yes. I think that look I think the optimism there is just that with the more normal weather scenario and really less supply in the local market, we see the market shaping up to more of a baseline performance really nothing more than that.

[Andrew Burd:]

Okay great. And then final question just clarification I didn't see in the press release. What was the EBITDA in the third quarter and also any indication of kind of contracted capacity going into 2017?

[Robert Phillips:]

Sure, I will start with the coal EBITDA for the quarter came in right around $16 million. And then I will let Heath expand on kind of lot of the opportunities that as we look around repositioning the coal going forward.

[Heath Deneke:]

Yes. I mean as far the re-contract there is not whole lot of news on that front. I think what we are doing is we are connecting the coal facility all of the tankage and the pipelines on the supply aggregation, assets in and around that acreage position that is getting connected in the Dapple, we are on schedule to have that connection complete when Dapple comes online we think that's going to generate some additional opportunities for us. So I think that's kind of where we are with coal.

[Andrew Burd:]

Great. Thanks for taking my questions.

[Operator:]

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

[Selman Akyol:]

Thank you. Good morning. Just a couple of quick ones from me. So going back to Willow Lake that's outside your JV with first reserve so you will be financing that on your own for any expansion?

[Robert Phillips:]

Yes it currently does sit – it does reside outside the joint venture. It's 100% on Crestwood asset. Obviously we think about our Delaware Permian strategy on a holistic basis. So today that's the case that may not always be the case. We are evaluating all of our options. As we look to really interconnect and combine the total footprint to gain the greatest value out of everything out there.

[Selman Akyol:]

Got it and then, in the opening comments I think you discussed potentially other producers in a long, the Shell gathering have any of those conversations started to take place? Is there any?

[Robert Phillips:]

Yes absolutely, they are taking place I mean there is a lot of acreage in and around that footprint, in and around the rigs footprint for that matter that is unspoken for from the dedication standpoint and we are actively working on including some of those customers into the system and hope to have some pretty exciting news to announce here in the near future on that.

[Selman Akyol:]

Alright that does it for me. Thanks.

[Operator:]

Thank you. The next question is coming from the line of J.R. Weston with Raymond James. Please proceed with your question.

[J.R. Weston:]

Hi, good morning. First I guess maybe just looking for an update on Southwest SL gathering. It looks like another little bit of sequential decline there. Your primary customer reported last week and talked a little bit about plans for 2017 and 2018, how are you discussions going with them and any update to the volume outlook for next couple of years?

[Heath Deneke:]

Yes. Hi, this is Heath again. I think discussions are going well. As you know they got around 22 docks that are out there on the system latest discussion we expect them or they communicated to us that they are going to complete those docks into 2017. We are also pleased, I mean if you look at current stripe prices I mean I think certainly the rock is economic to develop at what you are seeing at today's stripe and so we remain optimistic when we get into late 2017, 2018 that there could be some incremental development activity in that position.

[J.R. Weston:]

Okay, great, that's helpful. I guess maybe switching gears a little bit lot of discussion on the other Permian projects that you guys have, just kind of wondering if there is an update to the delta projects and just hearing a lot of discussions here recently around earnings season with kind of how competitive the Permian has become from midstream perspective especially on the crude gathering side and I just wonder if there is any read through there?

[Heath Deneke:]

Yes, I mean I guess what I would share with you on the delta I mean we are having lot of discussions around delta. I think it's getting clear when you look at all of the enthusiasm and the discuss around rig ramp-up in the Delaware Permian having the ability to get your crude out of the Delaware basin into the Midland into the corporate in Huston market it's important and our project provides a lot of optionality to do that sub-dollar barrel type pricing. And so, I think there is not anything I can say in terms of commitment at this point in time, all I can tell you that in conjunction with the system footprint, the gathering system footprint we are going to have lot of crude on our system. We are going to have a large scale terminal at Orla and we think we are going to be able to compete fairly well in terms of being part of the solution to get those barrels out to really liquid in high value markets.

[J.R. Weston:]

Okay. Perfect. I guess maybe just one last one from me. I think a couple of quarters ago, you had mentioned the EBITDA from the JV, I think you said it was around 20 million I was just wondering if there is any way you guys could quantify or directionally a little bit further on what you did on the prepared commentary on how the restructure contracts going to affect that?

[Robert Phillips:]

Yes. So I guess we are – we are right we are having a little north to 20 closer to 25 – what I would tell you is that the restructured contract pretty much guarantees and puts the floor at that level over the next call it five to seven years. If you look at what Chesapeake announced they were showing again their production could potentially grow from let's call it 12,000 to 15,000 in BOEs today up to BOEs over the next five plus years. So depending on your volume outlook if Chesapeake is successful, I mean you can see two to three times growth in kind of that four cash flow, but it's going to highly be dependent on the activity there.

[J.R. Weston:]

Okay, great, that's all I had. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from the line of Charles Marshall with Capital One. Please proceed with your question.

[Charles Marshall:]

Hey good morning everyone. Just to quickly clarify, so the floor on the PRB restructuring is it more on the floor of the 20 million or will there be sort of a lower floor from that sort of run rate of 20 million that you identified?

[Robert Phillips:]

Just to clarify, I think Heath said, I mean we look at, on 2016 basis we expect the asset to generate around $25 million of cash flow. We have revenue guarantees that will hold us cash flow flat based upon those guarantees for the next five to seven years. And it's diluted to I think with the restructuring if the contract and some of the technology advancements to Chesapeake theme there could be significant upside to that the volumetric development takes place. But for me cash flow standpoint there is an absolute floor at current cash flow levels that are guaranteed under the contracts.

[Charles Marshall:]

Got it, thank you. And then, just regarding the rig system there is no change there with respect to the financing of that when it gets streamlined. Is that correct that first reserve will commit the initial charge of capital and then you will make up to 50

[Robert Phillips:]

That's correct. The joint venture that we have executed with them is inclusive of Delaware Permian opportunities and has the flexibility built in to accommodate that project on the same type structure when it materializes.

[Charles Marshall:]

Got it, but that’s the financing lease from the Crestwood standpoint at least initially and the gate is different than the SWEPI, the assets for SWEPI, is that correct?

[Robert Phillips:]

Same structure just scaled up obviously to the greater scope.

[Charles Marshall:]

Okay, got it. And then, just lastly from me on COLT can you explain what is going on this quarter with the nice step up of volumes relative to 2Q?

[Robert Phillips:]

Yes, I mean we continue to see activity. We continue to get more than our fair share of the market up there in terms of western bound cargoes. We are also doing a good bit of, our marketing group has been pretty active in sourcing unit trends as well that have put some barrels into the East Coast as well. So I think you are just kind of seeing again COLT is the best assets in the Bakken from the crude by rail standpoint and we are able to kind of given our location, our access to supply we are able to take good advantage of the opportunities that remains.

[Robert Phillips:]

Charles, this is Bob. Let me just add a little bit of additional color there. I think our response to the earlier question about COLT was a little bit muted. It's a really important asset to us. We are spending a lot of time on it. We have new customers coming into the facility. We are ourselves generating a lot of activity around the COLT facility, the new marketing group that we put together right out a year ago is really starting to do a much more material job of running barrels through the facility. We call it Crestwood crude services. We told you all a year or so ago that we are going to try to optimize the available storage capacity and the pipeline capacity through the COLT connector and the spreads to the extent there any between in bridge on one side and rail. We did have a very good quarter from a rail loading facility in the third quarter and that was both our traditional customers as well as increased utilization by Crestwood crude services. They have taken on a fair amount of the available storage there. And to the extent that there are any spreads available we are utilizing that capacity really on a full rate basis. So that Crestwood crud service group is paying the COLT a full rate for either the delivery interconnect or the storage or the redeliver interconnect charge and that's exactly the way we set that strategy up. I might also tell you from a risk management standpoint that those barrels and that marketing activity is run through our NGL marketing business, so the book is fully hedged to the extent that there is a position there whether it's front to back or whether it's just intra month trade. Those positions are fully hedged by our NGL risk management team in Kansas City and the net results of that activity flows through the MSL group from a segment reporting standpoint, but the most important results are the that group is paying a pretty handsome and growing amount of fees to the COLT facility and so one of the ways that we intend to offset the potential loss of customers as some of these old original five year contract for roll-off is with increased use of the facility by our own people on a fully hedged basis taking advantage of that capacity that we own. And our supply aggregation capacity the point that Heath made is with the Dapple interconnect which is underway and we all have our fingers crossed on Dapple that they get that project moving forward. But that's actually drawing more barrels to COLT because of that interconnect and where the interconnect is being made to Dapple and the availability of the storage. So we have actually got new customers coming in the COLT to buy storage and pipeline interchange capacity just because of the Dapple interconnect. So we are pretty excited about that. We are not going to be able to replace fully replace Robert said this over and over again, Robert I will give you a chance to say it one more time. We are not going to be able to fully replace the full earning potential of that Tesoro contract that was entered into back in 2010-2011 that was a different point in time it was a different contract with different fees and that's just not the market today. But if you all think that COLT earnings are going to zero you are absolutely wrong and the guys have done a great job of optimizing the asset and this new Crestwood crude services group is doing a fabulous job of using volumetric capacity at market rates to be able to generate additional activity there. So we are pretty pleased all in where we are and I think 2017 will be a better year after we get the Dapple connect and attract more supply to that area. I think it's actually maybe a sideways year for us in 2017 and starting to grow in 2018 again particularly oil prices increase and supplies in the entire basin increase. We are going to see COLT kind of moving back to real strategic location for a lot of barrels to flow out of the basin and have optionality to different markets. So, we are not giving up on that. We hope you all don't give up on it either.

[Charles Marshall:]

That was great color. Thanks Bob.

[Operator:]

Thank you. It appears we have no further question at this time. So I would like to pass the floor back over to Mr. Phillips for any additional concluding comments.

[Robert Phillips:]

Okay. Thank you very much operator and thanks to all of you for joining us this morning. We are pretty excited about where we are and looking forward to coming back with some of the investor conferences starting in late November and December given a little bit more color particularly around the Delaware Permian and the first reserve joint venture those were the big highlights for us. But I think you can see we have got growing momentum on the Arrow again, Powder River Basin and the Barnett all beginning to show pretty big contributions to the bottom line. So, thanks to everybody for joining us.

[Operator:]

Ladies and gentlemen this does conclude today's teleconference. Again we thank you for your participation and you may disconnect your lines at this time.