Crestwood Equity Partners LP
Q4 2015 Earnings Call Transcript

Published: 23 Feb 2016

[Operator:]

Good morning, and welcome to this morning's conference call to discuss Crestwood Equity Partners' Fourth Quarter and full year 2015 Financial and Operating Results and 2016 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 to the most comparable GAAP measures are included in the news release issued this morning. Joining us today with prepared remarks our 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 fallowing a prepared remark. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press "*0" on your telephone keypad. And as a reminder, this conference is being recorded. At this time, I would turn the call over to Bob Phillips. Please begin.

[Robert Phillips:]

Thank you, operator and good morning to all of you. Thanks for joining us for this early call to get the day all. With me today is the Crestwood management team and they're all available to answer any questions that you might have about the areas that they cover. I want to start the call with a quick overview of Crestwood's 2015 highlights and I'll talk briefly about the 2016 market environment, turn it over to Robert to discuss the 2016 guidance and outlook and then give a brief summary of the fourth quarter results before we open it up for questions to you all. So, let me start by saying that it goes without saying that we are very disappointed in our fourth quarter results. But relatively pleased with our full-year '15 results compared to 2014. Think clearly the fourth quarter was impacted by weather more so that any recent quarter that we've experienced. And unfortunately on the margin, a handful of issues that Robert will detail for you, impacted the quarter. We don’t think that that quarter represents our base business and we're looking forward to a much improved 2016. So, let me start with some 2015 highlights. Clearly it was a tough year for everybody in our business. And it looks like '16 is going to continue to be just as challenging. Oil and gas and NGL prices declined throughout the year, which had a big impact on many of our customer's activity levels. On the gathering side, some of our producers were challenged. It started out with reduced drilling, then reduced completions, then production shut-ins in several areas and finally some of our customers have experienced credit issues out there. I think you're all well aware that more importantly though on the demand side, our storage and transportation assets had another really good year, based on strong utility customer business, our marketing supply and logistics division also had a very good year, based up on their contracts in long time relationships with refineries and petrochemical customers who continued to do very well in this low price market. So, despite impressions to the contrary, while our gather business fell off a little bit and will continue to stay weak in 2016. The rest of our business is actually thriving in this market environment. I think diversity and balance really shaped our 2015 and it's going to have a big impact on our 2016, as well as Robert will lay out for you. Now going back to the beginning of 2015, early in the year. We recognize that the downturn probably was not going to be a V shape recovery as the industry experienced in 2008 and 2009, so we put a plan in place. And throughout the year, we completed a series of steps that we believe improve Crestwood's competitive even financial position. Some of those important steps were downsizing to cut cost. Reorganizing our operations and commercial groups to increase efficiency and improve customer service. Extending the maturities on our long-term debt, recognizing the need for balance sheet strength, and finally, completing the simplification merger and entering into a new $1.5 billion revolver which satisfies our liquidity needs in 2016 and beyond. So, in that context, I am very proud what the management team did and what the Crestwood employees delivered with improved overall performance in 2015 of 6% increase in adjusted EBITDA and a 1% increase in DCF. Those were big achievements in a tough market and I am proud of our team for delivering that. So, let me dig a little bit deeper in the '15 area before we go to '16 and then I want to touch on some of the challenges that we face presently. First, cost reductions. I want to put that in perspective for you. In the first quarter of '15, we implemented a companywide cost reduction program reducing our O&M and G&A expenses by $26 million during the year compared to 2014 and more than $45 million reduction from the peak run rate that we experienced in the fourth quarter. Remember, in '14, we were growing, the industry was building, we were putting a lot of new operations into place, a lot of new compression. Expenses were running up based up on expected high volumes in 2015. We slammed that door shut in the first quarter of the year. Cut those expenses out, right sized our cost and got a Crestwood prepared to compete in 2015. In 2016, we've identified another $10 million worth of run rate expenses that we can take out of the structure. In June of last year, we reorganized our internal operations to consolidate our pipeline operations across all three commodities, and we consolidated our marketing organization in Kansas city and we think both of those steps have big impacts on our ability to control cost, improve efficiency, provide great customer service and maintain a very high standard for safety and regulatory compliance. In September, we finally completed the merger of the partnerships structure between Crestwood Midstream and Crestwood Equity that permanently eliminated the incentive distribution rights. It simplified our balance sheet, consolidated our revolvers, it enhanced our overall credit profile, it gave us one business strategy and one set of investors. We certainly believed then and we believe now that that was the right next step for the company. We are glad we did it, and of course this time would tell that strategy was something that others in our space would soon replicate. So, we are glad we got that out of the way early. We faced a lot of challenges in 2015, and despite completing all those strategic steps, our unit price and our bonds continued to deteriorate throughout the year because investors remained focused on a handful of Crestwood issues. So, let me address those. I'll start with the Quicksilver Bankruptcy which they filed in March of '15. By January of '16, we were well through the process and Quicksilver signed agreements to sell their U.S. assets to a group called BlueStone Natural Resources. That's an NGP affiliate and we think they are a very competent team and we would be happy to be partners with them going forward if they are the successful bidder. Importantly, we also negotiated a deal with Barnett Shale Gas, which is the second lien creditor group, and they were appointed as the backup bidder. So, Bluestone has until March 31 of this year to complete the sale and we are currently involved in very constructive dialogue with BlueStone Gas on their future development plans if they successfully complete the transaction. And as I said we would look forward to being partners with them. But importantly, we also entered into a binding agreement with Barnett Shale Gas, the second lien creditor group, which would have the affect of restructuring the current gathering and processing agreements, if they become the successful buyer of the assets. Either way, we expect restructured agreements to be fair to all parties involved in this and we hope that they will maximize current volumes in today's low price environment, while enhancing the future development potential of the assets as prices recover. So, Crestwood continues to want to be constructive here and be an important part of the overall solution. Now, an important aspect of the KWK bankruptcy emerged on February 5 of this year, based on the sale to BlueStone, Quicksilver filed a motion with the bankruptcy court for approval to reject our current gathering and processing agreements which had not be rejected in the last year during the bankruptcy process. And Quicksilver did this specifically as a condition president to its agreement with BlueStone. We planned extraneously object to that motion, we believe our agreements with Quicksilver contain a long-term dedications with very strong contractual conveyances of interest in the lands and in unproduced gas. We believe and many in the industry support our view that these covenants create a real-estate interest that runs with the land and therefore is not subject to rejection in bankruptcy. Furthermore, our system is you all know connects over 1000 Quicksilver wells in a spread across a large part of the greater Fort Worth metropolitan area and we provide critical services to gather condition, process, compress, and redeliver Quicksilver's produced gas and the natural gas liquids that we extract at our plants for their benefit to their downstream long haul take away pipelines and markets. So, we remain very confident that our Barnett system will continue to provide essential gathering and processing services for the successor to Quicksilver's upstream interest and we look forward to resolving this chapter with Quicksilver and their successor. The next issue I want to turn to is the Southwest Marcellus Gathering system for Antero. As you know, Antero recently announced its 2016 capital budget with a 23% reduction in capital from 2015, while forecasting a 15% increase in 2016 gas production. They are focusing their 2016 program on the highly rich areas. They've consolidated around that acreage as other producers are doing, so that's not unexpected to us in the current down turn. And they've announced the carryover of about 70 drill but uncompleted wells or DUCs in the Marcellus/Utica areas in to 2017. And that includes 20 DUCs that are located on the Crestwood gathering system. Those are wells that were drilled at the end of '14, early '15. We expected those based on their previous guidance to be completed in '16, now they are pushing those to '17. Again, that doesn't surprise us, given how low prices were in 2015. Antero also highlighted in their recent announcement, though the importance of the new Stonewall pipeline which enables them to sell virtually all of their gas in 2016 at current favorably priced indices, which we think will offset the need for any economic shut-ins of volumes at low prices, like they did and we experienced in the second half of 2015. So, as Robert talks about the impact that those shut-ins had on our fourth quarter, I think we are optimistic that the Antero's recent announcement, the in-service of the Stonewall pipeline in December of '15 and the value that creates for them and higher netbacks will offset any need to economically shut in volumes during 2016. As you recall, our contracts continue to have minimum volume commitments at 450 million a day to 2018, gives us downside protection. Based on Antero's current development plans with the [indiscernible] on our system. And we expect throughput to be in excess of the MVCs and do not expect to receive any significant deficiency payments from Antero through 2018. I continue to believe that the gathering system represents a great long-term asset for Crestwood, it's exactly the right spots. Got great rock underneath it. It's under a 20-year contract with Antero, a strong producer. It has undeniable long-term development potential as process improve for Antero and we value that system over the long-term. Another issue that investors have an interest in they've been focused on in private conversations with us, is our 50/50 joint venture with Williams in the Powder River Basin Niobrara area. And the 20-year contract that the joint venture has with Chesapeake. As you all know, we built out the system in 2013 through 2015 to handle between a 100 and a 150 million a day of rich gas through our gathering and processing assets. And we actually reached the peak of over a 100 million a day in early 2015. Then Chesapeake's financial condition began to change. They shut down their drilling and completion program in Wyoming, as well as in other regions too. At this point, they don’t plan to drill any wells in our area, in 2016. But the 20-year contract is a cost of services agreement and it offers us some protections. We do know that's a tough structure for Chesapeake in this type of market. Having said that, Williams in Crestwood have invested a substantial amount of capital in the build out of the system. But we are all working very closely with Chesapeake to make sure that they can flow their gas at current prices. To position them with better economics when they can't restart drilling, but also to preserve our expected returns on invested capital throughout the remainder of this long-term contract. I'm very optimistic that we will find an accommodation which helps all of us, Williams, Chesapeake and Crestwood. And like Williams, we are closely monitoring Chesapeake's credit situation. But we have a high degree of confidence in the Chesapeake management team that they will make it through this downturn. So, those are the issues that I think investors are largely focused on. Let me turn to some of the positives, before I turn it over to Robert. I'll start with the Bakken aero gathering system. It continues to outperform our expectations. Our producer customers, they had had great technical success in 2015 with bigger completions and lower well cost, resulting in better wells and growing volumes despite a reduced rig count. Aero hit people all production of about 73,000 barrels a day in September of 2015 as WPX, Whiting, Halcon and even XTO delivered incredible single well results as technology continues to drive efficiencies up in the Bakken and improved returns for producers even at these low prices. We currently have four rigs running on the acreage now. We had a very good January from a volume standpoint. We have 30 new wells that are being completed, are expected to come on in the next few weeks to couple of months. And we're pleased with how Aero is positioned even in this market. Also in the Bakken, our COLT Hub continued to deliver strong financial performance in '15 despite low spreads between WTI and Brent. This was due to our take-or-pay contracts with Pacific Northwest refiners. And when you look at our 2016 contract volumes for all of our services, storage, pipeline and rail, it totals about a 120 to a 125,000 barrels a day. So, we don’t see a significant volume metric fallout in terms of the number of barrels that we'll be handling for our customers. Those contracts will continue to deliver good results in '16 and we're working aggressively to reposition this asset to be the low cost premiere crude oil supply hub in North Dakota. And that includes potentially even a connection to [Dapple] [ph] if it gets built. An additional gathering system connections in the region has all producers, suppliers, and refinery market customers, are searching for more optionality to access Bakken barrels even in this down market. We also continue to have good discussions with Tesoro regarding services that we think we can provide them in 2017. So, all in all we think we are set up well and call for '16 moving into '17. Now, let's go to the Delaware Permian, our gathering and processing system at Willow Lake was expanded in '15 and will contribute more in '16. Now running at strong volumes producers in that area of the Delaware Permian, Eddy County, New Mexico, are selectively continuing their Wolfcamp development plans in '16, as many have announced solid capital budgets and surprisingly satisfactory returns even at current prices. We love the Delaware Permian Basin and we continue to work diligently around the Willow Lake area for expansion opportunities as well as on the previously announced potential major three phase gathering system in that region with the support of our general partner, First Reserve. Now, to our NGL supply and logistics group. That team remains poised to take advantage of continually growing Marcellus/Utica and Canadian NGL volumes that want to move in to the Northeast markets. And they are doing that successfully by utilizing our very unique integrated network of truck, rail, storage, and terminals, to market propane and butanes to the East coast markets. Supply storage and terminals did very well in 2015 despite a lack of weather driven demand in the fourth quarter, but out trucking business as Robert will point out was very challenged due to that lack of cold weather demand for propane in the Northeast and as a result of narrow spreads for butane as blending stock in motor gasoline. We think both of those businesses will recover nicely. In '16 we have some additional new NGL supply contracts that we've signed up and are starting in '16. We expect our West Coast operations to return to normal in '16, after all the refinery disruptions on the West Coast in '15. And I think that business is poised to have a really good year next year. Finally, our premier North East storage and transportation assets delivered another great year in '15, up 7% year-over-year from '14, due largely to the high degree of take-or-pay contracts we have, but the high utilization rates with our North East utilities in our Marcellus Dry Gas producers. And like the other business I mentioned, we expect North East storage and transport to be a strong contributor in '16. It's well positioned for regional growth projects that will be needed in '17 and '18 when Marcellus Dry Gas drilling picks back up at the end of this year and into '17. So, let me summarize that while our industry faces clear challenge in '16, our base business is sound and we think it will produce substantial operating cash flow again this year. But given the financial markets that we live in and expecting a lower for longer environment, we are evaluating a wide range of options that when we complete those if we can, we think they will substantially de-lever Crestwood and put us in a much better position to take advantage of the growth opportunities that clearly will emerge on the other side of this down turn. And with that overview, happy to turn it over to Robert to talk about 2016 guidance and fourth quarter results. Robert?

[Robert Halpin:]

Thanks, Bob. In 2016, we expect to generate adjusted EBITDA of $490 million to $520 million or just the midpoint would be a 4% reduction from 2015 levels. By segment, we expect our gathering and processing segment to generate between $235 million and $250 million. We expect our storage and transportation segment to generate between $225 million and $235 million and we expect our marketing supply and logistic segment to generate between $95 million and $100 million. Crestwood continues to benefit from its strong contract portfolio and that trend will continue in 2016, as Crestwood's cash flow will be comprised a 56% take-or-pay, 36% fixed fee, and 8% variable contracts. Crestwood has a balanced and diversified mix of customers across its three business segments that includes integrated producers, refiners, utilities, and petrochemical companies. Crestwood has proactively worked with counterparties with potential liquidity issues to mitigate any working capital and credit exposure in the event of continued market deterioration. For the fourth quarter and full-year 2015, adjusted EBITDA totaled to $119 million and $527 million respectively that compared to a $133 million and $496 million in the fourth quarter and full-year 2014 respectively. Distributable cash flow in 2015 totaled $362 million and distribution coverage for the full-year 2015 was 0.96 times. In the fourth quarter of 2015, Crestwood operations were impacted by lower demand caused by unseasonably warm weather and reduced producer activity across many of our gathering systems. Specifically, our trucking operations were $10 million lower than expectations, due to limited NGL demand as a result of historic warm weather throughout the fourth quarter. That business is already ramping up and is expected to have a much improved 2016. Also the Marcellus Gathering system was $8 million lower for the quarter than we expected, as a result of economic shut-ins due to low local gas prices and the impact of incentive rate agreements. We continue to have our minimum volume commitments to protect any further downside in the future, but as Bob alluded to, we did not expect any significant deficiency payments associated with that contract, through the 2018 timeframe. Well, much of the business was impacted by warm weather in the North East our Arrow and COLT assets located in the Bakken, both has strong contributions increasing year-over-year cash flow by 35% and 28% respectively. With that I will now turn to the review of our operating segments. In our gathering and processing segment, segment EBITDA totaled $57 million in the fourth quarter 2015, compared to $68 million in the fourth quarter 2014. Natural gas gathering volumes and compression volumes declined 24% and 30% respectively compared to the fourth quarter of 2014. The two areas driving volumes declines were the Marcellus and the Barnett. Volume declines in the segment were partially offset by an 18% increase in processing volumes, a 6% increase in crude oil or gathering volumes and 45% increase in produced water gathering volumes on our Arrow system. Operations and maintenance expenses were reduced 22% in the fourth quarter of 2015, compared to fourth quarter 2014 which helped offset some of these volumetric declines. In 2016, we anticipate average volumes across the GNP segment to be down between 15% and 20% as producers continue to pare back their development programs in the current pricing environment. In our storage and transportation segment, segment EBITDA totaled $52 million in the fourth quarter of 2015 compared to $55 million in the fourth quarter 2014. While, unseasonably warm weather impacted our interruptible demand and hub services on our North East storage assets. The COLT hub increased 12% over the fourth quarter 2014, primarily as a result of higher take-or-pay revenues at the facility. In 2016, our North East storage and transportation natural gas assets and cold crude oil hub facility are well contracted with meaningful take-or-pay contracts for the balance of the full year. We expect this segment to remain flat throughout 5% in 2016. In our marketing supply and logistics segment, segment EBITDA totaled $28 million in the fourth quarter 2015, compared to $31 million in the fourth quarter 2014. Segment EBITDA during the quarter was again impacted by unseasonably warm weather in the Marcellus and Utica regions, resulting in a 20-year record low number of heating degree days. This lower demand for NGLs impacted our trucking storage and terminal operations, offset by strong performance from our marketing team. Based on new NGL marketing agreements, LPG rail terminal expansions and increased marketing opportunities on the West Coast and in the Rocky Mountain' regions, we expect this segment to remain flat in 2016. Now looking at expenses. We have continued to achieve results through our cost reduction initiatives by reducing operations and maintenance in general and administrative expenses for the fourth quarter 2015 by $11.7 million, a 14% reduction from the fourth quarter of 2014, excluding $2.1 million in cost incurred related to the merger of CEQP and CMLP. As of yearend, Crestwood had approximately $2.5 billion of debt outstanding, including $1.8 billion of fixed rate senior notes and $735 million in outstanding borrowings under our $1.5 billion revolving credit facility. This resulted in a leverage ratio of 4.75 times compared to our covenant of 5.5 times. Crestwood has ample liquidity under its revolver to fund limited expected capital expenditures during 2016 and will not require additional capital funding sources. Furthermore, in March of 2015, we completed a timely senior notes offering and Crestwood's nearest term senior note maturity is not until 2020. So, in closing, Crestwood delivered strong 2015 performance with year-over-year growth in EBITDA, DCF, and full-year coverage ratio of about one times, despite extremely challenging operating conditions. We have strong liquidity with our $1.5 billion revolver that we closed on September 2015 and our nearest term bond maturity is not until 2020. That said, the true underlying value of Crestwood's operating assets remained hugely dislocated in this current market environment. And in 2016 we intent to take strategic steps to materially strengthen our balance sheet and Crestwood plans to emerge from this down cycle as a financially sound, well capitalized company, that is strongly positioned to capture the attractive investment opportunities we have in front of us. It should materially enhance value, the long-term value to our unit holders. I think with that, operator, we are ready to open the lineup for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Bird with J.P. Morgan. Please proceed with your question.

[Andrew Bird:]

Hi, good morning. Just curious, can you talk about the distribution policy at this juncture, given the yield, and implied leverage with the guidance for this year?

[Robert Halpin:]

Sure. I think as we discussed this morning, first start from a big picture. We expect EBITDA in 2016 to be in the range of 490 million to 520 million, approximately 4% down from the midpoint of 2015. As we just commented on our closing remarks, a big part of our 2016 strategy is around evaluating a number of alternatives primarily focused on building balance sheet strength given the market environment and our outlook for our assets. As a number of these options that we are evaluating could have a material impact to our capital structure and clearly the distribution policy is a component of that evaluation but we are still early in the stages of evaluating all of those options. And I think at this point want to have a total picture and view on all the levers we have, to achieve our objectives. And so I think, at this point it's premature to get into the specifics of our outlook, but I think the clearly focusing on balance sheet will be a key component of our strategies in 2016.

[Andrew Bird:]

Great, thanks. And in terms of guidance and kind of have you view it throughout the year and the cadence. Can you any commentary to provide, I guess specifically within gathering and processing, the cadence of volumes, how you see volumes and EBITDA within that segment evolving quarter-by-quarter throughout this year?

[Robert Halpin:]

Yes. Andrew we haven't given specific quarter-by-quarter guidance, but I think that at a high level across the GNP segment, we provided a range in our earnings release today around our view for that asset of that segment. We commented on volumetric declines in and around 20% level across this segment and I think that when you think about our activity assumptions, a lot of the assets given the pricing environment operating at PDP declines and throughout the year, you would expect kind of quarter-over-quarter periodic decline throughout the year from where we were today.

[Andrew Bird:]

Okay, that's helpful. And then, kind of marrying out with the first question, I kind of what obviously we're still in the early stages but I guess what kind of triggers would you need to see internally to accelerate a process of addressing the status quo in light of potential balance sheet issues down the road?

[Robert Halpin:]

Yes. I think, first of all from a balance sheet liquidity standpoint, we are very comfortable for the position today. We have a significant component of our cash flow next year that's on take-or-pay guaranteed contracts. As we talked about, we have a whole number of options a large number of options that we are currently evaluating and understanding the totality of those options is the key component in making any decision around the distribution. So, as we said I think at this point it's a bit premature but clearly we'll provide wholesome color and disclosure and an outlook for what our policies could be admitted to if and when we have all the facts together.

[Andrew Bird:]

Great. And then last question before I'll hop back on the queue, around the NGL business. Good to hear that you are expecting kind of flattish year-over-year. Two part question. One is, how do you see especially within the Northeast, with improved basin take away from NGLs. How do you see that impacting the business? And then second part of the question is kind of can you lend -- I guess provide some clarification into some of those growth opportunities that you see in the Rockies in the West Coast. Thank you.

[Robert Halpin:]

Andy, Will Gautreaux is on the line from Kansas City. He runs that business, let's let him answer it. Will?

[William Gautreaux:]

Yes. Good morning. I think we continue to feel good about the need for take away in general for producers, particularly in the Marcellus and Utica, even with new take away capability. There will in some ways new take away capability to create even more market imbalances in that market between the summer and the winter depending on what the supply curve is. And so, all producers need take away to export DUCs but they also need to participate in the local market. And so, our portfolio is well positioned to penetrate all those markets. And so that's kind of the basic premise and the consistency and upside we see in the business. I think the comments on the West Coast and the Rockies, the West Coast is primarily just the recovery of that refinery sector. There are some refiners that have problems there over the last year. We anticipate those back on in '16 and we continue to pursue opportunities in the Bakken area on NGLs.

[Andrew Bird:]

Great. Thank you, very much. I will now be back in queue.

[Operator:]

Our next question comes from the line of Michael Blum with Wells Fargo Advisors. Please proceed with your questions.

[Michael Blum:]

Thank you. Hi, good morning. I guess you referenced at the end of your comments some sort of ruling out more of a strategic plan. Can you just give us the sense for timing of when you think you'll come out with that to the market?

[Robert Phillips:]

Michael, we've got numerous activities ongoing on a parallel path basis and we're evaluating a wide range of different options to de-lever the balance sheet. That ultimately will be our primary goal throughout the year. And we want to make sure that we are totally focused on getting our leverage ratio in an appropriate spot, relative to the rating agency's expectations by the end of the year. And we feel like we can do that with our current very small capital budget which we paired down as almost all midstream players have. They've high graded or prioritized their capital spend for the year. And we've certainly done that. We are evaluating a wide range of different levers that we can pull to achieve that goal. Having said that it's going to be a quarter-by-quarter kind of process as we go through the year to decide what is the best use of our cash flow, to achieve our goals and under the circumstances as we measure those market conditions quarter-to-quarter and as we look forward to see how much closer we get to a turn in this cycle. And so, the answer from a timing standpoint is we are working on a wide range of options today, and many of those are on parallel path and we will announce a good news when we have it. As soon as we have it and to the extent that we have something to announce in, we can further announce the most comprehensive plan that we can associated with those announcements, than we will do that. But I'd like for investors to stay focused on our ultimate target and that is to get to the end of the year with an appropriate level of leverage for our business, given the expansion opportunities we expect to have around some of the key assets that we own today and new projects we are working on in the future. So, I know that is a long non-answer but it is I'm clearly opening the hood up and letting you know how we are thinking about this. And we are very committed to coming up with a comprehensive plan to the extent that we can sequence it the right way so that we can deliver a comprehensive plan and give visibility to all of our stakeholders at the same time. Then, we certainly hope that we can do that as we go throughout the year. But in the event we can't we are going to ask you to stay focused on our primary goal which is to de-lever the balance sheet to an appropriate level relative to what the rating agencies are expecting for companies like us in the business that we are in by the end of the year. Robert, you want to add to that?

[Robert Halpin:]

I think that's spot on. I think that Michael that real dynamic is we continue to progress all the options in front of us on an aggressive path and we'll have more clarity when we have it.

[Michael Blum:]

Okay, great. I appreciate that one. I guess a follow-up to that, obviously one lever of many is the distribution. And my question is really just as it relates to the term loan that's sits up at Crestwood holdings and which has obviously some debt service and a covenant. How does that will that impact the flexibility you have as it relates to the distribution?

[Robert Halpin:]

The short answer is no. We were closely and independently with our full board, with First Reserve around the right action plan and comprehensive action plan for the partnership. And in short, any implications or factors from a term loan perspective outside of the partnership or relevant to that discussion. Every discussion in ultimate strategy and path forward is clearly focused around the right path and best utilization of cash for the partnership.

[Robert Phillips:]

Let me just add to that a little additional color. First Reserve's been a great partner since we started this company back in 2010. And each step of the way, they have stepped up visibly and materially to show confidence in Crestwood, confidence in the team and the assets, and in their significant investment in the partnership. And that confidence was continued to be evidenced in the fourth quarter, when they bought additional shares in the market and now own about 23% of the outstanding shares. They remain totally committed to Crestwood. And so we're absolutely satisfied that whatever issues there may or may not be with respect to their ownership interest in the partnership. They are great long-term investor and great long-term partner with the management team and they are going to resolve those issues and we are just pleased to have them as a 23% owner of the partnership and a good general partner.

[Michael Blum:]

Okay, great. And then my last question is just can you give you any more details or window into the negotiations going on with the Permian, the potential Permian investment and just how that's progressing where that stands?

[Heath Deneke:]

Yes. Hi, this is Heath Deneke. Not a whole lot of new news. I think is as we are continuing to refine our expansion plans as we you could imagine that producers are also continuing to look at their long-term development plans in the assets. So, I think we are very pleased, we are hopeful that here in the coming months we will able to complete the transaction and everything is moving in the right direction to be able to accomplish that.

[Michael Blum:]

Great. Thank you, very much.

[Operator:]

Our next question comes from the line of Ethan Bellamy with Robert W. Baird. Please proceed with your question.

[Ethan Bellamy:]

Hey, good morning, guys. You touched on Tesoro, but they now have their own in-house asset. What would be the rationale for them continuing to be a customer of yours, now that they have their own infrastructure?

[Robert Phillips:]

Ethan, this is Bob. Let me make a quick comment and then turn over to Brian Freed who runs that business for us and is the relationship manager for the Tesoro relationship. Brian actually was the developer on that project back in 2010 and before. So, he originated the relationship, knows them well. They've have been a great customer of ours. We are in the now in the last year of a five-year contract. And as I have experienced throughout my career, if you got great customer who has a high utilization rate for an asset and we have been providing good services to that customer. And the product itself continues to be vitally important to them and the service has been important to them for the last five years. I think service providers and customers always find a way to continue the relationship and continue a level of business, now maybe at lesser volume and lesser fees than it was when the original deal was struck back in 2010. But we know that Tesoro is incredibly committed to the Bakken and we intend to continue to be a service provider in '17 and beyond. Brian, you want to give some color around that?

[Brian Freed:]

Yes, Bob. I think that's a great introduction for it. And I think the only thing that I would add to that is that that service we provided, it continues to be a value. And when you look additionally at what other asset required is and where COLT is, it's geographically separate, so it's a completely totally different access to supply basin between those two locations. One is north of the river, one south of the river and there is a diversity of supply aspect associated with it that should be a value.

[Robert Phillips:]

In other words, there is a lot more supply around COLT hub than there is down there where that facility was. And then, this is my own personal view, because we looked at that asset as well. I think the important part of that acquisition was the pipeline that they got and the pipeline we are out of way that they got. It adds incrementally to the pipeline network that Tesoro already owns. And so my view is while there is an additional ability to store crude and to load it on rail down there, it just simply is not the access to the level of supply and the diversity of supply that we offer at COLT. And so I think that we certainly are willing to continue to be a service provider to Tesoro. They've been a great customer of ours. We have a good relationship with them and so I am hopeful we'll be able to continue that and provide services in addition to what they provide for themselves down there.

[Ethan Bellamy:]

Okay. And then, while we were on the Bakken, Sandpiper being delayed to 19 and you mentioned if Dapple gets built. Could you talk about the other big infrastructure projects that are out there and I'd love to hear your probability expectation of Dapple going forward. I assume you know more about that than I do?

[Robert Phillips:]

Well, I think we probably don't. You are pretty smart then, you talked to more guys than we do, Ethan. So, I just noticed today that and maybe I am late seeing it but Rover was delayed, and so totally unrelated but same company, so we don't know whether Dapple is going to be delayed or not. We know they've spent a lot of time and money on engineering and write away. We certainly have been in negotiation with the Dapple people to make connections at our facilities. That's an important next step for us. We want to be connected to Dapple. We want customers to utilize COLT hub and Arrow as supply origination points. We think those are going to be great pooling points for supply, potentially even price discovery points because of the significant amount of crude supply that we attract as a hub. And so we know that Dapple people are excited about connecting to us and we are excited to connect to them. Brian you want to add anything on timing

[Brian Freed:]

No, I don't have anything specific. I refer to them on in terms of the timing, it's just that it's not in place yet. And I think would they continue to tell the market place that it's going to be in place in Q4 of this year, but that there is a lot of work to be done to get that in service in Q4 of this year. In terms of Sandpiper, we're already connected to the Enbridge system right now. We have that connection over at our Beaver Lodge location. So, you kind of nail the two large infrastructure projects that are being proposed out of the basin and I think we discussed the timing of both

[Ethan Bellamy:]

Okay, that's helpful. And then, bigger picture question about that basin. Then there is sort of the inflection point of where is new drilling economic and then there is the question of what our people making money and lifting cost. What do you think as you plan for that basin and the capital expenses out there, where is the price of crude where volume start going up for you and where is the point of which you are basically just expecting production to roll over. I am just curious about how you view the economic sensitivity to crude prices there?

[Robert Phillips:]

And I'm going to let Will Moore, who runs our corporate development and he is very familiar with all the producers up there and all the all of the midstream assets that have come to the market within the last couple of years. I am going to let him answer the economics part and then I want Heath to take a minute to a very quick minute to update us on the expansions that we are going to have on that Arrow system in 2016 or part of that capital that Robert mentioned is going to be Arrow capital and it's kind of one part amendments to customer contracts to expand the system in the areas that they want to drill because they are high grading their drilling capital in 2016. But also is regulatory compliance capital that we are spending as well on the image over the FBR reservation. So, Will, why don’t you start off on economics and then Heath you can give us a quick summary on '16 capital on Arrow?

[Will Moore:]

Yes. It's a very good question. I don't know that we have a definitive answer on what the price of crude has to do to see increase in volume there. We consistently see volumes stay flat, based on current pricing. Every one of our producers tells us they are making acceptable returns at the current price level, but obviously if you saw crude go up, their returns would improve and you would expect them to dedicate more capital to the resource. The break-even cost there is, especially in the Dunn County acreage, seen as low as $25, WTI. It's different for producer but I think the important part is we are still getting drilling plans from our producers that have over a 100 wells a year being connected. Now we're risking those, given the current environment. But I think from an activity level and the capital allocation level from our producers, we feel very confident that they can achieve acceptable returns at the current pricing environment.

[Heath Deneke:]

Yes. And this is Heath. And just to quickly comment on 2016. As Bob mentioned and Robert highlighted in the call, we do we have four rigs running in the area, despite the low price environment that we are in now. We do expect to continue to have a substantial amount of well connections during the 2016 time frame. And when we look out at capital I think we're kind of allocating lot of time in improving our system. We have expansion plans for our water gathering system and anticipation of additional volumes coming on to the system. And we look forward as we kind of get back up into what I kind of call the $40 to $50 price environment. We think that activity will accelerate beyond what we are actually expecting for 2016.

[Ethan Bellamy:]

Okay, thanks. One last question. I know you can't speak for them, but have they communicated to you or do you anticipate that First Reserve is going to make any more unit purchases?

[Heath Deneke:]

Yes. I think, Ethan, we can't speak to that at this point. I know they really like the price at today's levels, as we all do. But I think that in terms of --.

[Robert Phillips:]

That was a 10b5 program. So, we're totally un-involved that.

[Ethan Bellamy:]

Got it. Thank you.

[Operator:]

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

[Selman Akyol:]

Thank you. Good morning. Couple of real quick ones from me. If you could just hopefully expand a little bit on and I do appreciate the update in terms of Quicksilver and BlueStone, but my question is directly, is your gathering contracts separate from your processing contracts? Are those are linked in as one, is there any discretion here as one could be accepted and one could be rejected?

[Heath Deneke:]

Yes. Hi, this is Heath Deneke. I mean the short answer to your question is simply this. We do have three separate contracts for the different operating areas within Barnett. But in the Barnett rich area, our gathering and processing agreements are one agreement and as we maintained and continue to maintain these contracts containing covenants around with the land, we believe those rights in the middle of our interest start create a real-estate interest that is not subject to rejection in the contracts. But one thing that is clear, is that in the event that the contracts were to be rejected or could be rejected, it's a no or non-type proposition. So, there couldn't be cherry picking of terms or favorable parts of service that would now or nothing event. But again, we remain very confident and look forward to making our case in the upcoming hearing.

[Selman Akyol:]

Okay. And would those contracts be structured the same way over Chesapeake too, with your joint venture?

[Heath Deneke:]

Yes, that's correct.

[Selman Akyol:]

All right. And then, last one from me, but clearly you talk about deleveraging the balance sheet and being in good position when things turn to make investments in key basins. So, I guess if we ask it differently, what is off the table for potential asset sales or in the restructuring?

[Robert Phillips:]

Yes. Selman, the only thing that's off the table is we are not going to the capital markets for any additional capital in 2016, not at these unit prices or at these bond prices so everything that we do in the way of a comprehensive solution will be totally within our own portfolio. I think the big take away for me is we've got a lot of confidence in our 2016 adjusted EBITDA forecast. The business that we own and operate will continue to generate a lot of cash flow. In 2016 that cash flow we expect over the five year period is going to start growing in '17 as producers come back to the system and restart their drilling activities. We see '16 is kind of a dead year from that standpoint, not a lot of activity but because of the significant cost cutting that we've done in the efficiency gains that we created through our organization. We are going to have a lot of cash flow here and we are going to have to make decisions about what to do with that. And as I said, we hope that it will be a comprehensive solution to achieve our primary goal of lower leverage as we exit the year and go into '17 – '18, which we think are going to be growth years for the industry and growth years for us. So, the only thing that's off the table right now is we will not be going to the market for equity or debt in 2016.

[Selman Akyol:]

All right. Thanks very much.

[Operator:]

Our next question comes from the line of Helen Ryoo with Barclays. Please proceed with your question.

[Helen Ryoo:]

Thank you. Good morning. Bob, I appreciate the color on the Quicksilver process. I guess this is more of a clarification. If the contract gets rejected and I understand that you have a pretty good case to prevent that from happening, but hypothetically if it gets rejected, what happens to the other third party working interest holders like Tokyo Gas? Do they get rejected together or is it just related to Quicksilver’s net interest?

[Robert Phillips:]

Helen, thanks for the clarifying question because that is a great question. People don't often focus on the fact that we have a separate agreement with Tokyo Gas and that this bankruptcy really just relates to the working interest that Quicksilver owns which Heath remind me on a [indiscernible] basis is --.

[Heath Deneke:]

It's in the 60, yes.

[Robert Phillips:]

About 60% of the total. Yes. So, 40% of the working interest will largely remain at the original terms of the gathering and processing agreement unless of course we agree to modify the terms under which we will gather and process and compress their gas. So, having said that, Heath, you want to I know you guys have researched this, I'm not sure we have an opinion that we want to make public, but it's an interesting question that she asked.

[Heath Deneke:]

Yes. With the upcoming hearing coming up, I think we're going to be select in what we discuss here. But I think you have noted we do have a contract in place with Tokyo Gas. We do expect our Quicksilver contracts to continue with any successor to their upstream interest. And but we do think that the contract issues at hand or as it relates to Quicksilver are a little different than because of their bankruptcy process relative to what's in place with Tokyo Gas.

[Robert Phillips:]

Yes. Just to be clear, Helen, we have third party gas in all those system as well. Devon is a really big customer of ours up there. So, there is no circumstance under which either through the bankruptcy process or any of this legal maneuvering that our system shuts down and then we have obligations to Tokyo Gas to Eni to a certain extend up and alliance and to Devon and other producers to continue together and process, compress, and treat their gas across those three systems manage on the some other producers on the Lake Arlington system. So, there is no scenario by which we shut those systems down and just stop making cash flow in that area.

[Helen Ryoo:]

Right. And that's very helpful. When you come up with the guidance, wondering what is assumed on what happens on this front. I guess the other outcome could be some sort of renegotiation.

[Robert Phillips:]

Sure.

[Helen Ryoo:]

I think you mentioned in the past that any NPV positive field you look into, so is that sort of what's assumed in the --.

[Robert Halpin:]

Yes. I mean, one of the things that the Bob alluded to in his comments, was the fact that we do have a deal in place with Barnett Shale Gas which is effectively a consortium back by the second lien. And so from a pricing standpoint, we have a good handle on what we think restructured agreement would look like. And in addition to that, there was from a volumetric standpoint there was a fair amount of gas that was shut in 2015 that we believe when we restructured the agreement that will become economic to come back on line. And so, I think what you'll see in our 2016 plan, we reflects what we think we are going to be able to get done with a successor from Quicksilver interest as well as an expectation that we think volumes that we will be maximizing volumes during that time period. We don't have any future development baked into 2016, but we do think that some of those wells that were shut in will be returned to service and that's reflected in our plan.

[Helen Ryoo:]

Got it. And then the other question was that Chesapeake comments, the Niobrara, is that where majority of your Chesapeake exposure comes from? I think maybe there is something in North Belize about the Haynesville area and Granite Wash. And could you maybe --.

[Robert Halpin:]

Yes. I'm sorry, go ahead.

[Helen Ryoo:]

No.

[Robert Halpin:]

Short answer is "yes." We do have an excessive with them up in the Northeast with our storage and transportation business but the majority of our Chesapeake exposure is in the in our 50/50 joint venture with Williams and the Powder River Basin.

[Helen Ryoo:]

Have you said how much EBITDA that asset is generating in Powder River?

[Robert Halpin:]

Yes we have talked probably about historically it's just not $20 million on EBITDA basis net or 50% interest for 2015.

[Helen Ryoo:]

Got it. And then lastly, do you have any exposure to Sabine Oil?

[Robert Halpin:]

We have a contract with them in the Granite Wash, it's fairly low dollar valued contract.

[Helen Ryoo:]

And is it mostly gathering that's connected to the well head?

[Robert Halpin:]

Its gathering and processing.

[Helen Ryoo:]

Okay. Thank you, very much.

[Robert Phillips:]

We buy that production and resell it. So, we would --.

[Robert Halpin:]

We actually remit payment to them.

[Robert Phillips:]

Unlikely that we would ever be in a credit exposure there.

[Robert Halpin:]

Correct.

[Helen Ryoo:]

Right. And just compared to somebody like Chesapeake, I guess, it is a very is it a pretty small exposure?

[Robert Halpin:]

Very small.

[Robert Phillips:]

De Minimis.

[Helen Ryoo:]

De Minimis, okay.

[Robert Halpin:]

Right up.

[Helen Ryoo:]

Thank you so much.

[Robert Phillips:]

Thanks, Helen. Okay, Josh --.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to you Bob Phillips for closing comments.

[Robert Phillips:]

Thank you, operator. And thanks to everybody that joined. We had a big turn out today and we appreciate the interest in our 2016 plan. I think we have given a fair amount of color around our expectations for the year. My big take away is that despite the expectation for weak prices throughout the year and lower volumes on the gathering and processing side, that's only about 40% to 45% of our total business. With our storage and transportation and our marketing supply and logistics, NGL, and crude businesses, being over 55% for the year. So, I wanted to make that point. Finally, in terms of the strategic opportunities to improve Crestwood, we are focused on year-end leverage ratio and the steps that we are going to be taking throughout this year and announcing when they are right for announcement or to de-lever the balance sheet and exist the year with a very attractive leverage ratio. So, look forward to announcing steps in that direction as we go forward. And thanks, again, to everybody that joined the call this morning. That's it operator.

[Operator:]

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