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Executives

Jill McMillan - Director of Public & Industry Affairs

Barry E. Davis - Chairman, Chief Executive Officer, President, Chief Executive Officer of Crosstex Energy GP LLC, President of Crosstex Energy GP LLC and Director of Crosstex Energy GP LLC

Michael J. Garberding - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

William W. Davis - Chief Operating Officer of Crosstex Energy GP LLC and Executive Vice President of Crosstex Energy GP LLC

Analysts

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Paul Jacob

John Edwards - Crédit Suisse AG, Research Division

David Askew - RBC Capital Markets, LLC, Research Division

Lin Shen

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Eugene Robin

Jeffrey Bronchick - Cove Street Capital, LLC

Scott Fogleman - Crédit Suisse AG, Research Division

Crosstex Energy (XTXI) Q1 2013 Earnings Call May 9, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 Crosstex Energy LP Earnings Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Jill McMillan, Director of Public and Industry Affairs. Please proceed, ma'am.

Jill McMillan

Thank you, Matthew, and good morning, everyone. Thank you for joining us today to discuss Crosstex's first quarter 2013 results. On the call today are Barry Davis, President and Chief Executive Officer; Mike Garberding, Executive Vice President and Chief Financial Officer; and Bill Davis, the Executive Vice President and Chief Operating Officer.

We issued our first quarter 2013 earnings release yesterday evening and the 10-Q was filed this morning. For those of you who didn't receive the release, it is available on our website at crosstexenergy.com. If you want to listen to a recording of today's call, you have 90 days to access the replay by phone or webcast on our website.

I will remind you that any statements that include our expectations or predictions should be considered forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are subject to a number of assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements, and we undertake no obligation to update or revise any forward-looking statements.

We will also discuss reconciliations of certain non-GAAP items, and you'll find the reconciliations in our earnings release. We encourage you to review the cautionary statements and other disclosures made in our SEC filings, specifically, those under the heading, Risk Factors.

I will now turn the call over to Barry.

Barry E. Davis

Thank you, Jill. Good morning, everyone, and thank you for joining us today. We are pleased with our performance for the first quarter, which we will talk about in detail this morning. Additionally, we will discuss the great progress we're making to expand our scale, diversify our services and grow our predictable base business.

We continue to execute our strategy and become a larger, more diversified, fee-based midstream company. We remain focused on achieving our growth plan and are in the middle of implementing the $1 billion of growth projects we initiated last year that will be completed in 2014. They will considerably expand and diversify our existing platform.

These projects include our Cajun-Sibon pipeline and fractionation expansion, the first phase of which will be completed and begin operations in the third quarter. The financial contributions from Phase 1 are expected to be consistent with our previous projections.

Other new projects underway include the buildup of our Ohio River Valley assets and Phase 2 of our crude oil terminal development at Riverside. In addition, we continue to work on generating complementary growth projects that we think will lead to the next $1 billion of investment opportunities across our asset platform during the next 3 years.

Our teams are working diligently to move them from opportunities to executable projects. We're fortunate to be operating in this robust dynamic energy environment. We are excited about what lies ahead and believe we are ideally positioned to benefit for several reasons.

First, we are in the right energy market. It is estimated that well over $10 billion in midstream infrastructure will be added each year over the next 20 years to meet the producers' needs. Our presence in 6 of the top shale plays puts us in front of this growth, and we intend to meet our customers' needs for tailored solutions with projects that will provide investors with increasing and more stable predictable cash flow.

Second, we have the right platform. Our assets are strategically located and we have expanded our services for crude and NGLs to meet changing market needs, all of which create more growth opportunities for us. At our current size, relatively small investments can have a greater impact on distribution and dividend growth at our partnership and our general partner.

Third, we have the right opportunities to deliver transformative growth. We are focusing on fee-based projects that give us both geographic and product diversity. The projects currently underway, when completed and operational, would diversify our business so that approximately 50% of our margin will come from services provided for crude, condensate and natural gas liquids, and 50% from natural gas services.

In addition, we estimate more than 85% of our gross operator margin will be derived from fee-based endeavors.

Fourth, we have the right people. The Crosstex team has a seasoned, dedicated management team and 750 employees, who have a strong sense of ownership. Each of us is dedicated to executing our plan to the best of our ability and driving positive results in a safe environment.

And finally, it's the right time to invest in Crosstex. We are transforming the company into a larger, more diversified, fee-based midstream provider, and we're confident in our future long-term growth. Our outlook is essentially the same as what we told you last quarter. We have prepared for the low-processing margins in today's market environment by refocusing our business on fee-based cash flow. You can see the results of our base business have remained relatively flat with the loss of processing upsides, which have been significant in past periods. And our efforts to increase the base business continues, like our Cajun-Sibon expansion project, which is expected to contribute $115 million to $130 million of stable, fee-based cash flow when completed.

Now looking briefly at our first quarter 2013 financials. We are pleased to report that we had good results. Adjusted EBITDA for the first quarter was $57.7 million, compared with adjusted EBITDA of $58.5 million for the year-ago period.

In the first quarter last year, commodity-based margins accounted for $25 million of our gross margin, compared with only $14 million in the first quarter of this year. We have prepared for the low-processing margin in today's market environment by refocusing our business on fee-based cash flows. Additionally, in the first quarter, we capitalized on seasonal NGL demand, saw higher-than-expected volumes and margins on our North Texas system and achieved solid performance from our ORV business.

Distributable cash flow was $31.8 million versus $35.6 million for the first quarter of 2012. In summary, we are pleased with our first quarter performance and are excited about what's ahead.

I will now turn the call over to Mike Garberding, who will discuss the first quarter 2013 results in more detail.

Michael J. Garberding

Thanks, Barry. Good morning. Today, I'm going to focus my remarks on 2 of our competitive advantages that Barry covered: The right platform and the right opportunities.

Beginning with the right platform. Our asset footprint continues to produce solid results while we execute our large-scale growth projects like Cajun-Sibon. In the first quarter, we had strong performance from our base business. Our focus on fee-based business, which was approximately 86% of gross operating margin for the quarter, has continued to provide a solid base of cash flows.

We also continue to optimize our assets by capturing additional volumes in North Texas and seasonal NGL demand opportunities that typically become available during the winter months in our PNGL business.

Similar to last year, we expect these seasonal margins will moderate as we move into the second quarter. Our weighted average liquid price for the quarter was around $1.02 a gallon and our natural gas liquids-to-gas price ratio was around 300%, both flat compared with the fourth quarter of 2012. Ethane remained about 35% of the weighted average liquid barrel during the first quarter due to reduced ethane volumes related to weakness in ethane pricing. This is consistent with what we saw in the fourth quarter of 2012. The continued weakness from the light end products has impacted our operating processing volumes, which declined quarter-over-quarter by approximately $150 million per day.

From a financial perspective, the partnership realized adjusted EBITDA of $57.7 million for the first quarter of 2013, an increase of approximately 12% from the fourth quarter 2012 realized adjusted EBITDA of $51.7 million. Adjusted EBITDA and distributable cash flow for the first quarter were positively impacted by the receipt of the first cash distribution of $4.4 million from our investment in Howard Energy Partners.

Gross operating margin for the first quarter of 2013 was $104.7 million, similar to what we achieved in the fourth quarter of 2012. The gross operating margin was driven by increased NGL fractionation marketing activities in our PNGL system and a strong contribution from our ORV assets, which were partially offset by reduced processing margins and the impact of the sinkhole that formed near Bayou Corne, Louisiana.

Distributable cash flow was $31.8 million for the first quarter of 2013, an increase of $5.1 million from the fourth quarter of 2012. The distributions at $0.33 per unit. The coverage ratio was approximately 1.13x for the first quarter. Since we may not capture the additional on our Texas volumes and the seasonal PNGL margins we achieved in the first quarter, we could have a lower distribution coverage ratio in the second quarter of this year.

As we explained in our 2013 guidance presentation, we expect to increase distributions during the second half of the year, when Phase 1 of Cajun-Sibon expansion and the Riverside crude terminal expansion projects come online. We expect distribution coverage for 2013 to be consistent with our guidance at greater than 1x.

We project 2013 adjusted EBITDA to fall within the range provided in our 2013 guidance. In our previous earnings call in early March, I mentioned that we could have commodity exposure of approximately $10 million from the mid-point of the guidance if commodity prices continued at similar levels for us to 2013. This exposure was somewhat mitigated in the first quarter by the system optimization margins that I just mentioned, but we still have the same commodity exposure for the remainder of the year.

Moving to the right opportunities, we continue to invest heavily to expand our platforms in Ohio and Louisiana. Capital expenditures for the first quarter were approximately $123 million, including additional cash invested at Howard Energy Partners and maintenance capital expenditures. Growth capital expenditures of $118 million were focused mainly on the Cajun-Sibon expansion, as well as Riverside Phase 2, which are under construction.

These projects will transform the business by increasing product diversity and fee-based margin. Today, we have hedged approximately 56% of our total percent of liquids volumes and 17% of our total processing margin volumes for the remainder of 2013. We only hedge contracted volumes that we know are coming to us and only use product-specific hedges. This is why we have such a low percentage of processing margin volume hedged. I'll remind you that only 14% of our 2013 gross operating margin is exposed to commodity price risk, and we have hedged a portion of that exposure.

From a balance sheet perspective, we continue to maintain our strong liquidity position. We currently have only $12 million borrowed under our $635 million credit facility. We ended the quarter with a debt-to-EBITDA ratio of 4x calculated in accordance with our bank credit facility. We expect our debt-to-EBITDA to trend up during the construction of Cajun-Sibon pipeline projects, which we have taken into consideration with our current bank covenant of 5.5x for 2013.

We expect delevering as Cajun-Sibon Phase 1 and Riverside Phase 2 become operational mid-2013. Earnings from our Ohio River Valley assets continue to grow and Cajun-Sibon Phase 2 comes online in the second half of 2014.

We raised almost $190 million in equity during the first quarter. The establishment of an aftermarket equity issuance program allowed us to raise $21 million during the quarter. We have the financial flexibility to execute our capital program, as well as additional growth projects as those opportunities are developed.

Turning briefly to Crosstex Energy Inc. On a stand-alone basis, the corporation had cash on hand of approximately $3.5 million and $22 million of partners outstanding under the corporation's bank credit facility as of the end of the first quarter of 2013. This cash balance excludes cash held by our Utica-focused development company, which Bill will talk about in a moment. As we have said previously, we don't currently expect that the corporation will pay any significant income taxes in the near future.

Now Bill will update you on our growth projects and operations.

William W. Davis

Good morning. I'll add a little to what Barry said earlier. With our current asset base, we've achieved substantial geographic and product diversities that will enhance the size and scale of our business. The $1 billion of projects that we're working on right now will continue to add to that size and scale. Furthermore, that growth will then lead to new opportunities for additional growth in these areas, which we plan to capitalize on.

I'll begin our asset review with an update on our Cajun-Sibon pipeline and fractionation expansion. Construction of both phases of the project is well underway. Phase 1, which includes the 139-mile pipeline from Mont Belvieu to Eunice and the expansion of that Eunice's fractionation plant, will begin operation in late July and is expected to meet our 2013 EBITDA protections. The project is expected to ramp up to full utilization quickly.

In Phase 2, we are adding pumping stations on the Phase 1 pipeline to increase total capacity to 120,000 barrels per day, constructing a new 100,000-barrel per day fractionator at the Plaquemine gas-processing complex and expanding capacity from Eunice to the new Plaquemine fractionator. The fractionator is under construction and the side of Plaquemine is being cleared.

We expect Phase 2, which will add twice as much cash flow as Phase 1, will be in service during the second half of 2014. The Cajun-Sibon expansion projects are supported by a 5-year ethane sales agreement with Williams Olefins, LLC, a subsidiary of the Williams Companies and a 10-year sales agreement for ethane and propane with Dow Hydrocarbons. Cajun-Sibon is a big step in our plan to grow our crude and liquid services, bringing our estimated fourth quarter of 2013 cash flow run rate from liquids and crude condensate services to about 50% of our business.

We will continue to focus on executing projects like these. Phase 2 construction of the crude terminal at our Riverside fractionator is nearing completion. The Phase 2 project will provide 10,000 barrels per day of minimum take-or-pay business. The total capacity at Riverside are 14,000 barrels per day. We expect the annual fee-based cash flow from the Riverside crew terminals will be at least $10 million per year beginning in June.

Our processing and natural gas liquids business, or PNGL, benefited from seasonal demand in the quarter, imported NGL volumes from truck and rail activity at our fractionators and offshore Miocene/Wilcox gas production that drove fee-based volumes at our Pelican gas-processing complex. These improvements were offset by lower-opportunity processing margins and volumes.

Market demand for NGL rail and truck handling fractionation services continued strong. Currently, our aggregate volumes for truck and rail NGL imports are approximately 12,000 to 13,000 barrels per day.

Our Ohio River Valley business, or ORV, performed extremely well in the first quarter. ORV gives us a tremendous growth platform in the crude condensate and brine logistics businesses in Utica and Marcellus shale plays. E&P companies are focused on the Utica's rich gas and condensate window as the producer community continues to delineate the play with drilling permits of approximately 15% from the fourth quarter of 2012.

The wells in this part of the play produce considerable condensate volumes, as well as high natural gas and natural gas liquids volumes. Even though volumes are materializing slower than anticipated, some of which is because of the midstream infrastructure bottlenecks in the region, we expect significant growth in condensate opportunities as the approximately 150 wells that are currently shut in come on line and future wells are completed.

We're expanding our presence in the ORV area through condensate stabilization, product marketing, enlarging our crude condensate and NGL gathering and takeaway system and leveraging our rail terminals and truck fleet to gather crude and condensate volumes.

In the first quarter, we continue to pursue critical condensate-related projects, such as expanding the Black Run rail terminal. We're also increasing the Bells Run barge terminal storage capacity and condensate-handling capabilities and expect it to become a leading market hub when the work is completed.

We're continuing to take advantage of the right opportunities in this robust regional market to develop condensate solutions for our customers. As we recently announced, the corporation has agreed to invest approximately $75 million in 3 new natural gas compression and condensate stabilization facilities in the region, which complement our current assets in the Ohio River Valley.

As we have said, condensate solutions will be key to the early development of the Utica. The corporation will make the investment in E2, a company we established in March with the former management of Enerven Compression Services. Our initial investment in E2 was about $50 million for 2 compression and stabilization facilities. And then yesterday afternoon, we announced an additional $25 million investment for the third facility. E2 will build, own and manage and operate all 3 units, which are supported by a long-term, fee-based contract with Antero Resources.

These facilities are scheduled to be operational during the second half of 2013. The investments are being made by Crosstex Energy Inc., our general partner, and represents ownership of approximately 93% in E2.

Using the corporation to facilitate this investment provides us with an additional source of growth capital. We expect the assets, once they are operational, maybe dropped down into the partnership.

We're also expanding our brine logistics offerings by increasing the capacity of our saltwater disposal network in related wells. During the first quarter, we achieved record brine disposal rates, the result of favorable weather conditions and the optimization of the newest disposal well in West Virginia bringing [indiscernible] #1, along with the other 6 disposal wells. We drilled one additional saltwater disposal well in the first quarter, which will become operational mid-year.

We think we're well-positioned to continue the growth that we see coming in this region. In Louisiana, our LIG pipeline system has access to several plays, including the Haynesville, Austin Chalk, Tuscaloosa Marine Shale and Miocene/Wilcox, which could provide great additional transportation processing and fractionation volumes for both our LIG and PNGL facilities. We continue to monitor producer activity in these newer plays for liquids-rich production opportunities that will benefit both our systems.

As I mentioned earlier, our Pelican gas processing complex is benefiting from new production from the Miocene/Wilcox formation in the Gulf of Mexico. Several additional prospects are being drilled into this formation that could benefit both our LIG and PNGL plants.

Our 36-inch DOE pipeline near Napoleonville remains out of service because of the sinkhole near Bayou Corne. The sinkhole continues to impact transmission volumes, which is reducing our supply at the River markets. We expect this situation will continue until we can restore service on the system, which we expect to do in the third quarter of 2013.

In North Texas, our gathering and transmission volumes in the Barnett Shale remain strong the first quarter. Our processing plants remain full. We connected several new wells drilled by producers who continue to focus in liquids-rich gas, and these wells flowed at better-than-forecasted production rates. There currently are more than 13,000 locations yet to be drilled on the Barnett Shale, about half of them are within 3 miles of our assets. So we'll have an excellent opportunity to compete for that gas as it's developed.

We continue to capitalize on a variety of near-term opportunities in the north -- in North Texas to increase our system throughput, which has helped to offset the play's underlying volume decline.

In the Permian Basin, where we have a joint venture with Apache Corporation, Deadwood Cryogenic Plant remains full. Volumes are currently running about 56 million cubic feet per day, which is at capacity and ahead of plan. We are considering alternatives to expand our processing capacity in the region. We also are continuing to discuss additional gathering and processing business with producers and are evaluating the development of crude oil gathering infrastructure in the area. With 450 rigs active in the basin and our position with Deadwood and Mesquite, we are confident that we'll have opportunities to expand our assets in this exciting region.

Drilling continues to increase in the vicinity of Howard Energy Partners assets in South Texas. That work is being completed on the 200 million cubic feet per day Reveille cryogenic plant that will tie into the rig-counting system Howard acquired last year. Howard is targeting plant construction to begin in June, with plant startup in early 2014. We continue to be pleased with our investment in Howard Energy, which currently amounts to approximately $95 million. We received our first cash distribution on our investment in Howard of $4.4 million in the first quarter. Now I'll give the call back to Barry.

Barry E. Davis

Thanks, Bill. Before we move to Q&A, I'd like to emphasize that we are achieving our growth plan and taking advantage of opportunities in this dynamic energy market.

By our next earnings call in August, we will have accomplished more than half of our $1 billion growth program. During the rest of 2013, we will continue to execute our plan to become a larger, more diversified, fee-based midstream company. Our goal is to be well-balanced during the ups and downs of the energy business cycles so we can continue to provide secure and growing returns to our stakeholders.

Now Bill, Mike and I will be happy to answer your questions. And I will turn it back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Gabe Moreen of Bank of America Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Just a quick couple of ones. On the distributions you received from Howard this quarter. I think at your Analyst Day, you laid out expectations of $10 million to $15 million for the year. It looks like you're a little bit ahead of that. Can you just talk about how the amount of that and the timing of that and whether that's changed at all relative to expectations?

Michael J. Garberding

Gabe, this is Mike. Good to talk to you. Right now, our expectations is in that same range for the year. As you can see, we did get a little bit more in the first quarter. But overall, we still expect to be in that same range of distributions to be received this year from Howard.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. Great. And then, I think, Bill may have given the product update. But if you can talk about some of the long-term projects, may be a little bit more in terms of the propane/butane export facility, Cajun-Sibon Phases 3 and 4. I know there's been a couple additional NGL export projects announced in the market. Just wondering how those projects are going and whether the competitive landscape -- how the competitive landscape is looking?

William W. Davis

Gabe, it's Bill. Yes, we're continuing to work those projects. They're still in the preliminary phase of commercial negotiations. So we don't really have a lot to update you with right now other than they are still projects that we're very diligent in pursuing.

Operator

Your next question comes from the line of Paul Jacob from Raymond James.

Paul Jacob

I guess the first one is on the condensate stabilization at XDXI and the opportunity for dropping that down to XTEX. Do you think that you would do that right when those facilities are in place? Or do you think that, that would happen sometime after that? And if it did happen later down the road, what would be the incremental benefits, as you see it, to the Crosstex Energy LP in the meantime?

Barry E. Davis

Yes, first of all, let me just expand a bit on the opportunity that we are working with E2 on. I mean, we're excited about the partnering with them. We've worked with them on a number of projects in other locations. For example, in North Texas, we've done a lot of business with them there. And we saw this as really being a great synergistic opportunity. They were pursuing certain phases of the services in the Ohio River Valley. And so we just felt like it was very complementary and we had an opportunity to be, essentially, a financial partner and a strategic partner with them. Clearly, we would expect these assets to come into Crosstex Energy LP when they are fully developed. And there's a range of times from immediately up on start-up to somewhere after they're fully ramped up. As you can see, we've already expanded this -- by yesterday's announcement, we've already expanded it 3x over twice. So there's 3 phases within a very short period of time. And we think this is going to continue to be the case. So I think the drop-down will really be a question of when we feel like it's the right time as far as the incremental development that will happen, which could be anywhere between the end of this year and say, the end of 2014. As far as the impact, Mike, do you want to add any comments on that?

Michael J. Garberding

Yes, so Paul, what we'll do is when it's up and running, it will all depend upon the volume running through the station as far as what drop-down looks like. So that will be determined between the 2 independent Boards at that time. But again, because these are devolved projects, like we've seen from our organic standpoint, they do have good returns.

Paul Jacob

Okay. And then are there any provisions in place that will prevent you in terms of just timing from acquiring the remainder interest in that joint venture?

Barry E. Davis

There's nothing that prevents us. In fact, there's a structure that would facilitate that happening really at a time of our choosing, at a range of times within the agreements. So we would expect that to happen.

Paul Jacob

Okay. And then turning to opportunity processing volumes, recognizing that those continue to kind of taper off in light of ethane rejection, and looking at that market, I'm assuming that it's quite sticky. Do you see more downside risk in terms of opportunity volumes declining? Or do you think you've kind hit the bottom of that?

William W. Davis

Yes, this is Bill. We are basically at 0 and have been for several months on opportunity processing. So I'd say, yes, we're at the bottom.

Paul Jacob

Okay. And then last question for me is in terms -- you talked about, Mike, the $10 million variability to the midpoint of guidance. And I just want to clarify, is that to the $144 million, $145 million of EBITDA guidance? And then when would you be comfortable sort of working that in this year if your think the market was there?

Michael J. Garberding

So when we talked about the EBITDA guidance -- again, our midpoint of guidance for this year was $235 million. And as we said, really, in the March call and also on this call is that we thought, given what our view in commodities were at the point in guidance versus today, we had about $10 million exposure in the business from that point in time through today. As we said in the first quarter, our asset teams did a great job of continuing to find out optimization in and around the assets to offset that potential commodity decline. However, if you look at today's prices and assume those persist through the remaining of the year, there is still some commodity exposure on the business. So the $10 million really represents that potential commodity exposure in the business if nothing changes from today on forward, both from a volume and price standpoint.

Operator

Your next question comes from the line of John Edwards of Credit Suisse.

John Edwards - Crédit Suisse AG, Research Division

Just on the volumes. How much of the volume drop was directly attributable to the sinkhole issue?

William W. Davis

Hey, John, it's Bill. Probably, on LIG, you'd say about $100 million a day of the volume is associated with the sinkhole.

John Edwards - Crédit Suisse AG, Research Division

Okay. All right. And then, as far as breaking out the segments, the financials on the segments, I mean, there was sort of an indirect discussion in the press release. Are we going to be able to get a little more detail, I mean, kind of a standard table on the segments?

Barry E. Davis

Yes, John, this is Mike. That will be in the 10-Q. And then once you have a chance to look at that, if you have some follow-up questions, just give me a call.

John Edwards - Crédit Suisse AG, Research Division

Okay, all right. And then you mentioned also in your comments regarding, I guess, I think you -- the comment was something like $150 million a day decline because -- at the light end of the barrel. Was almost -- was that basically entirely attributable to ethane rejection?

Michael J. Garberding

Yes. So again, what I mentioned was that we have seen a quarter-to-quarter drop in volumes on PNGL of about 150 million a day. And again, the main rationale for that drop was just the continued weakness in the ethane pricing. And as we say, we just have less opportunities to process because of that. So yes.

Operator

Your next question comes from the line of TJ Schultz of RBC Capital Markets.

David Askew - RBC Capital Markets, LLC, Research Division

It's David on for TJ. I had 2 quick questions on Cajun-Sibon 1. One is, can you guys pinpoint the month when you expect it to be in service? And then second is, is there any potential risk to the volume on the supply side from ethane rejection?

William W. Davis

Most -- just to answer the second question first, David, this is Bill. Generally, our contracts provide for a minimum take-or-pay status with the suppliers. So they have some ability to not fulfill the full amount of capacity subscription. But generally, that they're at 85% or 90% minimums there. So that's the maximum exposure. And that creates that range that we put out for the combined projects of $115 million to $130 million of projected EBITDA when both are in service. As it relates to -- and now, I'm going to have to ask you to repeat the first -- yes, we'll be bringing the facility into service during July and August and expect to have it ramping up to full capacity during the September, October timeframe.

David Askew - RBC Capital Markets, LLC, Research Division

Okay. Just switching over to ORV. You mentioned the constraints on the midstream side, and it looks like the crude volumes were maybe a little bit lighter Q-on-Q. Can you just guys talk about how the volumes are tracking to the plan that you guys laid out in the Analyst Day?

Barry E. Davis

Yes, David, this is Barry. And first of all, there has been much reported about the infrastructure constraints, if you will, in the Utica. We have a number of projects that will come on board, the M3 projects, processing plants, the Natrium plant, a couple of Markwest facilities. And essentially, what we're seeing is condensate volumes produced in association with rich gas, and so we have to have the processing capacity in order to allow the condensate volumes to flow. So we think that's going to happen here through the rest of the year and we'll what we think will be a very dramatic ramp-up in condensate volumes that we are extremely well-positioned to respond to. Regarding the crude oil, we have not seen significant development activity associated with the oil window of the Utica. We still believe that producers will pursue that. They will pursue finding the right ways to develop that production. And we are even more ideally positioned for the crude window than the condensate, while we're very well-positioned for the condensate as well. So we're still very excited about the Utica and think that it will lead to great opportunities, as we've projected in the past.

David Askew - RBC Capital Markets, LLC, Research Division

Okay. And then one more, I guess, kind of switching back to NGL logistics. The fractionation volumes were down sequentially and sort of a lower estimate. I mean, was that mostly due to ethane rejection? And are you guys able to extract some take-or-pay payments there?

William W. Davis

For those -- this is Bill again. The bulk of the fractionation volume declines you see sequentially are really due to 2 issues that are Mesquite and our Eunice facility. First of all, in February, we shut down the Eunice fractionator to begin doing the final work around the expansion project there. So we were offloading volumes that we normally would have been fractionating on our systems. The second piece had to do with, specifically with ethane rejection, as it created space on the liquids lines flowing from West Texas to Belvieu. We found it was better economics for us to not run volumes through the Mesquite fractionator to load on to railcars, but rather to put those volumes directly on to the pipeline to get them to the Belvieu. So those 2 events created our reduced fractionation volumes sequentially there.

Operator

[Operator Instructions] And your next question comes from the line of Lin Shen from Hite Hedge.

Lin Shen

You mentioned that your Q2 distribution coverage may be lower than Q1 because you might not be able to capture the strong butane margin. Is this going to be the only reason you think it's going to be or maybe a combination of lower processing volumes and then less income from Howard?

Michael J. Garberding

So we'll take that in separate pieces. So one, again, as we mentioned on Howard, we do expect that $10 million to $15 million that we talked about in the beginning of the call. So we expect that consistent distribution of Howard during this year. Second, from a processing standpoint, we've already -- we have the low-processing prices today in the quarter. Like Bill mentioned, we don't really have any opportunity of processing expected. We do have some price exposure related to our existing processing contracts. But again, we don't have a large amount of opportunity processes projected in the business. And 3, there is the seasonal business, which we talked about, and we still believe we can continue to optimize the business to achieve some of this, but it's just hard to forecast over this period. So by saying we might have a lower coverage ratio, it's just saying that we'll continue to try to achieve that optimization, but it's not guaranteed.

Lin Shen

Okay. So I'm just -- I also want to clarify that the Q2 maybe, like less coverage, shouldn't affect your decision for their second half share growth increase?

Barry E. Davis

This is Barry. Let me just comment that, again, I think that's -- what Mike described is the whole of what we would expect right now in the second quarter to possibly be different from the first quarter. Again, we think those are opportunities that we have in front of us to make up for as we did in the first quarter. It would not affect our second quarter. We reaffirmed our guidance here in this call in the prepared remarks, and our guidance included an increase in distribution and dividend in the second half of this year. And so, by doing such, we are affirming that, that will be our intent, is to increase our distributions and dividends consistent with the guidance in the second half. I just also want to be clear that our expectation on the Howard distribution going forward is that we would see distributions consistent with what we saw in the first quarter. So if, in fact, that's the case, we will see better than the guidance that we've given in the $10 million to $15 million range.

Operator

The next question comes from the line of Sharon Lui from Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Just wondering, what's the potential for Crosstex to maybe partner with some of the other companies proposing some of the large-scale NGL projects out there, especially to capitalize on the Louisiana petchem market? It seems like you are at advantage, given, I guess, your existing footprint in that region.

Barry E. Davis

Yes, Sharon, we are in the middle of those opportunities. I'd say we're very well-positioned from a marketplace standpoint in South Louisiana, as well as up in the Ohio River Valley. So we are quick to engage in those discussions and certainly have a number of things right now that could result in something that would look like a joint venture or a shared opportunity.

Operator

Your next question comes from the line of Eugene Robin from Cove Street Capital.

Eugene Robin

Two questions for you guys. First off, can you guys flesh out the actual economics for E2? And then, secondly, just kind of briefly go over -- why use GP for the acquisition of the -- the acquisition vehicle, as opposed to the LP?

Barry E. Davis

First of all, let me address the economics. These are fee-based, well-contracted builds. Basically, we have long-term contracts with producers that fully support a strong rate of return on the projects. So that's the economic scenario for our XTXI investment. As we drop those down, we would expect to do that in a way that would be very constructive for EX as well. So Mike, I'll let you to comment on the rest of that.

Michael J. Garberding

From a financing standpoint, as we said in the last call, for us, we continue to look at financing development projects in different ways. And at XI, we said we have to find financing the capability to do certain-sized projects that move quickly from development to cash. And as I said, in these projects, you'll have some of the projects up and running in the third quarter this year and another project, and there was one up and running in the fourth quarter. So again, very quick development time frame, which then allows us to drop down and then potentially use the facility again for the new development up and around Utica through E2. So again, it's a good proxy for us expand our financial capabilities, which may involve entities.

Barry E. Davis

Got it. And then, I'm just curious, I mean, $75 million doesn't seem like that much for EX to do just on the revolver alone. I'm curious, why is isn't necessary for the GP to be used as the vehicle?

Michael J. Garberding

Again, it's just -- looking at a total capacity between both entities, as you mentioned, again, we have the capability. then we have a lot of development projects, not only that we're working on today, but also development projects that Bill mentioned that we're working to bring to bear. So again, we look at that total defined pipeline of not only what we're doing today, but what we think we're going to do in what we think about development capital.

Barry E. Davis

And Eugene, I would actually say that it also provide us on opportunity to do something here that we hadn't done before. We think at the very straightforward transaction that really could demonstrate the capability of XI to support for projects in the future. So what we thought was a very good first project for XI to be involved in.

Jeffrey Bronchick - Cove Street Capital, LLC

This is Eugene's partner, Jeff Bronchick. So again, so Xi is an equivalent development venture vehicle as opposed to a pass-through vehicle for cash flow from the LP. Is that how you're seeing it?

Barry E. Davis

Eugene, I'm not sure that we would describe it as you just did. I mean, it is another vehicle through which we can finance development projects and then drop them into EX when it is better fit, if you will, for the full cash flow that we need to see at EX.

Michael J. Garberding

But as we said, though, it's a very defined development. Again, I mean, the credit facility we've put in place is now $85 million. So it -- again, it is a smaller comparison to the development capability of EX.

Jeffrey Bronchick - Cove Street Capital, LLC

And so, again, on the XI, so -- I just want to make this really, really clear. I just wanted to understand that, that -- it is a conduit for deal structure to move things eventually down to the LP and not be perceived as an additional source of asset collection. Is that a fair statement?

Barry E. Davis

Eugene, I think that's a fair description. It is not our intent to build and hold assets at XI long-term. We would agree with what you said.

Operator

Your next question comes from the line of Scott Fogleman from Crédit Suisse.

Scott Fogleman - Crédit Suisse AG, Research Division

I just have a question regarding -- I mean, you mentioned that Williams Olefins is one of your shippers for Phase 2 of Cajun-Sibon and with a -- and with just a 5-year contract. And with Williams and Boardwalk discussing the Bluegrass project running right in the Eunice, I mean, chances are, if that goes forward, yes, that's not going to be renewed after 5 years. I mean, was the demand sufficient that you don't think that there would be much of a problem replacing them?

William W. Davis

Well, let me just correct the way you stated that. Williams is our market, not a shipper for the ethane on Phase 1 of Cajun-Sibon. So just to set that. And they're not part of the Cajun-Sibon Phase 2 market uptake. The -- 5 years from now, I don't know what their needs for ethane are exactly going to be. I think the focus of the land that they, at Williams, are working is initially going to be supplying the Lake Charles market. So I don't know that it has any immediate impacts on their guys and their needs. We'll see how that evolve over time.

Operator

[Operator Instructions] Thank you for questions, ladies and gentlemen. I would now like to turn the call to Barry Davis for closing remarks.

Barry E. Davis

Thank you. Before we end the call, I want to quickly remind you that in 2013, our strategy has not changed. We're on target to become the best midstream energy solution provider in the industry. We are in the right energy market and we have the right platform, the right opportunities and the right people. Thanks again for participating in today's call, and we appreciate your support of our efforts here at Crosstex. Thank you, and have a great day.

Operator

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a good day.

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