Plains All American Pipeline, L.P. (NYSE:PAA) Q4 2016 Earnings Conference Call February 8, 2017 11:00 AM ET
Ryan Smith - Director of IR
Greg Armstrong - Chairman and CEO
Willie Chiang - Chief Operating Officer
Alan Swanson - CFO
Harry Pefanis - President
Shneur Gershuni - UBS
Jeremy Tonet - J. P. Morgan
Brian Zarahn - Mizuho Securities
Kristina Kazarian - Deutsche Bank
Christine Cho - Barclays Capital
John Edwards - Credit Suisse
Michael Blum - Wells Fargo
Vikram Bagri - Citi
Ross Payne - Wells Fargo
Tom Abrams - Morgan Stanley
Ethan Bellamy - Robert W. Baird & Co.
Jerren Holder - Goldman Sachs
Robert Balsamo - FBR & Co.
Danilo Juvane - BMO Capital Markets
John Kiani - Cove Key Management
Selman Akyol - Stifel, Nicolaus & Company, Inc
Welcome to the Plains All American Pipeline and Plains GP Holdings Fourth Quarter and Final 2016 Results. At this time, all participant lines are in a listen-only mode. And later there will be an opportunity for questions. Just as a brief reminder, today's conference is being recorded.
And I'd now like to turn the call over to Director of Investor Relations, Ryan Smith.
Thanks, Justin. Good morning, and welcome to Plains All American Pipeline's fourth quarter and full year 2016 earnings conference call. The slide presentation for today's call can be found within the Investor Relations and News and Events section of our Web site at plainsallamerican.com.
During today's call, we will provide forward-looking comments on PAA's outlook. Important factors, which could cause actual results to differ materially, are included in our latest filings with the SEC. Today's presentation will also include references to non-GAAP financial measures, such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can be found within the Investor Relations and Financial Information section of our Web site.
Today's presentation will also include selected financial information for PAGP. PAGP does not directly own any operating assets, and its principal source of cash flow is derived from its indirect investment in PAA. Accordingly, PAA's results are consolidated with PAGP's results under GAAP. We do not intend to cover PAGP's results separately from PAA's. Instead, we have included schedules in the Appendix to the slide presentation for today's call that contain PAGP specific information. Please see PAGP's quarterly and annual filings with the SEC for PAGP's consolidated results.
Today's call will be chaired by Greg Armstrong, Chairman and CEO. Also participating in the call are Willie Chiang, Chief Operating Officer of U.S.; and Al Swanson, Chief Financial Officer; Harry Pefanis, PAA's President; and several other members of our senior management team are present and available for the Q&A portion of today's call.
With that, I'll now turn the call over to Greg.
Thanks Ryan. Good morning and thank you for joining us. Before we discuss our fourth quarter and full year 2016 results, I want to share a few comments about the format of today's call and our related materials. First, in late January, we provided a detailed press release, and held conference call to address PAA’s agreement to acquire the Alpha Crude Connector. In connection with that event, we also provided updates on our Permian Basic production outlook, asset sales program, financing activities and anticipated financial performance. To avoid being repetitive, we intend to essentially incorporate that information into today's call by reference. Additionally, we made changes to our presentation materials and conference call format. In brief, we have incorporated a content version of our guidance into our earnings press release and eliminated the separate 8-K guidance information.
Going forward, we also intend to shorten our prepared remarks to roughly 10 to 15 minutes and thus allow more time for questions. The changes are the results of our review of reporting and conference call practices of our peers, as well as suggestions received from several investors and analysts convinced the guidance in the link of our prepared remarks to take into consideration that we released our results on the day prior to our conference call. We also expect some cost savings and internal efficiencies, and also quickly discover that our commercial group favored reducing the amount of potentially competitive information as we are aware that several of our competitors also monitor information we provide.
With respect to the information released last night as shown on slide three, the fourth quarter and full year 2016 results and 2017 adjusted EBITDA guidance are consistent with the information we provided in the press release and conference call held in late January. Fourth quarter and full year adjusted EBITDA were essentially in line with the midpoint of our 2016 guidance. Additionally, I would note that the headline amounts for 2016 and 2017 adjusted EBITDA are above the prior guidance but that these amounts include a modification with respect to excluding DD&A expense associated with equity investments from adjusted EBITDA, and I will discuss that modification in a moment.
Excluding the positive impact of these adjustments, I would characterize the amount as generally in line with the prior guidance at plus or minus 1% variance. As we discussed recently, drilling activities have picked up and there're other very encouraging signs on horizon. But I would note there will be a time delay before our transportation volumes and gathering margins will reflect the benefits of this increased activity. And we anticipate the first six to nine months of 2017 will be challenging. Additionally, as Willie will discuss during his part of the call, we have a number of projects that will be completed around mid-year and position the ramp up in the latter half of 2017.
Accordingly, these factors had been incorporated into our 2017 guidance, and we expect to see a fairly significant improvement in late '17 and fully into 2018. With that in mind, I would characterize 2017 as an event filled year of transition. Included on slide four are important events that we believe will be worthy of tracking throughout the year, and include the completion and integration of the Alpha Crude Connector acquisition, completion of the Diamond Pipeline, several Fort Sask NGL projects and other contracted capital projects, as well as a step-up in minimum volume commitments in several of PAA's pipeline.
Expansion of the BridgeTex and Cactus capacity, which provides PAA with an increase of 110,000 barrels per day of takeaway capacity from the Permian Basin, volume increases on our transportation segment related to Permian Basin production growth where PAA has its largest asset base and the most operating leverage. We also expect to see an easing of margin pressure on certain of our gathering activities as the competitive dynamics of the Permian Basin are influenced by increasing production volumes, relative to the current high MVC to production ratio; and then also closing of $670 million of asset sales currently under contract, and the potential for further non-core asset sales.
The anticipated improvement in operating performance as well as the execution of our financing plan for 2017 should position PAA for a return to targeted distribution coverage and credit metrics in late 2017, continuing into 2018 and beyond. At the end of the year, I believe the most important quantitative measure for assessing PAA's performance during 2017 will be the level of preliminary 2018 adjusted EBITDA guidance furnished in connection with our third quarter conference call in November of 2017. We look forward to providing you updates on our progress towards that objective throughout the year.
With that, I'll turn the call over to Willie.
Thanks Greg. Good morning. During my portion of the call, I'll discuss our fourth quarter segment performance, 2016 and 2017 capital programs, our 2017 full year guidance and I'll close with a few comments on our asset sales program. As shown on slide five, fourth quarter adjusted EBITDA of $600 million was generally in line with expectations. Adjusted EBITDA for our transportation segment was $278 million, excluding the benefit of the equity earnings adjustment, performance was in line with expectations, and volumes were slightly below expectations.
Adjusted EBITDA for our Facilities segment was $171 million, facilities volumes were in line with expectation but performance benefited from more favorable market conditions at hub services at our two gas storage facilities, as well as lower operating costs. Lastly, adjusted EBITDA for Supply & Logistics segment was $151 million. Although, volumes were largely in line with expectations, performance was lower, primarily due to less favorable NGL market conditions than forecasted.
As shown on slide six, we continue to progress our multiyear capital program. In 2016, we completed approximately $1.4 billion of expansion capital investments, including key projects incurred by MVCs and other contractual support, such as our Permian Basin state-line project, our Red River and Caddo pipelines and phases of our Fort Saks NGL hub expansion. We anticipate $800 million of CapEx in 2017 as noted in our January 25th conference call. The major projects in our 2017 capital program include the Diamond Pipeline JV, build-outs of the Permian Basin area gathering systems and connections, including the Alpha connector gathering system and our multiphase project at Fort Sask. In service timing information for our larger projects are included on slide six as well.
Slide seven contains the modified financial and operating guidance table that we have started to incorporate into our earnings press release. It shows our 2017 adjusted EBITDA guidance of plus or minus $2.36 billion. This reflects continued growth in our fee-based segments, including an increase of 10% from 2016 to 2017. Our full year 2017 segment guidance is shown on slide eight. We expect our transportation segment adjusted EBITDA to increase approximately $174 million or 15% over 2016. This is driven by combination of Permian production growth, our acquisition of the Alpha Crude Connector, the benefit of 2016 and '17 capital projects, and MVC step-ups on several of our pipelines, all of this more than offsetting the impact of asset sales.
Specific to our Permian growth, we're pleased to report that the FTC has granted early termination of the Hart-Scott-Rodino waiting period for the Alpha Crude Connector transaction, and we expect to close in the next week or so. In addition, we have approximately a dozen bolt-on gathering systems and connection projects in progress, which we will complete mid-year or shortly thereafter to support meaningful anticipated production growth in the second half of 2017. Additionally, PAA's STACK joint venture pipeline is strategically located, and will benefit from the anticipated production growth in the STACK as well. We forecast 2017 performance for our facilities segment as relatively consistent with 2016 levels. EBITDA growth is driven by additional U.S. crude storage capacity that we placed into service in '17, as well as the completion of Canadian NGL storage and fractionation projects, offset by the impact of recent intending asset sales.
In the U.S., we will add roughly 2 million barrels of storage in Cushing, St. James and Patoka by mid-year. In Canada, the Fort Sask expansion projects include NGL storage caverns being commissioned throughout the year, and the completion of our fractionator expansion. These projects are supported by MVC type storage contracts effective in the fourth quarter of ‘17, which will drive significant adjusted EBITDA growth in late ’17 and beyond. Overall, we expect our Supply & Logistics segment to be relatively consistent with 2016 performance. However, we currently anticipate that the first half of 2017 will continue to be challenging with crude oil and NGL market conditions improving in the second half of the year as aggregate production volumes increase and margin pressures ease.
Now, just to reiterate, we expect performance improvement to be weighted towards the latter half of 2017 as projects are completed and volumes ramp-up. We also expect competition to remain intense for the first, six to nine months of the year. With that in mind, we expect the first quarter to provide approximately 23% of the 2017 full year adjusted EBITDA -- EBITDA guidance of $2.36 billion. Also shown as a directional illustration that reflects the inherent seasonality of our NGL business and the expectations for growth in the latter half of 2017.
For a quick recap of our asset sales activities, our program totals -- our program total currently sits at $1.2 billion, of that $550 million closed in 2016, and we're expecting $670 million to close in the first half of 2017. We've already closed one transaction and we've just received notice that the FTC has granted early termination of the HSR waiting period for another transaction that will close shortly. Together, these two transactions represent approximately $160 million in proceeds.
We will continue to evaluate additional opportunities to high-grade the portfolio of our pursuing incremental non-core asset sales and strategic joint ventures. And I also note that we've been very pleased with the continued progress on previously mentioned cost cut reductions and efficiency initiatives. With that, I'll turn the call over to Al.
Thanks, Willie. During my portion of the call, I will discuss our capitalization and liquidity, financing activities, and 2017 funding plan, as well as several accounting related matters. As shown on slide nine, at December 31st, PAA had a long-term debt-to-capitalization ratio of 53%, a long-term debt-to-adjusted EBITDA ratio of 4.7 times and $2.4 billion of committed liquidity. We had $400 million note, mature in January, so liquidity after repaying the note was $2 billion. PAA ended in 2016 with long-term debt of $10.1 billion, which represents a decrease of $250 million from year-end 20156, despite assuming $642 million of debt in connection with our simplification transaction completed in November of last year.
As we discussed in detail on our recent ACC acquisition conference call, we plan to fund the acquisition, and our current 2017 expansion capital program with proceeds from asset sales, additional common equity and repaying cash flow is such that we expect to end 2017 with a long-term debt balance at or below the year-end 2016 level. We recognize that our leverage is elevated relative to historical levels and our targets. However, we believe that we are currently in the trough of this industry cycle and the combination of significant earnings growth we have in our asset base as projects are completed and the industry recovers. And the solid funding plan we have for 2017 that we will see meaningful improvement in our leverage in the second half of 2017 and into 2018.
As shown on slide 10, during the fourth quarter, we sold 16.4 million units through PAA continuous operating program for total net proceeds of $516 million. Total proceeds for both the PAA and PAGP programs have totaled approximately $1 billion since August 2016.
I will now shift over to several accounting matters. As Greg indicated in his opening comments, our adjusted EBITDA metric have been modify to exclude depreciation and amortization expense, associated with equity method investments. Previously, PAA’s adjusted EBITDA included net income from non-consolidated subsidiaries, which was after deducting DD&A. These amounts were fairly small up until last few years, but have grown recently as more and more projects have been jointly developed, and is expected to grow further as additional projects, like the Diamond Pipeline, are completed.
This adjustment is consistent with the concept of cash earnings available for distribution from these investments and brings our adjusted EBITDA presentation in line with methodology, used by our peers. It does not impact DCF as we only include actual cash distributions received from equity method investments in DCF. Additionally, PAA’s fourth quarter and full year 2016 GAAP earnings include a mark-to-market derivative loss of $227 million and $374 million respectively as reported in the selected items impacting comparability table in the press release we issued yesterday.
We use financial derivatives to hedge purchases and sales of physical commodity, and to hedge inventory. To the extent we have mark-to-market derivative losses we have offsetting gains associated with the anticipated physical transactions that are being hedged. GAAP requires that the unrealized or mark-to-market gains or losses on derivatives are recognized in earning, but does not permit the recognition of the offsetting gain on the hedge physical transaction.
To provide some additional color on the full year 2016 derivative loss of $374 million, approximately 75% relates to mark-to-market losses on open derivative as of year-end, which are primarily associated with approximately 37 million barrels of hedged crude oil and NGL inventory. The balance of the loss is attributable to the roll-off of gains from 2015. The mark-to-market loss is non-cash and will roll-off upon the occurrence of the physical -- the hedged physical transactions over half of which will occur in the first quarter of 2017, and nearly all of which will occur in the next twelve months.
I would also note that when we incur mark-to-market losses, we are generally required to deposit cash margin with our querying brokers. At year end, we had $410 million of cash margin deposited with our querying brokers. We fund margin deposits with borrowings from our short-term hedged inventory facility, which is repaid with the proceeds generated when the hedge physical transaction cash settled along with the associated financial derivatives.
The final accounting item I will touch on is our current income expense for the quarter, which was $17 million above guidance and negatively impacted DCF. This was the result of a flip between current and deferred taxes as a result of a year-end true-up in our effective tax rate calculation.
With that, I'll turn the call back over to Greg.
Thanks Al. We appreciate your participation in today's call and for your investments in PAA and PAGP. In past calls, we have run out of time before we run out of participants in the queue to ask questions. Accordingly, one of our objectives with our new format provides more opportunity for more participants to ask questions. With that in mind, I would ask you to please abide by rule of one question and one follow-up question, and then queue up again if you have additional questions.
Operator, we’re ready to open the call up for questions.
Certainly, thank you. [Operator Instruction] Looks likes our first question comes from the line of Shneur Gershuni of UBS. Your line is open.
Q - Shneur Gershuni
Just one question and one follow-up. First question, I think, you addressed this in your prepared remarks. But I just wanted to clarify how you’re thinking about the guidance for this year in terms of your active rates. When I look at it, the transportation guidance was really positive and encouraging but the S&L was a little less. So when we think about your expected 4Q '17 earnings run rate, which is quite healthy compared to the rest of the year. Is it that transportation up for an even bigger 2018, because exit rate is fairly strong or is it really S&L that’s going to be the driver in 2018 where it first returned to a more normalized level. Just wondering how you can -- if you can just give us a way to bridge your exit for 4Q '17 as to how we would think about 2018?
Shneur, I think you put your finger on the preponderance so that is going to be on the fee based activities. We certainly have some seasonality and we’re expecting some market recovery in S&L in fourth quarter. But we’re not expecting anywhere close to return to the margins per barrel that we saw three to four years ago. But we do have quite a bit of volume pick-up. So, even at lower margins but higher volumes in S&L, we do have some contribution there.
So, I think when we think about 2018, we’re not giving guidance to that level yet. But our preliminary internal look is that we might see a 10% increase in S&L in 2018 over 2017. But because of the number has gotten to be where it's relatively small, you’re talking about $35 million or $40 million pick-up in '18. So the bulk of what we’re looking for into the strong quarter is going to come from the fee based activity. And again, we’ve got a lot of projects, as Willie said, that are coming on mid-year that will ramp up. I mean the minute you put an asset in service, it does -- it just turn-on in full rate. So, we’re seeing that build-up in the fourth quarter. And then we’ve got projects that finish in the fourth quarter that set up 2018 going forward. And so, if you detected a sense of significant enthusiasm above the fourth quarter '17 and full 2018 that was because that’s exactly the way we feel.
Shneur, I would add the big project is coming on, it's the Diamond Pipeline, finishes year-end '17 and set well for 2018, because we got in on that.
So '18 transportation is going to be pretty good too. And as a follow-up question, I was wondering if you can talk about your expected equity needs for the year, and how you expect to meet those needs. Given the Moody’s recent comments, does that cause you to accelerate your plan, or is asset sales still part of the plan? I was just wondering if you can give us a little bit of color on how you expect to meet those needs.
Sure. We remain very confident in our ability to execute on our 2017 funding plan. With regard to the equity component of it, we've been very pleased with the execution, effectiveness and efficiency of our ATM programs, our continuous operating program. They've been very cost effective. And clearly as you can tell, we've been able to raise large amounts in fairly short periods of time. We do want to retain as much flexibility as possible as we develop our plans and execute in the most cost effective way to finance our growth.
We will look at the asset sales, as you mentioned. And depending on those might fine-tune the amount of equity, we're thinking of. Clearly, if you run the math on the information we've provided in the ACC call, the amount of equity if fairly modest relative to the size of the Company, it's probably plus or minus 4%. So we don't think it's a major issue there. You did touch on the rating agencies. Clearly, we will be considering rating agency considerations as we look at the asset sales and raising our equity. So, hopefully that address your question.
And the next question comes from the line of Jeremy Tonet of JPMorgan. Your line is open.
Just wanted to touch on the Supply & Logistics a little bit more, and just wondering if you could frame for us how you see that guidance upside versus downside risk. And then kind of also 1Q '17 versus 4Q '16, what are some of the deltas there, because it seems like that's stepping down a bit there.
We're continuing to see, and as equally enthusiastic as we are about our fee-based activities going into 2018m, we're cautious about the first six to nine months. Jeremy, we just seen a intense amount of competition. Some of the dropdown in the first quarter is there were some weather related issues. I think you may have heard some producers, especially in the Williston. And we factored in what we think is the right adjustments to reflect reductions in volumes. And also we're going to see intense competition in some of that area.
So, whereas before we would have told you and we still think long-term this is the right answer. We think supply and logistics probably has a baseline around $500 million. It's probably, for different reasons than we would have thought three or four years ago, because we've seen a significant increase in volume and expect to see it continue in volume, especially in the Permian Basin. But margins are just unbelievably compressed. We've probably given 65%, 70% plus of the margin just because of competition out there.
So, do we have some wood to chop in S&L this year? Yes, that's why we're talking about being cautious on the first six to nine months. We do see the volumes rising to a level by the end of the year that the ratio of production to what we call MVC, and we include in that, Jeremy, the local refining because as a practical matter, even though there may not be a commitment, they has to buy their barrels in order to run their refinery. So we include that as kind of in the contractual almost obligation.
That ratio starts to improve quite a bit to where you don't have as many parties trying to compete to fill-up empty space that they're going to pay for, regardless. And we also see some, and going into '18, some MVCs roll-off at a higher tariff. There'll be some MVC commitments, ours included that roll-in at a lower tariff and that should affect competition a bit. But again, as we look out, we think we're probably going to see a base level of $500 million plus or minus, but we probably may not see it until we get beyond 2018.
So when Shneur asked his questions earlier and was talking about the upside, I think we’ve got $365 million in S&L for 2017 in our guidance, and if we're up 10%, we're at $400 million. So, we're still short of the $500 million. But again what we're seeing is most of our growth is going to come from the fee-based side of it, underpinned in a material way, by contracts that we have. And then, obviously, we've got incremental capacity on the likes of Cactus and BridgeTex that had decent rates that as we see volumes come up, I mean, bottom-line is they need to ship on just about everyone pipeline coming out of the Permian. So we expect to get our share there.
And then maybe just the last one, picking up on that point, when do you see the time frame of when those pipes could fill up? And are there any other brown-fields where you could add a little pumping or something else to increase your takeaway capacity of the basin?
I don't think there's going to be a large opportunity again for its existing capacity. I think most everybody has tweaked the capacity increases that are available. We think second half of next year of 2017 you could start seeing enough crude. We say in the $55 price environment, and the rig activity at the levels we're seeing today. We think by second half of the year, we should start seeing more of a balance between the MVCs and the crude available for, basically for the market.
Your question, I think, on takeaway capacity. If because of the projects and enterprise has coming on in '18, and I think they've announced they're going to go ahead and go straight to the 450,000 barrels a day, we don’t see a shortage of takeaway capacity. But the margin -- the amount of headroom, if you will, between production and takeaway gets tighter and that should obviously improve the realizations on the gathering margins, and potentially even some of the realizations on the pipeline tariffs. And so, we do think there is -- the bottom line is, Jeremy, we think they can produce as much oil out of the Permian as they want to. It’s a matter of rigs. It's a manufacturing operation. Think of it like a short cycle oil-sands deal. I mean it’s just replete with resources and they're getting better and smarter at how they get it out.
So we've got it forecasted to go to roughly 3.5 million barrels I think by around 2020. If you increase the rigs by 50 plus, you could move that number forward quite a bit. And obviously if you decrease it, you can move it out. So, we think we were looking at options already for how we make sure that producers can move their oil probably not by the end of '17 but by the end of '18. There may be either new builds or loops. So when you mentioned brown-field, I think you were referring to like adding pumps, but you can add loops and do it much more effectively than you can building true greenfield pipeline.
Is there anything else you could share with us on that loop factor? The Cactus upsize surprised us a little bit. So we're just trying to get a feel for what could be out there.
I would say this. I think there is a lot of missile targeting towards the Gulf right now. Certainly, we've got one of the great ones going into the Cushing area. And doing something with that pipeline would make a lot of sense.
And there is some bottleneck constraints at between Midland and Cushing. And we can create some additional capacity by segment of that line.
And our next question comes from the line of Brian Zarahn of Mizuho. Your line is open.
I just have one question, Greg, and 10 parts. 2017 transportation items, can you give us a little more color on the 600,000 barrel a day volume growth. I mean is that just pretty much on the Permian except for the new projects? If you can elaborate a bit on that and where you expect to end exit rate volumes in 2017?
Brain, this is Willie, I'll make a comment on that. When you look at our volumes, make sure -- for a remainder that they’re tariff volumes. So, if you look at the growth numbers between the growth numbers in the Permian that we expect and the multiple volume, the tariffs that we get on it, there is a multiplier effect to combine that with the step-up in MVCs on one of our large pipelines, that's still a significant portion of that. And everything else is optimizing around what we get, trying to give as many barrels into the system. And those are the two big pieces.
So, to kind of elaborate on Willie's, so if we make the barrel from the well-head the Midland and that's a tariff moving on the gathering barrel, and then we move it on a takeaway barrel that's an account that barrel flat. So, it's not necessarily counting that we get 600,000 barrels, 88s of all the production in the Permian. But in some cases, we may touch that barrel not only 2 times but 3 times, and possibly even 4 times in certain areas.
I guess any comment on where exit rate volume relative to total volumes total relative to your average?
We're going to have an Analyst Day on May 24th, and I think we're going to be able to roll-out some additional thoughts on an area-by-area basis, and we certainly intend to do that at that point of time. And I mentioned earlier part of our consideration for how we modified our disclosures was our commercial gas kicking us under the table at the time we shared too much information. But I do think by the time we get to the May 24th Analyst Meeting, we’ll be able to share some data there.
Some of that growth is also the offices that we acquired.
And then I guess the follow-up would be, understanding lot of the production is manufacturing type process. But there are cross-currents. So, how do you assess the efficiency gains relative to high inventories and some creeping oil services cost inflation. I mean how could that potentially impact your production growth outlook?
So, that is a great question. Clearly, we’re all feeling better in February of 2017 than we did in February 2016, probably because of OPEC change in probably past year, and so far their actions, which have been supportive. I think as we go forward, and we obviously do our projections on a basin-by-basin and really take it down to county-by-county basis. We think the Permian, quite candidly, no matter what the world wants in terms of incremental production, is probably going to raise its production, because the economics are there even at lower levels. And certain of the areas that we looked at like the Northern Delaware, I mean the rate of returns are almost triple digits. And if you cut the price of oil and the price of gas and you actually assume lesser efficiencies, you’re still dealing with something in the 30% to 40% range.
So we expect Permian to basically persevere. The level of production, obviously, will be dictated somewhat by the amount of cash flow they have to reinvest. But some of the recent players in there are more committed long-term. I mean, obviously, ExxonMobil, just made a significant investment. And I don’t necessary think there’re going to be cash flow constraint and if they are, they probably do an asset allocation or capital allocation that will favor the Permian.
I would also just point out that that doesn’t mean that people that don’t -- production in Permian and production in Eagle Ford that implies that the Eagle Ford is not economic. It not only these process, but even lower. It's just not as economic. So, I believe our focus on the Permian, where we have our largest asset-base and our most operating leverage, we trying to sensitize that to what happens if prices come down. And we still think we see continued momentum in the Permian. It may slow the progress, but I don’t think it's going to stop the progress.
And our next question comes from the line of Kristina Kazarian of Deutsche Bank. Your line is open.
So, a clarification question for you, I know you touched on this on slide six. But how should we need to be thinking about MVC levels on these projects, especially in context of that $174 million number on slide eight. So, I guess there’s you list a bunch of bullets below the $174 million. How does the MVC make up half of this, and what's the breakdown of those bullets?
Just on slide six, the first -- the Diamond Pipeline is really not a contributor of any significance in '17 at all. So the other systems that we’re bringing online, and the MVC step-up; so we're finishing the Red River; we're finishing the Caddo Pipeline in 2016, so which really ramping up in '17. Those are supported by MVCs. Our Cactus pipeline, there is a step up in MVCs on that for a couple of our customers. And so, Saddlehorn just came into service, and we get a full year of it and those have been effectively MVCs. So, there is a lot of underpinning to the uplift. It's certainly not 100%, I haven’t calculated exactly what it is, but we certainly run flexes on our forecast as to what happens if and feel pretty good about our outlook by the time we get to the end of ’17 going into ‘18. Again, I would tell you, we're cautious about the first six months, and we’ll measure ourselves with how we provide guidance, really for '18, is to how well we’ve executed on our side and how well we've anticipated the volume growth. But a large part of that that we discussed already in Jeremy's question is really underpinned by MVC's.
I was quickly doing math here, as Greg was talking, to give you little more color on that. On projects start-ups, MVC step-ups, which we were very certain of, it's well more than half of that number that gives you a little more color on that.
And then, Al, maybe so on one of your way as well. Can you touch on, on slide nine you talked about the long-term leverage target of 3.5 to 4 times, in your mind. When is that reasonable to occur?
If you just do the math by -- we've stated we would intend to exit the year at or below the $10.1 billion, and with the cash flow growth in our EBITDA that what we’re showing on that is a LTM or look back number. You can calculate it at year-end '17 and see we’re slightly above it. And so, we would expect to be at or inside that range in '18 with the momentum.
Our next question comes from the line of Christine Cho of Barclays. Your line is open.
I wanted to start on the S&L guidance this year. Volumes are up about 100,000 barrels per day year-over-year. Is that mostly driven by your recent acquisition, or are there other large footprint takes in there? And then with respect to the adjusted EBITDA per barrel coming down, is that mostly the assumption of more shorter haul volumes or should we assume longer haul spread get worse before it gets better in second half of this year? I know there were some scheduled MVC ramp-up across the industry. Wasn’t sure if such an increase would be steeper than what the production increase could end-up being, which would put more pressure on the spread.
To address the first part of your question, so the increase in volume is not really -- and in that part it's not related to the ACC acquisition. It is related, in many parts, to the expected volume increase we expect to see primarily in the premium. Also by some reductions quite candidly in other areas, because there will be a sag in certain areas in the first six to nine months of the year. I think when you -- well, without getting too granular, the volume growth is associated with just the volume growth, primarily in the Permian and the margin pressure is because we expect to see intense competition continue for the first six to nine months.
And then NGL, we’re assuming -- we’ve got the expected volumes that we bought, last year we get a full year this year. And those margins per barrel are going to bring your average down little bit from where it was too. So, you’re right, it's a cascade of things. But I would say the overall theme is when you allow -- it's not ACC, it does include some of the Specter acquisition for a full year. And then we’re candidly marking to market our expectations with respect to what volume growth -- gathering margins are going to be, and we hope we get it right. It's pretty intense out there.
And then just as a follow-up, the exit rate for 2016 in the Permian was 2.1 million barrels per day. You expected to be 2.5 million at this year end. If I would to take an average of that, for the year, it's 200,000 barrels per day. So, if I look at your 100,000 barrels per day, you’re assuming a little more than 50% market share of the average of the production increase this year. Is that an accurate statement?
No. Are you just talking about back to the 100,000 on the gathering?
Yes, keep in mind, again, we referenced to the fact that you’ve got the full year of the Specter acquisition.
I think, in general, and we try never to talk in terms of market share. But we have a big footprint out there, and we’re a major player. But it's probably more than 25% range.
We have some volume increases in STACK and SCOOP as well. So that would be second part of it -- Permian to be the largest, as Greg mentioned, the NGL ramp with the Specter assets.
I might just mention I mean, on the STACK, we're equally enthusiastic about volume increases there. I mean, it shown to be probably second only to the Permian in terms of growth. Percentage wise, it's a bit much higher. For us, quite candidly as a logistics company, it's so caught and picking close to the market, though we don't make as much money on it as we do on the ones that are farther away.
And our next question comes from the line of John Edwards of Credit Suisse. Your line is open.
Greg, just if you can help us understand the Permian numbers that you're putting up, because if I'm reading the fourth quarter '16 numbers right. And I guess this has to do with the multiple touches on the barrels. I mean you're actually reporting a higher volume number than I guess the entire Permian production. So going forward, I mean, is there some multiplier we should think about relative to the Permian production? So, if you're exiting at around 2.5 in '17, would that imply maybe 5% or 10% above that, because of the multiple touches. Or help me think about that better for helping us model out our volume metric outlook?
John, I'll acknowledge that when we changed our guidance detail for all the right reasons, we recognized it's going to force some model rejiggering. Quite the best thing it is trying to deal with that little bit offline and talk about some of the different components as you try to model that. But yes, we're not capturing over 100% of the volume growth but we do have multiple touches. And we also have some MVC step-ups in there. So to some extent, volumes that might have been going one direction may go a different direction there, and it'll change the margin and could change the volume that comes-off of third party land.
And John, there's certain movement there where within the Permian number, we would have three different tariffs moving it. So there's a multiplier effect as you indicate. You could have one tariff movement on the gathering side, one intra-basin to get to an export pipe, and then the export pipe out. And if the barrel went on tax issue it actually has another half movement then in our Eagle Ford numbers. So that one the nature of your question, but on some of these, you do get actually three different tariff -- independent tariff movements and that would be three barrels.
Just of high level, so if you're thinking say 2.5 exit rate '17, I mean should we be thinking Permian volumes on your pipes of like of like 2.7, is it add to 100 -- I mean just some rule of thumb, I'm trying to figure -- maybe I can take the this offline, I am getting granular here…
Yes, we'll take it offline. But your question is very valid and probably a good exercise for us to try and -- because we can do a look forward on our numbers too to find out if we gave you a number this year, is it going to be applicable next year. We’ll consider that and then circle back around to you.
So, then just the other questions, just sort of -- just backing up into the equity needs. So our calculation is sizeable amount of equity in '17 to keep long-term debt at the 10.1 figure, maybe our numbers are off. But it's a very large number. And I just wanted to get any additional comment you could add there would be helpful.
I mean, a very high level way of attempting to calculate it would be ACC in our expansion capital program of equals $2 billion. We've got just under $700 million of asset sales in '17 that would lead you before retain cash flow. And then you also look at, we completed already about $190 million in the first quarter in January. So my guess is if you're walking that math, you get right around the $1 billion of equity. Clearly, if we sell some more assets that number could go down.
If we do all -- the $1 billion of equity that I just walked you through was what we just completed in five months on the ATM programs. But notably in that the PAGP program was actually only active for two weeks of the five months. And then clearly we have access as we mentioned earlier to we think to the underwritten market or an overnight market if we choose to go that way. And so we think it's actually very modest number relative to the size of the company and what our track record has been.
And that's where, I think Al earlier mentioned, John, I mean you're plus or minus 4% of our equity market cap. So, it's not going to have a material effect on -- shouldn’t the market and shouldn't have a material effect on DCF per unit as we de-lever a little bit more aggressively. As we discussed with rating agencies just to make things happen positively earlier. So, I think it’s again a very valid question just in context of the size of our Company it's not that much in terms of overall either dilution or execution risk.
And our next question is from the line of Michael Bloom with Wells Fargo. Your line is open.
I guess a question for Al. Just want to know will the rating agency to be giving you credit in the way you calculate metrics based on your new EBITDA calculation, because in rough math, it seems like it’s going to add about $50 million to EBITDA in 2017. So just want to make sure I'm looking at that correctly. And then will the rating agencies looking at that ways were up?
Short answer is yes, we believe so. We think this is actually what others are doing. We looked at a number of our peers. Quite frankly, we probably should have made this adjustment before. But yes, we believe so, we had actually walked them through this before we released earnings back when we were talking with them with the ACC acquisition.
And the next question comes from the line of Vikram Bagri of Citi.
In the past, you've highlighted $300 million of upside from Permian transportation and facilities assets. I imagine that the number is closer to $400 million after the ACC acquisition, two questions on that. With Bridgetex & Cactus expansions underway, how much of incremental CapEx is required to achieve that EBITDA number? And two, once Permian production increases to 3 million barrels plus and takeaway gets tight, how much of that EBITDA gets captured? I'm trying to understand if you’re breaking anything for trucking and real assets in that $300 million upside?
Yes, I think the best thing we can do is that number was, I think we provided -- you’re breaking down the upside that we calculated back in the middle of 2016. I think the best thing we can do rather than trying to answer it and then have to recalibrate it in May is kick the can down the road a little bit, because we can provide the full presentation of that, and have a chance that if demonstrated against the most current information at the time we get to the May conference call.
I hate to dodge your question. But I think, directionally, we should expect to see volume-metrically all the things you just said to be true. From a competition standpoint, I think you’re going to see -- we’ll interested and see how overall transportation tariffs fair-out as the new capacity comes on. So, we’ll give you a better calibration. There is some gives and takes, and I think that is probably up. But I don’t want to give you a precise calculation because I think there is also some takeaway.
And as a follow-up in S&L segment, it sounds like the derivative contracts on interest assets rolled over last year. So, are you planning to layer on more hedges to protect the margin there? Or is that un-hedged currently?
We hedge most of the margin on the frac spread at the input facilities. But it's an ongoing program we do with the assets that we had prior to the Specter acquisition. And we continue that program with the Specter acquisition.
Your next question is from the line of Ross Payne with Wells Fargo. Your line is open.
The question that I’ve got is operating leases is in Moody's calculation. And can we expect operating leases to come down as you let some of the railcars roll-off? And then finally, if you could give us a little bit of color on some of your conversations with Moody's that you had post the announcement of the acquisition? Thanks.
Ross, the short answer on the operating leases is, yes. About over half of our railcars are NGL related, but on the crude side, we will see those numbers come down as they roll-off, basically like a bond maturity ladder, so to speak. With regard to Moody's, I think, it’d premature for us to comment specifically on our discussions with them. Clearly, you’ve read the right-up that they put out. We continue to have discussions with them as they work through their review. We want to retain the Moody's IG rating, and we intend to take all reasonable steps to do so. But I think it would be premature to comment on some of those discussions.
Ross, I would just add, I mean we've obviously got a lot of harrows in our quiver as we go through the year. Al has mentioned assets sales. There is also, as you look forward, and I the people like to do a trailing LTM or current quarter annualize. But when you got a major capital program that you’re finishing and you've also got volume growth coming through MVCs going forward, we hope as we go forward, we’ll take steps that will solidify their view of our current credit, but also that the outlook will focus little bit on where we're going. Because we're going to turn that finance capital into cash flow. And that’s an important factor, as they look forward.
You add to that things like the preferred that we did which get deems as I think for about $800 million plus or minus of debt. We view it as purely equity. But nonetheless that’s in there calculation, that becomes convertible at the end of ’17. And it wouldn’t cost us any equity to our shareholders, but it would just a conversion of that would reduce debt by 0.3 turns. So, there is some other things out there that is go through '17, reinforce the concept that '17 is the year of transition, not only for performance for our stake equity holders but also for our debt holders.
And the next question comes from the line of Tom Abrams of Morgan Stanley. Your line is open.
Let's go to Canada, this is the question that you may also want to kick to May, but I’ll ask it generally, so maybe you can answer it. I'm thinking about Canada and all the things that are going up there was Trans Mountain and Energy East, and Keystone XL. And just the production keeps growing, may be some bottlenecks on visual gas, so it's a lot of things going on up there. Is it a place where, at the end of this decade, you could be spending several hundred million dollars on infrastructure?
Well, you’ve read my mind when you say it's probably some way how to kick it to May. But I do think there is opportunity up there, and our assets put us in some of the right areas to be a participant in some meaningful projects up there. I think we’re probably one of the largest NGL players up there, and if some of this production, especially there is a lot of gas rich areas with a high liquids content, bodes well for that. The rate of development will dictate probably the pace of that infrastructure expansion. We're not the company that’s going to get trying get in front of, and compete with the Trans Mountain or a Keystone XL or an Energy East. But we are the company that could help provide some of the critical plumbing to be able to handle the product flows to allow that crude to get to the right pipeline.
Next question is from the line of Ethan Bellamy of Baird. Your line is open.
What’s the crude oil assumption behind your guidance, I thought I heard you say 55 bucks. And Greg could you talk about how you see prices playing out? And then I think it’s a slim possibility to what would the border adjustment tax do to your business?
In our assumption for purposes of trying to assess development activity, we're still in roughly $55 a barrel. And to put little bit of a finer point on it, with the exception of the Permian, we're basically assuming that producers grow within cash flow. So, if that $55 turned out to be $50, we would moderate our assumptions of the rate of development. If it went up, we would expect them probably to get a little enthusiastic. In the Permian, I don’t think we took a very long lead off first, but we assume basically that they would out-spend 5% in the aggregate of cash flow. And it's the rate that we're seeing right now that may be a conservative assumption. Again, I don’t think it affects our 2017 performance, but it may put a big smile on our face in 2018.
As far as prices, we're we don’t have any better crystal ball, in fact we have a lot of data. And there is a trade-off out there. OPEC needs to do, what they said they are going to do. And if they do, we should come into alignment somewhere in 2017. Inventory levels are high, but they tend to be concentrated in the U.S. And even if more so but we’ve also become probably the manufacturing center for gasoline worldwide. We’re exporting probably this year total products, including propane about 1 million barrels a day of what we did last year, about half of that is gasoline. And so you need more inventory to be able to be an effective manufacturing operation.
As far as the border adjustment tax, I got to say, it's an average so many things about how it's going to work, or how it's not going to work, ask them to come in. I think we’re just going to stay tuned. And once we think it will have the biggest impact on obviously and these are refiners unless there is an exclusion there, how it affects them will create both opportunities and headaches for mid-stream. But we get paid to move barrels. And whether it's an imported barrel or a domestically produced barrel, I think we’re indifferent. Obviously, we want to see as much in Permian as possible. But as I said in my earlier comments, we think the Permian probably perseveres, almost no matter what happens with price, but we’ll supply demand balances, because it's just such an economic barrel.
The next question is from the line of Jerren Holder of Goldman Sachs.
What's your outlook for U.S. like crude exports increasing, and how you’re positioned to benefit, if and when, we get to that point?
As we get our long range planning, we certainly see a lot of production coming out of the Permian that if you start to get out to 3.5 million barrels a day and we’re at 2.1 million that means 1.4 has got to go some place other than Midland. And most of the pipes are pointed toward the Gulf Coast that’s why we think there may be a support for something going to Cushing, which complete the Midwest. If you look at the barrels that are going to converge on the Gulf Coast, not only on the Permian but dapple. The Gulf Coast itself has been increasing of late, tells us that you’re going to need more and more exports. And we have some dock capacity. We’ve got some under development. And we’ll probably provide a better picture of our views on that, and it's potentially impact obviously in the maybe Analyst Meeting.
And as a follow-up, can you remind us as you raise equity on PAGPs ATM or COP. How does that process work? You’re just simultaneously buying PAA units. Can you remind us how that works?
Yes, that’s correct. Basically, the net proceeds realized from PAGPs sale by a common unit from PAA on a one-for-one base here.
And the next question is from the line of Robert Balsamo with FBR.
Just on the housekeeping stuff last, on the maintenance CapEx, in your DCF guidance. I know it's just going down, it seem to be going down year-over-year and continuing that trend. How do we think about that moving forward? And is that still just a tightening during the down turn, expected to do increase in the future, just general thoughts on that.
Well, first and foremost, we’re always trying to do the right thing on maintaining our assets. I think the step down that you’re seeing is a result of some of the assets sales that we’ve transacted on. A lot of the assets sales may have been a bit higher on maintenance capital in the rest of the system.
And then the other part of that, DCF guidance, you said other entities are small contributors. But just what goes into that line item that's left in the DCF currents and other? It seems a little bit different from the previous years.
The two adjustments that are -- two things that get aggregated into that other are, there's still a difference between actual cash distributions received on the joint ventures, the equity method joint ventures that we discussed, and the adjusted EBITDA from those joint ventures. So, my comments in the prepared remarks about the adjustment we made get those two closer together, that's why you actually see that number been smaller. And then the second part I think it's aggregated there is we do have one consolidated entity that has a partner in it that we make distributions to. But the primary reason why that's pretty tight is our adjusted EBITDA and the cash received, that's the biggest part of that adjustment.
And the next question is from the line of Danilo Juvane with BMO Capital.
Just one follow-up on the Cactus and BridgeTex expansions. When do you guys expect to get any committed shipper of volumes on those expansions?
Well, we're in discussions. I don't know that we can actually get you a good forecast. Clearly, we have committed shippers on the base level that we already had. What we're doing in part is ramping up in advance the volume growth that we see coming. And whether that means we get spot walkup shippers as the volumes grow or we get people that are trying to secure perhaps rates that are below the walk-up ride and getting start into a market, and that will just play out over the next six to nine months, I suspect.
And those were low cost expansions. We need commitments to fund those expansions.
And I guess as I relate that to the guidance that you provided for Supply & Logistics this year and just going forward. To the extent that we continue to see additional either loops or expansions of existing systems. How does that translate to you getting back that $500 million base line long-term?
Well, I think that the $500 million base long-term with the Supply & Logistics is independent of the transportation volumes. It's really more associated with the growth in the production volumes that is not committed to other pipelines, and therefore not been bought at a loss, if you will, to try and subsidize the amount they would otherwise lose on the MVCs. And so, again, hopefully we're being conservative, but I certainly think we're being realistic. We're not anticipating that to happen in '17 for sure or '18 it's probably beyond '18 event. I don’t know if that’s '19 or '20. And so my earlier comment was this if Supply & Logistics picks-up 10% in 2018 that would put us at $400 million, so we'd still be a $100 million short. What's going to drive our performance is going to be the fee-based aspects of it, which is tied to combination of MVCs and visible volume growth that needs takeaway capacity that we can provide.
And the next question is from the line of John Kiani of Cove Key Management. Your line is open.
How much do you currently have outstanding under your commercial paper program and what would happen, was that in the event that you were downgraded to sub-investment grade by Moody's, and lost your prime commercial paper rating, please.
We fund both under our CP program and our credit facilities. The reality of it is for probably most of the last year, the interest savings of CP versus our credit facilities is very small. And as you know, you have to have a 100% back-up for a CP program. So the reality of it is, is if we lost access to the CP market, there would be no material impact at all on the Company, either in our cost or our liquidity and ability to fund the Company.
And just on that same line, is there been any change, just even on the margin in your desire to maintain the investment grade rating. I think the comments you made earlier were helpful that you said all you’ll take all reasonable steps to do so. But your earlier comments, for example, in the third quarter call seemed a little strong. I just want to make sure I'm not misreading you where you said you were steadfast in your commitment to the investment grade rating. And you're committed and intend to maintain it. So is it a situation where if the cost is just too onerous, from an equity issuance perspective, that you're willing to let it go now? Or do you still stand-by your earlier thoughts that you really do whatever it takes, please?
Let me just say as CEO, we are committed to investment grade. There has been no deterioration in our passion to maintain that. I think what Al is saying is if we had to cut-off our head to try and maintain something, that wouldn’t make a lot of sense. But even with more prudent actions, and understandably people can disagree on what those are. But no, there's been no deterioration at all in our commitment to the investment grade, it maintains in all three agencies.
And clearly, I agree with what Greg just said. Part of the comment there is, and we touched on this on our ACC call, our recent conference call, you might listen to that. But clearly with Moody's prior to the day before the ACC announcement, we were operating under a concept of 5.5 times leverage under their methodology by year-end '17, and that changed. So, that's where -- we aren't 100% sure as to the timeline. Whether we have till year-end '17 with them or the new number is around 5.0 with an undetermined date to it. So that's probably why you might sense a little bit. But yes, we're very much committed to try to do it if it’s reasonable and we can.
I mean, I heard what you said on the ACC call and I thought it was helpful, but it left me a little bit confused and uncertain. And I understand what you're saying that maybe the goal-posts potentially have changed a little bit. But from a timing perspective, I guess since you're on review for downgrade, they typically resolved those within 90 days. So is it fair to say that you have to figure something out with them sooner rather than later, if you want to preserve the investment grade rating?
And our next question comes from the line Selman Akyol of Stifel. Your line is open.
Real quickly, just on the facilities, if you take a look at your guidance on a year over year basis, you have it up slightly, but if you were to adjust '16 for some asset sales, there's probably more growth there than the 2%. So, I guess I am curious really what's driving that, what are your assumptions behind it, especially I guess given your opening comments, you said you had a frac coming on late in the fourth quarter?
Yes, that's pretty moderate competitor to this year. I think we have more stores in Cushing. We have lot more stores at St. James. We have the Specter assets that we acquired at our facilities. And all those offset and create the increase over the asset pieces and also terminals that we sold.
We do have another question from the line of Shneur Gershuni of UBS Securities.
Just a follow-up question guys, in thinking about the new Alpha connector pipeline that you have. Would you expect the S&L to become a shipper on that pipe? Do you expect it to demonstrate shipping cash free overtime?
It might. But I think most of that is committed to system. So it's irrelevant who the shipper is, because it's contractually committed to the systems.
We’ll certainly try to work with producers to see if we can give them access to a better market that means we purchase the barrel and ship on their behalf and deliver a barrel back or something. But as Harry said, those volumes as they produce they are committed to the system. To the extent there are uncommitted acreage opportunities out there that will just depend on the negotiated basis. But clearly, as we look at the ACC system, we saw that as upside opportunity but not a base level or essential requirement.
We do have another question from the line of John Edwards with Credit Suisse. Your line is open.
My question has been answered. Thank you.
Thank you. And the last question comes from the line of Tom Abraham of Morgan Stanley.
When you sell one share of PAGP and buy simultaneously one share of PAA, what you do with the other $1.40?
It all goes to PAA. So, PAA gets the benefit of that arbitrage.
Got it. Okay, thanks a lot.
Thanks everybody for participating in the call. We went a little bit longer on Q&A, I think that we took a little bit longer to explain what we were doing. We’ll try to hold this to one hour to be respectful of your time and ours, but I appreciate all the support. We're done on this call.
And ladies and gentlemen, that does conclude the presentation. We do thank you for your participation and for using our executive teleconference service. You may now disconnect.
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