Crestwood Equity Partners' (CEQP) CEO Robert Phillips on Q2 2017 Results - Earnings Call Transcript

About: Crestwood Equity Partners LP (CEQP)
by: SA Transcripts

Crestwood Equity Partners LP (NYSE:CEQP) Q2 2017 Earnings Conference Call August 1, 2017 9:00 AM ET


Robert Phillips - Chairman, President & CEO

Robert Halpin - SVP & CFO

Heath Deneke - EVP & COO

Steven Dougherty - Chief Accounting Officer


Darren Horowitz - Raymond James

Andrew Burd - JP Morgan

Shneur Gershuni - UBS Securities

Elvira Scotto - RBC Capital Markets


Good morning and welcome to this morning's conference call to discuss Crestwood Equity Partners' Second Quarter 2017 Financial Operating Results.

Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, and distributable cash flow will be discussed. Reconciliations to the more comparable GAAP measures are included in the news release issued this morning.

Joining us today with prepared remarks are Chairman, President and Chief Executive Officer, Bob Phillips; and Senior Vice President and Chief Financial Officer, Robert Halpin; and Executive Vice President and Chief Operating Officer, Heath Deneke. Additional members of the senior management team will be available for the question and answer session with Crestwood's current analysts following the prepared remarks. Today's call is being recorded. [Operator Instructions]

At this time, I will turn the call over to Bob Phillips.

Robert Phillips

Thank you, Audrey. Good morning to everybody and thanks for joining us. We are really excited to announce our second quarter results and give you an update on our projects. Before we do that, I want to give our investors some context on where we are strategically so that they will know what to expect going forward. Let's start with a personal observation based on my 40 years in the energy business.

The past couple of years have been tough on the midstream sector in general and to Crestwood in particular. Like a lot of other midstream partnerships, many that were bigger than us, we were ill-prepared for the market crash in 2015 and 2016, we had too much debt, not enough coverage while committing to what now seems to be unrealistic distribution growth goals to attract investors. We think that's a bad combination and we're not going to go back there.

While conditions have improved greatly in the first half of 2017, I think we all agree that we still live in a potentially lower-for-longer environment, which means there will continue to be some level of investor uncertainty and I think midstream valuations will suffer from high correlation to crude oil. Our diversified operating model is built around this premise and I think in this recovering market, investors will likely be attracted to Steady Eddie companies that show visible growth while being managed with financial and operating discipline.

Starting last year, we repositioned Crestwood not only to survive in this period, but actually thrive in this market. We fixed our balance sheet, changed our operating cost structure, got past our producer in recontracting issues and focus narrowly on the strong growth potential of our Bakken, our Delaware-Permian and our Marcellus assets which represents three of the lowest breakeven regions in the industry.

We effectively rebuilt the portfolio and I think Crestwood's recent performance is starting to highlight the future earnings potential of this portfolio. Crestwood as you know has an impressive acreage and throughput dedications across the entire portfolio in some of the best areas of these low-cost basins which still have significant economic supply potential and still meet midstream infrastructure. We're building off of that base and we have substantial growth potential ahead of us.

Along the way, our commitment to project execution and operational efficiency, safety and compliance and best-in-class customer service remain the pillars of our organization. Those principals are now more important than ever before to differentiate Crestwood from other mid-cap midstream companies.

Financially, the moves that we made along with First Reserve, our general partner and with the guidance of our Board of Directors are allowing us to fully develop the potential of our growth assets in the Bakken and the Delaware-Permian in the near term and in the Marcellus over the long term. As I said, we fixed our balance sheet through asset sales, capital efficiency, we pushed out our long term debt and we built significant financial flexibility through partnerships. We're now delivering strong leverage and coverage ratios quarter-after-quarter.

This should give our investors greater confidence in our ability to meet the current distribution, clear visibility to resume DCF growth in 2018 and dry powder to take advantage of new investment opportunities to drive long term accretive DCF growth. We're very proud of our assets and we invite investors to compare Crestwood's long term grown potential in these regions to others in the mid-cap MLP space.

I think we make a very favorable comparison. On the commercial side, we continue to sign up new customers like Shell and our long term customers like WPX and Chesapeake are improving their ability to grow volumes on our systems. Our portfolio remains reasonably balanced between gas, NGLs and crude, with water becoming a larger contributor and an important growth area for us.

While oil is the economic driver in the Bakken, we are still largely a gas company with gas volumes on a revenue basis of approximately 4 BCF a day across the portfolio. So we have substantial exposure to gas upside [ph], which we think is significant particularly in the Marcellus, our contracts are still largely fixed fee with a growing but appropriate exposure to NGLs through our new gas processing plant projects in the Delaware-Permian and the Bakken. We also thank NGLs have substantial room to grow to the upside and that we should benefit from that over the next few years.

Our regional partnerships like Stagecoach with Consolidated Edison on our northeast Marcellus storage in transportation business, as well as First Reserve Fund 13 [ph] in the Delaware Permian, Brookfield infrastructure on our gulf coast storage and transportation business and Williams in the Powder River basin gives us more leverage to larger projects and larger opportunities in the future. These joint venture structures are essential to our ability to compete for new infrastructure deals and finance long term growth projects without near term dilution or increasing leverage above our target range. This is an important part of our customer service and growth model. We love to have our customers as our partners and we think it's a great way to align interest in balance risk.

Finally, a brief comment on the second quarter, then I'll turn it over to Robert to review the financial results and he is to give you an update on the assets and projects. Our second quarter results solidly beat our internal budget and consensus estimates and I have four quick takeaways for you - first is the out-performance by our gathering in processing segment. This was structural, not a bliff. It was driven by another great quarter at the Bakken Arrow, but also improving fundamentals across all of our major gathering and processing assets. This highlights the quality of core acreage dedicated to Crestwood on our systems and the universally better wells that are being completed by our producers. Our producers are well-protected from lower oil prices with some of the lowest breakevens in the business and very strong hedge books. We think our producer-consumers are in great shape.

Second is the tremendous execution by our project management teams in the Bakken and Delaware basin, finishing projects on time under budget with impressive safety performance. Third is an increasing backlog or inventory of growth projects with the announcement of the Bear Den pipeline and plant in the Bakken and the Orla Express Pipeline and plant in the Delaware basin. Fourth, the positive outlook for the second half of the year compared to some in our peer group led us to getting comfortable with the 5% increase in 2017 cash flow guidance and much greater confidence for our 2018 plan.

So with that overview, happy to turn it over to Robert for our second quarter review and then he is to give you a detailed update on our key assets and projects. Robert?

Robert Halpin

Great. Thank you, Bob. I'm very pleased with our strong second quarter results and with where Crestwood in position now heading into the second half of 2017. And what is typically our trough [ph] quarter during the year, our second quarter cash flows were up 7% over the first quarter of 2017 as solid execution and improving fundamentals have Crestwood back on track to delivering growth across many of our core assets. Let's take a quick review of the second quarter results and then I'll get into discussing guidance.

During the second quarter, adjusted EBITDA totaled $97 million compared to $106 million in the second quarter of 2016. Please note that the decline in cash flow from 2016 was a result of the contribution of 50% of our Northeast storage and pipeline assets through our Stagecoach joint venture with Con Edison. This is the last quarter where there will be discrepancies in the year-over-year comparability of results in connection with the formation of the Stagecoach joint venture.

Distributable cash flow for the second quarter was $61 million compared to $71 million in the second quarter of 2016, again, reflective of the deconsolidation of Stagecoach. For the second quarter of 2017, we declared a distribution of $0.60 to our common unit holders, driving distribution coverage for the quarter at 1.5x or 1.1x if our Class A preferred units were currently paying cash distributions.

Now for a quick review of our segment results; in our gathering and processing segment, segment EBITDA totaled $68 million in the second quarter of 2017, a 16% increase when compared to $59 million in the second quarter of 2016. Segment EBITDA increased as a result of sequential volume growth over the first quarter. Bakken oil volumes grew 19%, Southwest Marcellus volumes were up 5%, the Powder River Basin Niobrara was up 28% and the Delaware Basin was up 42% all over the first quarter numbers. In the second half of the year, the fundamentals for the segment remain very strong as activity continues and has resumed across many of our larger systems.

In our storage and transportation segment, segment EBITDA totaled $17 million in the second quarter of 2017 compared to $45 million in the second quarter of 2016. Second quarter 2017 segment EBITDA reflects Crestwood's 35% share of Stagecoach's JV earnings. During the second quarter of 2017, natural gas storage and transportation volumes averaged 2.3 BCF per day compared to 1.5 BCFs per day in the second quarter of 2016. Second quarter of 2017 volumes increased over 50% from the second quarter of 2016, primarily as a result of increase in Northeast transportation volumes on our North South and MARC I pipelines, as stronger gas prices in the second half of 2016 drove increased production for many producers around our system.

In our marketing, supply and logistics segment, EBITDA totaled $15 million in the second quarter of 2017 compared to $13 million in the second quarter 2016. Segment EBITDA benefited from stronger marketing and storage margins during the second quarter compared to last year as a result of stronger propane, butane and natural gasoline spreads. Additionally, our U.S. salt business continues to exceed our internal budget and recently hit record-production volumes of more than 100 tons.

Now moving to expenses; our operations in maintenance and general and administrative expenses, net of non-cash unit based compensation decreased $18 million or 25% compared to the second quarter of 2016. While $6 million of these cost reductions were attributable to the formation of the Stagecoach joint venture, Crestwood continues to maintain discipline across the organization to manage our operating expenses.

Now turning to the balance sheet; as of June 30th, Crestwood had approximately $1.6 billion of debt outstanding including $1.2 billion of fixed rate senior notes and $443 million in outstanding borrowings under our $1.5 billion revolving credit facility. Crestwood's leverage ratio was just under four times as of June 30, 2017. As we look out to the second half of the year, I am very pleased with how Crestwood's assets are positioned and with the improved business fundamentals across our three operating segments. Our performance in the first half of the year has outpaced our initial expectations as our gathering and processing segment generated meaningful cash flow growth.

When combined with a high quality projects that we continue to execute on in the Bakken and in the Delaware Basin, we believe it is appropriate to increase our original 2017 adjusted EBITDA expectations of $360 million to $390 million upward to better-reflect the performance of our assets. As we are positioned today, we believe increasing our adjusted EBITDA range to $380 million to $400 million in our distributable cash flow range to $210 million to $230 million reflects the improved outlook of our business.

With this outperformance, Crestwood plans to recommend to the Board of Directors to begin cash payments on our Series A preferred units beginning in the third quarter of 2017. We will maintain our annual cash distributions of $2.40 for common unit which even with the accelerated cash payment of our preferred units will result in full year 2017 cash distribution coverage ratio of approximately 1.2x to 1.4x. Growth capital of $225 million to $250 million and maintenance capital of $20 million to $25 million remain unchanged at this time and we are committed to maintaining a year end leverage ratio in the range of 4.0x to 4.5x.

As we have previously discussed, Crestwood reinstated and went effective on our ATM shelf registration statement in the second quarter 2017. With the filing of our second quarter 10-Q later this week, we intend to also file the remaining documentation around our ATM program including the perspective settlement.

As we have stated many times this year, our 2017 capital needs are fully financed through available liquidity and capital commitments that we have already secured through our regional joint venture relationships. So while we do not have any near term requirements for equity capital, we do believe it is prudent to keep those tools available to Crestwood as we continue to pursue multiple exciting capital projects and continue to maintain our commitment to a strong balance sheet.

We have solid momentum heading into the second half of the year and we are absolutely committed to maintaining our strategy of steady execution while positioning the partnership to deliver DCF growth in 2018. Now I will turn it over to Heath to update you on our assets and projects.

Heath Deneke

Thanks, Robert. First, I'd like to echo Bob and Robert's comments on the strong second quarter performance and the positive outlook that we have for the second half of the year. We're in a great position for growth across our portfolios, so let's just go and dive into the key assets and I'll give you more color on some of our projects as well.

Consistent with recent industry reports highlighting a resurgence of the Bakken, the headline for our GMP segment this quarter was our Bakken Arrow system. During the second quarter, the Arrow system averaged 82,000 barrels of oil per day, 50 million cubic feet of gas per day and 36,000 barrels of water per day. To put Arrow's performance into perspective, our oil volumes increased approximately 20% over the first quarter of 2017 in approximately 40% over the second quarter of 2016.

Year-to-date, we have connected 59 well set of systems compared to 48 wells for all of last year and we expect to connect an additional 30-50 wells during the second half of 2017. We believe the pickup in activity from our Bakken producers is largely driven by continued and sustainable reduction in drilling in completion cost, as well as significant improvements in overall well performance.

Many of our producers' drilling and completion cost are now averaging approximately $5.5 million per well with 30 day initial production rates and excess of 1,700 barrels of oil per day. But based on our numbers, that's about a 40% reduction in DNC CapEx, combined with a 50% increase in 30-day IPs from the results we're seeing just a couple of years ago. Additionally, we've seen the days required to drill a well cut by more than half over the past couple of years, which means we can now get about twice the number of wells drilled per active rig.

On average, our Arrow producers are hedged above $49 per barrel for the second half of 2017 and since [indiscernible] has come online in June, we've seen netbacks around the Johnson corner area increased by $2 to $3 per barrel.

We believe the combination of all these factors are why producer development activity on the Arrow system has accelerated despite the $40 to $50 oil price environment we are now in and it's also why we believe that production will continue to grow in 2018 and beyond at these price levels.

So as a result of the expected production growth, we are expanding our crude, natural gas and water gathering system to meet both existing and future growth and we're on track to have the first phase of the Bear Den processing plant in service towards the end of the third quarter with the second processing train plant to come online as early as the end of 2018.

As evidenced by the Arrow system volume comparisons that we provided in our earnings release, our gas gathering volumes have lagged a bit behind the pace of growth experienced on the crude and water system. The cause of this disconnect quite frankly is largely attributable to the gas system constraints and downstream curtailments that we've experienced - both of which will be alleviated this year by our gathering system expansions and the completion of the initial phase of the Bear Den gas plant.

As a reminder, the Bear Den gas plant is supported by volumes produced on the Arrow system that we own and control and are currently being processed with the third party. So as gas production volumes continue to grow on the basin, I also wanted to point out that we are being very proactive about exploring new NGL takeaway projects that will further enhance our producer netbacks and we believe will avoid downstream constraints that could emerge over time, which would potentially restrict our ability to realize the full potential of production growth around the Arrow system.

We're shifting gears now to the Delaware basin. Certainly have a lot of great activity to discuss here. During the quarter as you recall, Crestwood contributed its Willow Lake assets into the Permian joint venture with First Reserve, so now all of Crestwood's Delaware Basin assets are included in the joint venture. The contribution of Willow Lake was a first step in Crestwood strategy of expanding and integrating our Delaware Basin footprint to create a super system that spans over 2 million acres in Culberson Reeves, Loving and more counties Texas, as well as into Eddie and Lake counties in New Mexico.

So while our existing contracts in acreage dedication around the Little Late area we think are more than sufficient to fill up the announced 200 million a day oil plant, we believe the expanded footprint being created by the integration of the Willow Lake system, the Nautilus system and the vast acreage in between will certainly position Crestwood in the First Reserve joint venture to compete as a large scale gas gather and processor across the entire Delaware Basin.

Our joint venture is also actively pursuing crude and water-related organic growth opportunities with existing new customers alongside our GMP footprint. Our near term plans on the crude side include a new crude in condensate terminal at the Orla facility that will offer storage and crude blending, condensate stabilization, track racks as well as access to multiple downstream takeaway outlets.

On the water handling side, we are in discussions with various producers in New Mexico and Texas to develop a large scale produced water system that we believe will offer an integrated gathering, recycling and disposal solution in the basins. We're giving the extremely high water-to-oil ratios. In the basin, we believe that the water handling business is likely to grow to be an $8 billion to $10 billion per year business over the next five to seven years in the Delaware-Permian.

Volumes are produced water today are in and around the 3.5 million barrel per day mark and based on industry forecast, we expect that to exceed over 7 million barrels per day of water as early as 2022. Nearly half of the cost and production at the well head is associated with water handling expenses and most of the produced water today in the basin is being trucked off to bed or gathered via smaller scale less efficient producer systems to nearby disposal wells.

We believe that an integrated large scale water system, much like the scale that you see in some of the gas gathering and processing systems in the basin will certainly help with reduce the cost of water handling for the users and is almost a necessary step in our opinion to enable the amount of production growth anticipated in the basin.

Crestwood and First Reserve teams are working very hard to position our joint venture to be a significant player in the water business in the region as well as on the gas and crude side and we certainly look forward to updating everyone as we continue to make progress on those efforts.

We're shifting back to the quarter results. One of the major highlights for this quarter was the early and service state for the Shell Nautilus gathering system and letting them award counties. I've said I can't be more proud of the results achieved by our project execution and operations team. This phase of the Nautilus system was completed without any significant employee or contract or related safety; it was certainly ahead of schedule by a month or two and well under budget. So combined with our latest volumes projections, we're expecting a sub-five times build multiple on the project and overall project returns north at 20%.

As Crestwood executes our strategy of pursuing organic growth opportunities around our core basins, we certainly hope that the Nautilus system success provides investors with added confidence in both our commercial team's ability to compete and win attractive deals and talk to your basins, as well as our project management team's ability to get the job done on time, on budget and safely.

Currently on the Nautilus system, there are four active rigs and we expect volumes to continue to ramp up through year end 2017 as well as in the 2018 and beyond. As a reminder, Shell does have the option to purchase up to a 50% equity interest in the system prior to September 1, 2017. We have a great working relationship with Shell and we are really excited about the prospect of having them as a strategic partner in the Delaware Basin. We certainly look forward to update in the market as we get closer to their election date.

Just to the west, near Orla Texas, Crestwood is well under way developing the Orla plant and the Orla Express pipeline. We have recently executed a Turkey EPC agreement for the construction of the 200 million a day plant and pleased to report that that contract is well within our planned capital budget for the facility and also as previously announced, Crestwood contributed its Willow Lake gathering process and Permian joint venture at a value of $151 million and of course, this value will be credit as part of Crestwood's capital requirements to the expansion projects. For the initial oil plan in the Orla Express pipeline as reminded, the project capital is expected to be around $170 million and we expect to have the project in service during the second half of 2018.

Before I shift gear to the storage and transportation segment, I wanted to take the time to briefly comment on the improving results that we're benefiting from and other areas of the gathering and processing segment that probably aren't going to make the headlines. In the Barnett, Bluestone has continued to optimize and improve well performance across the wet and dry gas systems to offset natural declines and when you combine that with natural gas in the $3 plus mark versus our budget assumptions of $2.75 per MCF, we continue to see strong performance in upside, relative to our Barnett forecast. In the Marcellus, Antero continues to [indiscernible] the docks bit ahead of our original schedule with 15 wells now having been completed this year and the remaining seven expected to come online during the second half of 2017. And the result of that acceleration our 2017 plan volumes are trading higher than we originally anticipated.

Finally in the Powder River Basin, Chesapeake has two rigs running on the Jackalope system and certainly has plenty of room to ramp up drilling activity with more than 150 drilling permits in hand and another 100 permits filed. As you know, if you pay attention to Chesapeake, they certainly have been recording excellent results in both the Turner and Sussex formation in the basin and I just wanted to provide you some numbers to put it in the context.

In March, they brought on the well targeting the Turner information online at 2,500 barrels of oil per day and then they followed that up with the second well on the opposite side of the acreage position that flowed around 2,900 barrels of oil equivalent per day. And both of these had all cuts ranging from 50% to 80%. In the Sussex formation, Chesapeake has 20 wells on the schedule to complete into 2017 and it's very publicly stated that they expect and are generating repeatable well performance results with RORs ranging from 30% to 50% even at current commodity prices.

Chesapeake also has pending test in the Maui formation and more Turner wells coming online during the second half of '17. While there are still a lot more work to be done delineating the massive stacked pay acreage position that's dedicated to our Jackalope system, the results thus far are very, very positive. Our gas gathering and processing volumes on the system are growing and we remain very excited about the prospect of expanding our service offerings to include other services such as crude and water gathering as Chesapeake shifts into development mode.

For now let's shift gears to the storage and transportation segment. Overall, the segment grew in-line with expectations and continuous to be a very stable contributor of cash flow for Crestwood. We continue to benefit from a great relationship with Con Ed and we remain focused on positioning the Stagecoach joint venture to capitalize on northeast infrastructure projects over the coming years. We are currently working on some exciting projects with other industry partners in the area that will offer more takeaway capacity of the northeast Pennsylvania area, which will enable our producers around the Stagecoach platform to return to production growth.

And finally at COLT, we generated over 17 million of EBITDA in the first half of the year and we continue to see the demand for our storage, our pipelines, our rail loading services at levels expected during the second half of our plan.

As Robert discussed on me-and-myself [ph] segment, we also had a very strong quarter and we continue to look for opportunities regarding NGL asset portfolio. During the third quarter, we will start the butane blending season and then expect to finish the year strong during the fourth quarter as current forecast predict a more normalized winter. We're looking for NGL team add a lot of value on our needs and processing plants in the Bakken and the Delaware-Permian and we're certainly valuing additional downstream infrastructure opportunities where we might be able to extend the value chain and enhance our producer net backs.

Before I wrap up the business section, I wanted to briefly comment on our focus to position the partnership for resumption of distribution growth. On previous messaging, maybe we've been sent to mixed signals around our long term distribution strategy. And I wanted to be clear. As an MLP, it is our clear objective to generate unit holder value and reward our investors by returning capital to them in the form of a steadily growing distribution. We're absolutely committed to that goal and our current plan show that we could be in a position to resume distribution growth during the second half of 2018.

As we've stated many times, we are committed to maintaining a distribution coverage ratio north of 1.2x and a leverage ratio around the 4x mark or lower. So around this time next year as a major near term capital projects in the Bakken and Delaware Basin are in service in contributing and so long as we're over 1.2x covered and have a healthy balance sheet as well as visibility and confidence that our long term cash flows can sustain stable distribution growth, we will recommend to the board the resume distribution growth at that time. It's as simple as that.

To wrap up here, we had a great first half of the year and we have a lot of positive momentum moving into the back half of the year and a tremendous amount of visible growth for 2018 and beyond. The management team here at Crestwood, we really can be more pleased with near long term outlook of the business overall.

With that, Operator, I think we're ready to open the lines for questions.

Question-and-Answer Session


Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Darren Horowitz with Raymond James. Please state your question.

Darren Horowitz

Good morning, guys. I appreciate all the detail. Heath, I had a couple of questions with regard to what you discussed on further enhancing [indiscernible] netbacks by looking more downstream. Specifically in the Delaware, we can see tying Nautilus into Orla too makes sense, you get better recoveries at Orla and in those times, obviously give producers a little bit of an uplift. But how do you think about controlling those hydrocarbons, the Y-grade [ph] and the dry gas out of the tailgate of what should be an expanded Orla and how deep downstream do you actually want to touch those hydrocarbons?

Heath Deneke

That's a great question, Darren. On the netbacks side and as it relates to controlling the Y-grades, I think that what we've done at Orla, Orla has created us such a large scale and where we've located it, it's in great proximity to several NGL outlets as well as gas residue outlets. So that was a big strategy of ours. We realize it could be successful and compete in the long run. We want it to be able to offer a lot of options as well as ensure that we get really competitive net backs on the downstream side of the plant. That's our immediate focus, but as you know, we run a nationwide NGL business. We're heavily involved in Y-grade across the country and we think that our NGL team can add additional value on the liquid side, as well as our gas marketing team as the opportunity presents itself. Much like at Arrow, a lot of the producers want us to step in and control the full value of hydrocarbon chain and we're certainly positioned well to do that with a really well-positioned asset in the Delaware-Permian and the Bakken as well.

Darren Horowitz

Okay. I think that makes sense and just shifting over to Arrow since you mentioned it. When we think about the uplift and the gathering and processing adjusted EBITDA component of guidance, with Arrows like you mentioned, out of the 30 to 50 well connections that should be made in the back half of this year, do you expect that case of connections to be more linear over the third and fourth quarter or more lumpy? And when you look at the composition of what Arrow represents in guidance, initially Arrow was supposed to be forecast to be about $120 million in terms of its contribution to this year's 2017 EBITDA. But if you just look in 2Q and annualize just a couple of months, is you get closer to $130 million annualized run rate. So how do you guys think about Arrow's contribution in terms of guidance? And then from a timing perspective, the distribution of that EBITDA benefit?

Robert Halpin

Darren, this is Robert. I'll take that one. I think that you highlighted and we highlighted in our prepared remarks the importance of Arrow and continued growth trajectory we see around that asset given the exceptionally strong economics that our producers are realizing up there. In terms of the second half well completions, we guided $30 million to $50 million for the second half of the year. That range is largely driven by the timing dynamic that you mentioned on whether they get some of the late completions in the fourth quarter in this year or it spills over into the first part of 2018. But I think certainly the 30 well side of that range and then kind of to the midpoint, I think it will be a pretty linear spread throughout the remainder of the year. I think the parameters you gave on cash flow contribution are generally consistent with what we're seeing and I think that if we continue to see those wells connected, in line with the producers' development schedules that we have received, they'll see that cash flow ramp continue to build on a linear basis through the remainder of the year.

Darren Horowitz

Okay. And then my last question if I could on COLT.

Robert Halpin

Hey, Darren. Sorry. One incremental comment I would make that is we think about cash flow uplift as we've talked about the Bear Den plant going in service in the second half of the year and I think that that as Heath alluded to will bring some nice uplift to gas volumes that have been constrained through the first half year results. Again, another factor to play in, keep an eye on as doing timing of the service to that plant and I think all things are trending in the right direction for us on that front.

Heath Deneke

That's absolutely right. We expect the plant as a reminder to come on. As soon as it comes online, we expect to fully load it up with the full capacity of the plant so it should be a contributor in the fourth quarter.

Darren Horowitz

Okay, I appreciate that. And then if I could just squeeze one last one in on COLT. I think in the 2017 budget, $30 million was the mark for COLT's benefit and I know you all did about $10 million in the first quarter and $17 million here in the second. I appreciate and recognize that we probably won't see that nice routable take-your-pay cash flow and the model shifted a little bit more. The resilience on pipes are down shouldn't [ph] takeaway, but with dapple online and that's the positive and as COLT aggregate supply, I would argue that should be even more of a positive. So how do you guys think about with that aggregated supply, the distribution of those barrels and what that could mean for you volumetric downstream of COLT?

Heath Deneke

This is Heath. Just one quick correction, the $17 million was for the first half of the year.

Darren Horowitz

Excuse me. First half.

Heath Deneke

Look, COLT overall, we're pleased with how we're performing relative to expectations. We're certainly factored into our go-forward plans of substantial reduction and take-or-pay volumes and more of a shift to a crude aggregation facility. That strategy is playing out as expected. We're putting a lot of volumes in the dapple, we're certainly getting our fair share of grew by rail loading when it makes sense and we're continuing to optimize our storage and pipeline connections to bring in additional marketing fees. I think of the long run, we continue to think that COLT should be performing in and around this level flat over the foreseeable future with perhaps some upside if volumes continue to grow in and around footprint.

Darren Horowitz

I appreciate it. Thanks, guys.


Thank you. Our next question comes from the line of Andrew Burd with JP Morgan. Please state your question.

Andrew Burd

Hi, good morning. Congratulations on the execution in the quarter. First question is on the distribution growth potential for next year. Curious how you're approaching increasing the payout versus reinvesting the cash and keeping more financial flexibility, given that Crestwood yield today is roughly 10%.

Robert Halpin

I think, Andy, as we hit on in the call and I think have talked in prior discussions around our policy, I think it's really pretty straightforward and that is we're committed to our financial metrics and delivering strength on distribution coverage in a leverage and our balance sheet basis. I think we guided that we'd like to be at one point two times sustainable for the long term - or better on the balance sheet side for the long term. And I think based on our estimates today and our outlook long term for the business, we think we'll be comfortably in excess of those two metrics heading into the second half of next year and I think as a result of that are prepared to start working towards distributing greater amounts of cash flow out to our investors in the form of the distribution. Not prepared at this point to give specific guidelines around growth trajectory. I think as you pointed out, that will be a consideration around our capital needs as we continue to execute around our portfolio, but our primary commitment is to 1, 2 and 40 [ph] on the leverage and coverage side, and I think the rest at this point we believe is suitable to be pass along to [ph] investors for distributions.

Robert Phillips

Andy, this is Bob. Let me just add a little additional color there. Growing excess cash flow is a double-edged sword in this business. If you have projects to invest in at good returns like we do, we all know over the years that math suggests you should reinvest the capital. At the same time, if investors are demanding growth rates to be at competitive investment, then you have to think about what's the market for distribution growth out there. What I said at the beginning of the call was we are not going to go back to where we were. We're going to continue to manage with financial discipline.

Our general partner First Reserve and our board and our management team collectively own about a third of the outstanding stock here. We're all long term investors, we're all long term investors, we're going to make the right business decision for our excess cash flow. I hope that this market improves to the point where investors are valuing a company like Crestwood and the growth profile and the excess cash flow. That suggest that they're valuing successful companies despite their size in a recovering business. We've all been on the right side of those recovery cycles as well.

So our first job is to grow the excess cash flow. The second job will be to air on the discipline side as long term shareholders owning about a third of the stock. We're going to make the best investment decision. I can only hope that we move back to a period where investors have reasonable expectations for distribution growth in the 5% to 10% per year range and if that's where the industry moves back to, when investors come back to midstream MLPs, then I think we'll be in great shape to be very attractive to investors to split the baby, so to speak, reinvest in good projects and distribute at a reasonable level to our shareholders so that they're back to getting the total return proposition that we all started with back in 2011 and 2012. Just a little additional color from the perspective of the general partner, the board and the management team who are all very long term shareholders in this business.

Andrew Burd

Great. Thanks for that, Bob. And then moving to Arrow, what's the visibility for the 30 to 50 incremental well connects in the second half? Is this motivated by new drilling expectations, or docks, or something else, or combination?

Robert Halpin

It's mostly new drilling. Our producers give us long term forecast, our well-connect plans and they update them almost on the monthly basis. So they've been fairly consistent with the level of planned activity in the second half of the year. I think the 30 to 50 is really more of a timing consideration. Sometimes these wells that they're all on schedule, it will get drilled, it's just a matter of do any slip into the early part of '18 versus the end of '17. So I think we got a pretty good strong line of sight on finishing in that 30 to 50 connects for '17.

Andrew Burd

Got it. And just to clarify, you didn't raise CapEx for those well connects because the customers pay for them. Am I speaking correct on that?

Robert Halpin

That's correct.

Andrew Burd

Okay, great. And then final, final question, just two housekeeping items versus if you could clarify on significant transaction and environmental expense and if they're one time in nature. And then on the Jackalope EBITDA, deferred, do you expect to recognize the entire amount in calendar '17?

Steven Dougherty

This is Steven Dougherty, Chief Accounting Officer. The significant transaction environmental related cost, I would primarily incur this quarter related to some efforts that we've done related to our marketing supply and logistics tracking business, which we'll be giving more color on in our 10-Q. So we do believe those are cost that are not going to recur in the future. We will be continuing that effort into the third and fourth quarter. That's the primary driver of that.

Robert Halpin

Yes. And on your question, I believe it's related to Jackalope and the deferred revenues. I think we do have some ongoing discussions with our customers and our partner in the basin. As Chesapeake continues to ramp up production and we have additional opportunities as they grow and consolidate their acreage position, we think that there could be some news coming out soon. They would try to help offset some of the revenue deferral that you've seen in the past, but it's a little bit too early to count on that. We certainly think there's a good possibility of that happening.

Andrew Burd

Great. Thanks for taking my questions.


Thank you. Your next question comes from the line of Shneur Gershuni with UBS. Please state your question.

Shneur Gershuni

Hi. Good morning, guys. Apologies in advance for a bunch of questions. But first, I guess I wanted to follow up on the return of capital question. When you think philosophically at how you are looking at returning capital, you sort of maybe comment about splitting the baby and so forth. Have you given any thought to a policy to words permanently internally funding your growth CapEx on a go-forward basis? Are you thinking about it more along a percentage of CapEx that you'd like to retain on a given basis? I was wondering if you can discuss your thought process around that?

Robert Halpin

Sure, Shneur. This is Robert and I think really as our policy and our general strategies around capital allocation going forward, I think as I said to Andy's question, I think that we are first and foremost committed to a distribution coverage level of 1.2 or greater. Again, that after paying the preferred units in cash which we expect as we talk about to make that change beginning next quarter, 1.20 are greater on a distribution coverage and 4.0 were better on the balance sheet, we feel given our asset portfolio or the trajectory of our cash flows and the quality of our contrast, that's an appropriate level for us to be at on both metrics and I think that any cash flow in excess of that - which we expect there will be - we will make a continued evaluation on a quarterly basis with our board and our general partner on the best allocation of that. Whether it's to increase distribution at a higher growth rate or reallocate towards higher return projects.

But I think again, the commitment is to the financial metrics that we mentioned. The utilization of excess TCF, we don't have a specific pinpointed percent of capital type target. We're focused first and foremost on those financial metrics and then the utilization of excess cash flow is really geared towards the return on the investment opportunities we have and balancing that versus our desire to grow our distribution as an MLP. I think that's really the color I can give you on our internal thought process, our board's thought process and first reserves thought process.

Shneur Gershuni

Okay, great. Just a couple of follow up questions. In the Northeast Antaro, have they brought any rigs back to your acreage? Just wondering if you can give us some color on that? And then secondly for the same region, volumes were pretty strong. Was there any cannibalization of moving completions up? Or the trend that we saw, something that you expect to continue going forward?

Robert Halpin

Yes. Look, as of yet, we haven't heard of near term plans to add rigs in the area. We continue to think that we have good economic acreage that it made sense to drill in this current price environment and it's probably even could be drilled at significantly lower prices than what we see today. We think it's a matter of time before Antaro gets back up to development activity in and around that footprint. As it relates to the docks, I think it's a positive. We were certainly have been talking in Antaro all along about bringing docks into 2017. I think we're a little conservative in terms of the timing that we planned and what we've seen and experienced has been an acceleration of that. They're just making better wells as well. We the combination, the results that they're seeing out of these completions hopefully will motivate them to keep going.

Shneur Gershuni

Okay, great. Two more follow ups. You've talked about a Shell JV in the past. Anything to update with respect to that. Are they looking to contribute assets or would they be acquiring? I was wondering if you can talk about that a little bit.

Robert Halpin

My general comments on that are if Shell likes to exercise their option which we hope they do, we believe they'll be a very strategic partner with us. Hard to speculate as to how that partnership may grow beyond the Nautilus system, but we're certainly eager and we think that's going to be one of the added benefits of having them as a customer and a strategic partner. There's certainly a large operator out there doing phenomenal wells and we want to provide as much service as we can.

Shneur Gershuni

Great. And final question, in your prepared remarks you talked about focusing on cost and so forth; they were surprisingly good this quarter. Is that a trend that we can expect to continue to see going forward? Are there any pressures that may potentially bring them back up a little bit or there are -- alternatively, are there some other alternative to take it lower as well, too?

Steven Dougherty

This is Steven Dougherty again. So yes, we did see a decrease in our operating and maintenance expenses and general administrative expense this quarter. Not only compared to first quarter '17 but also the second quarter '16; that is the trend that we do expect to continue. We don't believe it's going to decrease at the pace that it's currently decreasing at mainly because some of that decrease as we articulate in the press release, what do the deconsolidation of our Stagecoach assets. We do expect that from an operating and maintenance expense standpoint, we may see slight increases in that going forward as our production ramps up in certain of our areas that Heath described earlier.

Heath Deneke

Just to add to that, this is Heath again. I mean, I think what Doug is saying is that we do have a continued focus on cost control and becoming more efficient even as volumes grow across the system. And so on a go-forward basis, you may see some increases in OpEx but we hope that's going to be disproportioned to their rate of increase you're going to see on the volumetric side of the business.

Shneur Gershuni

Great. Thank you very much, guys.


Thank you. [Operator Instructions] Our next question comes from the line of Elvira Scotto with RBC Capital Markets. Please state your question.

Elvira Scotto

Hi, good morning. A couple of question on the updated guidance. I guess first, what is the commodity price assumption in the guidance? And then second, how much of the guidance update or the EBITDA kind of increased expectation on EBITDA is based on a better first half versus your previous sort of internal expectations versus expectations for a better second half? So how much is better first half than expected?

Robert Halpin

Elvira, this is Robert. I'll give you some color on that. I think from your first part of your question, commodity prices, I think we haven't really updated our commodity prices assumption and all that significantly from kind of what was in our initial expectations or initial guidance. Generally, in the $45 to $50 range on the crude side and kind of a $3 gas price environment; so I think we feel pretty good, we're kind of right in the middle of the fairway in terms of where commodity prices currently are. As it relates to the second part of your question in terms of revision upward, is it more attributable to the first half outperformance or second half expectations? I would say it's really a combination of the two.

Clearly, we have a growing amount of confidence around our asset footprint with the performance we've seen year-to-date really across the board, all segments and all operating divisions. We continue to have a very strong robust outlook in the second half that I think could drive outperformance relative to the second half plan as well. And then as we've talked about also, we've got some capital projects that we're spending dollars on this year that will come in service later part of this year and early part of 2018 that will to some degree or to some extent help the 2017 numbers but do a much greater extent impact 2018. And so I think it's really kind of linear across the board, both first half outperformance and some strong expectations headed into the second half.

Elvira Scotto

Thanks, that's helpful. Can you also talk a little bit about some of the recent announcements that we've heard in the Williston Basin related to some of the shippers on your systems? Like Healcon [ph] selling their acreage and waiting talking about maybe pulling a rig out of the Williston Basin? What kind of impact, if any, do you think those will have on your operations?

Robert Phillips

Yes. I mean I'll start with the [indiscernible] use and growing and stepping in. I mean, we think that is a positive; I think we've enjoyed a great relationship with Healcon [ph] over the years and what both Healcon [ph] and we're hearing from Braun [ph] is that we don't expect to see any changes in the 2017 activity. In fact, I think Healcon [ph] is going to stay on as operator through the vast majority of the year. And that was a fairly sizeable transaction that [indiscernible] entered into the Bakken; and so we hope that that will translate into probably even enhanced activity, relative to what Healcon [ph] was planning, certainly related to their growing position to Delaware-Permian. So net-net, we're excited about having step- in and look forward to a long and favorable relationships there.

As related to the widening rig, we did see that. I guess I could just answer most directly; we really didn't anticipate having any added well connection widening in our second half of the year. So I don't think their decision around the rig is really going to have any impact to our forecast.

Elvira Scotto

Thanks, that's really helpful. And then just the last one for me is, you mentioned potentially building out in the Delaware-Permian integrated large-scale water business. How big could that investment be for you?

Robert Phillips

It's a good question. I really -- the right time to speculate on size; I think the key area that we wanted to highlight was we like the model that we have at Arrow. We have opportunities to take that model into the Delaware-Permian and into the Powder River basin frankly, we're experiencing the water size of the business. As I said, if you think about water, it being about 50% of the cost to production for the producers and kind of, the -- the largely inefficient way that we believe is being handled and disposed of in the basin and you combine that with just all of the congestion from truck traffic and the disruption at some of the shallow injection well is going to have on production; we just think the environment is right to see some significant build out of water-related infrastructure in and off the area.

So it's hard to really give you a clear sense of the size and scale. I think if you look at my reference to what you've seen on the gas, gathering and processing between the Willow Lake, the oil pipeline, and then the Nautilus system, I mean that gives you kind of a general sense of the footprint that we'll be playing in and it's a fairly expensive footprint. But we do think if our plans are successful, it will be a good margin business that we think will have a lot of running room on the growth side to invest in.

Elvira Scotto

Great, thank you very much.


Thank you. Our next question comes from the line of Ned Berma [ph] with Wells Fargo. Please state your question.

Unidentified Analyst

Good morning, guys. Staying on the subject of growth CapEx; do you foresee any additional investment requirements for the Arrow system above the $50 million that's mentioned in the press release to further upgrade the system? And if yes, what type of returns would you expect on the incremental investments?

Robert Phillips

Yes, I don't think we expect to see additional expenditures in 2017. I think the projects that we have well on the flight now, we'll be wrapping up. As I do mention, we do have a second train of processing that may come online as early as the end of '18 or first half of '19. And so I think as we get closer to making the final investment decision on that second train, we'll keep the market posted and there will be some additional expenditures there. But for the time being, I think we've spent and guided to what we need to spend to realize the growing forecast that we have at Arrow.

Unidentified Analyst

Got it.

Heath Deneke

And Ned, I was just going to clarify your return expectation; I mean I think that consistent with what we've kind of communicate around the first phase expansion at Bear Den, we would hope to gain a little bit of efficiency with the second expansion just from -- about the capital end and throughput and revenue side of the equation. We guided on the first Bear Den plant to be -- kind of in the -- call it six times type area on a billed multiple basis and I think that level or maybe slightly inside of that level is where we expect to come out on the second phase if we move forward led this year early part of '18.

Unidentified Analyst

Got it. And then a quick housekeeping item; it seems guidance for 2017 now reflects cash distributions to preferred holders of $45 million. And I think previously that was about $30 million, so I'm just trying to reconcile the difference.

Robert Phillips

Yes, the difference is as we said in our prepared remarks is given our performance to date, where we are from a balance sheet and coverage standpoint, very comfortable in excess of our targets. We intend at this point to recommend to the board beginning in the third quarter that we'd begin making cash payments on that preferred. And so included in our guidance range is the expectation we have today that we'll be paying that incremental $15 million for the third quarter distribution.

Unidentified Analyst

That's helpful. Thank you.


Thank you. There are no further questions. Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I'll turn it back to your CEO, Bob Phillips for closing comments.

Robert Phillips

Thank you Audrey, and thanks to all of you for joining us in a great set of questions; very probing, right on point with both the message as well as the content. We understand that '17 is still a transition year, we called it that at the beginning, we said what we thought was reasonable and achievable guidance initially, our assets are performing better than we expected; as a result, we increase guidance, I think that's our message to you all that this is not going to be a runaway freight train, we haven't changed assumptions but Elvira's question was a good one. We have not changed either our pricing assumptions or our volume assumptions; we're just generally seeing better wells, better producers, better volumes across most of our systems and we expect a normal winter which should positively impact our storage and transport business and our MSL business and that speaks to the diversified portfolio that we have.

So given all that, I think it's a really big point that this management team has the confidence to stretch out for slightly higher guidance. We're going to hit that mark, we're going to maintain our financial discipline around leverage and coverage and overall, I think we'll all go into 2018 with a higher degree of confidence about what the real earning potential of this portfolio really is. So that's the message and the takeaway. We appreciate all of you joining us this morning. Look forward to talking to you at the end of the third quarter, hopefully with another great quarter. Thanks, everybody.


This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.