Crestwood Equity Partners LP

today's conference call to discuss Crestwood Equity Partners' first quarter 2021 financial and operating results. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934 that are based on assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures such as adjusted EBITDA and distributed cash flow will be discussed. Reconciliations to the most comparable GAAP measures are included in the news release issued this morning. Joining us today with prepared remarks are Chairman, President, and Chief Executive Officer Bob Phillips and Executive Vice President and Chief Financial Officer Robert Halpin. Additional members of the senior management team will be available for the question and answer session with Crestwood's current analysis following the prepared remarks. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bob Phillips.

Thanks, operator, and good morning to everyone. Thank you all for joining us today. We're certainly excited to announced another great quarter. The portfolio was resilient during the quarter, and the employees did an absolutely phenomenal job given all the challenges that we faced, that the industry faced throughout the quarter. I think it's important to note that we're more than a year into the COVID-19 pandemic, and while we're all used to working remotely, I know here at Crestwood, we look forward to Being able to meet our investors and analysts and our Crestwood stakeholders in person later this year, we're anxious to get there and know that you all are too. We continue to take employee and contractor safety very seriously here at Crestwood, but we have not let the pandemic hinder our goal of becoming a best-in-class midstream operator. We simply just didn't take the last year off. We've made a lot of progress in the past year on a number of our long-term goals, including positive free cash flow. Really excited about that. Very strong balance sheet. No near-term maturities. And what we think is an industry-leading sustainability program here at Crestwood. And most recently, and I'm really proud of this, the team put together a buyout of our general partner, First Reserve, which we think will transform Crestwood's MLP governance structure to a best-in-class and a publicly elected board of directors. When you combine that with very impressive outperformance in the first quarter of this year under difficult circumstances and listen to our message and the color around our portfolio, which we think underpins our very positive outlook for the We think this is an exceptional start to the year. Robert's going to cover the first quarter in detail. I do want to highlight some things that I think are important for you to take note of, starting with adjusted EBITDA of $165 million and distributable cash flow of $108 million. Both were increases over the first quarter of last year. Both were record quarterly results in our 10-year history for Crestwood, and both were well above consensus estimates. We did generate first quarter free cash flow after distributions of $64 million, also a record we're on track. And I think you'll note that we expect that free cash flow generation to continue throughout the year and get our debt level back to our target level. We did use that free cash flow to reduce debt, resulting in a first quarter leverage ratio of 4.2 times. Now, that includes the $268 million that we bought to complete the 11.5 million common unit buyback from First Reserve, so you can do the math there. And importantly, we posted a record distribution coverage of 2.8 times. That's the highest coverage ratio we've had in the 10-year history of Crestwood as an MLP. Additionally, in the first quarter, We took advantage of higher commodity prices to reset our gathering and processing percentage of proceeds contract margin 2021 hedge book. And we made really good progress on a handful of 2021 capital projects where we're expanding our Bakken, our Powder River, and our Delaware Basin gathering systems. So looking forward, by the end of the second quarter, we will have invested about 80% of our 2021 capital budget, which as a reminder was $35 to $45 million. And we have a number of rigs running on our assets again, so the timing could not have been better. And Robert and Diaco Avica will speak to the rigs that are running on our assets. The combination of these expanded facilities and leading to increasing volumes and higher margins that we've locked in for the second half of the year puts us squarely on track to achieve our revised 2021 guidance, which should generate free cash flow in the range of $130 to $180 million. And as I said, allow us to meet our number one financial objective, and that is to continue debt reduction down to our target range of three and a half to four times. I think the company is hitting on all owners right now. Notably, during the quarter, our employees had their hands full, as almost everyone in the energy business did, with the extreme weather event, winter storm Uri, that affected production volumes significantly. from North Dakota to Wyoming to Texas. In fact, when you look at the tables in the back, you'll see some volume reductions, and those are largely attributable to shut-in volumes that we had during the storm, offset by, as we've already pointed to, higher margins due to the resiliency of our portfolio. I thought the company did an outstanding job, and we've heard that from our customers, how much they appreciate the great work that our operating teams did in ensuring safe and reliable operations for our producers and our customers on the downstream side throughout this extreme winter event. I know that different companies have reacted different ways to the storm. Net-net winter storm Yuri was a positive event for Crestwood because of our portfolio and our incredibly dedicated employees who kept the lights on, kept gas flowing through the gathering systems, processing plants, and out of the storage facilities. notably at trace palacios which is our natural gas storage facility located on the texas gulf coast we generated approximately 10 million dollars in adjusted dba net to crestwood remember that's a 50 50 joint venture with brookfield And that was entirely due to prior winterization efforts and a backup generator that we had invested in previously, which allowed our facility uniquely to remain operational and meet demand from our firm customers. And I want to point out that those employees down at Trace did a yeoman's job in keeping that facility going during winter storm Yuri, despite the loss of commercial power. We were able to deliver over 5 BCF of gas to our customers, which was more gas than any other independent storage facility in Texas delivered during that critical week in February. So really proud of the job that those guys did for our customers. Also during the first quarter, I think Crestwood took a really big step forward, certainly in the 10-year history of the company. This was a milestone event for us. When we simplified our organizational structure through the successful buy-in of First Reserve's limited partner and general partner interest, that's the entity that we called Crestwood Holdings. So if you hear us refer to the Holdings transaction, that's the buy-in of First Reserve. The transaction provided what we thought was a very elegant solution for First Reserve. to exit their 10-year investment in Crestwood and set up the partnership for success going forward. And I want to take this minute to publicly thank our partners at First Reserve for the long-term relationship that we've had with them since 2010. They've been a great partner and a great sponsor, and we look forward to continuing to work with them on our Delaware Basin joint venture where they retain their interest, and we're really excited about the future potential of that investment for First Reserve as well. The Crestwood Holdings transaction was very well received by the market as it enhanced our alignment with public investors, certainly improves our financial flexibility. It increases our public float. while at the same time reducing the total number of common units outstanding. The secondary offering where we sold off some of First Reserve's units was oversubscribed, and it was bought by some extremely reputable, dedicated long-term institutional investors. We consider the entire transaction to be a win-win-win transaction for everybody. Now, as part of the holdings transaction, We announced that we expect to transition to a publicly elected board of directors. This is something that we started messaging back in the third quarter of 2020. It was aspirational then. We didn't have specific plans. But as time went on from quarter to quarter, we worked shoulder to shoulder with First Reserve and our independent board of directors to get this deal done. As a result, we bought in the GP interest. into Crestwood, so we expect to expand our board further. We'll continue to focus on board diversity as we expand the board, and we expect to hold our first board elections in the spring of 2022. At that point in time, Crestwood will be one of only three existing midstream MLPs that has a publicly elected board. We think that adds substantially to our ESG program. Additionally, on the ESG front, our team is working towards publishing Presswood's third annual sustainability report. As a new point of this third report, these disclosures will be in accordance with the Task Force for Climate-Related Financial Disclosures. So you'll see some additional information about how we're dealing with emissions here at Crestwood. This past year, we've done a lot of good work on methane emission reduction targets by tying it to our executive and our employee compensation plans. We're certainly looking now, as some of the industry is, to potentially make investments for responsibly sourced gas or RSG. You'll hear us talk about that more in the future. And we continue to collaborate with other midstream companies and trade groups across the midstream industry, like the EIC and the GPA, to educate the country on the benefits of responsible energy development and encouraging ESG best practices. So really proud of the leadership role that the team has taken across the industry in ESG. I guess as a final note, looking forward, as I pointed out, we're seeing growing activity across our GNP assets where producers are in fact showing capital discipline as we all hoped for. But rig counts on our assets continue to increase as the economics remain very, very strong in the areas that we operate in the Bakken, the Powder, and the Delaware, and because of high gas prices now in the Barnett as well. With crude oil hovering in the $60 per barrel range, our producer customers have 8 to 10 rigs operating across our systems, even more completion crews taking care of some of that duct inventory, and we are starting to have incremental discussions about adding additional drilling locations to the schedule in the second half of the year and early 22. So the outlook remains positive. I guess the last point, I know that some of you want to ask about the stagecoach divestiture process, which we're running with our partner Consolidated Edison. We've been engaged in that process for a while now. We expect to have more information on that process in the coming weeks. But I can tell you that we've been very encouraged by the number and quality of participants in that process. So with that as a final note, just really proud of the job the team did in the first quarter. I want to turn it over to Robert Halpin for a review of the first quarter financial results and give you an update on our 2021 guidance. Robert.

Great. Thank you, Bob. To echo Bob's comments, I'm also very proud to report another strong quarter for Crestwood. In the first quarter, our assets generated record adjusted EBITDA of $165 million, that up 9% year over year, and distributable cash flow of $108 million, that up 15% year over year, both above our internal forecasts and above consensus estimates. These results drove free cash flow after distributions of almost $64 million and which we used to reduce debt on the balance sheet, resulting in a leverage ratio of 4.2 times at the end of the first quarter. Crestwood maintained its distribution of 62.5 cents per unit for the quarter, resulting in a coverage ratio of approximately 2.8 times. Now let's look at the quarterly operating segment results. In the gathering and processing segment, first quarter EBITDA totaled $120 million, which was flat year over year. These results were driven by higher commodity prices that had a net positive impact on Crestwood's percent of proceeds contracts in the Bakken and percent of index contracts in the Barnett. And that went a long way to help offset some of the small volumetric declines or impacts that we saw as a result of the winter storm. As a part of Crestwood's conservative risk management practices, we took advantage of favorable commodity price movements in the first quarter to reset our overall hedge position for over 50% of our POP and POI volumes across the portfolio at attractive prices for the remainder of the year, which drives upside from our original budget and guidance range and provides cash flow certainty towards achieving our increased guidance range. Currently, we have 10 rigs operating on acreage dedicated to our GNP system in the Bakken, the Powder River Basin, and the Delaware Basin. This level of activity is expected to drive an increase in well connects in the second and third quarters, which will drive volume growth into the summer months and into the back half of this year. In our storage and transportation segment, first quarter EBITDA was $20 million compared to $14 million in the first quarter of 2020. The first quarter 2021 results exclude the impact of a $120 million goodwill impairment taken on our equity investment in our Stagecoach joint venture. This impairment charge is a non-cash adjustment of the fair value of the assets based on market-based information that was received during the quarter. Stagecoach has continued to see record demand as a result of increased production in the Marcellus, and as a result, both the storage and transportation assets are nearly 100% contracted. Moving to the Colt Hub, Rail loading volumes in the first quarter of 2021 increased 17% over the fourth quarter of 2020, as demand has continued to increase for crude-by-rail takeaway in light of the remaining uncertainty around Baffle. Finally, as Bob mentioned in his remarks, the Trace Palacios storage facility and our employees down at Trace performed exceptionally well during the winter storm, which played an important part in driving segment results during the first quarter. In the marketing supply and logistics segment, first quarter EBITDA totaled $31 million compared to $26 million in the first quarter of 2020. During the quarter, our gas marketing business benefited from market volatility driven by extreme weather, and Crestwood's NGL marketing and logistics team continued to see consistent retail demand. Going forward, Crestwood's NGL business expects to see increased commercial and refinery demand as economies continue to reopen across the country, which will drive enhanced margin opportunities for the business. Now moving on to the capital investments for the quarter, Crestwood invested $9 million in growth capital and joint venture contributions, which were focused on our produced water system expansions at Arrow and WellConnects in the Delaware Basin. We continue to expect four-year growth capital to be in the range of $35 million to $45 million, with maintenance capital in the range of $20 million to $25 million. As we've previously mentioned, at the end of March, Crestwood announced several important transactions that resulted in a simplified corporate structure and facilitated First Reserve's complete exit from its investment in CEQP. On March 30th, First Reserve closed on a private placement of 6 million common units to a high-quality institutional investor base for proceeds of $132 million. In conjunction with that secondary offering, Crestwood purchased First Reserve's remaining 11.5 million common units and the general partner interest for $268 million, which we financed on our revolving credit facility. By retiring 11.5 million common units, Presswood reduced its total units outstanding by 15%, driving substantial accretion to distributable cash flow per unit, which will also help drive $29 million in annual distribution savings at the current distribution rate, which results in incremental free cash flow distribution after distributions to accelerate our debt reduction objectives going forward. In connection with this announcement, Crestwood's Board of Directors also authorized a $175 million common and preferred unit repurchase program. While establishing the buyback program creates greater optionality for our strong expected free cash flow generation going forward, let me be clear, we remain firmly committed to prioritizing our free cash flow towards debt reduction until Crestwood reaches its long-term leverage target of three and a half to four times. Once we realize that target, we will continue to leverage the financial flexibility that we have to further optimize our asset portfolio and capital structure and potentially capitalize on our buyback program as opportunities present themselves. Last week, Crestwood closed the redemption of the remaining $288 million of 6.25% senior notes due 2023 at par by utilizing incremental borrowings on our evolving credit facility. Pro forma for this transaction, Crestwood has $2.6 billion in long-term debt outstanding, comprised of $1.8 billion in senior notes and $818 million drawn on our $1.25 billion revolver. With the full redemption of the 2023 notes, our next senior note maturity is not until 2025. Crestwood currently has more than $400 million in availability on the revolver, which when combined with our substantial free cash flow, provides Crestwood more than ample liquidity to execute on our go-forward business strategy. I am very pleased with where Crestwood is positioned at this point in the year. We have a line of sight on strong volumetric increases on our GNP assets and strong utilization on our S&T and MS&L infrastructure into the middle of this year, which gives us confidence in the assets' ability to generate between $575 million and $625 million in adjusted EBITDA for the full year. We also have a solid balance sheet highlighted by strong coverage and leverage ratios. We remain on track to generate total free cash flow after distribution within our revised guidance range of $130 million to $180 million for the year. With the first reserve transactions, we bought back 15% of our total common units outstanding, resulting in material accretion to our unit holders and cash distribution savings, resulting in significantly increased distribution coverage, all while increasing our total public unit flow. Finally, we've delivered on our stated commitment to best-in-class governance by taking action to eliminate our GP governance structure and put in place a path to a publicly elected board. We believe that all of these accomplishments taken together further differentiate Crestwood from our peers and will continue to drive increased value for our union holders. At this time, operator, we're ready to turn the call over for questions.