Plains GP Holdings LP (PAGP) 2016 Q4 法說會逐字稿

Welcome to the Plains All American Pipeline and Plains GP Holdings' fourth-quarter and final 2016 results.

(Operator Instructions)

Just as a brief reminder, today's conference call is being recorded. I would now like turn the call over to Director of Investor Relations, Ryan Smith.

Thanks Jonathan. Good morning and welcome to Plains All American Pipeline's fourth-quarter and full-year 2016 earnings conference call. The five presentations for today's call can be found within the Investor Relations and News and Events section of our website at www.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 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 website.

Today's presentation will also include selected financial information for PAGP. PAGP does not directly own any operating assets and it's 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's 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 - US; 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 will 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 a conference call that addressed PAA's agreement to acquire the Alpha Crude Connector. In connection with that event, we also provided updates on our Permian Basin 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 condensed 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 result of our review of reporting and conference call practices of our peers, as well as suggestions received from several investors and analysts to condense the guidance and the length of our prepared remarks, to take into consideration that we release our results on the day prior to our conference call.

We also expect some cost savings and internal efficiencies and also quickly discovered that our commercial group favored reducing the amount of potentially competitive information, as we are aware that several of our competitors also monitor the information we provide. With respect to the information released last night, as shown on slide 3, these 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 Al will discuss that modification in a moment. Excluding the positive impact of these adjustments, I would characterize the amounts as generally in line with the prior guidance of plus or minus 1% variance.

As we discussed recently, drilling activity has picked up and there other very encouraging signs on the 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 discussed during his part of the call, we have a number projects that will be completed around midyear and positioned to ramp up in the latter half of 2017.

Accordingly, these factors have been incorporated into our 2017 guidance and we expect to see a fairly significant improvement in late 2017 and fully into 2018. With that in mind, I would characterize 2017 as an event-filled year of transition.

Included on slide 4, 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 the PAA's pipeline. Expansion of the Bridge Tex & 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 in 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 the closing of $70 million of asset sales currently under contract and the potential for further non-core asset sales.

We anticipate the improvement in operate 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 2017.

We look forward to providing you updates on our progress toward that objective throughout the year. With that I will 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 5, 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 gas storage facilities, as well as lower operating costs.

Lastly, adjusted EBITDA for supply and 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 6, we continue to progress our multi-year capital program. In 2016 we did approximately $1.4 billion of expansion capital investments, including key projects anchored by MVC's and other contractual support, such as our Permian Basin Stateline project, our Red River and Caddo pipelines and phases of our Fort Sask NGL hub expansion.

We anticipate $800 million of CapEx in 2017 as noted in our January 25 conference call. 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 multi-phase program at Fort Sask. In-service timing information for our larger projects are included on slide 6 as well.

Slide 7 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 is 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 8. We expect our transportation segment adjusted EBITDA to increase approximately $174 million or 15% over 2016.

This is driven by a combination of: Permian production growth; our acquisition of the Alpha Crude Connector; the benefit of 2016 and 2017 capital projects; the MVC step-ups on several of our pipelines. All of this, more than offsetting the impacts 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 in connection projects in progress, which we will complete mid-year or shortly thereafter to support meaningful, anticipated production growth in the second half the 2017. Additionally, PAA's STACK joint venture pipeline is strategically located and will benefit from 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 US crude storage capacity that will be placed into service in 2017 as well as the completion of Canadian NGL storage and [fractionation process] offset by the impact of recent and pending asset sales. In the US, we will add roughly two million barrels of storage in Cushing, St. James and Patoka by midyear.

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 2017, which will drive significant adjusted EBITDA growth in late 2017 and beyond.

Overall, we expect the supply and 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.

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 guidance of $2.36 billion.

Also shown, is 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 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 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 by pursuing incremental non-core asset sales and strategic joint ventures. 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 will turn it over to Al.

Thanks Willie. During my portion of the call, I will discuss our capitalization and liquidity, financing activities in 2017 funding plans, as well as several accounting related matters. As shown on slide 9, at December 31, 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 a $400 million note mature in January, so liquidity after repaying the note was $2 billion. PAA ended 2016 with long-term debt of $10.1 billion, which represents a decrease of $250 million from year-end 2015. 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 in our current 2017 expansion capital program with proceeds from asset sales, additional common equity and retained cash flows but 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 our PAA continuous offering program. For total net proceeds of $516 million. Total proceeds for both the PAA and PAGP programs have totalled 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 metrics have been modified 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 the 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 tax 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 tables in the press release we issued yesterday. We used financial derivatives to hedge purchases and sales of physical commodities 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 hedged 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 derivatives 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 gain from 2015.

The mark-to-market loss is non-cash and will roll off upon the occurrence of the hedged physical transaction, over half of which will occur in the first quarter of 2017 and nearly all of which will occur in the next 12 months. I would also note that when we incur mark-to-market losses, we are generally required to deposit cash margin with our clearing broker's.

At year end we had $410 million of cash margin deposited with our clearing broker's. We fund margin deposits with borrowings from our short-term hedged inventory facility, which is repaid with the proceeds generated when the hedged physical transaction cash settles, along with the associated financial derivative.

The final accounting item I will touch on is our current income tax expense for the quarter, which was $17 million of guidance and negatively impacted DCF. This was the result of a flip between current and deferred taxes as result of a year-end true-up in our effective tax rate calculation. With that I will turn the call back over to Greg.

Thanks Al. We appreciate your precipitation in today's call and for your investment 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 is to provide more opportunity for more participants to ask questions. With that in mind, I would ask you to please abide by the rule of one question and one follow-up question and then queue up again if you have additional questions. Operator we are ready to open the call for questions.

(Operator Instructions)

Our first question comes from the line of Shneur Gershuni, UBS. Your line is open.

Hi, good morning guys.

Hi, Shneur.

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 are thinking about the guidance for this year, in terms of your exit rate? When I look at the transportation guidance was very positive and encouraging, but the S&L was a little less so.

When we think about your expected 4Q 2017 earnings run rate, which is quite healthy compared to the rest of the year, does it set transportation up for an even bigger 2018 because its exit rate is fairly strong? Or is it really S&L that's going to be the driver in 2018 where it starts to return to a more normalized level? Just wondering how -- if you can give us a weighted bridge, your exit for 4Q 2017 as to how we would think about 2018?

Yes, Shneur, I think you put your finger on it. The preponderance of 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 the fourth quarter.

But were not expecting anywhere close to a return to the kind of margins per barrel that we saw three or four years ago. We do have quite a bit volume pickup, so even at lower margins but higher volumes in S&L, we do have some contribution there.

I think -- when we think about 2018 and 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 in -- because the number has gotten to be where it's relatively small, you're talking about a $35 million or $40 million pick up in 2018.

The bulk of what we're looking for into the strong quarter, is going to come from the fee-based activities. Again, we have 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 doesn't just turn on at full rate. 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. If you detected a sense of significant enthusiasm about the fourth-quarter of 2017 and full 2018, that was because that's exactly the way we feel.

Shneur, I would add, the big project that is coming on is the Diamond Pipeline. Finishes year end 2017 and will set us up well for 2018 because we've got MVC's on that.

2018 transportation is going to pretty good too. As a follow-up question, I was wondering if you could 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 could give us a little bit of color on how 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 or continuous operating programs.

They've been very cost effective and clearly, as you can tell, we've been able to raise a large amount 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 with thinking of. Clearly, if you run the math on the information we provided in the ACC call, the amount of equity is fairly modest relative to the size of the company.

It's probably plus or minus 4%. 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. Hopefully that addressed your question.

No, it does. Thank you very much guys and I'll get back into queue.

Thanks Shneur

Our next question comes from the line of Jeremy Tonet, JPMorgan. Your line is open.

Good morning.

Good morning.

Just want to touch on the supply and logistics a little bit more and just wondering, if you could frame for us how you see that guidance upside versus downside risks and then 1Q 2017 versus 4Q 2016, what are some of the Delta's there? It seems like that is stepping down a bit there.

You know it is. We're continuing to see and as equally enthusiastic as we are about our fee-based activities going into 2018, we're cautious about the first six months to nine months. Jeremy, we're just seeing an intense amount of competition.

Some of the drop-down in the first quarter is -- there were some weather related issues. I think you may have heard some producers, especially in the Williston. We factored in what we think is the right adjustments to reflect reductions in volumes and also we're going to see an intense competition in some of that area.

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 up 65%, 70% plus of the margin just because of competition out there.

Do we have some wood to chop in S&L this year? Yes. That's why were talking about being cautious on the first six months 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's.

Then we include in that, Jeremy, the local refining because as a practical matter even though there may not be a commitment, they have to buy their barrels in order to run their refinery. We include that in a 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've got to pay for. Regardless -- we also see some and going into 2018, some MVC's roll off at a higher tariff.

There will be some MVC commitments, ours included, that roll in at a lower tariff and that should affect competition a little bit. Again, as we look out -- we think we will probably see a base level of $500 million plus or minus. But we probably may not see it until we get beyond 2018.

When Shneur asked his questions earlier and was talking but the upside, I think we have got $365 million in S&L for 2017 in our guidance. If we are up 10%, we're at $400 million, so we're still short of the $500 million.

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. Obviously, we've got incremental capacity on the likes of Cactus and BridgeTex, at decent rates, that as we see volumes come up the bottom line is, they need to ship on just about every pipeline coming out of the Permian. So we expect to get our share of that.

Maybe just the last one. Picking up on that point, when do you see the timeframe of when those pipes could fill up and are there any other brownfield's where you could add a little pumping or something else to increase your take away capacity out of the basin?

I don't think there's going to be a large opportunity to increase existing capacity. I think most everybody has a -- tweaked the capacity increases that are available.

We think the second half of next year, in 2017, you can start seeing enough crude -- we stay in this $55 price environment and the rig activity at the levels we're seeing today. We think by the second half of the year, we should start seeing more of a balance between the MVC's and the crude available for -- basically for the market.

Your question on take away capacity because of the project that Enterprise has coming on 2018, I think they've announced they're going to go ahead and go straight to the 450 thousand barrels a day. We don't see a shortage of take away capacity.

But the margin -- the amount of headroom, if you will, between production and take away gets tighter. That should obviously improve the realizations on the gathering margins. And potentially even some of the realizations on the pipeline tariffs.

We do think, there's -- 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 the rigs. It's a manufacturing operation.

Think of it like a short-cycle oil sandfield. It's just replete with resources and they are getting better and smarter at how they get it out. 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 can move that number forward quite a bit and obviously if you decreased it, you can move it out. We think -- we were looking at options already for how we make sure the producers can move their oil.

Probably not by the end of 2017, but by the end of 2018, there may be either new builds or loops. And you mentioned brownfield, I think you were referring to adding pumps. But you can add loops and much more effectively than you can building a true greenville pipeline.

Is there anything else you could share with us on that loop factor? The Cactus upside surprised us a little bit, so we're trying to get a feel for what you've got there.

I would say this. I think there's a lot of missiles 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.

There's some bottleneck constraints -- between Midland and Cushing. You can create some additional capacity by looking at the segments of that line.

That's helpful. Thanks.

Thank you, Jeremy.

And our next question comes from the line of Brian Zarahn of Mizuho.

Good morning.

Good morning, Brian.

I have one question but it's in 10 parts.

Nice try.

On the 2017 transportation guidance, can you give us a little more color on the 600,000 barrel a day volume growth? Is that pretty much all in the Permian except for the new projects? If you could elaborate a bit on that and what you expect to end exit rate volumes in 2017?

Yes Brian. This is Willie. I'll make it comment on that.

When you look at our volumes, make sure you -- we will remind you that they are tariff volumes. If you look at the growth numbers -- between the growth numbers in the Permian that we expect, in the multiple volume tariffs we get on it; there's a multiplier effect.

Combine that with the step-up in MVC's on one of our large pipelines, that's a significant portion of that. Everything else is optimizing around what we get, trying to get as much barrels into the system. These are the two big pieces.

To elaborate on Willie. If we move a barrel from the well head to Midland and that's a tariff movement on the gathering barrel and then we move it on a take away barrel, that's going to count that barrel twice.

So it's not necessarily counting that we get 600,000 barrels, 8/8's of all the production in the Permian. In some cases we may touch that barrel, not only two times, but three times, and possibly even four times in certain areas.

Any comment on where exit rate volumes relative to total volumes -- relative to your average?

We are going to have an analyst day on May 24 and I think we're going to be able to rollout some additional thoughts on an area-by-area basis, and we certainly intend to do that at that point in time. I mentioned earlier, part of our consideration for how we modified our exposure was our commercial guys kicking us under the table every time we shared too much information. I do think by the time we get to the May 24 analyst meeting, will be able to share some data there.

Some of that growth is also the [offices] that we acquired.

The follow-up would be, understanding a lot of the production is a manufacturing type process but there are crosscurrents. How do you assess the efficiency gains relative to high inventories and some creeping oil services cost inflation, how could that potentially impact your production growth outlook?

It's a great question. Clearly, we're all feeling better in February 2017 then we did in February 2016. Partly because of OPEC's change in body posture. 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 a 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 it's production, because the economics are there even at lower levels.

Certainly the areas we looked at, like the northern Delaware, I mean, the rate of returns are almost triple digits. 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.

We expect Permian to basically persevere. The level of production 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, obviously ExxonMobil just made a significant investment.

I don't necessarily think they is going to be cash flow constraint and even if they are, they will probably do an asset allocation or capital allocation that will favor the Permian. I would also just point out, that doesn't mean that people that own production in the Permian and production in the Eagle Ford, that implies that the Eagle Ford's not economic -- not only these prices but even lower. It's just not as economic.

I believe our focus on the Permian, where we have our largest asset base and our most operating leverage. We tried to sensitized 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.

Thanks, guys.

Thank you.

And our next question comes from the line of Kristina Kazarian, Deutsche Bank. Your line is open.

Hey, guys.

Good morning, Kristina.

A clarification question for you. I know you touched on this on slide 6. How should we be thinking about MVC levels on these projects, especially in context of that $174 million number on slide 8? You list a bunch of bullets below the $174 million. How does MVC make up half of this and what is the break down of these bullets?

Yes, on slide 6, the Diamond Pipeline is really not a contributor of any significance in 2017 at all. The other systems that we are -- we're bringing online, and the MVC step-up, we're finishing the Red River, we're finishing the Caddo Pipeline in 2016. So it's really ramping up in 2017.

Those are supported by MVC. Our Cactus Pipeline, there's a step line -- step-up in MVC's on that for a couple of our customers. Saddlehorn just came into service and we get a full year of it. Those have effected the MVC's. There's a lot of underpinning to the uplift. It's certainly not 100%. I haven't calculated exactly what it is.

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 2017 going into 2018. Again, I would tell you we are cautious about the first six months.

We'll measure ourselves with how we provide guidance, really for 2018 as to how well we've execute on our side and how well we've anticipated the volume growth. A large part of that, that we discussed earlier in Jeremy's question, is really underpinned by MVC's.

Kristina this is Willie. I was quickly doing math here as Greg was talking. To give you a little more color on that.

On project startups, MVC step-ups, which we are very certain of, it is well more than half of that number. That gives you a little more color on that.

That's great. Al, maybe throwing one your way as well. Can you touch on slide 9. You talk about the long-term leverage target as 3.5 to 4 times. In your mind, when is that reasonable to occur?

If you just do the math -- we've stated, we would intend to exit the year at or below that $10.1 billion. And with the cash flow growth, in our EBITDA, that's what we are showing on that slide, is an LPM or a look back number.

You can -- you can calculate it at year end 2017 and see we're slightly above it. We would expect to be at or inside that range in 2018. We're at the momentum.

Perfect. That's very helpful. Thank you.

And our next question comes from the line of Christine Cho of Barclays.

Hi, everyone. I wanted to start on the S&L guidance of 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 puts and takes in there? And then with respect to the adjusted EBITDA per barrel coming down, is that mostly the assumption of more shorter hauled volumes or should we assume longer haul spread gets worse before it gets better, the second half of this year? I know there were some scheduled MVC ramp up's 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.

Yes, to address the first part of your question. The increase in volume is not related and that part is not related to the ACC acquisition. It is related, in many parts, to the expected volume increase, we expect to see primarily in the Permian. Offset by some reductions, quite candidly in other areas. Because there will be a sag in certain areas in the first six months to nine months of the year.

I think, when you pull it all together without getting too granular, the volume growth is associated -- primarily in the Permian and the margin pressure is because we expect to see intense competition continue for the first six months to nine months. Then NGL, we're assuming -- we've got the Spector volumes that we bought last year. We get a full-year this year. Those margins per barrel are going bring your average down a little bit from where was too.

You're right, it's a cascade of things but I would say the overall theme is -- it's not ACC, it does include some of the Spector acquisition for a full year. And then we're candidly marking-to-market our expectations with respect to what volume growth -- excuse me, gathering margins are going to be.

And we hope we get it right. It's pretty intense out there.

Okay. Then just as a follow-up, you know, your -- the exit rate for 2016 and the Permian was 2.1 million barrels per day. You expected to be 2.5 million barrels at this year end.

If I was 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. You're talking about back to the 100,000 on the gathering?

Yes.

Yes, keep in mind again, we reference to the fact that you've got the full year of the Spector acquisition.

Okay.

I think in general, we try never to talk in terms of market share, but we have a big footprint out there and we're a major player. It's probably more in the 25% range.

We had some volume increases in the STACK scoop as well. That would be the second-largest area.

The Permian would be the largest. As Greg mentioned, the NGL ramped with the Spector assets contributing.

I might just mention, on the STACK, we're equally enthusiastic about volume increases there. I mean it's shown to be probably second only to the Permian, in terms of growth.

Percentage wise it's much higher. For us, quite candidly, as a logistics company it's so cotton 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.

Thank you.

Thank you.

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

Yes, good morning, everybody. Greg, if you could just help us understand the Permian numbers that you're putting up. Because I'm reading the fourth-quarter 2016 numbers right, I guess this has to do with the multiple touches on the barrels.

You're actually reporting a higher volume number than, I guess, the entire Permian production. Going forward, is there some sort of a multiplier we should think about relative to the Permian production?

So if you're if you're exiting at around 2.5 in 2017, would that imply 5% or 10% above that, because of the multiple touches or help me think about that better for helping us model out our volumetric outlook.

Yes and -- John, I'll acknowledge that when we changed our guidance detail, for all the right reasons, we recognize it will force some model rejiggering. Probably the best thing to do is trying to deal with that a little bit off-line and talk about some of the different components, as you try to model that.

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've been going one direction, may go different direction on there and it will change the margin and it could change the volumes when it comes off a third-party line.

And John, there is certain movement there, where within the Permian number, we would have three different tariffs moving -- there is a multiplier effect, as you indicate.

Okay. So --

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 -- if the barrel went on Cactus you would actually have another half movement down in our Eagle Ford numbers.

That wasn't the nature of the question but on some of these, you do get actually three different tariffs -- independent tariff movements, that would be three barrels.

Sort of high levels, if your thinking say 2.5 exit rate 2017, should we be thinking Permian volumes on your pipes of 2.7 times, add 200 -- some rule of thumb. Maybe I can take this off-line. Getting kind of granular here.

Yes, we'll take it off-line. Your question is very valid and it's probably a good exercise for us to try -- because we can look forward on our numbers too, to find out if we gave you a number this year is a going to be applicable next year. We'll consider that and circle back around to you.

Okay. Then, just the other question -- Al, just backing up into the equity -- equity needs. So our calculation is a sizable amount of equity in 2017 to keep long-term debt at $10.1 billion figure.

We're -- 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, it would be helpful.

Yes, I mean -- I mean a very high level way of attempting to calculate it would be, ACC and our expansion capital program equals $2 billion. We've got just under $700 million of asset sales in 2017 that would -- that would leave you --

Before cash flow.

-- before retained cash flow. And you also look at, we completed already about $190 million in the first-quarter in January.

My guess is if you're walking that math, you get right around $1 billion of equity. Clearly, if we sell some more assets, that number could go down. If we do the -- the $1 billion of equity that I just walked you through, was what we completed in five months on the ATM programs.

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 too, we think to the underwritten market or an overnight market if we choose to go that way.

So we think it's actually a very modest number relative to the size of the company and what our track record has been.

And that's why I think Al's earlier mention, John, plus or minus 4% of our equity market cap. 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 delever a little bit more aggressively.

As we discussed with grade agencies, to make things, happen possibly earlier. I think it's very valid question, it's just in context of the size of our company, it's not that much in terms of overall either dilution or execution risks.

Yes okay, fair enough. I'll get back in the queue. Thank you so much.

Thank you.

Your next question from the line of Michael Blum with Wells Fargo. Your line is open.

Thanks. Here's a question for Al. Just wanted to know whether rating agencies be giving you credit in the way they 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. I want to make sure I'm looking at that correctly. And then will the rating agencies look at it that way as well?

Short answer is yes, we believe so. We think this is actually what others are doing. We looked at a number of our -- 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, before we released earnings, back when we were talking with them with the ACC acquisition.

Okay great, thank you.

The next question comes from the line of Vikram Bagri, Citigroup.

Hi guys. In the question highlighted $300 million of upside from Permian transportation and facilities asset. I imagine that the number is closer to $400 million after the ACC acquisition. Two questions on that.

With the BridgeTex and Cactus expansions underway, how much of incremental CapEx is required to achieve that EBITDA number? And two, once Permian production is 3 million barrels plus, and take away gets [tied] how much of that EBITDA gets captured? I'm trying to understand if you are taking anything for trucking and real assets in that $300 million upside?

I think the best thing we can do, that number -- I think we've 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 recalibrated it in May, is kick the can down the road a little bit.

We can provide the full presentation of that and have a chance to demonstrate it 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 -- volumetrically all the things you just said to be true.

From a competition standpoint, I think you're going to see -- we'll be interested to see how overall transportation tariffs fair out as these new capacity comes on. We'll give you a better calibration -- there is some gives and takes. I think net is probably up but I don't to give you a precise calculation because I think there's also some takeaways.

Okay. Sounds good. And as a follow-up, (inaudible) segment, it sounds like the benefit of contracts on interest assets rolled over last year.

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 outlook on the FRAC tax credit at the [inference] facilities. That's an ongoing program we do with the assets that we had prior to the Spector acquisition. We continue that program with the Spector acquisition.

Thanks. That's all I had.

Thank you.

Our next question from the line of Ross Payne, Wells Fargo Securities. Your line is open.

How are you doing? 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. 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.

Right, 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 -- with regard to Moody's, I think it would be premature for us to comment specifically on our discussions with them. Clearly, you've read the write up that they put out. We continue to have discussions with them as they work through their review.

We want to retain, as you know, the Moody's IG rating and we intend to take all reasonable steps to do so. I think it would be premature to comment on some of those discussions.

Thanks.

Yes Ross, I would just add -- we've obviously got a lot of arrows in our quiver as we go through the year. Al's mentioned asset sales. There's also, as you look forward and I realize people like to do a trailing LTM or a current quarter annualized; but when you've got a major capital program that you're finishing and you've also got volume growth coming through MVC's 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 a little bit on where we're going, because we're going to turn that finance capital into cash flow.

That's an important factor as they look forward. You add to that, things like the preferred that we did, which it dings us, I think, for about $800 million plus or minus of debt. We view it as purely equity.

Nonetheless, that's in their calculation. That becomes convertible at the end of 2017. It wouldn't cost us any equity to our shareholders, but it would -- just the conversion of that would reduce debt by 0.3 turns.

There is some other things out there that as we go through 2017, reinforce the concept that 2017 is a year of transition. Not only for performance for our stake equity holders, but also for our debt holders.

That's very helpful. Thanks, guys.

The next question comes from the line of Tom Abrams with Morgan Stanley. Your line is open.

Thanks lot. What's left? Let's go up to Canada, this question you may also 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 with Trans Mountain and Energy East and Keystone XL and just the production keeps growing. Maybe some bottlenecks on residual gas.

There's a lot of things going on up there. Is it a place where at the end of this decade you could -- you could be spending several hundred million dollars on infrastructure?

Well, you read my mind when it you said it probably something we should kick to May. I do think there's 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's 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 -- we're not the company that's going get -- try and get in front of and compete with a 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.

Great. Thanks a lot. We'll see you tonight. Hope it's a good barbecue.

You got it.

The next question from the line of Ethan Bellamy of Baird. Your line is open.

Good morning, guys. What's the crude oil assumption behind your guidance? I heard you say $55 and Greg could you talk about how you see prices playing out? And then I think it's a slim possibility, what would a border adjustment tax do to your business?

In our assumption, for purposes of trying to assess development activity, we're assuming roughly $55 a barrel. To put a little bit of a finer point on it, with the exception of the Permian, we're basically assuming that producers drill within cash flow.

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 outspend 5% in the aggregate of cash flow. At the rate that we're seeing right now, there may be a conservative assumption.

Again, I don't think at 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. At best, we have a lot of data. There's a trade-off out there. If OPEC meets to do what they said they're 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 US and even 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 billion barrels a day over what we did last year. About half of that is gasoline. You need more inventory to be able to be an effective manufacturing operation.

As far as the border adjustment tax, I've got a tell you and I've read so many things about how it's going to work or how it's not going to work, how it's going to come in. I think we are just going to stay tuned.

The ones that we think it will have the biggest impact on obviously, will be the refiners unless there an exclusion there. How it affects them will create both opportunities and headaches for a midstream. But we get paid to move barrels.

Whether it's an imported barrel or a domestically produced barrel, we're -- I say we're indifferent. Obviously, we went to see as much coming out of the Permian as possible. As I said in my earlier comments, we think the Permian probably perseveres almost no matter what happens with price or world supply demand balances because it's just such an economic barrel.

Always very helpful, Greg. Thank you.

Thank you.

The next question from the line of Jerren Holder, Goldman Sachs.

Thanks, good morning. What's your outlook for US crude exports increasing and how are you positioned to benefit this when we get to that point?

Yes we're -- 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 up to 3.5 million barrels a day and we're at 2.1 million barrels, that means 1.4 million barrels has got to go someplace other than Midland. Most of the pipes are pointed toward the Gulf Coast.

That's why we think there may be support for something going to Cushing, which could be the Midwest. If you look at the barrels that are going to converge on the Gulf Coast, not only out of the Permian, but Dapple, the Gulf Coast itself has been increasing of late.

It tells us that you're going to need more and more exports. We have some [dock] capacity. We've got some under development. We'll probably provide a better picture of our views on that and its potential impact on us in the May analyst meeting.

Thanks. As a follow-up, can you remind us as you raised equity on PAGP's ATM or COP, how did that process work? You're simultaneously buying PAA units? Can you remind us of how that works?

Yes, that's correct. Basically the net proceeds realized from the PAGP's sale buys a common unit from PAA. On a one-for-one basis.

Thank you.

The next question from the line of Robert Balsamo with FBR.

Hello, guys. Thanks for taking the question. Just some housekeeping stuff left.

On the maintenance CapEx, your DCS guidance, I noticed it's going down -- seems to be going down year over year and continuing that trend, how do we think about that moving forward? Is that still just a belt-tightening during the down turn, expect it to increase in the future -- just general thoughts on that?

Yes, 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 asset sales that we've transacted on. A lot of the asset sales may have been a bit higher on maintenance capital than the rest of the system.

Okay, great. And then as part of that DCS guidance, just that other entities that are small contributors, but just what goes into that line item that's left in the DCS [parens] in other -- seems different than previous years.

Yes, the -- the two adjustments, are two things that kind of get aggregated into that other -- still the 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. My comments, in the prepared remarks about the adjustment we made gets those two closer together. That's why you actually see that number being smaller.

The second part that gets aggregated there, is we do have one consolidated entity that has -- that has a partner in it that we make distributions to. The primary reason why that's pretty tight, is our adjusted EBITDA and the cash received, that's the biggest part of that adjustment.

Okay, thanks very much.

Thank you.

And our next question from line of Danilo Juvane, BMO Capital Markets

Most my questions have been hit. Just want to follow up on the Cactus and BridgeTex expansions. When do you guys expect to getting the committed shipper of volumes on those expansions?

Well, we're in discussions. I don't know that we can actually give 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 of the volume growth that we see coming. Whether that means we get spot walk-up shippers as the volumes grow or we get people that are trying to secure, perhaps rates that are below the walk-up rate and getting certainty to a market.

That will this kind of play out over the next six months to nine months, I suspect.

Those are low cost expansions. We didn't need commitments to fund those expansions.

Okay. I appreciate that.

I guess as I relate that to the guidance you provided for supply and logistics this year and just going forward, to the extent that we continue to see additional -- these are loops or expansions of existing systems. How does that translate to you getting back that $500 million base buying long-term?

We'll I think -- the $500 million base long-term with the supply and logistics is independent of the transportation volumes. It's really more associated with the growth and the production volumes that is not committed to other pipelines. Therefore not being bought at a loss, if you will, to try and subsidize the amount they would otherwise lose on the MVCs. Again we're -- hopefully we're being conservative but I certainly think we're being realistic.

We're not anticipating that to happen in 2017 for sure or 2018. It's probably, a beyond 2018 event. I don't know if it's 2019 or 2020.

My earlier comment was if supply and logistics picks up 10% in 2018, that would put us at $400 million, so we'd still be $100 million short. What's going to drive our performance is going to be the fee-based aspects of it which is tied to a combination of MVC's and visible volume growth that needs takeaway capacity that we can provide.

Okay, thank you. That's it for me.

Thanks.

The next question from the line of John Chianti of Cope Key Management. Your line is open.

Good morning.

Good morning, John.

How much do currently have outstanding under your commercial fee program and what would happen with that in the event you were downgraded to sub-investment grade by Moody's and lost your prime commercial paper rating? Please.

Sure. We fund bulk under our DP program and our credit facilities. The reality of it is, we're probably most of the last year, the interest savings of CP versus our credit facilities is very small.

As you know, you have to have 100% backup for a CP program. The reality of it 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.

Just on that same line -- has 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.

Your earlier comments for example, 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 committed and intend to maintain it.

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 -- your earlier thoughts that you would really do whatever it takes? Please.

Let me just say this as CEO, we are committed to investment-grade. There has been no deterioration in our passion to maintain that. You know, I think what Al is saying, if we had to cut off our head to try and maintain something, that wouldn't make a lot of sense.

But any reasonable prudent actions -- and understandably, people can disagree on what those are. No, there's been no deterioration at all in our commitment to the investment grade and maintaining it at all three agencies.

Yes and clearly I agree with what Greg just said. Part of the comment there, and we touched on this in our ACC call, our recent conference call. You might listen to that.

Clearly with Moody's, prior to the day before the ACC announcement, we were operating under a concept of 5 1/2 times leverage under their methodology by year-end 2017 and that changed. That's where we aren't 100% sure as to the timeline, whether, we have until year end 2017 with them.

Or the new number is around 5.0 with an undetermined date to it. That's probably why you might sense a little bit. Yes, we're very much committed to try to do it, if it's reasonable. And we can.

Yes, I heard what you said on the ACC call. I thought it was helpful but it left me a little bit confused and uncertain. I understand what you're saying that, may be the goal posts potentially have changed a little bit.

From a timing perspective, I guess, since you are on review for downgrade, they typically resolve 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?

Correct.

Got it. That's very helpful. Thank you.

And our next question comes from the line of Selman Akyol with Stifel. Your line is open.

Thank you. 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. If you were to adjust 2016 for some asset sales there's probably more growth there than the 2%.

I guess, I'm curious as to really what's driving that, what are your assumptions behind it especially given your opening comments? You said you had a frac coming on late in the fourth quarter.

That's a pretty moderate competitor to this year. We have more storage at Cushing, a little more storage at St. James. We have the Spector assets that we acquired [to] our facilities. All those, sort of offset and create the increase over the asset from the East Coast and West Coast terminals that we've sold.

All right. Thank you.

Thank you.

We have another question from the line of Shneur Gershuni of UBS

Hi. Just a follow-up question, guys. In thinking about that new alpha connector pipeline that you have.

Would you expect S&L to become a shipper on that pipe? Do you expect it to demonstrate a shipping history over time?

It might. Most of that is committed to the system. So it's sort of irrelevant who the shipper is because it's contractually committed to the system.

We'll certainly try to work with the producers to see if we can give them access to a better market. If that means we purchased the barrel and ship on their behalf and deliver a barrel back or something.

As Harry said, those volumes, as they produce them, they're committed to the system. To the extent they are uncommitted acreage opportunities out there, that'll just depend on a negotiated basis. Clearly as we looked at the ACC system, we saw that as upside opportunity not a base level essential requirement.

Thank you very much, guys. I appreciate the call.

Thank you.

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.

That's it that my perfect next statement. I think we have one more question and we will come to a close.

Certainly, thank you and last question comes from the line of Tom Abrams from Morgan Stanley.

A perfect way to set it up here. A little tongue-in-cheek. When you sell one share of PAGP and buy simultaneously one share of PAA, what to do with the other $1.40?

It all goes to PAA. PAA gets the benefit of that arbitrage.

Got it. Thanks a lot.

Thanks everybody for participating in the call. We went a little bit longer on Q&A because we took a little longer to explain what we were doing. Will try to hold these to one hour to be respectful of your time and ours.

I appreciate all the support. We are done on this call.

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.