SEMG Q4 2017 Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to the SemGroup Corporation Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. As a reminder, this event is being recorded. I would now like to turn the conference over to SemGroup's Head of Investor Relations, Alisa Perkins. Please go ahead.
Alisa Perkins: Thank you, Rachel. Good morning, everyone. We are glad that you could join us today for our fourth quarter and full year conference call. I hope that you’ve had a chance to review our press release and earnings presentation, which can be found on our website. I would like to remind everyone that today's presentation may contain projections, forward-looking statements and certain non-GAAP financial measures. We encourage you to read our full disclosures and our latest press release, slide presentation and SEC filings for a discussion of those items. These materials contain reconciliations to GAAP financial measures. Hosting the call today is Carlin Conner, our CEO and Bob Fitzgerald, our CFO With that, let me turn the call over to Carlin.
Carlin Conner: Thank you, Alisa, and good morning everyone, We are pleased to be here today to review SemGroup’s financial performance for fourth quarter and full year 2017 and to share our expectations for 2018. Starting with Slide 4, we are quite pleased with the execution of our strategy as we now begin to see the results of these efforts. The last couple of years have been challenging due to market conditions, but our success in developing a new, more secure profile of cash flows will drive shareholder value as we balance upstream opportunity with demand pool security. Now to our results. We finished the year with a strong fourth quarter generating more than a third of the year’s total adjusted EBITDA in the last quarter alone. Adjusted EBITDA was $111.5 million in the fourth quarter and $328 million for the full year, which is at the high-end of our revised guidance provided in November. Our positive results for the back half of 2017 were largely driven by our contributions from our new Gulf Coast assets, Maurepas Pipeline and HFOTCO. The vast majority of incremental cash flows from these assets are secured by Take-or-Pay contracts. Bob will provide more detail on our fourth quarter results in a few moments. This morning we also announced a dividend increase of 5% to $0.4725 per share resulting in coverage of 1.7 times for the fourth quarter. The dividend will be payable on March 19, 2018. Our capital raise initiatives have been successful. In December, we closed on the sale of our 50% interest in Glass Mountain Pipeline for $300 million. At the beginning of 2018, we announced the sale of our asphalt business in SemMexico and our SemLogistics business in the UK for a combined total of $140 million. While these sales support our capital raise, the strategic aspects of our divestitures allow us to simplify our portfolio and focus on our core business. In addition, we recently closed on a $350 million preferred equity offering. In total, we have raised nearly $800 million, of which $650 million have closed and we expect that the remainder to close by the end of the third quarter. This total raise to-date exceeds the funding needed for the HFOTCO’s second payment, which we intend to pay by the end of the first quarter capturing the early payment discount of nearly $22 million. In terms of project execution in our key regions in 2017, we’ve reached a number of milestones in Canada, the Mid-Continent and on the Gulf Coast. In Canada, we are building on SemCAMS unique platform the liquids rich Montney & Duvernay regions. In December, CAMS announced construction of a new gas plant Smoke Lake after signing long-term processing agreements with two producers in the Duvernay. Discussions are continuing with other producers who may require additional capacity. The new plant will be interconnected with SemCAMS existing KA and K3 plants to leverage our super system of multiple gas plants, pipelines, liquids handling and sulphur recovery. In the Montney area, construction is progressing well on our Wapiti Plant. This project is on budget and on track to be completed in the first half of 2019. Once the Wapiti and Smoke Lake plants are in service, SemCAMS will have a combined 1.7 BCF per day of licensed gas processing capacity in Canada. This further enhances our foundation for future operational synergies and growth in this very active region. We expect further Montney development in the Pipestone area the north of the Wapiti Complex. But it’s too early to identify specific projects and timing at this point. In the Mid-Continent, the Canton Gas Pipeline extending our Northern Oklahoma processing assets down into the stack came online at the end of December and current volumes are approaching 100 million cubic feet per day and expected to grow in 2018. We continue to expand our low-pressure gathering system in Blaine County and are in discussions with other mid-stream counterparties to provide additional offloads that would feed Canton. The pipeline is operating at 35% to 40% of its current capacity of 200 million cubic feet per day and we still have the ability to expand it to 400 million cubic feet per day. Our belief is that the recently announced Mississippi Lime acreage divestiture by Chesapeake and other potential consolidation transactions with key producers, could lead to increased activity and drilling programs. We are well positioned to serve those increased volumes. To be clear, our current 2018 forecast does not include any benefits from this producer reshuffling. Although we are becoming more and more comfortable with the potential for increased rig activity, especially in the second half of the year. In the DJ Basin, we are continuing to evaluate opportunities to repurpose one of our White Cliffs Pipelines. Discussions have advanced appreciably since the beginning of the year and we remain optimistic on a potential project and look forward to discussing this more in the future. Also, on White Cliffs, we have received a strong response from shippers regarding our temporary incentive rate adjustment that was implemented late last year. In December, we saw an average of 107,000 barrels per day with a slight increase in volumes during the first two months of this year. Our TARP work in 2017 was successful as we handled significant excess barrels while MBCs ramped up on other systems. Our very strategic accomplishments on the Gulf Coast had immediately improved the cash flow security for SemGroup, while also providing near-term earnings growth and long-term development prospects. With the acquisition of HFOTCO, we are now earning more secure, downstream-facing cash flows in a very active region. HFOTCO is a remarkably versatile, unique, deepwater exposed and interconnected asset in a prime location on Houston Ship Channel, the largest energy complex in North America. Today, HFOTCO has performed consistent with our initial expectations and looking forward, we anticipate it will continue to produce expected cash flows. The capital project driving our near-term growth, a 1.45 million barrel crude storage expansion and construction of a new ship dock remain on budget and on time and should be completed by mid-year. Late last week, we provided a market update regarding the recent recontracting of our heated tank customers along with context on how the team has been successful at diversifying our service offerings beyond residual fuel oil over the last several years. As noted in the supplemental slides, with our crude storage expansion going into service in a few months, roughly one-third of our storage tanks will be in residual fuel oil service with a portion used for bunker fuel. That said, I am pleased to report that we have been highly successful at recontracting 100% of our heated tanks that were up for renewal in the fourth quarter and we are experiencing strong demand for storage during the first two months of this year. We are confident there will be a continued tank demand for heated products and we will continue to meet that demand. Also in 2017, as part of our downstream pivot, we completed our refinery-facing Maurepas Pipeline. In the fourth quarter, we received our first full quarter of cash contributions. We continue to see opportunities to extend the 24-inch crude pipeline that connect with other local refiners. Market developments like Caplines reversal, Bayou Bridge construction and shrinking heavy imports are important components in driving demand for the pipeline. Clearly, 2017 was a year of transition for SemGroup. We executed on our strategic plan of simplifying our business and adding stable, cash flowing assets with growth prospects to our portfolio. I’ll talk more about our outlook for 2018 in a few minutes, but first, I’d like to hand it over to Bob to review our 2017 results in more detail. Bob?
Bob Fitzgerald: Thanks, Carlin. Turning to the fourth quarter results on Slide 5, SemGroup reported net income of $2.6 million, compared to a net loss of $19 million for the prior quarter. Fourth net income included a $150 million gain on the sale of Glass Mountain Pipeline, which was offset by $120 million of non-cash charges related to the held-for-sale write-downs of SemMaterials Mexico and SemLogistics. Additionally, SemGroup recorded a deferred tax charge of $18 million, primarily due to the U.S. tax rate change. For the full year 2017, SemGroup net loss of $17 million, compared to net income of $2 million in 2016. SemGroup posted fourth quarter consolidated adjusted EBITDA of $111.5 million, a 23% increase over the third quarter reflecting full quarter earnings contributions from HFOTCO, and Maurepas Pipeline. On a full year basis, adjusted EBITDA in 2017 was $328 million, an increase of 16% over the prior year driven by our new investments on the Gulf Coasts. Moving to Slide 6, starting this quarter, we’ve revised our segment reporting performance measure from adjusted EBITDA to segment profit. As SemGroup management is in the midst of a transformational change in its asset portfolio, driven by the acquisition of HFOTCO, as well as the sale of several business units, management believes that asset performance is best measured on a segment profit basis before any allocation of corporate overhead. This of course does not change consolidated earnings. While our core segments remain the same, the amount previously reported for Corporate and Other for 2015 and 2016 have been recast to include SemGroup's former U.K. and Mexico segments. Reconciliations of segment profit to formerly reported segment adjusted EBITDA are included in the Appendix of our earnings presentation. We do not expect the recent tax reform changes to have a significant impact on our U.S. cash tax position over the next several years. Deferred tax assets and liabilities were restated at year end to reflect the federal corporate tax rate reduction to 21%. In addition, we do not expect any FERC-related TARP adjustments due to the tax law changes as we do not utilize FERC’s cost of service rate structure. We are required to increase the interest rate on HFOTCO’s tax exempts Hurricane Ike bonds in accordance with the indenture agreement. Similar to most tax exempts indenture agreements, our agreement contains a corporate tax gross up provision in the event of a tax rate change in order to maintain the investors’ expected returns. For HFOTCO, that increase was approximately 25 basis points resulting in a borrowing rate of still less than 3%. This change will increase our cash interest expense by approximately $550,000 per year. We ended 2017 with net operating losses of $166 million, compared to $147 million at the end of 2016. We do not expect to be in a U.S. cash taxpaying position through at least 2021. Now turning to Slide 7 for a look at our fourth quarter profit by segments. Crude Transportation fourth quarter segment profit was $41.6 million, an increase of 20% over the prior quarter due primarily to the full quarter contribution for Maurepas Pipeline, partially offset by lower White Cliffs Pipeline volumes. Crude facility’s reported fourth quarter profit of $14 million compared to $9 million in the third quarter. The fourth quarter profit includes $5 million related to an annual volume deficiency payment at our Platteville Truck Unloading Facility. The related Take-or-Pay contract expired late 2017. Crude Supply and Logistics reported a loss of $1.5 million, essentially flat with the prior quarter. The segment’s profitability declined year-over-year as basin differentials tightened during the year resulting in compressed marketing and blending margins. HFOTCO posted a fourth quarter profit of $33 million, reflecting a full quarter as a SemGroup asset. Total contributions to SemGroup in 2017 were $61.5 million. Turning to the SemGas segment, profit was $14.5 million, a decline of $1 million from the third quarter reflecting lower volumes in Northern Oklahoma. SemCAMS profit was $23.7 million for the quarter, up $7 million from the previous quarter. The increase in the fourth quarter reflects $3.5 million increase due to Take-or-Pay deficiency recognition and producer recoveries, coupled with an increase in volumes. Moving to Slide 8, our leverage and liquidity position. We ended the quarter with consolidated net leverage ratio of five times and consolidated available liquidity of $980 million. Looking forward, we expect the end of 2018 with consolidated leverage in the mid to high 5s. We continue to target consolidated leverage of five times or lower, which we expect to achieve by the end of 2019. I’ll now turn the call back over to Carlin to discuss guidance for 2018.
Carlin Conner: Thanks, Bob. Our 2018 guidance is covered on Slide 9. We expect adjusted EBITDA of between $385 million and $415 million. This reflects more than a 20% increase in year-over-year cash flows. Our adjusted EBITDA guidance assumes that the sale of SemMexico and SemLogistics closed by the end of the first quarter and second quarter respectively for combined partial year contribution of $9 million. This slide outlines several key assumptions underpinning our guidance. There are a few points I’d like to draw your attention to. 2018 adjusted EBITDA guidance includes the benefit of a full year HFOTCO and Maurepas contribution and incremental volumes at SemGas related to the completion of the Canton Pipeline. These assets continue to perform as expected. Our 2018 guidance is absent approximately $25 million year-over-year related to asset sales and approximately $15 million related to one-time items reported in 2017. We anticipate SemGas Northern Oklahoma base volumes to remain flat to declining given our current outlook with existing producers. Due to continued tight basin differentials and lower blend margins, we are assuming a $10 million to $15 million negative contribution from supply and logistics. Having said that, we feel there is potential for upside at SemGas from acreage ownership changes, which have not been reflected in guidance. In addition, we could see improvement in Supply and Logistics if differentials return, but we have not factored that in at this time. Looking further ahead, 2019 looks even stronger with the full year of contributions from HFOTCO’s crude expansion project. It will also include initial half year contributions from the Wapiti Gas Plant, plus the built-in growth in our core businesses. Based on our current outlook for growth, we are targeting an annual dividend growth rate of at least 5% through 2019. Turning to Slide 10, we plan to spend approximately $310 million for growth CapEx across our three strategic areas. Maintenance CapEx is projected to be $40 million. In mid-2018, we expect HFOTCO’s crude tank expansion and ship dock five to be completed. The Wapiti and Smoke Lake plants are scheduled to be completed in 2019. Slide 11 provides a summary of the efforts of our capital raise. The $790 million of capital raise today enhances our liquidity. We intend to pay the HFOTCO’s second payment by the end of the first quarter allowing us to capture nearly $22 million in discounts. The excess capital combined with our retained cash in our revolver will be re-utilized to fund our anticipated 2018 capital projects. As we have previously discussed, we will continue to be opportunistic in evaluating future capital raises as new high-quality projects present themselves. That brings us to our final slide. The last year has been a period of transition and transformation. We executed on our plan to simplify our portfolio and add more stable cash flows with downstream-facing assets. We are just beginning to see the results of this and we expect to continue on this positive trajectory through 2019 and beyond. We are well positioned to create strong value for shareholders, especially as we see new contributions from key projects in Canada, the Mid-Continent and on the Gulf Coast. With that, I’d like to thank you for your time this morning and now turn the call over for questions. Operator?
Operator: [Operator Instructions] The first question comes from Elvira Scotto with RBC. Please go ahead.
Elvira Scotto: Hi, good morning. Can you talk a little bit more about HFOTCO, specifically around residual fuel oil market? Last week, we saw the announcement at IMTT, then you have the IMO regulations coming in. How do you see this market evolving? How much of your residual fuel oil is bunker fuel?
Carlin Conner: Hello, Elvira, this is Carlin. So, and you think about residual fuel oil, the market is changing. It’s been a market that we have said repeatedly in the past it’s flat to possibly been a declining market. The diversification at the current HFOTCO team has undergone with the projects in the past has been I think very constructive for our future. Currently, today, only a third – once we finish our crude expansion, only a third of the tankage at the HFOTCO is for residual fuel oil. We have a lot of other heated products that we see growing demand. So those tanks, as we continue to look forward continue to be used for non-residual fuel oil storage. With respect to IMO, we’ve said quite some time that we believe we are in a good position. It’s neutral to positive for us near-term. There is definitely going to be some changes in how marine bunker fuels are built going forward. We believe we are in a very good position to help fuel suppliers with that, as well as again, as I’ve always said remembering that the bottom of the barrel is still coming through these refineries. We are in a great position to aggregate barrels for ultimately to be shipped out of the country for other uses, the size of bunker fuels, industrial fuels, power plants overseas and other needs. So, we see – we definitely see some noise in the market, but we see our facility being in a good position to continue to deliver the results. Furthermore, our recent recontracting efforts have proven that ought to be the case. While I think that was a fairly negative report from another terminal on their recontracting efforts during the same timeframe, we basically recontracted a 100% of our heated tanks. So we do not see that as a read through to what’s happening in our market.
Elvira Scotto: Okay, great. And then, just a couple follow-ups on that. I mean, could you – because you have some good real estate there on the Houston Ship Channel. Can you or would you potentially even repurpose more tanks?
Carlin Conner: Well, that’s all about the opportunity and we definitely see the facility being prime real estate and having the waterfront that we have. We can definitely envision meeting other market demand beyond the crude oil and reside that we need today or heated products. So, we continue – our commercial guys continue to think about that and as opportunities present themselves, we will always evaluate incrementally what the CapEx requires to flip these tanks into an alternative service and what the potential benefits would be for that kind of move.
Elvira Scotto: Okay. And then, just in terms of your recontracting, what are you seeing on the rate side? I mean, you’ve recontracted, but are rates steady? Are they - or were they lower or higher?
Carlin Conner: Well, as you can appreciate, we don’t want to give our customers and competitors too much market information. But, when you have a facility that is already is maintaining contract renewals, you have ups and downs. And we have both. In our recontracting, we’ve seen some positive move and we’ve also seen some negative movement. I’d say the balance would be – it’s neutral. When you net everything out, we are forecasting for 2018 right on top of the numbers that we modeled when we acquired the facility.
Elvira Scotto: Okay. So that was the $135 million to $145 million of EBITDA?
Carlin Conner: It’s correct.
Elvira Scotto: Okay, great. And then, just the last one from me, and then I’ll jump back in the queue if I have more, but on White Cliffs, can you just talk a little bit about your confidence level on heating your guidance of 100,000 barrels a day to 110,000 barrels a day. You have some MBCs that are ramping that are ramping on a competing pipeline. Can you just kind of talk about your confidence level on that?
Carlin Conner: Yes, this is Carlin again. We have quite a bit of confidence in our forecast of White Cliffs. As you know, we had two TARP maneuvers last year. One was we tried to grab volume from a very large producer who was a shipper and then when that TARP strategy ran its course and we saw those barrels move to a competing pipeline as part of their ramping MBCs. We didn’t move the strategy to trying to attract a new wave of producers that were smaller and did not have commitments on the pipelines and also some marketers out there and that TARP strategy also was successful as we did 107,000 barrels in December, which is as you know, way above our MBCs and we did that in the phase of ramping MBCs. So, I would tell you that, I think we have been spot on, on how we have managed the White Cliffs with this increased competition. The good news is, we start to see a lot more activity in the basin as well on the crude side. So we feel like we’ve kind of going through the low in the valley of not only crude production being in question, but also a lot of competing pipelines coming online. We seem like we have gotten through that. Now it’s important to appreciate that we’ve also – with that TARP structure we lowered effectively our average TARP and when you look at our MBCs plus the excess TARP. So, our volumes are good, but our earnings are slightly down with respect to White Cliffs.
Elvira Scotto: Got it, okay. Thanks, I’ll jump back in the queue later.
Operator: The next question comes from Shneur Gershuni with UBS. Please go ahead.
Shneur Gershuni: Hi, good morning everyone. I guess, maybe I’ll start off by continuing the White Cliffs discussion from Elvira. You sort of talked about in your prepared remarks about the potential to repurpose one of the 12-inch lines. Where would you put the probability of that going to – through to fruition? And if you can talk about the logistical challenges, that wouldn’t be needed to overcome to make that necessary would you have to build it further. I was just wondering if you can sort of talk about how that process is?
Carlin Conner: Well, let me say this much, I won’t put a probability on it, but we obviously are very confident for us to continue to talk about this. Feel it really good about it. The discussions with potential shippers has been, as I said in my notes, it’s gained appreciably I think since the beginning of the year. So there is definitely, I think something to be done with the repurposing. It’s really all I want to say about the probability. I think from a what does it take to repurpose the pipe, clearly we understand that we need to be able to be in a position to receive where liquids are coming from and we also need to be in a position to deliver where liquid need to go. So that’s part of the project and I really don’t want to say anymore about that. But you can appreciate that that is all contemplated in the project, origin and destination. As far as White Cliffs itself, there is – you are handling a lighter product. So there are some up redo that you need to go through and there is possibly some other small minor items that you have to taking count for. Good news is, it’s going north to south like the crude pipe. So, it’s really about cleaning it and making these minor modifications and getting the origin and destinations figured out.
Shneur Gershuni: Okay, great. Just a follow-up on some of the assumptions with respect to your guidance. First of all, you’ve cited a turnaround as part of an issue with SemCAMS. Can you walk us through if there is a schedule and a timeframe as to when the turnarounds typically occur? Is it a certain time of a year? Is it every two or three years? I was just wondering if you can sort of give us a sense on how to be think about it over a longer term basis?
Bob Fitzgerald: Hey, Shneur, this is Bob. I’ll take that one. Yes, there is a schedule. We typically will do the turnaround every four, five years. Last year of course, we did a turnaround at K3 and then this year we are doing a turnaround in the second quarter for KA. We expect that to last three to four weeks and as you know that we expect volumes to drop and that’s what we’ve included in our forecast through the second quarter, that’s beating into the guidance.
Shneur Gershuni: Okay, and so, is it fair to assume through the next three years, we shouldn’t be seeing any turnaround activity at either of the facilities?
Bob Fitzgerald: That’s fair.
Shneur Gershuni: Great. And then, finally, with SemGas, I’ve seen with the Canton Pipeline the margins should be falling as more volume is ramp up and so forth. How should we think about the segment performance, not including the potential that you could see some increased drilling activity. But, how should we be thinking about the segment performance for this year sort of – you are rising volumes but you have the margin headwind versus legacy declines in some of the existing wells. How does it shake out over the course of the next year or two?
Bob Fitzgerald: Yes, of course, we are not going to give segment guidance at this point, but what I’ll say to address that is that, you are right in that. We do expect margins to overall in average decline, because the fact that we are not doing extensive gathering with the stack. We are just basically taking volumes and we are moving it up the pipe into the processing plants at Rose Valley. So those margins structurally are going to be just lower because we are not nearly trying to recover as much capital as we do in Northern Oklahoma and the Mississippi Lime. We are expecting that growth to hit as we’ve talked about the last couple of quarters with the project for Canton that will contribute to some increasing EBITDA contributions going forward. But it’s going to be at a lower rate as Carlin mentioned in his prepared comments.
Shneur Gershuni: If I remember correctly, you were able to put more compression on the Canton line. What would be sort of the decision factors as to when to go or no go on something like that?
Carlin Conner: Well, this is Carlin. The teams out commercializing that capacity and as we find deals that makes sense and give us an acceptable return on our capital and good risk reward profile, we would then make the decision to pull that compression forward.
Shneur Gershuni: Would there be kind of like, is it, do you sort of have to weigh the lower margin on those margins or is this potential for rig activity to ramp at the Mississippi Lime that you don’t want to use up some of your capacity at Rose Valley? Or is there enough capacity to basically handle both at this stage?
Carlin Conner: Well, we are speculating a bit on the renewed interest in the line. We do believe that with Chesapeake selling that acreage that the buyer is probably going to get back to work and put some rigs in place, so we are excited about that. Again, it’s not in our guidance. So I want to be clear about that. As we see that development happening, we will definitely have to take a look at available capacity at Rose Valley and we have lots of options including offloading if we need to offload, if we fill up, I think it’d be a fantastic problem to have if Rose Valley is filled and we have Canton also contributing the – needing to contribute more gas to that plant.
Shneur Gershuni: Got it. Great, thank you very much. Really appreciate the color guys.
Operator: The next question comes from Tom Abrahams with Morgan Stanley. Please go ahead.
Tom Abrams: Hey, thank you. I wanted to ask a little about the year end 2019 debt-to-EBITDA goal at 5.0. Can you make that without asset sales do you think?
Carlin Conner: I assume, Tom, you are referring to the comments we made in the prepared remarks that we’re going to trying to drive it down over the next two years as to the end of 2019. And we could do that, we could do it with a number of options. It could be some asset sales. It could be some other structures that we want to do to raise some additional funding. The option – we have a number of options. I think that’s the good news here. And we’ll continue to look at that. We’ve got a few other assets that we’ll continue to look at, but we’ll also look at other things as well including growth of the business and naturally delevering a bit.
Tom Abrams: Sure. All right. And then, I wanted to ask about – around the Maurepas extension. You mentioned that might depend or be impacted by other decisions in that area. Can you just walk through what presents a capliner per seller or some of the other things you mentioned?
Carlin Conner: Well…
Bob Fitzgerald: With the competing projects or would they be something that would support your project?
Tom Abrams: Certainly, since the timing of that.
Carlin Conner: Yes, I am sorry to interrupt, Tom. So, it’s no different than what we’ve already said. For Maurepas to be a viable and valuable pipeline for refiners that are downstream of the Narco Refinery, St. James needs to have a slate of crude oil and potential blends that are going to be attractive to those refiners. So we’ve always talked about the liquidity at St. James, the quality. And also obviously discounted barrels. So, any of those projects or any of those items I mentioned are we think contributes to liquidity at St. James, and we think we’ll change – maybe the decision process and accelerate the decision process for these refineries to go ahead and secure access to St. James via pipeline. I do not consider any of those being competitors. I think those are the add to the story why Maurepas we think is very valuable beyond just the Shell contract and that is – it gets St. James barrels closer to those refiners that are further down the river.
Tom Abrams: Got it. All right. Thanks a lot. See you soon.
Operator: The next question comes from Craig Shere with Tuohy Brothers. Please go ahead.
Craig Shere: Good morning. Is the SemGas sale off the table for now? And the initial SemLogistics sale value was a little light, how likely do you see a back-end or now do you have to wait for years on that? And how large can it be?
Carlin Conner: So, let me first say that the earn out is structured, I think it’s a four year earn out. I think, we every year we’ll reconcile. There is a cap to that earn out. It’s pretty significant and I’ll tell you that the probability is, we are hopeful. We’ve seen earnings out of that facility that point to possibly reaching it. So we are hopeful for that. I will say that, selling a logistics was really partly cleaning up the portfolio and simplifying the portfolio, I should say. The structural business at SemLogistics, it was difficult for us to continue to support the continued investment in that market without more structural business. So, it was something we felt like we needed to do, perfect timing as we raise capital and redeploy and simplify our story. So, I wouldn’t focus too much on any near-term multiple. There were years where we earn nothing at SemLogistics. So, I would say, it’s a good exit for us. I think the counterparty is the perfect buyer and the perfect owner and we look forward to Valero taking it over at some point and also taking our employees which we will miss those employees. As far as the SemGas, I’ll tell you that the – when we – last third quarter last year, when we were starting to get in balance about potential valuation of SemGas, we went through the process and we were little bit disappointed that people were not assigning a proper value for what we consider a significant part of that business and that is the Mississippi Lime acreage. And so we decided, we pulled it back and didn’t hit our number. So we pulled it back and now we are going to invest and continue to operate and run a good business like we’ve already have. If someone would come back around and offer something that made sense to us like any other asset we have like with Glass Mountain, we would consider potentially divesting. But right now, we are happy with what’s happening with Canton, what’s happening with potentially the Lime acreage and we’ll see what the future holds.
Craig Shere: Understood.
Carlin Conner: Right now, we are operating this facility as we are going to grow it, excuse me – this business.
Craig Shere: Very good. And on the White Cliffs repurposing, I know you’ve already had a couple of questions, but could we have an announcement as early as the first quarter call? It sounds like you might have something imminent?
Carlin Conner: I’ve always seem to make mistakes when I start putting timelines on things. So I’d rather say that it’s very, very close we think and we’ll see how it plays out.
Craig Shere: Okay, and how do you think about growth CapEx funding over the next couple of years and achieving the under five times leverage? Can you digest additional low CapEx to EBITDA projects at SemCAMS, Maurepas, HFOTCO without resorting to equity issuance at these depressed levels?
Bob Fitzgerald: Yes, I think, as we look at it, Craig, we think that given where we are at and obviously our CapEx spending is as indicated in our guidance for 2018, we are going to continue to look at those projects. Those projects come at small bites taking some of the big bites. So, as we look at those opportunities, we want to be cognizant of driving total shareholder return and then the funding options, as we mentioned earlier, we’ll continue to look at whatever our opportunities might be, whether those are future asset sales using – debt using our equity or some other process. As Carlin highlighted earlier, our cash flows come through EBITDA are growing significantly this year and in 2019, we are going to have full year of the HFOTCO project and then we’ll have a good part of the year with our Wapiti Plant. So, those cash flows are going to contribute to funding those growth projects as well.
Craig Shere: Okay, and the bottom of Slide 10, the attractive EBITDA multiples for HFOTCO and a couple of the SemCAMS projects, can you discuss the time to achieve?
Carlin Conner: Are you looking at?
Craig Shere: I am sorry.
Carlin Conner: Yes, so, you are looking at Slide 10 in the presentation of capital expenditure guidance?
Craig Shere: Yes, the six or seven times multiples on those key projects.
Carlin Conner: I think, as always, it was a big installation. You have a little bit of ramp, but not much. I think in the case of the HFOTCO projects, I think that’s fairly immediate. Wapiti Plant, I think we have a little bit of a ramp on that one and I am not certain on Smoke Lake, Bob, if you have any?
Bob Fitzgerald: Again, the Canadian plants are going to be supported with Take-or-Pay. So, in of itself it’s going to help us to ensure that we get to those EBITDA multiples quickly.
Carlin Conner: Was that the question about the ramp?
Craig Shere: Well, I am just trying to get a sense, well, two things. One is it going to take, maybe a year or two from start-ups to get there and two, are you assuming much beyond the initial contracted commitments?
Carlin Conner: Well, as you know with the Wapiti Plant, we have 120 of the 200 committed and that plant has a little bit of a ramp, but we are in the middle of the commercializing the remaining 80 million a day and we’ll think we’ll have that, as Bob alluded to, Take-or-Pay contracts ASAP. So, those will be relatively immediate, I would say, as far as the contracts. But there may be some ramps in those contracts on the volumes as they come up and I think the same can be said to Smoke Lake.
Craig Shere: Okay, thank you.
Operator: The next question comes from Tristan Richardson with SunTrust. Please go ahead.
Tristan Richardson: Hey, good morning guys. Just on the SNL drag in 2018 being pretty consistent with 2017 and obviously, you guys made the decision to absorb some P&L to facilitate movement for your customers, but curious opportunities to bring that in or where you can make changes to that business to reduce some of the drag there?
Carlin Conner: Tristan, this is Carlin. We’d like think of SNL as a business that does support the rest of the business as well as it has its own separate P&L and the 10 to 15 is, as you point out, that is the drag on their book. I mean, that’s what they are bringing. They are also paying us quite a bit more than that other – in services using our pipes and trucks. So, if you combine all that together, it’s a positive outcome. However, we like the way to think we want to make sure S&L is looking at the market properly and we think they are. If you look back in past years, we’ve made $25 million, $30 million, $35 million a year on the S&L business when the markets were in our favor and we believe that’s important to keep that option open and keep the relationships open, keep our fingers in those markets. You can’t just kind of come in and out with this business. So, even though, we had a rough 2017, we are forecasting a rough 2018. We still believe it’s a business that you got to support, because they will snap out of it. It’s a multi-year cycle. And when they’ve snapped back out, and you make good money doing this business. So, we feel like, it’s the right play for us. It drives other earnings, but also on zone it will – it could make quite a bit of money in the proper market conditions. I will say that, we may be taking a more negative view in 2018 in some others, but we just wanted to be sure we get this forecast right and we wanted to make sure that we had – we really thought through the downside scenario. So we went with pretty drastic negative 10 and negative 15 in our forecast for - million for S&L.
Tristan Richardson: That’s helpful. Thanks Carlin. And then, just, I guess, curious, how much utilization uplift do you see in the – by using the S&L?
Carlin Conner: Bob will correct me if I state this wrong. But I want to say, we spent $40 million to $45 million – they spent $40 million to $45 million into corporate services.
Tristan Richardson: Okay. And then, just last one from me, curious on the outlook in the facilities business, it seems, utilization is expected to be strong, but curious about the guide, how that reflects maybe the pricing environment at Cushing across your customers?
Carlin Conner: As we look at Cushing, a couple thoughts, we most recently actually extended a contract here in the first quarter that was on a one year, or year-to-year renewal process. So we did to that at the right that we had in the contract. We did at rates – I believe it was with the new customer last year too when we’re getting ahead of that and that was in that kind of low 30s. So, as we look forward, we think the rates, very well could be in that low 30s. But it all depends. The market is pretty volatile right now. So, we are going to pay attention to what the producers are – or the customers are looking for Cushing storage. What they are looking for today, it’s not just the lease rate it’s also throughput and the throughput capacity. So that’s becoming a much bigger issue, not just for us and other terminal operators, but also for the users getting that throughput out there. So we are looking at both items and we’ll try to optimize around both items.
Tristan Richardson: That’s helpful, Bob and then, just asking it in other way. So the guidance that you guys have put out for 2018, does that incorporate some of the – just of Cushing being a volatile market right now?
Bob Fitzgerald: Yes, what it assumes is that, we are renewing, we put our assumptions in there for what we’re doing. As indicated in some of our past calls, we don’t see a significant change this year. In 2019, we do some more renewals hitting us. So, we are working this year, but we are also keeping an eye forward into 2019 to see what – how that market develops.
Tristan Richardson: Okay, thank you guys very much.
Operator: The next question comes from Christine Cho with Barclays. Please go ahead.
Christine Cho: Hi, everyone. Can you remind us the SemGas? How that works on with respect to the Chesapeake acreage? Does that transfer over to the potential new owners as is or do you anticipate that there is going to be some sort of negotiation around rates?
Carlin Conner: No, it would transfer – anything going with Chesapeake as you might recall, that’s under a 20 year acreage dedication. So, we would expect that to transfer with the real estate, with the land going forward.
Christine Cho: Okay.
Carlin Conner: Throughout the environment
Christine Cho: Okay. And then, can you talk about how the contracting works for that non-crude oil portions of HFOTCO? I think many of them – many of the customers have been on this system for a long time and I think the contracts are on an evergreen basis. But if they are or are not going to renew? How much advance notice do they have to give you?
Carlin Conner: I don’t know the specific notice requirements, but typically, you’ll see conversations start up with the commercial teams at least six months to a year ahead of those contract negotiations renewals. And usually that – they start way before the notice period right, because you don’t want to wait until the notice period. So - and because HFOTCO has developed kind of a market-maker reputation, the customers that are there and you rightly pointed out that their average length of time at the terminal has been fifteen plus years. Those folks who have built the business around that asset are very, very protective of losing any kind of tankage in the facility, because in that business, if you are not there, where the markets being made, then you are potentially going to put your own business in jeopardy. So, and then the refiners are much more longer-term and thinking through this. So, they are a bit different, I would say, and they typically do longer-term contracts. But I’ll tell you Christine, we will have advance notice way ahead if we start to see any deterioration that gives us any kind of concern. And again, we believe we have multiple levers to pull if the residual fuel oil market continues to slide down a bit.
Christine Cho: And do you find that the contracts kind of roll or like do the contract expirations really happen at a certain time of the year or is it pretty ratable throughout the year?
Carlin Conner: I don’t have that in front of me either, but I would tell you, when I remember looking into due diligence of HFOTCO’s that it was pretty ratable throughout the year. The commercial guys that are in charge of keeping the tanks leased are kind of non-stop discussing with commercial folks from our customers.
Christine Cho: Okay, great. And then last question for me, you guys, I think provide the consolidated customer mix for all of HFOTCO, but curious if you can just give us any color on the portion that’s just resid fuel, like what the customer composition of that segment looks like? And I think I the presentation, you guys also refer to something called like niche traders. Are those the types of traders that like, specifically only trade in one certain commodity or can you give some, I guess, explanation on what that means?
Carlin Conner: Yes, I would say niche traders are these companies I was referring to earlier that their business revolves around the assets, around the terminal at HFOTCO. And so, those folks are the ones who – that’s their workplace. They need that terminal for them to gather different qualities and different products and bring it in and do what they do. So, those are niche trader and then of course, I think everything else is pretty self-explanatory on that chart. As far as the make-up of residual fuel, we probably won’t give in too much granular detail more than we’ve already given, but I can tell you that, we handle a significant amount of residual fuel oil that is not bunker-related. So, bunker fuels, pure bunker fuels are a portion and it’s also important to remember residual fuel is aggregated on the Houston Ship Channel and shipped to all places around the world, right. And some of that oil eventually end up in a bunker fuel in Singapore maybe or somewhere else or it may end up in a power plant in China. We don’t really know beyond the protocol what ends up happening after that. So, it’s kind of – we know what our customers do and we know what the products are used for, but we really don’t know what our customers do with those products.
Christine Cho: Helpful. Thank you so much.
Operator: The next question comes from Ryan Levine with Citi. Please go ahead.
Ryan Levine: Good morning. What were the determinant factors in setting the new dividend policy? And what should we look for post-2019?
Carlin Conner: Well, Ryan, it’s like, we always say, every – once a year, we like to take a stop and take a look at the – look at our earnings past and what we forecast earnings to be, look at our capital needs, look at our balance sheet, look at the market expectations and weigh all these different factors and then come together with the Board with a recommendation on we think as a dividend that is sustainable and supportable. The 5% for us make some sense. I mean, we are growing coverage and we feel like that that is a quantum of capital. It’s – I think $7.5 million. It’s not going to change or leverage metrics materially. So we think – but we do think we have a lot of investors who are still yield investors who want to see us continue to grow dividend, but we are not going to be beholding to that specifically and we just going to – that’s one factor. And I will tell you, I think it’s a reasonable growth rate and when you think about the coverage and the cash flows we have coming on in the next two, three years, contracted cash flows. These are projects that we have, we just have to finish the execution on. So, we feel like we are in the wheelhouse, so where we need to be and we’ll see how things develop over time.
Ryan Levine: Okay. And then, just on the follow-up from a capital raising standpoint, if some of these growth initiatives were to require, I mean, from out of spending, would you be able to go back to the preferred market? Is that the common equity market still on the table as an unattractive funding mechanism?
Carlin Conner: Are you talking about incremental to the plan?
Ryan Levine: Correct.
Carlin Conner: Yes, incremental to the plan, depending on the size and the negative carry of an investment, all those things matter in determining whether or not how we will finance those projects. So, it depends. It’s obviously, we are working on leverage. So, anything that’s really large that has a significant negative carry to it as we develop it will put pressure on us and we probably need to be thoughtful about how we would finance that project, whether it’s a JV, whether it’s common equity, whether it’s pref, whatever or asset sales. But the plan as we have it today and Bob will correct me if I was going to state this, but the plan that we have it today and growth we have, we feel pretty good about the financing.
Bob Fitzgerald: I might just add Ryan to that that, we just spend a lot of time talking about the pref, but we are very pleased with that transaction and partnering up with the firm like Walberg. We've got, what we think is pretty attractive rates. We’ll always look at the cost of capital on anything that we are doing to fund those types of growth projects that we have going forward. And if we think it’s more attractive on the prefs and we’ll have the potential, we can even tack on to the existing prefs that we just did. So, we’ll take a look at all those options and what the costs are and then we’ll make the appropriate decisions from there.
Ryan Levine: Okay. And then on Canada, and one of the questions you alluded to the recontracting or new contracting schedule for SemCAMS, is there anymore color you could provide on the contracting schedule throughout the year? Are there any meaningful milestones that we should look for beyond the 120,000 a day?
Carlin Conner: For SemCAMS?
Ryan Levine: Yes.
Carlin Conner: With SemCAMS, we expect as far as the volumes and activity is going, we expect SemCAMS to be relatively flat today. I think what you refer 120 is, is the Wapiti plant where we have that plant – that plant will be 200 million a day, when it’s up and running. Here we expect that to happen in the second quarter of 2019. And as we look at that, we fully expect to have that plant completely contracted. We are getting pretty close down that with other commercial parties that want to join that plant. We’ve always indicated that we thought we get that done in advance of go live. We have even more confidence in that today than we did when we sent out the plant. So, yes, that would be a part of that contribution going forward immediately.
Ryan Levine: Okay, great. Thank you.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Carlin Conner for any closing remarks.
Carlin Conner: Thank you all very much for joining us today. We appreciate your continued interest and support. Have a great day.