SEMG Q4 2018 Earnings Call

Operator: Good morning, ladies and gentlemen, and welcome to the SemGroup's Fourth Quarter and Full-Year 2018 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] Please note this event is being recorded. At this time, I would like to turn the conference over to SemGroup's, Alisa Perkins. Please, go ahead.

Alisa Perkins: Thank you, Elison. Good morning, everyone. Our call today's will be hosted by Carlin Conner, our CEO; and Bob Fitzgerald, our CFO. Dave Minielly, Executive Vice President of SemGroup U.S. Operations is also here. Before we begin, I would like to remind you that our earnings release and presentation for today's call include projections, forward-looking statements and certain non-GAAP financial measures. We encourage you to read our full disclosures in our latest press release, slide presentation, and SEC filings for a discussion of those items, including reconciliations to GAAP financial measures. As you may have noticed, in this quarter's materials we have changed our segment reporting to better reflect our current business portfolio, which has undergone significant change since 2017. SemGroup will now report results for three operating segments: U.S. Liquids, U.S. Gas and Canada. U.S. Liquids includes the results of SemGroup U.S. Crude Transportation, Crude Facilities, and Storage Operation, Crude Supply & Logistics and HFOTCO. U.S. Gas contains the results of the historical SemGas segment. Canada includes the operations of our historical SemCAMS segment along with our newly acquired Meritage assets. Our prior Mexico and U.K. operating segments are included within Corporate and Other, as these businesses were sold in 2018. Reconciliation to our prior reporting segments are included in the material. With that, I'll turn the call over to Carlin.

Carlin Conner: Thank you, Alisa, and good morning, everyone. We're pleased to be here to discuss our fourth quarter and full-year financial results. We also have a number of strategic accomplishments to review, including the recent SemCAMS Midstream joint venture with KKR and the continued execution of the plan we set forth over three years ago. In addition, Bob and I will provide details on our financial and operational expectations for 2019. As you can see on Slide 4 of our earnings presentation, we began transforming our company in 2016 with a mission to create a portfolio with cash flow diversity and increased certainty, driven by midstream needs from both the upstream producing and downstream refining sectors. We took a step in this direction with the construction and multi-decade contracting of Maurepas Pipeline. We then took a more significant step with the acquisition of a large scale and extremely versatile crude and products terminal on the Houston Ship Channel. Along the way, we decreased our direct commodity exposure via recontracting and asset developments like the Canton Gas Pipeline and the partially repurposing of White Cliffs to NGL service. We also divested non-core assets that competed for capital and added cash flow volatility all the while staying opportunistic with other capital raise initiatives. In the midst of these changes we acted on business development opportunities in began to extend and leverage the footprint of our legacy business. Fast forward to this year where in Canada, the Wapiti plant came online two months ahead of schedule and within budget. Construction of the Smoke Lake plant and Pipestone Pipeline are well underway. And the expansion of the Paterson Creek plant part of the Meritage acquisition is scheduled to come online in the third quarter of this year. The transformation and growth from the Gulf Coast to Canada has resulted in a significantly higher proportion of stable fee based revenues, a more diverse customer base and clear path to growth moving forward. While we have captured our desired Gulf Coast platform and are building a competitive Canadian footprint, other aspects of our business have faced headwinds driven by lower commodity prices and collapse differentials. At the same time, energy capital markets have been challenged to say the least. Against this market backdrop we have proactively raised $1.6 billion over the past year and a half to fuel our growth projects and make progress toward our balance sheet goals. We executed the capital raise at attractive cost of capital through a combination of non-core asset sales, preferred equity and strategic financial transactions. The SemCAMS Midstream joint venture with KKR, which we closed on this week, brought gross cash proceeds of $484 million to SemGroup as well as an excellent set of assets contiguous with our existing footprint in a high growth basin. As we advanced our Canadian strategy, we are pleased to have a strong financial partner with deep energy experience at our side. The SemCAMS Midstream management team, which has a track record of operational success and on time, on budget construction expertise, is focused on integrating these assets and capturing efficiencies as well as future opportunities. With the restructuring of our portfolio largely complete, we have reorganized our business segments to better reflect our operating structure. As Alisa mentioned in the opening, our new segments are U.S. Liquids, U.S. Gas and Canada. From a management perspective, this structure allows us to better align our operational and commercial goals while becoming more efficient and effective. The new U.S. business segments better facilitate our ability to identify and act on commercial opportunities and leverage our assets from the DJ Basin and Cushing to the Gulf Coast. Our proposed Gladiator project is a great example of seizing commercial synergies by integrating our Cushing terminal with our Gulf Coast footprint. We have extended the open season on this opportunity to the end of March, in response to significant customer interest. The project offers customers seamless connectivity from the Rockies and Mid-Continent to a vast network was marketing - including our HFOTCO terminal on the Houston ship channel. In addition, we're working on a number of other opportunities on the Gulf Coast including new product and feedstock, pipeline connectivity to refineries, as well as expanding our access to long haul pipelines. Now turning to Slide 5, for 2019 guidance highlights. We expect adjusted EBITDA to grow in 2019 continuing in 2020 based on a combination of incremental earnings from contracted in progress growth projects, improving crude marketing margins and the growing contribution from the Meritage acquisition. We expect adjusted EBITDA between $420 million and $465 million in 2019 and cash available for dividends or CAFD in the range of $155 million to $200 million. The year-over-year reduction in CAFD reflects the expected impact from asset sales including the JV transactions we recently completed. We expect to spend just over $300 million for capital projects this year. Net the SemGroup including $262 million in growth CapEx primarily around our Canadian and Gulf Coast footprints. As previously announced, we decided not to increase the dividend for the quarter and at this point expect to keep it flat throughout the year. Although our dividend coverage is strong, we remain focused on our balance sheet strategy and the fund high return organic growth projects. Bob will now provide more detail on our financial results and segment expectations.

Robert Fitzgerald: Thanks, Carlin. Starting on Slide 6. SemGroup reported net income of $3 million in the fourth quarter compared to net income of $8 million in the prior quarter. The change quarter-over-quarter is primarily due to higher income tax expense and foreign currency losses. For the full-year 2018, SemGroup reported a net loss of $24 million compared to a net loss of $17 million in 2017. Fourth quarter adjusted EBITDA was up 9% at $105 million compared to $96 million in the third quarter. The quarter-over-quarter increase reflects higher volumes and margins in our U.S. liquids business, which was somewhat offset by a $5 million, non-cash lower cost or market charge, expected to be recovered in the first quarter of 2019. Adjusted EBITDA for full-year 2018 was $394 million, a 20% increase from $328 million in 2017 and within our guidance of $385 million to $400 million. The year-over-year increase was driven by the full-year earnings contributions from Maurepas Pipeline in the HFOTCO acquisition, both of which came on line in the second half to 2017. Our cash available for dividends was just under $57 million for the quarter, resulting in a 1.5x coverage ratio. We will use the excess cash flow to help fund our balance sheet goals and organic growth projects. We ended the year with a consolidated debt leverage ratio of 5.3x more than a half turn improvement from the third quarter reflecting the deleveraging impact of the Maurepas joint venture. We expect to continue this deleveraging effort with the Canadian joint venture as well as with other initiatives that we are pursuing. More details on our year end leverage and liquidity position are included in the appendix of our earnings presentation. Now turning to Slide 7 for segment profit results. U.S. Liquids reported segment profit of $86 million for the quarter, a 13% increase over the prior quarter. Full-year 2018 segment profit was $309 million, a 35% increase over the prior year. The quarter-over-quarter increase was driven primarily by improved marketing margins, a full quarter's contribution from the new storage tanks at the Houston Terminal and higher White Cliffs Pipeline volumes. White Cliffs Pipeline volumes were up due to a combination of factors, including the return to pipe from rail starting in the fourth quarter and strong interest from shippers to build shipper history prior to taking a one line out of service. The fourth quarter was also negatively impacted by the $5 million inventory charge previously mentioned. Crude marketing margins increased substantially during the quarter, particularly on the dapple system, and we expect 2019 to continue to reflect year-over-year improvement. Moving on to our U.S. Gas segment, we reported segment profit of $18 million during the fourth quarter, down $2 million from the third quarter. The decrease was due to lower volumes and commodity prices. Full-year 2018 segment profit of $67 million is essentially unchanged from last year. Segment profit at our Canadian business was $70 million for the quarter, down $3 million from the prior quarter due primarily to the timing of operating expense recoveries and smaller one-time related charges. For the year, segment profit was $81 million, up 7% from 2017 due primarily to higher volumes. The next few slides provides additional details on our 2019 financial and operating guidance. As Carlin previously noted, we expect 2019 adjusted EBITDA to be between $420 million and $465 million. On a year-over-year basis, earnings are increasing due to incremental cash flows from the Meritage acquisition and new growth projects, like the Wapiti Plant. In addition, we will benefit from the full-year contributions from HFOTCO storage tanks and improving crude marketing margins. This is somewhat offset by expected lower contributions from White Cliffs and gas as well as the loss of earnings from divested assets. Looking at segment profit guidance, we are forecasting between $320 million and $350 million for U.S. Liquids in 2019. Key assumptions impacting our guidance range include the shutdown of one segment of White Cliffs Pipeline beginning April 1 as we prepare for the conversion to NGL service. We are seeing continued strong demand on White Cliffs during the first quarter and believe that we will be able to retain some of those volumes in the future as we have entered into an offload transportation agreement Saddlehorn Pipeline. In addition, we are forecasting crude marketing margins to range from breakeven to slightly up as margins remained positive on our dapple commitment. Recontracting heating oil storage at HFOTCO has been 100% as demand continues to surpass supply at heating infrastructure. We believe the IMO 2020 in vacuum gas oil service are tailwinds for our heated storage business. U.S. Gas is expected to deliver segment profit between $55 million and $65 million in 2019. We anticipate continued volatility in U.S. Gas volumes with the first half of the year to be below 2018 levels as producers reduced their drilling budgets. We are forecasting a slight improvement in the second half as we anticipate rigs being redeployed. We are projecting 2019 segment profit for Canada to be between $125 million and $135 million, which assumes volumes ramp at the newly completed Wapiti Plant throughout the year. Wapiti is currently processing about 85 million cubic feet per day and rapping to 150 million cubic feet per day for the fourth quarter. The plan is effectively fully committed and expected to be 100% utilization by mid-2020 We have a similar volume ramp expectation for both Patterson Creek and Smokes Lake Plants. With Smoke Lake contributing little to 2019 profit as it comes on in the fourth quarter. One Slide 9, we've outlined 2019 capital expenditure guidance. We anticipate U.S. growth CapEx to be $150 million with the majority allocated to U.S. Liquid segment and support of the White Cliffs Pipeline conversion and the Maurepas Pipeline project at the Houston Ship Channel. We expect to spend about $40 million in maintenance capital in the U.S. during the year. SemCAMS Midstream growth CapEx is expected to come in at $220 million, which includes Patterson Creek expansion and the Pipestone Pipeline project. We are forecasting SemCAMS has spent $10 million in maintenance capital. The consolidated SemCAMS Midstream capital expenditures are gross spend numbers. Our 51% ownership of the joint venture implies a next spend of $117 million. However, the joint venture will fund these projects through a combination of tapping it's revolving credit facility and partner cash contributions. Before I hand the call back to Carlin, I want to spend a moment on the closing of the Meritage acquisition and the implications of the joint venture to our financial reporting. The earnings presentation includes an updated capital structure overview reflecting in the transaction values that closing. The closing price is $490 million, which included a capital reimbursement of $115 million for the Patterson Creek Plant expansion through the closing date. The purchase price increase when compared to our original guidance that we provided in January reflects the additional expansion capital spent during the first two months of this year. The acquisition is still subject to final post-closing adjustments. In advance of that joint venture with KKR we restructured our SemGroup, legal entities pertaining to our legacy Canadian businesses. As a result, we anticipate incurring an $8 million cash tax charge related to intercompany debt forgiveness. We will account for this in the first quarter of 2019 and do not expect it to impact their CAFD guidance and this is a non-recurring items. SemGroup will fully consolidate SemCAMS Midstream due to its controlling interest. Adjusted will therefore be reported on a 100% basis. However CAFD will be reduced by our partner share of the results. This is similar to how we are reporting the Maurepas Pipeline joint venture. We have included additional details in the earnings presentation and how we are reporting the various JVs in our financial statements and related disclosures. I'll now turn the call back over to Carlin for some closing remarks.

Carlin Conner: Thanks Bob. In addition to making our company more efficient and focus. The business transformation is beginning to deliver the intended financial results. We closed out the year strong, improving quarter-over-quarter and delivering full-year adjusted EBITDA, reflecting organic growth at our HFOTCO terminal and improving crude margins. Our investments will continue to deliver incremental contracted growth into 2020 and beyond. Our new structure aligned our management team and our employees to safely and efficiently operate our business while delivering reliable service that's responsive to our customers' needs. At that line on Slide 11, our teams are executing on a clear set of priorities as we balanced prudent capital managers with strategic growth. Our business is delivering secure and diversified cash flows and our return driven growth is discipline and capital efficient. We will continue to unlock synergies within our existing asset portfolio while remaining opportunistic to incremental opportunities. As I noted earlier, we continue to evaluate options to deleverage our balance sheet. We have aggressively raised over $1.6 billion during the last year and a half, but we are not done. As with the SemCAMS Midstream JV, we were actively looking into a number of other options to achieve leverage goals while funding growth. We fully appreciate that the market continues to expect lowered risk and leverage. As market expectations haven't tightened so has our focus to improve our position. It is a bit premature to describe in detail the options we were considering, but they include all the options we've previously discussed on past calls, including assets sales, preferred equity, and strategic transactions. Before we turn the call over for questions, I want to let you know about a transition on our Investor Relations team. Alisa Perkins has been promoted to a new role within the organization and Kevin Greenwell, a.k.a. KG, has been appointed Director of Investor Relations. Congratulations Alisa and welcome KG. With that, I'd like to thank you for your time this morning. I will now turn the call over for questions. Operator?

Operator: Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Christine Cho of Barclays. Please go ahead.

Christine Cho: Good morning, everyone. If I could start with some gas. The guidance for 2019 came in a bit on the light side and you kind of talked about it a little in your prepared remarks. Can you just remind us, you had built the Canton Pipeline for a third party to feed into your Rose Valley plant from the stack? I think the natural gas pipeline itself with take-or-pay contract; I thought the contract that the Rose Valley processing facility was also take-or-pay. But is it actually volume metric? I guess I'm just trying to get a sense of how much of the light guidance is due to stack expectations being revised lower versus your legacy stuff?

Robert Fitzgerald: Hi Christine. This is Bob. I'll take that one. You're right about Canton, that pipeline was built and it's underpinned with the take-or-pay minimum volume commitment on that asset. The Rose Valley plants, the legacy Mississippi lime producer contracts that we have those or not take-or-pay, those are either acreage dedication or like-for-lease dedication. So that will be subject to some level of volume volatility depending upon producer drilling budgets.

Christine Cho: But what about the volumes that are feeding in from the stack into Rose Valley on the Canton Pipeline? Are those also volume metric?

Robert Fitzgerald: No. Well, we have a minimum volume commitment that underpins it and sell, but we're exceeding those minimum volume commitments today. And that's what our forecast continues to be through the year.

Carlin Conner: Christine, this is Carline. To be clear, the NBCs on this Canton Pipeline include processing. That's kind of built into the…

Christine Cho: I see it. Okay. And then moving over to HFOTCO, when you guys bought the asset, you gave EBITDA expectations for $135 million to $145 million in 2018, and while your segment profit was in that range this year after allocating G&A. I think your EBITDA was a bit soft relative to original expectations and it seems to flow through to 2019 as well. Can you just go through the driver for the shortfall? Is this more of a timing issue or because you didn't spend as much growth CapEx as much as you had anticipated at the time of the acquisition? Any color there would be helpful.

Carlin Conner: Thanks Christine. This is Carline. 2018, we were a little short of that guidance mainly due to some one-time items. We had an insurance claim; we also had some timing issues with the tanks coming back in service off of the crude expansion. As we look at 2019, we were a little light of where we forecasted back in and we're not giving segment guide, I mean specific asset guidance. But I would like to talk about HFOTCO. We were a little light in the sense that the marketing that we had, if you recall in our chart for 2019, we're still seeing differentials compressed MEH to Brent. And we're not seeing the activity on the outbound that we thought we would see, but we definitely plan to see that going forward. And then finally, there are some timing, projects that we had specifically more road that we had forecasted to come on line sooner that are coming on line. I'll wrap it up by saying the HFOTCO is performing generally within the expectations that we had. And I'll tell you that the strategic conversations we're having around exports and around other projects, including pipelines to and from refiners and to and from basins or from basins has been very, very promising. So we look forward to where we're going with HFOTCO.

Christine Cho: Okay. That's helpful. And then last question for me. The economics of the Wapiti plant, I think were originally 6x, but the most recent presentation was 7x. Can you just talk about what drove that because it doesn't look like the CapEx for the project went up?

Carlin Conner: Yes. This is Carlin and again. I think we had a little squiggly 6x before and it's proximate. If you recall, we had not sold the plan out, by then when we posted that we had anticipated by the end of 2018 to sell a plan out, which we have at a slight lower rates. So therefore we have a little bit of a value coming off of that 6x.

Christine Cho: Great. Thank you for the color.

Carlin Conner: A very good project, I want to highlight that 7x is a great project for that area.

Operator: Our next question will come from Tristan Richardson of SunTrust. Please go ahead.

Tristan Richardson: Hey, good morning, guys. Just curious about the EBITDA range given, should we think of that range is primarily a function of how U.S. Gas and Liquids marketing plays out over the course of the year. Given that you have pretty firm visibility on the Wapiti ramp and the re-contracting on HFOTCO et cetera?

Carlin Conner: This is Carlin, Tristan. I'll take a stab and then Bob can clean it up. Yes. The way I look at this is really a function of U.S. Gas being a bit soft due to what's happening in the Mississippi line. We also - we do have some volume metric forecast in all of our businesses that are still somewhat dependent on commodities. So we have a little bit of activity based risk I guess in those numbers as well. I feel really good about the structured part of the business that, where the contractor sitting and the opportunities that are coming around those assets. But clearly U.S. Gas, White Cliffs also with the repurposing and having a lot of noise around what's happening in 2019 with the repurposing and the offloading to another pipeline.

Tristan Richardson: Helpful, thanks. And then not a new question and Carlin, appreciate your prepared comments on leverage and that that you aren't done yet. I mean perhaps it's early to think about an exit rate for 2019, but even if we take a step back further, can you talk about the longer-term path to moving leverage to a level? Is a level consistent with the broader Midstream space to target? I mean are we thinking about a four handle or a three handle over the long-term and just kind of curious sort of the end game for the deleveraging pursued initiative?

Carlin Conner: Well, our initial goal was to get less than 5x by the end of 2019. And we continue to work that in our plan that we have in front of you, accomplishes that for the most part. As we look forward beyond 2019, we still have the expectation that we'll continue to work leverage down, our growth, a lot of the projects that are coming online in 2019, in 2020 and 2021. These are contracted projects. These aren't things we have to go grab. Those projects will start delivering full cycle EBITDA, which will be a natural de-leveraging leveraging event for us quite substantially. And then we will also continue to look at optimizing our portfolio. I like we have been doing for 18 months now.

Tristan Richardson: Helpful. Thanks guys very much.

Operator: Our next question will come from Elvira Scotto of RBC Capital Markets. Please go ahead.

Elvira Scotto: Hey, good morning, everyone. Going back to a U.S. Gas, so what is it that gives you confidence in your expectation for increased activity in the back half of the year? And then just a related question, what is your commodity prices assumption that's embedded in that guidance?

Robert Fitzgerald: Sure. Elvira, its Bob. The guidance that we've given for gas in the range that we provided assumes a few things with regard to the timing of rigs. We did see a rig, a dropdown in the first quarter, at the beginning of the first quarter of this year from where we were at the end of last year. And at this point, one of our producers is actually down to zero rigs and we believe that that will probably come to the second half of the year. But that's part of that range that we put out there for our guidance for our gas segment profit. We'll have to wait and see. We're monitoring the situation very closely. And how that will play out as producers continue to reevaluate their CapEx programs going forward. With regard to the commodity price baskets that we're looking at, we've got our assumptions for gas include WTI around $50 a barrel, Henry Hub gas index just under $3 and then with regard to the NGL basket, we generally look at that as a percent of WTI, but roughly it would translate to somewhere in the $0.55 per gallon range on NGL basket level.

Elvira Scotto: Okay. Thanks for that. And then just sort of a couple of questions here. For Maurepas and Canada, the way the fees are structured and the way that you're reporting EBITDA and then your cash available for dividends. I mean, do you, will Maurepas and Canada, how did they distribute cash back to the partners? I mean, are they going to distribute 100% of that cash back to the partners or is it going to be a dividend and then they hold something back?

Carlin Conner: Yes, so the way that we structured it, and I imagine you were dreaming and referring to Slide 14 that we put out there that kind of gives a little more color and detail around the accounting and the different elements of our financials. The way that their process will generally work is that the Board of each of those joint ventures will review the financial results in the cash flows for the period. We'll hold back or retained cash is needed to fund near-term projects were particularly maintenance capital projects to make sure that the JV is able to keep up with the maintenance program. And then after that we'll look at based upon what kind of reserve of cash that we think we need to have, we'll go ahead and distribute the rest of that cash back out to the shareholders.

Elvira Scotto: Got it.

Carlin Conner: I mean by that I mean the partners in the JV.

Elvira Scotto: Right. Now understood. So when you guys go down to that cash available for dividends and it's a percent of the JV cash available for dividends, it's really not a percent of that, right? It's a smaller number. It should theoretically be a smaller number.

Robert Fitzgerald: We will go through like an example on Page 15, we would go through our consolidated CAFD, but we'll also have effectively a CAFD computed for each of the joint ventures that we fully consolidate and have that we will then take their partner's share of that CAFD and that's going to hit the non-controlling interest line item that you see on 15.

Elvira Scotto: Gotcha. Okay, great. And then just a question on your the Series A convertible preferred. So looking at the guidance, I just want to confirm that cash available for dividends per share, assuming no conversion of that because I think the part the holders have a right to convert in July of this year. Because I believe that's the 18-month anniversary. And then if you can just remind me is there a mandatory convert at some point? I know I think you guys can convert after three years, but can you just walk through the mechanics real quick?

Robert Fitzgerald: Sure. I think guys mostly correct in the sense that the conversion factor is one that after 18 months. The holders can't convert at $33 per share conversion price. We haven't factored in a conversion this year given where the markets currently are at. And we've also, as you probably noticed, we've also assumed that we will be picking through 2019. We have a 10 quarter pic associated with that prep. The Company can call that after three years I believe it is, has a redeem an optional redemption opportunity. But that's just an optional one. There's no mandatory convert for either the issuer or the investor on this transaction.

Elvira Scotto: Got it. Okay. I think that's all for me. Thanks a lot.

Robert Fitzgerald: Thanks.

Operator: The next question will come from Danilo Juvane of BMO Capital Markets. Please go ahead.

Danilo Juvane: Thank you and good morning. Just as an extension of Elvira's question on DCF walkthrough. Bob, I think last quarter, if I'm not mistaken, you walked us through similar kind of dynamic with Maurepas, whereby you would have within DCF adjustment consolidated the EBITDA, but taken out the dividends distributed from Maurepas. If you were to do that similarly for both Maurepas and the Canadian JV here? How does that sort of compare from a DCF basis for the rest of the year?

Robert Fitzgerald: As far as the cash distribution goes relative to the percent of the CAFD I think is what you're asking.

Danilo Juvane: Exactly.

Robert Fitzgerald: I don't have that in front of me right now. What that would be? I think it be fairly approximate since we're factoring in maintenance CapEx and the DCF calculation itself. For Maurepas, there's no credit facility or financing costs, so it's a pretty straightforward calculation, a little more complicated in Canada given the structure up there and the capital structure in particular. I'm happy to get with you guys offline on that and we can kind of walk through any of the specifics, but for now I think it should be fairly close, will be how I would look at it.

Danilo Juvane: So should we expect your pro-rata share of the DCF and to effectively beat the dividend that you received from the JVs?

Robert Fitzgerald: It should be in the right zip code. Correct.

Danilo Juvane: Okay. Thank you. Any updates on the crude storage recontract for the year. What is the significant guidance and any updates on whether or not there's any recontract conversations on the crude side of White Cliffs? Thank you.

Carlin Conner: Yes. This is Carlin. We got David Minielly here. He's going to give us an update on the White Cliffs recontract.

David Minielly: Sure. So on the White Cliffs recontracting, we are actively engaged with our shippers about recontracting as they look to secure capacity or the basin going forward. Nothing definite yet, but it's certainly something that we continue to work through.

Danilo Juvane: Sure. What do you guys have baked into guidance? Are you assuming similar rates and volumes for the entirety of 2019?

Carlin Conner: Yes, we still have the temporary tariff in that has been in for now, I guess over 12 months. And again, we continue to think about extending the services through some of the projects that we've talked about all the way into the Gulf Coast as these crude customers in Platteville and the DJ think about ultimately what's the market they want to hit. We're getting a lot of traction around joint tariff ideas all the way through our Gladiator project or even other third party projects connecting into our Gulf Coast position at HFOTCO. So it's a lot more to I guess to calibrate than just a tariff on that line as a lot of things moving around that it's kind of hard to say exactly what the tariff will look like.

Danilo Juvane: Thanks for that. Last question from me is what fee are you assuming in the crude storage assets for the guidance of the year?

Carlin Conner: For Cushing?

Danilo Juvane: Yes.

Carlin Conner: Yes. So we're seeing some strengthening, if you recall, I guess our last call, we started to feel like the market was turning in our direction, but we're still in the mid-to-high 20s, low 30s average with getting some term. As you know, we've always value term over rate. But we're full and we're forecasting to be 95% to 97% utilized in 2019 with the difference really being some integrity programs that you have to go through.

Danilo Juvane: Thank you. Those are my questions.

Operator: The next question will come from Craig Shere of Tuohy Brothers Investment Research. Please go ahead.

Craig Shere: Good morning. Can you provide a little more color about Mid-Continent connection? Is there an opportunities around bolt-on and HFOTCO IMO 2020 opportunities?

Carlin Conner: Okay. This is Carlin again. Let's start with HFOTCO, the IMO 2020. Our heated oil service has been strong. The recontracting has been 100%. I would even say that the commercial team has done a really good job of upgrading our counter parties. And what I mean by that is that we've really focused on refineries as counterparties and we've also added vacuum gas oil, also known as VGO as a service offering, which need heated infrastructure, so it fits our assets. It's a product, an intermediate product of the refining process that is moving around and we feel pretty good about our position to serve that growing market. And we're picking up a lot of good contracts around that. The fuel oil side of the things, yes, we continue to monitor IMO 2020, and the reality is kind of like we had envisioned or at least began to envision last call, is that it looks to be instead of neutral to positive, it looks to be maybe more positive for us going forward as refiners still have to find a way to dispose of this high sulfur fuel oil and it's going to price down and it's going to price to a point where it can clear to new markets, maybe power generation, lots of lots of markets around the world will figure out a way to use this very low costs BTU content fuel. But it has to be aggregated, and it has to be shipped out. Plus there's a blending opportunity that we're starting to see people think about how to blend down the sulfur and that requires segregations requires new tanks or not new tanks requires tanks. Therefore, we feel like there's opportunity to continue to work with our customers and providing the services and getting a fair fee for those services. But we feel really good about the heat at all part of the HFOTCO story. Crude part, we've talked about, and that's always been a big winner for us and we continue to feel that way. With respect to the Gladiator Pipeline and connecting Cushing to Houston, the good news is, is that we have assets that people want to access, and especially on the Gulf Coast. So we have a seat at the table. I think, from a hospital point of view that allows us to have discussions with all of the potential pipes that are coming out. We have our own pipe project, which we think is a very good project in the sense that it's from a capital point of view, it's efficient, we have partners that are also looking to drive this project and with White Cliffs system, we can then provide joint tariffs all the way from the DJ Basin, all the way in HFOTCO. And we can pick up barrels in Cushing. They want to get to the Gulf as well. So there's a lot to do around Cushing to Houston. And we think our project, because of its manageable size, therefore it doesn't require massive commitments, may be the one that give FID sooner than the others.

Craig Shere: How much could that run in terms of total cost?

Robert Fitzgerald: Well, the interesting part about this is because we do have these other aspects of the supply chain of the answer. HFOTCO and Cushing and White Cliffs, we actually may not even have to participate in the investment of the pipe. Now we want to –we think there's good returns there. But we're - at the end of the day, our main goal is to be sure that our assets are connected and that we have the ability to serve our customers on the water at HFOTCO, gathered barrels in Platteville, deliver all the way through and then have a gathering system in Cushing that supports that as well. For us as we continue down this path with all the different options in these different potential partners. We're mindful of let's make sure that we allocate capital properly. And if there's a scenario where we don't have to be carry all the water on the CapEx that may be a good thing for us.

Craig Shere: And Maurepas?

Robert Fitzgerald: So Maurepas, the recently announced ACE pipeline, by P66, it definitely took a little bit of our growth out of the ultimate growth and extending Maurepas to Monroe and Schommer in Southeast Louisiana. Those refiners were targets for us. It was a long cut to begin with to extend the pipe through New Orleans or through Lake Pontchartrain. But it was a project that we were chasing. It feels like that project is probably going to be difficult for us to compete. We'd still have the St. Charles, Refinery, which is right down the street from Mark Paul and that extension makes a lot of sense for us and the refiner and we continue to have conversations with that refinery. And think we'll be hopefully having an announcement on the extension of Mark into that refinery sooner than later. So that's good news. That's the smaller growth project and then extending Maurepas into Schommer or Monroe.

Craig Shere: Got it. And last question on optimizing the portfolio. Could some gas be on the table again if volumes do starts stabilizing in the second half?

Carlin Conner: Well, I think as I said that - we will continue to think about raising capital in a creative way. And all of our assets have - we believe there are certain values associated with those assets and we want to be sure that we protect that if SemGas began to improve and made sense for us to look at something along those lines and we would obviously consider it. And also point to the fact that what we did recently in Canada as an example of how we can be creative around a strategic assets. And so we'll see how it plays out. The first thing I'd like to see the Mississippi line producers get back to work. So it SemGas could start seeing more volumes in their Rose Valley plant.

Craig Shere: Understood. Thank you.

Operator: The next question will come from Ryan Levine of Citi. Please go ahead.

Ryan Levine: Good morning. Would you be able to comment on the outlook for the marketing business in your guidance? And if you're expecting anything and association with the HFOTCO marketing opportunity in 2019?

Robert Fitzgerald: Hey, Ryan. This is Bob. We have - basically we're expecting our marketing business in 2019 to be right around breakeven, maybe slightly positive in that range. We're not getting too far out on our expectations for significant improvements in the differentials other than what we've been seeing and on the [DAPPLE] pipeline that we talked about earlier. We still have some transportation commitments on White Cliffs. Those recoveries are not as strong as what we would want and expect to see. So we're kind of have a little bit of a mixed bag, but nothing that's going to be two extraordinary in terms of how much we're expecting to grow there. And we'll - I think that's going to be the primary point of view that we have going forward into 2019.

Ryan Levine: And then around the HFOTCO marketing opportunity that was identified in the past. I think you mentioned you added some folks to the team to pursue that. Is there any update as to how that effort is going and if there is opportunity there where you could see some upside in the next couple of years there?

Carlin Conner: Hey Ryan. This is Carlin. You summarized it really well. We had a talent reshuffle at the back half of last year. So we feel like we've got the leader now that has put the strategy together. We're actually testing that strategy. We've loaded some cargos out of HFOTCO. The differentials just haven't been there for us to enjoy the type of profit we like on those, but we're discovering how the counterparties work. We're understanding how the operations work around marketing out of HFOTCO. We're figuring out doing some price discovery. So we're coming together and I absolutely still stand by my original thesis around HFOTCO that we will be generating, the company will be generating incremental profits because of their marketing around HFOTCO. 2019, we're not ready to put our stake in the ground yet on that partly due to the market doesn't appear to be giving us those differentials. But I definitely believe going forward beyond 2019, there's a real upside to our marketing around our HFOTCO assets. And I think we'll hit the numbers that we talked about when we bought the terminal.

Ryan Levine: Okay. Great. Thanks. That's all for me.

Operator: The next question will come from James Carreker of U.S. Capital Advisors. Please go ahead.

James Carreker: Hey, thanks for the questions. Just quickly, I guess on leverage targets, you've mentioned a goal of 5x by year in 2019, but kind of given these JV situations where EBITDA contains a 100% of the EBITDA from those assets, but kind of some of that gets leaked out via the NCI distributions. I guess, does that affect how you think about leverage and does it affect how the credit rating agencies think about what's your leverage profile looks like?

Robert Fitzgerald: Yes. It's Bob. James, I'll go ahead and start with that. The rating agencies that you ask about, they tend to look at things on their own basis and they have their own methodologies and actually each - the ones that we work with Moody's and S&P are different from each other. Are they generally looking at it on a fully consolidated basis? And that's how we report our fully consolidated leverage stats. You're right, we are picking up 100% of the EBITDA, but we're also in the case of, for example, in SemCAMS, 100% of the debt in our calculation. So we're keeping it on an apples-to-apples basis from that regard. Our Bank covenants though, on the other hand, typically we'll just report, on the bank covenant for the SemGroup facility, just the cash distributions that we received back. And so that's just the difference in how we do that. Of course, that's only on our restricted companies and things like that. So I'm happy to get into that with more detail for you. But how we're reporting our overall consolidate leverage metric is generally the way that, we assume the streets also looking at it. But just for clarity, we provide a lot of those details out there so that you guys can calculate it out how you think it should be calculate out based upon your perspective.

James Carreker: Sure. And then any feedback from the rating agencies about kind of, what would it take to get that next bump up a notch? You know, given that you've done some of these deleveraging transactions over the last year or so?

Robert Fitzgerald: Yes, I think a big part of it and again they're both a little bit different, but just in general, I would say that, they've always said a few things. One is they want us to reduce risk. They wanted it to increase scale, and diversity, and they want us to maintain a kind of a clean balance sheet or a low leverage position. And if you look at what we've done over the last, call it five years, we've certainly done the first two. We have reduced our risks. We've got much higher percentage of our cash flows are going to be take-or-pay. That provides a lot of base stability to our cash flows going forward. And we've increased our scale, overall when you look at what we control and what we operate. So we've done a lot of good work on that. And as we talked about in Carlin discussed, earlier we're very actively engaged on the leverage and helping to improve our balance sheet position and we targeted 5x. We believe that we've got really, really clear line of sight to hit that as you see in our numbers that we provided out last night. But we're not done. We are continued to work on, but I'll call it creative transactions that will help us to continue to optimize around our business, our strategies and then our balance sheet position and we'll continue to deliver it just like we've done over the last 18 months with $1.6 billion.

James Carreker: Okay. Thank you.

Operator: Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. 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 good day.

Operator: The conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.