ONEOK Inc

NYSE:OKE

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to the Fourth Quarter 2017 ONEOK Earnings Call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Andrew Ziola. Please go ahead, sir.

[Andrew Ziola, Vice President, Investor Relations]

Thank you, Avenee, and good morning everyone and welcome to ONEOK's fourth quarter 2017 and year-end earnings conference call. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?

[Terry Spencer, President and Chief Executive Officer]

Thanks Andrew. Good morning and thank you all for joining us today. As always we appreciate your continued interest and investment in ONEOK. Joining me today's call are Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs, Kevin Burdick, Executive Vice President and Chief Operating Officer. And the Senior Vice President of our business segments, also are available for questions. On this call, we will focus on fourth quarter and year end 2017 financial results. And provide some additional cover on our strategic and accretive growth projects including our recently announced Arbuckle II Pipeline, MB-4 Fractionator and Demicks Lake projects.

We've previously provided 2018 guidance in January. 2017 was an important year for ONEOK. We completed the ONEOK and ONEOK Partners merger transaction in June. And the benefits of that transaction are paying off to ONEOK and its shareholders, particularly as we invest more than $4 billion in strategic expansions over our existing integrated network of pipelines, plants, fractionation and storage facilities with more favorable access to the financial markets as a result of the merger and our continued focus on generating attractive returns. That was proven by extremely successful traditional equity offerings in early January that pre-funded that projects that we have recently announced.

From an operations perspective in 2017, I again want to thank our employees who personally endured Hurricane Harvey and countless others who worked tirelessly to keep our assets running safely in order to provide reliable services to our customers not only during the hurricane but every day. The dedication and commitment of all our employees to this company is remarkable and I very much appreciate their hard work in making our company successful.

Moving onto our 2017 performance, for the fourth quarter and for the full year of producer activity in production results drove the volume growth in all our business segments throughout our operating footprints which led to an adjusted EBITDA and distributable cash flow growth. The recent completion of two world scale petrochemical crackers will continue to increase demand for ethane in the Gulf Coast, as these facilities complete their startup activities.

In addition four more crackers with a total capacity of nearly 200,000 barrels per day of ethane are expected to be completed later this year. As outlined in our 2018 guidance, this additional demand for ethane is expected to drive approximately $100 million of additional EBITDA in our NGL segment compared with 2017. After staying for a few years now that new petrochemical facilities and ethane crackers are being built, it is now evident in the marketplace that the incremental demand for ethane is here. Our focus remains on executing our cracker growth projects to meet the need of our customers at Williston, Powder River, DJ STACKS SCOOPS and Permian basins.

Over the last decade, ONEOK experienced operations, constructions and commercial teams successfully executed $9 billion in capital investments, aggregating supply and delivering into the market safely, reliably in an environmentally responsible manner.

With that I will now turn the call over to Walt.

[Walt Hulse]

Thank you, Terry. ONEOK's 2017 operating income totaled nearly $1.4 billion and adjusted EBITDA totaled nearly $2 billion. 30% increases compared with 2016 and more than 25% increase compared with 2015. All driven primarily by strong volume growth and we expect to see that growth continuing with adjusted EBITDA increasing more than 15% for 2018 compared with 2017. Distributable cash flow was nearly $1.4 billion in 2017 and dividend coverage of more than 1.3x, was well above our guidance of 1.2x or greater for the year.

This month we paid a quarterly dividend of $0.77 per share or $3.08 per share on an annualized basis. The 25% increase compared with the same period in 2017. Management still expects to recommend dividend increases of 9% to 11% annually and maintain our target for annual dividend coverage of 1.2x or greater. As noted in our earnings release, fourth quarter net income included $141 million of one-time non-cash charges related to the Tax Cuts and Jobs Act, which impacted fourth quarter earnings per share by $0.36 and full year earnings per share by $0.47. We view the overall impact from the Tax Cuts and Jobs Act as positive to ONEOK due to the lower corporate tax rate and the immediate expansion of most of our capital spending.

As Terry mentioned, we have announced more than $4 billion of new capital growth projects since June. These interactive investments are expected to generate adjusted EBITDA on multiples of 4x to 6x and are backed by a combination of long-term fee-based contracts, volume commitments or acreage dedications. Based on these recent projects announcements ONEOK's 2018 capital growth expenditures are now expected to range from nearly $2 billion to $2.3 billion, an increase of approximately $700 million compared with our initial 2018 guidance.

Maintenance capital guidance remains unchanged to $140 million to $180 million. We have talked quite a bit about the funding of this highly accretive growth projects and how we essentially pre-funded our equity needs. In the fourth quarter, we received net proceeds of $384 million through ATM equity program and completed a $1.2 billion public common stock offering in January, resulting in total combined net proceeds of approximately $1.6 billion. With the expected significant cash generated from operations and excessive dividends, and ample borrowing capacity, we don't expect to issue any equity in 2018 or well into 2019. Following the equity offering in January ONEOK's pro forma debt to EBITDA on last 12 months basis improved to just under 4x and put us at our target a year earlier than we expected.

We expect our leverage to increase modestly during the later stages of construction but we continue to view four times or less, as an important target for ONEOK in long term. Our anticipated EBITDA growth in 2018 will enable us to fund our growth with excess cash flow from operations and short and long term debt, while maintaining strong credit metrics. As it relates to review of rates on West Texas LPG, the regulatory process continues and it will resolve itself in due course. Our 2018 NGL segment financial guidance encompasses a range of potential outcomes for the rig division.

The midpoint of NGL segment adjusted EBITDA guidance does not assume any uplift from potential rate increase. As we said previously, the outcomes of which will not impact our current or future negotiated rates of West Texas LPG nor will it hinder our ability to secure new NGL supply from producers and processors including the project which extends West Texas LPG into the core of Delaware basin. As we continue to actively negotiate with producers in the Permian for additional capacity.

Now I will turn the call over to Kevin for closer look at each of our business segments and to provide to some additional color on our growth projections.

[Kevin Burdick]

Thank you, Walt. Starting with the performance of our Natural Gas Liquid segment. 2017 was another year of strong volume growth setting us up well for even greater growth in 2018. Fourth quarter 2017 NGL volumes gathered averaged 867,000 barrels per day, a 7% increase compared with the third quarter 2017. And a 17% increase compared with the fourth quarter of 2016. Higher overall raw feed volumes on our Mid-Continent and West Texas LPG pipeline drove the sequential quarter increases with Mid-Continent volumes increasing more than 9% during that timeframe. Mid-Continent growth continues to be driven by strong producer results in STACK and SCOOP areas.

Our Bakken NGL pipeline is operating at full capacity as volumes averaged 136,000 barrels per day in the fourth quarter 2017. Our recently announced Elk Creek pipeline project will alleviate NGL capacity constraints out of the Rocky Mountain region once complete. And we expect to use our rail transport capabilities as early as second quarter 2018 to provide the necessary takeaway for expected volume growth until Elk Creek is in service. NGL volumes fractionated in fourth quarter 2017 increased 13% compared with the third quarter 2017 driven by higher gathered volumes across our NGL systems, and lower volumes fractionated in the third quarter due to impacts from Hurricane Harvey.

Volume that could not be fractionated during the third quarter because of the hurricane were stored and fractionated in the fourth quarter. Our NGL volumes were in line with our guidance range even with petrochemical cracker completion delay and the impacts from Hurricane Harvey. Moving onto the natural gas gathering and processing segment. We exceeded our 2017 financial guidance expectations due to the strong producer results in Williston Basin and STACK and SCOOP areas. The segment's fourth quarter 2017 average natural gas gathered and processed volumes increased 20% compared with the same period in 2016. Fourth quarter volumes processed increased 5% compared with the third quarter 2017 averaging nearly 1.7 billion cubic feet per day across our system.

Williston Basin volumes processed again established new highs with an average of more than 870 million cubic feet per day during the fourth quarter. Mid-Continent processed volumes average more than 790 million cubic feet per day, a 6% increase compared with the third quarter 2017. We exceeded our well connection expectations for 2017 in both the Williston Basin and Mid-Continent, connecting 430 and 113 wells respectively. And we expect to connect approximately 650 wells total in 2018, a nearly 20% increase from last year.

In the Williston Basin, continued producer activity, improving well performance and higher gas to oil ratios are driving volumes growth. Analysis of recent well results shows 25 to 30 rigs to date can produce as much natural gas volumes as 70 to 80 rigs three years ago. With now only 100 million cubic feet per day of available processing capacity on our systems, our recently announced Demicks Lake processing plant will provide producers in the region with much needed processing capacity to accommodate growth expectations. Volumes growth in the Mid-Continent in the fourth quarter 2017 was driven by strong producer results in the STACK and SCOOP areas which led to a 6% increase in natural gas volumes processed compared with the third quarter 2017.

Our third party offload is operational which provides us access to an additional 200 million cubic feet per day of processing capacity for our growing volumes in the STACK, and we are on track to add an additional 200 million cubic feet per day of capacity in the fourth quarter of this year with the expansion of our Canadian Valley plant. Once complete, we will have an approximately 1.1 billion cubic feet per day of processing capacity in Oklahoma. In the natural gas pipeline segment, 2017 adjusted EBITDA increased 9% compared with 2016. The segment continues to benefit from higher fee-based earnings and increased transportation capacity contracted. The segment continues discussions with producers in Permian basin and the STACK and SCOOP areas to accommodate additional natural gas takeaway capacity given the strong growth expectations in those splits.

Recent tax reform laws have spurred conversation around potential impacts for regulated pipelines. For ONEOK, since most of our natural gas pipeline contracts have been established through shipper specific negotiated rates and settlements, we don't anticipate adjustments to rates solely because of lower tax rates. Related to rate settlements on February 23, Northern Border Pipeline received a letter order from the FERC approving their uncontested rate case settlement without modifications. Now let's take a closer look at our recently announced capital growth projects and how these latest projects complement and enhance our previously announced investments.

This year we have announced two strategic NGL pipeline projects, Elk Creek and Arbuckle II. The 530 mile Arbuckle II pipeline will have an initial capacity of 400,000 barrels per day and has the capability to be expanded up to one million barrels per day with additional pump facilities which could more than double our current capacity between the Mid-Continent and Gulf Coast with minimal capital investment. We are also adding 125,000 barrels per day of additional fractionation capacity at Mont Belvieu with the announcement of our MB-4 fractionator. The Arbuckle II pipeline is already more than 50% contracted and will provide producers in all the basins where we operate with connectivity to growing demand in Mont Belvieu. The adjusted EBITDA are multiple forecasted for these projects are based only from these contracts and discussions with customers regarding additional supply continue to take place.

The MB-4 fractionator is already fully contracted and both projects are expected to be complete in the first quarter of 2020. Our Demicks Lake Plant will add an additional 200 million cubic feet per day of processing capacity in Williston Basin bringing ONEOK's total capacity in the region to more than 1.2 billion cubic feet per day in the fourth quarter 2019. Additionally, we are in the permitting process for an expansion of our Bear Creek processing facility that we expect could add 40 to 60 million cubic feet per day of capacity with minimal capital. NGLs from the Demicks Lake Plant will ultimately feed our Elk Creek pipeline which in turn will connect with ONEOK's extensive Mid-Continent NGL gathering system which provides connectivity from the Williston Basin to the Gulf Coast.

A quick update on our Elk Creek pipeline announced in early January. We continue to have discussions with producers and processors to secure additional supply out of the Rocky's region. And our outlook now exceeds our original volume expectations by 10% to 20%. We continue to proactively communicate with landowners, state and local agencies and other stakeholders along the pipeline route and expect to be given construction later this year. All of these strategic attractive return projects will work together to provide much needed solutions for producers and position ONEOK with considerable long-term operating leverage across our integrated network of assets. Terry that concludes my remarks.

[Terry Spencer, President and Chief Executive Officer]

Thanks Kevin. Before we take questions, I have got a couple of items to point out. As I mentioned earlier in my remarks ONEOK's will like to focus on executing on our $4 billion announced growth projects over the next several year. So which will take us to 2020? As we look beyond 2020, I'll go ahead and answer questions, some of you maybe wanting to ask and that is what's next. As Kevin detailed, many of our projects are being designed with the ability to expand immediately with minimal capital investments. And we'll continue to develop opportunities and in our under our asset footprint to expand even further. Whether that is to pipelines, processing plants, fractionators or storage. All of which we proven, we don't have to manage, build operate and optimize. So with that operator we're now ready for questions.

[Operator]

[Operator Instructions] And we'll take our first question from Shneur Gershuni with UBS Financial. Please go ahead.

Shneur Gershuni

Hi, good morning, everyone. Just wanted to start off with the new projects announcements, I guess two-part question, you know, first of all you'd mentioned, I believe in your prepared remarks you have contracts backing, the new pipeline builds. I was just wondering if you can clarify or the minimum buying commitments or the acreage dedications is there a way that we can sort of split that up. And then sort of a second part of that. And I think you kind of just answered it. Does this take care of all the large ticket project announcements that were kind of highlighted in the filings when you did the OKE-OKS merger?

Kevin Burdick

Sure. I'll start, this is Kevin. As it relates to Arbuckle II, and those volumes in the contracted capacity, there's not a lot of NVC's associated with that, they are in the form of plant dedications and acreage dedications. And so forth, on the big ticket items, yes, I think this handles the majority of - we sets up significant operating leverage or headroom like Terry mentioned in his remarks going forward. So we feel pretty good about the assets we have in place to be able to grow into the future.

Terry Spencer

Shneur, I'll let Walt handle the questions at the filing on merger.

Walt Hulse

Shneur at the time of the S4, we did not have any of these projects contemplated as we went through the course of 2017, we started to talk about our backlog. And with the announcement of these projects recently we've announced all of the projects that we have in that backlog. We started to look for future opportunities.

Shneur Gershuni

Okay great. And then just a follow-up, ethane recovery versus rejection has been a topic for some time. There's kind of an interesting developing market dynamic where you look at natural gas capacity being scarce in the Permian. And at times you've seen some sizeable differentials with Waha and, and Henry Hub, it could create a scenario where the economics of recovering ethane becomes greater in the Permian than any other basin in the country. And there's the possibility that Permian ethane recovery crowds out other basins. How is ONEOK positioned if this materializes? Is it offset by the full scale system that you have in place? Or is there some risk to the $100 million plus of ethane recovery that you're looking for this year.

Kevin Burdick

This is Kevin, and I'll let chaired in and chime in as well, I mean as you look at Waha and what's going on with the basis market, so the interesting thing is mid-continent basis has been extremely wide too. And you are right there with Waha. So that's one dynamic when you think about our significant position in the Mid-Continent. The other thing that's going on is based on our analysis we don't think that there's, you're not going be able to recover enough ethane solely out of the Permian to satisfy the additional demand that's going be coming online in the Gulf Coast. So even if, even if Waha did have a wider basis you're still going need ethane coming out of the mid-continent.

Terry Spencer

Shneur that's right, that's exactly right.

[Operator]

And we'll move next to Eric Genco with Citi Bank. Please go ahead.

Eric Genco

Hey, good morning. Just wanted to follow-up on the last question to make sure I understand it. You've got the $4.2 billion of projects. And you know, I think the understanding was that some of the, I mean the S4 forecast is based on sort of ongoing CapEx in that range. So maybe you could say frac processing some of that was, was ongoing but the two major pipelines Elk Creek and Arbuckle II are strategic and were not included, correct?

Walt Hulse

Yes, Eric, this is Walt. I think it's actually to fair to say that at the time of the S4 what was basically in there with our routine growth which did, which included well connects, plants connects and the NGL side, just our base group without the processing or fractionation. As we talked about our developing projects on the course of 2017, those included both the fractionation and processing plant.

Eric Genco

Okay so looking out now at the - if I look out of the consensus for 2021 that is actually below what was in there. And I know you don't want to spend too much time making the S4 sort of a serial guidance but if 2021 consensus is below the S4. And just the $2.8 billion CapEx for the projects 6x at $460 million of EBITDA. And then I guess oil, I mean oil right now we see about the forecast for what it would have been. Is there anything that you can think of that would be in anyway worse than S4 forecast.

Walt Hulse

It's fair to say that the S4 was a snapshot at a point in time that's kind of reflected our view in November of 2016. And obviously commodity prices are better, producer activities better, across the board we see fundamental for the business in a better spot today than we did when we filed that S4.

Eric Genco

Okay and then maybe another quick one, did you say how long at this point in time under the new tax code, you expect to avoid cash taxes of the OKE level? Was there a bit on that?

Walt Hulse

We did not say but our view hasn't changed from what we previously said.

Eric Genco

Okay. And then maybe last one for me, just want to try to understand. I think you mentioned in the prepared remarks, what happens between now and Elk Creek in terms of the NGL takeaway, if we think if US be the only game in town from a pipeline perspective. I know you mentioned rail, how should we see that sort of playing out in between now and when Elk Creek comes on in terms of the bundled rates, there are different ways that we should be modeling that. And how that growth will like flow through the bottom line.

Sheridan Swords

Eric this is Sheridan. As we put the barrels on the rail, we probably won't have a whole lot of margin left in those barrels basically all we're trying to do with the rail is provide our customers a way out of that volume. So there will be minimal uptick and margin on that as we get there but once we bring Elk Creek on, we'll turn all that into more for the pipeline.

[Operator]

Our next question will come from Kristina Kazarian with Credit Suisse. Please go ahead.

Kristina Kazarian

Good afternoon, guys. You guys have announced a lot of projects this year end. I mean it's only February, still can you talk a little bit about the longer term magnitude and cadence, and I know Terry you kind of alluded to some of these comments in your - alluded in your opening comments but magnitude in cadence of new project that maybe you'd love to do but haven't announced yet, so not what they are but just how we think about the year, next year kind of evolving around that topic?

Terry Spencer

Well certainly we, we had to just stop because we announced all this - we brought to reality the backlog of projects that we've been talking about for about the last year. We haven't stopped developing new opportunity; we'll continue to work hard around our existing footprint. And certainly as we've always done, if those, if those projects, beyond it's 2019-2020 timeframe, if those projects continue to get more visibility, then we, we advise, we let you know, as we get more clarity, as we get close, and certainly our past record as we start contracting for those projects or unannounced projects. We come out publicly with them. And so we're going to continue to do that. And certainly we still are finding opportunity and some of it, it isn't just gathering, processing and shipping NGL's and other, some of our other projects we've talked about export opportunities, so we continue to work that front very hard, so we got a number of other opportunities in the Q but certainly not ready to announce anything yet.

Kristina Kazarian

Got it, so just framing up from my standpoint is there like potential some more announced this year or should I be thinking more potentially given into next year and forward?

Terry Spencer

There's always a potential for more projects but I'll tell you the projects that we've just announced certainly position us with plenty of capacity for running growth so there's not a whole lot of need for more infrastructure, but there could be, we continue to see the positive movement bonds that we're seeing. There could be a potential for some things later on in the year perhaps not of the magnitude that we just announced but you certainly always have that that opportunity or that potential rather.

Kristina Kazarian

Last one for me following up on that kind of you've got pretty significant amount of NGOs headed down towards your downstream assets. How are you guys thinking about the mark end markets for purity products coming out the other side of your fraction maybe alluding to your export comment there as well?

Sheridan Swords

Kristina, this is Sheridan here. Obviously, we think is more and more propane and butane come online they will have to be exported and in the short term, we think there's plenty of export dock capacity down there in the Gulf Coast to be able to handle this as it comes on but we definitely see two or three years out that there will probably need to be more LPG exports out of the Gulf Coast. We also talked about on the ethane side that the three big crackers that everybody's been waiting for have now are up and running or reached mechanical completion, and we're into the second portion of that later this year. So we'll see a lot more demand on the ethane side coming at this period of time. We still see a lot of opportunity for additional ethane exports out of the Gulf Coast as you start looking at more than that three to five times. That's really how we kind of think about what the purity markets going to look like or our NGL down Mont Belvieu.

[Operator]

We'll take our next question from Brian Zarahn with Mizuho Securities. Please go ahead.

Brian Zarahn

Good morning, with your expectation of four to six time multiples on your new projects you know can you elaborate a bit on the timeframe. Is that a year one expectation or is that following a ramp up period?

Kevin Burdick

Brian, this is Kevin. Yes, that's not going to be a year one thing because obviously these assets come on they're going to ramp up with volume but we would expect to get there it kind of our current volume outlook. I'd say in two to three years as we move through that. Obviously, if we continue to have success contracting and bring more volume on that could accelerate.

Brian Zarahn

And then on Elk Creek, obviously it's a Bakken driven project but can you elaborate a little bit on the comments earlier on the opportunity in the DJ and Powder River?

Kevin Burdick

Yes. We're seeing strong, we continue to see - it's not just our equity GMP business in the Bakken that's seeing growth up there. So we're having success there in the Williston with third parties. You come down to the Powder River, there's been some announcements here recently as far as additional rigs and some acreage has changed hands and now it's getting drilled out a little more. So there's been more activity going on in the kind of the Niobrara / powder area and then you get down to the DJ, we're seeing growth there as well. And so with the combination of our assets with Bakken and Elk Creek we're in a great position to contract up that business.

Terry Spencer

The only thing I would add is when you see a lot of those rigs coming in especially in the Powder River we don't talk as much about that most of the rigs are coming on acreage that's already dedicated to us through existing contracts.

Brian Zarahn

Appreciate the color. I guess shifting gears to the Permian, any update on your discussions with potential customers on your West Texas LPG expansion project?

Terry Spencer

Yes. We still continue to talk to customers out there. We still in various levels of discussion with them and contract negotiations obviously that's a very competitive area out there, but we think we are advancing those discussions and when we get them, when we get ink on paper we'll let people know we have more capacity to be constructed out there. But we think everything's going as planned on that front, but it is competitive and we are working on multiple sides for new plants.

Brian Zarahn

And then last one for me on expansion CapEx this year, it's a little bit of wide range what are some of the moving parts permitting is the weather is it some other smaller projects and do you expect the CapEx to be back end loaded this year?

Walt Hulse

Yes. We will absolutely ramp up through the year with our CapEx spending as far as what's driving the range it's clearly timing I mean we have plans and we think and we'll be in the middle range there, but whether it's weather or some minor delays or accelerations that could move capital around when you've got the number of projects that we're going to be working on especially in the back half of the year.

Kevin Burdick

Yes .I think only thing I would add your comments that we got lot of experience to fill the pipeline's across this country, and so and we've had weather situations with just about every one of our projects, so we've got experience at factoring in those kinds of things that you don't always anticipate that affects the project. And we've certainly done that here in a capital estimates that we provided. So we used all that experience and data that we've accumulated and factored that into these estimates. So we should be in pretty good shape regardless of what happens.

[Operator]

We will move to our next question from Christine Cho with Barclays. Please go ahead.

Christine Cho

Good morning, everyone. For the initial 50 plus percent of the Arbuckle II pipeline that's contracted, how many new plants are going to be connected to the line to get to the 200,000 barrels per day? Can you give us any more color on how much of it is third party plants versus your plants? How much of it are volumes from Elk Creek filling into line versus volumes you are picking up in Oklahoma or West Texas? Is that's also an option for supply connection?

Sheridan Swords

Christina, this is Sheridan. What I would tell you is typically at 200 million a day plants going to produce to 20 to 25,000 barrels a day. We do have obviously some of our plants are in there from the SCOOPS and STACKS but by far the majority of the plants that will be connected in the SCOOPS and STACKS will be third party processing plants. So most of the plants hearing being announced today are contracted to this system. The Arbuckle II pipeline is a pipeline that provides capacity to all systems. So we do have some transport only volume on this system. Some of that volume will come off at Elk Creek but that is Elk Creek economics or from the Bakken to Conway, and if it was volume that's going to end up in Mont Belvieu then the additional fee to get from Conway to Mont Belvieu will be applied to Arbuckle on that piece as well. So that's why you're saying that part of the 200,000 plus barrels will be transport only and majority of it will be fracking down in Mont Belvieu with the additional frac capacity.

Christine Cho

But are you assuming some of the Bakken in that 200,000 barrels per day or that would be excess?

Sheridan Swords

We are something some of the Bakken in 200,000 barrels a day.

Christine Cho

Okay. And then what's your utilization on the Sterling and Arbuckle pipelines currently? The spread between Belvieu and Conway has widened out, so curious to know if you think this is a short-term phenomenon or is this beginning of continued widening until more capacity comes on? And does it seem like customers want to sign up for long-term capacity well ahead of their needs more today than what you've seen the last two years?

Sheridan Swords

So Christine Arbuckle pipeline is fully, we are moving as much volume out of the Mid-Continent as we can on Arbuckle pipeline. So if you say for moving out of the Mid-Continent, Arbuckle are 100% utilized. On the Sterling system, we are about 60 little over 60% utilized if you put in that Sterling III will be expanding 250. So we already put that volume in we're about 60% utilized, 67% utilized on the Sterling system. We do things spread --they're not going to be where they are today. You're seeing and the unusual spread differential here at the end of February where you're seeing $0.30 some spread, if you look ahead into the next month, they get back more into the $0.07 to $0.10. We think there's a possibility that could stay in that range especially as we see more ethane come online and fill up a lot of that Sterling space which you will constrain some of the space, but you are right, we think that could stay there until we bring on more capacity and that more capacity will be Arbuckle II.

Christine Cho

Okay, great and then I think you kind of addressed this in your prepared remarks but we heard one of your GMP competitors talk about one of their future plants connecting to your Bakken line. Was that included in your a 100,000 barrels per day of commitments for Elk Creek or is that incremental?

Sheridan Swords

What I would say that included in our prepared remarks that we now say that we are in 10% or 20% higher than what we originally said was our - the volume we had contracted on the line.

[Operator]

Our next question will come from Jeremy Tonet with JP Morgan. Please go ahead.

Jeremy Tonet

Good morning. Just want to start-off with operating in the NGL results there the optimization in marketing I think it was down a little bit quarter-over-quarter, but as you're talking about it is widen a bit here. I was just wondering if you could expand a bit on the commentary. It seems like it was offset by wider location depths and how you see that playing out and when you're looking at the NGL segment guidance over the course of 2018, what's up environment do you see for that versus kind of what we're seeing right?

Kevin Burdick

Well, are you referring to the sequential quarter-to-quarter optimization and marketing, Jeremy?

Jeremy Tonet

Yes.

Kevin Burdick

Yes. What's going on there is if you think back we've really had a very strong Q3 in optimization and marketing, and then it wasn't that fourth quarter was bad but just from some timing things we ended up you know it was lower. So it was really the strong third quarter that drove the sequential fourth quarter being down.

Jeremy Tonet

Great and then as you think about your 2018 guide, there's that embedded environment that's you know similar to what you're seeing now and those different factors or is it much different?

Kevin Burdick

I think Jeremy $0.03 to $0.04 I mean is what we put out there is kind of the spread that we use for ethane for our optimization., and yes we've seen some short-term things that are positives here in the first quarter, but does that continue through the rest of the year that we don't have that type of spreads we're seeing today built into our 2018 guidance.

Jeremy Tonet

Great, thanks for that. And thinking about your pipes going into Mexico there's just wondering you know given the state of Waha basis as you described you know where the volumes are now on that pipe? When does that - when could that hit full utilization in what do you see is the prospects are as far as maybe moving more that gas and further into Mexico over time given such rampant supply growth in the Permian?

Kevin Burdick

Well, I think the key with our West Texas and our Roadrunner pipeline is that regardless of the physical flow that's a long-term firm commitment demand charge we're getting paid regardless of the volume that are flowing. I mean as the downstream infrastructure continues to get built out in Mexico then we will see more physical volumes flow, timing of that's probably over the next one to two years. And Phil anything to add there?

Unidentified Company Representative

No, that's exactly right and we continue our conversations with markets in Mexico about expansion capabilities of Roadrunner 2 or they're obviously looking at the Waha pricing and seeing that that's pretty attractive to what they're trying to do so.

Terry Spencer

So, Terry. It's fair to say that as far as we concerned specifically as it relates to Roadrunner that they're still constructing or still in the construction side and some of their power plants and those have been slow and coming right, and so certainly as we move throughout the balance of the year the north some of the Norte Power Plants, some of those plants, they're making progress on certainly in those plants get further along will get operational will see increased loads on Roadrunner.

Unidentified Company Representative

Absolutely, yes, they continue their construction activities on their power plants and even in addition to that there's a pretty robust construction activity on the downstream pipeline side in Mexico right now. So it's a lot of those facilities will be coming online in next year or so and you'll see some increased supplies coming in from Waha and the States supporting those facilities. But as Kevin mentioned our facilities are already contracted their take or pay contracts and so we feel good about our position there.

Jeremy Tonet

Great, thanks for that and you guys noted I think 650 completion counts for next year. I was just wondering for 2018, I was wondering if you might build - expand a bit on some of the drivers or details to that and it seems like some of the producers this quarter we're talking about Mid-Continent growth or STACKS growth maybe a little bit slower than what they have message before and I am just wondering if this kind of match your expectations there?

Kevin Burdick

This is Kevin. Yes, we've seen-- we haven't seen anything come out. In fact, we've been quite pleased with that the producers have gone through their calls and talk about their capital spend for 2018 in both the Williston and the STACKS and SCOOPs and it's all been absolutely in line with our guidance and our outlook on things. So the 650 we still feel very good about that given what we're seeing from the recent capital announcements.

Jeremy Tonet

That's helpful, thanks. Then John just one last one seems like where your leverage sits, liquidity sits surely you guys enjoy some financial flexibility that I think others in the space still don't have yet and just wondering if you had thoughts as far as industry consolidation or M&A in general if that's something that's on your radar at all or just given the deep - we're going to growth opportunity set a really great rates of return that's just kind of not as much of a high priority for you guys right now?

Kevin Burdick

Well certainly, the organic growth strategy that we talked about today is what we're focused on. Okay, so as far as the M&A front goes it's certainly difficult to predict and actionability is always a challenge and certainly our company is well positioned in any event a compelling opportunity presented itself, we'd be ready but candidly with the organic growth opportunities that we see upfront of us over the next three to five years, we're not in a position to have to do any M&A. And so I hope that puts that --we're kind of where it belongs in terms priority.

[Operator]

We'll move next to Chris Sighinolfi with Jefferies. Please go ahead.

Chris Sighinolfi

Good morning, guys. So you've been busy, nice starts for the year here. You closed your prepared remarks mentioning through what comes next and my first questions related to that but specifically in regards to that the fractionation portfolio. The four key results indicate headroom of about a 160,000 barrels a day on the current capacity, and then before will obviously add about 125 but you have significant committed volumes who spoken about on the on the new NGL pipes and ethane recovery might be gravy on top of that. So I'm just wondering if we could talk about how on the frac side everything takes shape. Is it sort of strongly hinting about additional frac capacity that you'll add over the same timeframe or do you have a legacy contract rolling off or do you contract for capacity you might need? Are you responsible to frac all the volumes on your line? Can you just walk us through that?

Terry Spencer

Let's first Sheridan answer that question.

Sheridan Swords

So I think the first thing you have to look at fourth-quarter fractionation volumes are really higher than they should be due to as we said the third quarter being less than they should be we had a lot of store volume coming in the fourth quarter. So you have some more room in there as well but we think with what we have we do have some volume on our system that is train port only. We have some fairly large projects that we did end of line for people that have fractionated capacity in the Gold Coast area that we have done this as well. So we don't have to frac all the line in our system. But as we said our current MB4 fractionator is fully contracted so as we continue to grow with contracts with our customers, there could be another fractionation we hope there's another fractionator that comes online in the near future.

Chris Sighinolfi

And Sheridan I guess related to that then is there should we expect any upward pressure over the next couple years on frac fees at Belvieu or as you see the cadence of new plants from you and from peer companies, is there enough capacity coming online that you don't think we'll be pinched?

Sheridan Swords

Well, I think a lot of, when you think about when you contract and build a fractionator you have to --you're going to build NB4, we're going to build 125,000 barrels a day fractionator and that capacity comes online day one, but we ramped into that capacity from our commitments, as it ramps over two to three years, so and that's everybody is in the same boat. So there's going to be some capacity in the front that in the industry will have as we ramp into these contracts. So I think that we won't at this time get pinched on capacity. Overall, I think rate will be somewhat where they are today because when you look at really a fractionation rate you can't just look at what's going on in Belvieu. Most people are competing for the bundled service out in the field - so were competing in the Bakken, in the STACKS and all that, that's what we're getting a bundled service, we look at what the market is in that area it's not necessary that what the market is in Belvieu.

Chris Sighinolfi

Okay. And I guess final question on the frac front. There - would there be any rationale or opportunity to build additional frac in the mid-con or is it just logical to think that all new for a capacity is going to be Belvieu centric?

Sheridan Swords

We really think it's going to be Belvieu centric and one of the main reason is we think it's easier to ship raw feed and determine it into five products and backs it down a pipeline. And Belvieu is where we see the Belvieu or the Gold Coast is where we see incremental demand. We may put a little - the only thing we do for fractionation capacity in the Mid-Continent that we could do it at a relatively cheap small expansion rate which you saw a little bit what we're doing on Elk Creek pipeline. We spend a little bit of money to upgrade our cracks, but that's cheap capacity expansion. Any new Greenfield will all be built on Gulf Coast.

Chris Sighinolfi

Okay. And then I have one unrelated question which just does tell us back on Jeremy's inquiry about the optimization and marketing. Kind of appreciated your answer just in the relationship it indicated narrower product price differentials were partial offset to the water locational differentials? Are you or you --is there and activity there was you're supplementing propane for butane or butane for propane. Can you just talk us through that?

Terry Spencer

Really what you're doing we talk about product price differences from the time that we buy and sell and timing of the market and so okay big volume in a third quarter, big but nice price in third quarter not as much in the fourth quarter, essentially what we were talking about.

[Operator]

We'll take our next question from Ted Durbin with Goldman Sachs. Please go ahead.

Ted Durbin

Thank. Just coming back to the return profile on the projects but what drives the difference between the low end and the high end of the range the 4x to 6x. Is it more on the total capital you spend or I would think more on the volumes that actually show up or operating cost maybe you can just give us a sense of what's --what drives leverage to the high end?

Kevin Burdick

It's going to be - it's primarily, it's Kevin. It's going to be primarily timing and just your volume ramp. I mean again the high end of that range you're going to be earlier on and with our current contracted capacity, if those volumes come on faster and/or you get some more contracts, you're going to go - you're going to push that multiple lower.

Ted Durbin

Okay and so just coming back to the ramp then, is it fair to say that the first year is going to come in at 6x or that even may be higher than that I just a little more color on the timing of that two to three year ramp and where we start out at in the first year?

Kevin Burdick

I mean, yes, in the first year again if they're coming on at the beginning of the year by the end of that year you might be towards that high end. I mean but again that's going to be kind of splitting hairs a little bit as far as when exactly the volumes come on inside that first year.

Ted Durbin

Okay.

Kevin Burdick

But definitely, I would definitely think about it that way is that early on especially in the first year in years one and two you're going to be at that high end and then it's going to transition down as you fill it up.

Ted Durbin

Okay, no, that's helpful. Just on the guidance and the gathering and processing you're guiding to the $0.80 rate that's down from $0.86 from 2017. Is that just a mix shift between the Bakken and the mid-con as you think ahead into 2019? Should we expect that rate to be kind of a good run rate or how do we think about that I gas gathering rate?

Kevin Burdick

Chuck, do you want to take that?

Unidentified Company Representative

Yes. Kevin, I will take that. Yes, essentially that's what that is it's the Mid-Continent volumes coming on and our fees are still lower in the Mid-Continent than they are in the Bakken, so that's kind of a blended rate between the two basins.

Ted Durbin

Okay, great and then last one for me just coming back to the financing. Walt, you mentioned that you're close to where you want to be but you think the leverage ticks up over time obviously with the higher CapEx. I guess what's the comfort of the rating agency to let you get into I don't know mid to high 4s let's say and still keep that BBB rating. Do you need to come for, I don't know preferred equity or turn on the drip or there are other things you can do? Just give us a sense of kind of where we should see leverage trending into 2018 and 2019?

Walt Hulse

Well, I'll let the ratings speak for themselves, but I will say that we have had constant dialogue and keep in touch with on a regular basis. So they are well aware of what we're doing. And yes as we get these construction projects towards the end of 2019 coming down, we'll see some pickup in our leverage to more than 4x. I think it will be at the high end of the range you just mentioned, but as these pipelines come on and this cash flow, our credit metrics improve dramatically and we'll be back through that 4x target pretty quickly. So just given the transparency of these contracted volumes and how we see that playing out, we think that for our discussions of the agencies that we are pretty comfortable with that. We have other projects come on and we need to think about still some equity out there in 2018. We are leaving that door open, but as we sit here today, there's a good chance we won't have to issue any other equity.

Ted Durbin

Okay, great and then last one for me is just on your just management incentives in your proxy statement as you develop the next one. Are you going to keep or return the invested capital metric in there at the okay level somewhere - what you have it Okay. What should we look for in terms as metric system?

Walt Hulse

Yes. We will.

Ted Durbin

Okay. We will stay tune for that. Thanks .That's it for me.

[Operator]

Our next question will come from Craig Shere with Tuohy Brothers. Please go ahead.

Craig Shere

Good morning. Kevin sorry to beat this into ground but that two to three year ramp at 4x to 6x EBITDA. I'm thinking specifically around Elk Creek. I thought that you had about 70,000 barrel a day of MVC, is that just about right away with maybe another 30 that rolled in over a year or two and so I just want to confirm that's about right and also see if this rail volume Sheridan's talking about having no margin is basically the same as the MVC's or do you see that as potentially incremental that could be day one margin soon as Elk Creek comes on?

Kevin Burdick

Okay. This is Kevin. There are couple questions in there. So on the one clarification on the 70,000 barrels a day minimum volume, we said we had commit - the volume commitments on out of the 100,000 that 70,000 barrels a day ramps also. So that all that doesn't hit day one so that's one dynamic that's going on. Yes, as we rail volumes and as the volumes we put on rail grows over the next couple years while Elk Creek gets built then absolutely day one those volumes would shift over to the pipe and drive that incremental EBITDA very quickly. So that's the way I guess to think about how the volumes will grow but then you will have an initial EBITDA pop when a tree comes on line as you move these rail volumes over to the pipe like shared dimension. Hope that answer your questions.

Craig Shere

It does. Can you clarify how much capacity you can handle via rail and do you all intend to advise us over time how that portion of the business is growing so we can kind of model the EBITDA uplift once Elk Creek hit?

Kevin Burdick

Yes. We have said we expect to be able to rail up to 30,000 barrels a day from our Riverview facility and you know up north and so you can then kind of back end okay what would that mean if you're railing 30,000 barrels and then you've got the rates we're giving .

Craig Shere

Sure. Would you anticipate that to be relatively full by the time Elk Creek is online?

Kevin Burdick

Yes.

[Operator]

We will now take our next question from Ethan Bellamy with Baird. Please go ahead.

Ethan Bellamy

Hey, guys. Follow-up to Jeremy's question about your now excellent cost of capital but from a different angle. Do you have any desire to vertically or horizontally integrate for example maybe heading to the Northeast on the gas or NGL side? Or maybe moving downstream to LNG?

Terry Spencer

Not really. We thought about the Northeast from time to time and in particular the Marcellus region. We've got some NGL assets they're kind of in the region but not really suited to serve any Marcellus development and that are primarily our North system in our NGO segment. We pondered the Marcellus or sometimes but candidly it is its well-served by the midstream companies with really strong positions. So we don't see a spot there for us. And on the LNG front we you know we we're more interested in the infrastructure upstream and that's what we continue to work on pipeline, storage and those types of things that would serve LNG but not a particularly interest in being in LNG plants. So that's kind of how we think about those things in particular.

Ethan Bellamy

Okay. Thank you. And then just one sort of housekeeping question. Was there any - maybe what you described it abnormally high amount of freeze off or anything weather-related in the first quarter that would you be modeling?

Terry Spencer

No, I don't think we've seen anything kind of out of the ordinary. Like we have talked previously, we you know we build in a certain level of we know we're going to have some winter both at the tail end of Q4 and first couple months of the first quarter. So, yes we've seen some cold weather. We have seen some freeze-offs up north but nothing that I would consider out of the ordinary.

[Operator]

There are no further telephone questions at this time. I'd like to turn the conference back over to Andrew Ziola for any additional or closing remarks.

[Andrew Ziola, Vice President, Investor Relations]

Okay. Thank you. Great questions today. Our quiet period for the first quarter starts when we close our books in April. And extends until earnings are release in early May. Thank you for joining us.

[Operator]

This concludes today's conference. Thank you for your participation. You may now disconnect.