Enterprise Products Partners L.P. (EPD) Q1 2018 Earnings Conference Call Transcript

Enterprise Products Partners L.P. (EPD 0.56%)
Q1 2018 Earnings Conference Call
April 30, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Thea and I will be the conference operator today. At this time, I would like to welcome everyone to the Enterprise Products Partners L.P. quarter one 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw the question, press the # key.

Thank you. At this time, I would like to turn the conference over to Mr. Randy Burkhalter. Please go ahead, sir.

Randy Burkhalter -- Vice President of Investor Relations 

Thank you, Thea. Good morning, everyone, and welcome to the Enterprise Products Partners conference call to discuss first quarter 2018 earnings. Our speakers today will be Jim Teague, Chief Executive Officer of Enterprise General Partner and he'll be Bryan Bulawa, Chief Financial Officer. Other members of our senior management team are also in attendance for the call today.

During this call, we will make forward-looking statements within the meaning of section 21E of the Securities and Exchange Act of 1934, based on the beliefs of the company, as well as assumptions made by and currently available to enterprise's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.

Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. With that, I'll turn it over to Jim.

James Teague -- Director and Chief Executive Officer

Thank you, Randy. Our business performed exceptionally well in the first quarter, including records for net income, gross operating margin, and adjusted EBITDA. Excluding proceeds from asset sales, distributable cashflow was also a record. Record NGL and margin terminal volumes increased crude oil pipeline transportation and marine terminal volumes and higher natural gas pipeline transportation volumes led to three of our four business segments reporting higher results compared to first quarter last year.

These results are allowing us to consistently grow our profits, grow our distributions, plus make substantial headway toward equity self-funding. With a comfortable 1.5 times distribution coverage, we retained over $450 million to put back into our future growth. At Enterprise, it's probably time to quit thinking downturn. Today's results continued to prove that our future has really never looked brighter.

The first quarter, we were still in the ramp-up phase for two of our largest projects, our PDH plant in the Midland to ECHO crude oil pipeline. Both projects have now officially been put into service. On April 16th, we announced that our Midland to ECHO crude pipeline moved into full service with an expanded capacity of up to 475,000 barrels per day.

Supporting the Midland to ECHO pipeline are several strategic supply aggregation projects, including a new 140-mile pipeline from Loving County, Texas, to Midland that is expected in service this quarter. Recent extreme basis differentials for Midland have been a significant source of attention. Pipeline, rail, and trucking capacity out of the Permian appears to be very tight for at least the next year and with no significant additional takeaway expected until the second half of '19, the timing of our new pipeline couldn't have been better.

In that regard, our press release notes a large non-cash market to market charge for the first quarter. Throughout 2017 as the Midland basis widened to values that exceeded our committed fees, we felt it was appropriate to take some price risk off the table and begin a capacity hedging program. As prices rose and production moved up, that basis began to blow out significantly, which resulted in a large non-cash market to market impact.

As these hedges roll off in future periods, these unrealized market to market adjustments will be reversed against actual revenues for those hedge periods. Our PDH plant began commercial service in April. Thus far in April, PDH has operated at an 84% average utilization rate. It's been a long time coming, but now it's time to enjoy the benefits of this project's solid supply and demand fundamentals, substantial fee-based cashflow with upside, the end of some very expensive bridging agreements and it's a great fit in our C3 value chain.

Work on our iBDH is progressing with an expected second half next year start-up. As a reminder, half of this plant will fill excess capacity we have in our high-purity isobutylene and MTBE plants, which will allow us to upgrade additional NGLs into higher valued products. The other half is committed to an investment-grade customer through a 15-year fee-based contract on a feedstock—plus cost basis.

We have several ethylene projects including ethylene storage, a new pipeline, and our joint venture, ethylene export dock all scheduled for late into 2019. In NGLs, we started commissioning our first gas processing plant at Orla in the Delaware Basin in April.

We also have two other processing plants under construction at Orla with completion of our second Orla plant expected in the fourth quarter of this year and our third plant in the first half of 2019. We're also in the process of commissioning our 9th fractionator at Mount Belvieu, which is scheduled to be fully operational this quarter. Obviously, fractionation capacity is in high demand and is a key component in our value chain.

Last, our Chinook Pipeline is progressing. This pipeline is expected to begin operation in 2019. We feel strongly that capacity expansions are imminent in order to keep up with the needs of our Permian customers. Summarizing our NGL projects between new processing plants, pipelines and fractionation, we have a considerable amount of NGL assets under construction, most of them supported by the Permian Basin with growing demand on the Gulf Coast and Mount Belvieu. The reality is as much as we have going on out there, we're really not done finding opportunities in that basin.

Besides Midland crude oil basis differentials, probably the second most written about topic these days is the collapse in ethylene margins. When we announced our expansion into petrochemical midstream last year, we said that we expected price volatility and it's fair to say that's begun. But don't think of this as a signal to give up on US ethylene producers. Frackers have been running at a 95% rate as most US petrochemicals actually focus on ethane to polyethylene, where margins are currently about double that of historical norms.

US petrochemicals have extremely positive long-term fundamentals because of rich shale gas, which has given them a significant global advantage. Industry expansions of this magnitude in the US don't come without opportunities for enterprise. Enterprise has the premiere supply position in the industry to meet this growing feedstock demand and we're moving further into providing midstream-type services for both domestic and global petrochemicals.

Refined products in late 2018, we expect a complete new infrastructure consisting of pipeline, storage, and dock upgrades, which will significantly increase our refined products export capabilities at Beaumont, as demand for US refined products continue to grow, especially in Latin America.

A few words on demand growth. While the new crackers were delayed a little bit by Hurricane Harvey, those projects are now coming on line. Petrochemical demand for ethane is currently over one and a half million barrels a day and Tony Chovanec believes it could exceed 1.8 million barrels a day by year end.

Also on the topic of new demand, Enterprise liquid hydrocarbon exports continue to increase each month led by increases in demand for US crude. The name of the game for US production is exports, exports, exports, exports of crude oil, natural gas, ethane, LPG, petrochemicals, and refined products. Shown again by the results and statistics we published today, we don't think anyone is better situated to serve growing global demand in enterprise.

Finally, I ended last quarter by saying that we feel really good about 2018 and our long-term opportunities. Obviously, that sentiment remains. Institutional investors and research analysts recently named Enterprise Products as one of the most admired companies in America in the institutional investor annual survey.

We want the investor community that follows us to know how much we appreciate the strong support that you continue to show for our company. We all understand the investment community has broadly shown a strong preference for investments outside of energy. The midstream sector has been out of favor, admittedly somewhat self-infected.

Regardless, Enterprise will continue with what we have always done, deliver results, assistant distribution growth and generate long-term value. Obviously, long-term investors in the debt markets recognize the opportunities they have in Enterprise. We feel strongly that there will come a time when the equity markets, including the retail community will quit focusing on the sector we're in and instead, focus on the quality company we are. It's kind of like not one of us can pick the family we're in, but we are responsible for our own performance. We will continue to be responsible for our performance.

With that, I'll turn it over to Bryan.

Bryan Bulawa -- Chief Financial Officer

Thank you, Jim, and good morning, everyone. I'd like to echo Jim's enthusiasm. We are pleased with our record operational and financial performance. While our first and fourth quarters are typically seasonally strong periods, our operational and financial performance over the last several quarters demonstrates Enterprise as a uniquely positioned, integrated midstream system. We continue to benefit from increasing supply, domestic hydrocarbons and strong demand from both domestic and global markets.

The fundamentals surrounding our business are strong and we are excited about the prospects for continuing growth. I will now review a few income statement items for the first quarter, reiterate our expectations for our growth and sustaining capital expenditures for 2018, and wrap up with an overview of our balance sheet metrics and equity funding objectives.

Starting with the income statement items -- net income attributable to limited partners for the first quarter of 2018 was $901 million or $0.41 per unit on a fully diluted basis compared to $761 million or $0.36 per unit on a fully diluted basis for the first quarter of 2017.

We recognized a non-cash $37 million gain in the first quarter of 2018 or $0.02 per fully diluted unit attributable to the March 29th, 2018 step acquisition of the remaining 50% equity interest in our 150 million cubic feet per day Delaware Basin gas processing plant located in Reeves County, Texas. The purchase price for this ownership interest was $150 million. We also recognized a total of $140 million non-cash market to market loss during the first quarter of 2018, primarily due to the Midland to Houston and Midland to Cushing Basis Hedges.

Depreciation, amortization, and accretion expenses were $18 million higher compared to the same quarter of 2017 due to the Midland to ECHO pipeline and a few smaller capital projects being placed into service since the first quarter of 2017. Total capital spending in the first quarter of 2018 was $1.1 billion, including $66 million for sustaining capital expenditures. For the full year of 2018, we currently anticipate investing in approximately $3.2 billion to $3.4 million in growth capital expenditures, with this range including the aforementioned acquisition of 50% interest in the Delaware Basin gas processing facility. Further, we expect our sustaining capital expenditures for 2018 to be approximately $315 million.

Moving to our balance sheet, at March 31st, 2018, our total debt principal outstanding was $25.6 billion. The average life of our debt portfolio was 14.8 years, assuming the first call date for our hybrids and our effective average cost of debt was 4.6%. It should also be noted that over 90% of our debt portfolio is fixed rate, thereby insulating our cost of debt capital in a rising interest rate environment.

On February 1st, we issued an aggregate of $2.7 billion in the debt capital markets comprised of $1.25 billion of 4.25% senior unsecured 30-year notes, $750 million of 2.8% senior unsecured three-year notes and $700 million of five and three-eighths percent 60-year non-call 10 junior subordinated notes. Proceeds from the $700 million junior subordinated note issuance reused in March of 2018 to redeem all of the $682.7 million outstanding aggregate principal amount of our 7.03% junior subordinated notes due in 2068.

This redemption results in annual interest expense savings of $11.3 million. Adjusted EBITDA for the 12 months ended March 31th, 2018 was $5.9 billion and our consolidated leverage ratio was 4.1 times after adjusting debt for the partial equity treatment of the hybrid debt securities by the rating agencies and further reduced for cash and cash equivalence.

Working capital requirements remain elevated by approximately $475 million, which is largely comprised of margin requirements on the exchanges associated with the recent widening of the Midland to Houston basis spreads against our executed Midland to ECHO and Midland to Cushing hedging programs, which is more fully described in today's press release.

When also taking into account the pro forma benefit for contracted growth projects under construction during the quarter, our adjusted leverage ratio was approximately 3.7 times. Our consolidated liquidity was approximately $5 billion at March 31st, 2018, which included available barn capacity under our credit facilities and unrestricted cash.

Finally, during the first quarter, we retained $458 million in excess distributable cashflow, which alone funded 45% of our first quarter, 2018 growth capital expenditures. Just to reiterate Jim's comments in the press release, when factoring in our anticipated retained distributable cashflow for the full year of 2018 and expected proceeds from the distribution reinvestment program or our drip and the employee unit purchase program or UPP, we do not anticipate any additional external equity needs for this year.

For 2019, we continue to anticipate a fully self-funded equity model excluding the drip and the UPP participation on an approximate $3 billion growth capital investment profile, while preserving our target leverage objective of 3.75 to 4 times.

With that, I'll turn the call back over to Randy for questions.

Randy Burkhalter -- Vice President of Investor Relations 

Thank you, Bryan. We're ready to take questions from our listeners. Thea?

Questions and Answers:

Operator

At this time, I would like to remind everyone that if you would like to ask a question to press *1 on your telephone keypad now. Again, ladies and gentlemen, please limit yourself to one question and one follow-up. We'll pause for just a moment.

The first question will come from Jeremy Tonet with J.P. Morgan.

Jeremy Toney -- J.P. Morgan -- Analyst

Good morning. Congrats on the strong quarter there. I was wondering for the Midland pipe, how were you able to expand it to 575? Was this drag-reducing agents? Is this the final level of expansion or could this be pushed further?

James Teague -- Director and Chief Executive Officer

It was primarily due to drag-reducing agents and very little additional upside over what we've announced.

Jeremy Toney -- J.P. Morgan -- Analyst

Great. Thanks for that. Just wanted to go a bit more as far as the growth projects in the future, you guys seem to be having a lot of conversations, but just wanted to see a bit more if this could be -- what part of your business this could be. Is it more in the downstream petrochemical side? Is it more on the Permian side? Are there other areas that you see growth, anything that you can share with us there?

James Teague -- Director and Chief Executive Officer

I think the answer to your question is yes.

Jeremy Toney -- J.P. Morgan -- Analyst

Okay. We'll wait for that, then. Thank you.

Operator

The next question will come from Tristan Richardson with SunTrust Robinson.

Tristan Richardson -- SunTrust Robinson -- Analyst

Hey, good morning, guys. Just curious in terms of the CapEx outlook for this year. It seems to be up a little bit. Is it just pull forward from current projects that are on plan?

Bryan Bulawa -- Chief Financial Officer

Hey, Tristan, it's Bryan. Some of the movement is partially because of the acquisitions that we've already announced with the one I've mentioned in the script with respect to the Delaware Basin gas facility as well as, if you recall, we also purchased land on the ship channel. So, those acquisitions, and then you also had a little bit of scope changes with some existing projects which have expanded on those projects. Let me be clear -- that's not a cost overrun but the lead expansion of those existing projects.

Tristan Richardson -- SunTrust Robinson -- Analyst

Thanks, Bryan. That's helpful. In terms of Chinook, you talked a little bit recently about anticipating early expansions on that, just curious what the factors are that influencing decisions on the initial capacity designed for Chinook.

James Teague -- Director and Chief Executive Officer

We're seeing more volume, building more plants. Tony, you got anything? That's the essence of it. People are wanting to move. People get nervous about takeaway in the Permian.

Tony Chovanec -- Senior Vice President

I would say the Delaware Basin part of the Permian really continues to exceed. That's a large reason for capacity. Anything to add?

Bryan Bulawa -- Chief Financial Officer

That's exactly what the customer wants. We're seeing very strong interest in it.

Tristan Richardson -- SunTrust Robinson -- Analyst

Fair enough. Appreciate it. Thank you guys very much.

Operator

The next question will come from Chris Sighinolfi with Jefferies.

Bryan Bulawa -- Chief Financial Officer

Good morning, Chris. You there?

Operator

Chris, your line is open.

Chris Sighinolfi -- Jefferies & Company -- Managing Director

I'm sorry. Hello, guys. Can you hear me now?

Bryan Bulawa -- Chief Financial Officer

Yeah.

Chris Sighinolfi -- Jefferies & Company -- Managing Director

Sorry about that. Good morning. Much of the discussion around enterprise is export activity as centered on the ship channel, Beaumont, and Corpus, but I did see an industry article last week suggesting you guys had a VLCC in Texas City. I thought the draft there was too shallow to permit that caliber of vessel. So, just curious what you're working on in Texas City. Any color would be helpful.

James Teague -- Director and Chief Executive Officer

Sure. This is Jim. First of all, all the press talks about Enterprise's Texas City dock and it's really not enterprise's Texas City dock it's Seaway's Texas City dock, which is a joint venture between Enterprise and Enbridge. We work closely on those Seaway docks at Texas City and Freeport. If I was Al Monaco, I'd get a little irritated seeing Enterprise's Texas City docks. Now, Enbridge is a partner in that.

The only thing we did is we want to see what's possible. So, we brought up the LCCN. We didn't load anything on it. All we're doing is taking measurements and seeing if the load arms work. We're evaluating the information we've got so far. Preliminary, it looks good. You're right about the draft. The time set would be we'd load a laddering vessel and follow the VLCC out and transload it. It's a pretty simple concept, but we think it may grow legs.

Chris Sighinolfi -- Jefferies & Company -- Managing Director

To understand that, Jim, partially load the vessel at the dock, then ferry it out and then fully load it offshore.

James Teague -- Director and Chief Executive Officer

Yeah. We can probably get 1.1 million, 1.2 million barrels on that. We would have a laddering vessel at the Houston Ship Channel. They'd follow each other out and transload. Frankly, we're just saying physically does it work? Then we'll take a look at the economics. We're talking to some people that are in that business to see if we could put legs to this. It's kind of a neat concept.

Chris Sighinolfi -- Jefferies & Company -- Managing Director

Yeah. It's not part of what I had been considering before. We heard some other pure stock about offshore activity, but not the sort of hybrid option you're talking about. That's interesting. Secondly, I had a question on the Midland ECHO pipe. I hadn't realized it was a 20% outstanding option on that line, probably just an oversight on my part. But I'm curious if any of the other inflight expansions include ownership options which you're paying attention to.

James Teague -- Director and Chief Executive Officer

On that pipeline, Jeremy? Chris, you mean on Midland Sealy?

Chris Sighinolfi -- Jefferies & Company -- Managing Director

Yeah, Midland Sealy, I hadn't realized it was that option. So, I was just curious. Two questions -- one, is $200 million roughly the proportional cost of construction and two, are there other assets that you're building we should pay attention to that have buy in options either by shippers or third parties.

James Teague -- Director and Chief Executive Officer

What I'm going to do is I'll throw you back to how this company was built. Dan, we've got a number of joint ventures, everything from fractionators or gas parents to you name it. In every case, they brought more than money. They brought production or they brought offtake. So, if you see us include a joint venture partner, you can bet he's bringing a lot of money and it supports our entire value chain. I'm not going to comment as to whether or not what we that we haven't announced yet.

Bryan Bulawa -- Chief Financial Officer

Chris, this is Bryan. As far as the proportional, yes, that is representative of the proportional cost.

Chris Sighinolfi -- Jefferies & Company -- Managing Director

Okay. Great. Thanks a lot for taking my question this morning, guys, and congrats on a great question.

Operator

The next question will come from Shneur Gershuni with UBS.

Shneur Gershuni -- UBS -- Managing Director

Hi, good morning, guys. Just a first off before getting my questions, I just want to confirm something you said to Tristan earlier about NGLs versus crude lines. Are you saying customers are more worried about NGLs versus crude lines? Are you saying that customers are actually shifted and worried about NGL capacity now and that's why you're not looking at converting the NGL line?

James Teague -- Director and Chief Executive Officer

I wouldn't say we weren't looking at converting an NGL line. I think we clearly have said we're taking a hard look at that and we expect that -- frankly, I think we'll do it, but I'm not sure what the timing will be.

Shneur Gershuni -- UBS -- Managing Director

Sort of shifting a little bit here, I think Bryan had walked through why the CapEx numbers were up a little bit this year, but I was wondering where you're seeing opportunities in how large that can be. I ask that against the context of last year, you had lowered your distribution growth rate to be self-funded, but you just put up a 1.5 times covered quarter and you've got a lot of retained DCF. Do we get back on to a higher growth plane going forward?

Randy Burkhalter -- Vice President of Investor Relations 

Yeah, Shneur, this is Randy. The first thing is the largest component to getting to self-funding from an equity standpoint was EBITDA expansion. If you would, moderating the distribution growth was a very small part of it. So, we're expecting -- the performance in the first quarter didn't necessarily surprise us. With that, as far as growth prospects, I think we were continuing to see good conversation around projects on the demand side, but now you're seeing more projects on the supply side as well. I'd really say some of these growth opportunities really had all four segments.

Shneur Gershuni -- UBS -- Managing Director

So, would it be fair to say you weren't surprised by the performance in the first quarter, that you would expect those metrics to continue throughout the year?

Randy Burkhalter -- Vice President of Investor Relations 

Let's not get ahead of ourselves. I think I'd go back to what Bryan said -- our strongest quarters are our first quarters and fourth quarters, just seasonally.

Shneur Gershuni -- UBS -- Managing Director

Okay. Fair enough. And one final question here. I recognize that you had said at the time when the FERC first put out their decision not a material impact to Enterprise, but I wonder if it restarted a conversation about the corporate structure for Enterprise. Many have opined recently that ticking the box would not necessarily impact too many unit holders and at the same time, given your CapEx spend and ability to expense it, there wouldn't be too much of a tax expectation going forward. Has that conversation restarted? Are you thinking about it or talking about it internally?

Randy Burkhalter -- Vice President of Investor Relations 

I don't think any more so than what we had been in the past. We look at it periodically. It's a big step. Right now, we don't see anything that's compelling that leads us to come in and check the box. When we come in look at valuations and things of that nature, there's not anything, a differentiator, between an MLP and a C corp from that perspective. Right now, we continue to monitor it. We'll update our evaluation from time to time, but no development on that front.

Shneur Gershuni -- UBS -- Managing Director

Great. Thank you very much, guys, appreciate the color.

Operator

The next question will come from Colton Bean with Tudor, Pickering, Holt.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Vice President, Equity Research

Good morning. So, I just want to kick it back over to Midland to Sealy, with the remaining 30,000 barrels or so of unhedged, uncontracted capacity, are you comfortable with that exposure or would you also consider further hedging if the forward curve widens out again?

James Teague -- Director and Chief Executive Officer

We always consider everything. Frankly, we just -- I'm not going to signal commercially what we're going to do.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Vice President, Equity Research

Got it. Then just in terms of Gulf Coast LPG, it looks like the industry moved nearly a million barrels a day out of docks in Q1, pretty close to nameplate there. Could you just remind us around your optimization activity around the cold storage and what maybe a timeline would be to reach that 35% capacity increase?

James Teague -- Director and Chief Executive Officer

You've got a good memory. You must have been at the analyst conference. We're working on that right now. Frankly, I think we have a couple of three options that we're looking at. That's one of them. I think what we're going to find is we've got a pretty inexpensive expansion capability. It's just which one do we pick. What you mentioned is one of them.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Vice President, Equity Research

Okay. So, likely leaving the dock loading rates as is and just figuring out how to optimize to max those out?

James Teague -- Director and Chief Executive Officer

We could increase the loading rates.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Vice President, Equity Research

Understood. Okay. Just the final one. So, on the fee-based processing, it looked like volumes were effectively flat quarter over quarter, but you should have had a bit of a tailwind there from South Eddy. So, can you just walk us through some of the moving pieces in the different regions?

Bradley Motal -- Senior Vice President

This is Brad. We see our Delaware Basin continuing to ramp up. There has been a little bit of a lag from our producers from what we've seen as far as our initial schedule, but that volume is still showing up a little bit late. And then in the Eagle Ford, volumes continue to grow and same thing up in the Rockies in Pinedale region. So, we're flat. I think it just balances, some a little bit later than normal, some better than we anticipated.

Colton Bean -- Tudor, Pickering, Holt & Co. -- Vice President, Equity Research

Got it. Thank you very much, guys.

Operator

The next question will come from Brian Zarahn with Mizuho.

Brian Zarahn -- Mizuho -- Analyst

Good morning. On the subject of exports, it seems like crude exports exceeded NGL exports for the first time on your system. Is that trend continuing in April?

Brent Secrest -- Senior Vice President

This is Brent. April, the trend continues. We'll see what happens down the road. We had some cancellations in the first quarter, but it was more positive just around crude oil. Going forward as the volumes increased, obviously our belief is that those will have to be exported. Then we'll have to work on the next project to find more supply for crude oil.

Brian Zarahn -- Mizuho -- Analyst

And then sticking in the Permian, any updates on a potential gas pipe project?

Bradley Motal -- Senior Vice President

This is Brad again. We continue to evaluate it. I'll echo what Jim and Brian said. We're talking to producers. We're talking to potential partners trying to figure out everything it takes to figure out if we're going to make this thing fly or not.

Brian Zarahn -- Mizuho -- Analyst

The last one from me, given the projects you're looking to add to your backlog, is $3 billion still a reasonable estimate for CapEx next year?

Bryan Bulawa -- Chief Financial Officer

As far as what we're looking at, yes.

Brian Zarahn -- Mizuho -- Analyst

Thanks, Bryan.

Operator

The next question will come from Matthew Phillips with Guggenheim.

Matthew Phillips -- Guggenheim -- Analyst

Good morning, guys. Follow up on the crude hedging program you all initiated, the recovery there, would we expect to see that evenly spread through the lifespan of that through '19? How should we view that?

Daniel Boss -- Senior Vice President

This is Daniel Boss. If you look at the total recognized loss during the first quarter on that program and then combine that with what was recognized through December of 2017, we expect about $118 million to reverse in the second through fourth quarter of 2018, an additional $40 million to reverse in 2019.

Matthew Phillips -- Guggenheim -- Analyst

Got it. On the NGL conversion, once you have sufficient commercial interest, how long will that take from when you decide until when it's in service.

James Teague -- Director and Chief Executive Officer

Less than a year.

Matthew Phillips -- Guggenheim -- Analyst

Got it. Okay. That's all for me. Thank you.

Operator

The next question will come from Darren Horowitz with Raymond James.

Darren Horowitz -- Raymond James -- Analyst

Good morning, guys. Jim, my first question -- with a lot of the new crackers expected to start up, let's just say into May and even into June if they get pushed back a little bit, what's your in house view on regional ethane netbacks? Is there the opportunity if we can soak up some of that rejected ethane and ethane prices get up to about $0.30 by the middle of this year, hypothetically on page to exit in that mid-$0.30 range, do you guys foresee some regional arbitrage opportunities happening and what do you think that could mean from an opportunistic processing perspective for you?

James Teague -- Director and Chief Executive Officer

Took young long enough to get on the phone, Darren.

Brent Secrest -- Senior Vice President

In terms of ethane prices, what you're seeing is some competition for the pipe. So, when you see some stranded barrels up in Conway, that leads to potentially some ethane that may not get in the pipe, which lessens supply. I think it's fairly well-known that frack space is tight right now and we haven't seen that for a while. I can create a bullish case for ethane. I don't think it's a long-term bullish case. I think it's a short-term bullish case. Then once you see pipelines come online and frack space starting to lighten up as the fracks come online, then I think maybe things get back to normal. Certainly in the short-term, there's going to be a fight for pipeline space.

James Teague -- Director and Chief Executive Officer

I think what he just said is yes, we see arbitrage opportunities. Is that when you said, Brent?

Brent Secrest -- Senior Vice President

Yeah, I said it in more words, though.

Darren Horowitz -- Raymond James -- Analyst

I got it. Jim, just kind of a big picture, more hypothetical question -- it seems like this trade war issue or tariff issue with the US and China continues to get kicked around. Recently, there's been more discussion talking about what that could do with regard to US propane exports and any thoughts on possibly an issue with reneging on long-term binding contracts and if that happens, then that could discount barrels to find other markets and maybe the Chinese demand could be met by a bid up of Mideast barrels possibly depressing US product and leaving it stuck at the dock. How do you navigate all this mess? How do you think it plays out?

James Teague -- Director and Chief Executive Officer

First of all, I get out of the fetal position in the corner of my office. I'm not worried about it, Darren. First of all, there's been no tariffs imposed. We don't have one contract -- no, we've got one contract with a Chinese company. If it happens -- there's a demand for LPG. It's not just China. It's Korea. It's India. So, I don't worry that, "Okay, China won't import our propane." Well, they're going to import somebody's propane, which is going to leave somebody else needing propane.

Darren Horowitz -- Raymond James -- Analyst

So, maybe the better way to think about it is the physical product will price to move.

James Teague -- Director and Chief Executive Officer

Yes.

Darren Horowitz -- Raymond James -- Analyst

Okay. And then finally, for me, Bryan, just one quick housekeeping question -- and I guess we can do the math in reverse -- but what's the aggregate value of the Midland to ECHO hedges and more importantly, what's the timing and magnitude as to when they get settled between now and the end of 2019?

Bryan Bulawa -- Chief Financial Officer

I'm going to let Daniel answer that.

Daniel Boss -- Senior Vice President

So, Darren, the aggregate value is $156 million that we recognize through March. Like I mentioned before, if you look at that on the way it roles off, about $118 million rolls off for the balance of this year and then $38 million for 2019. Now, that implies that these valuations are as of March 31st. So, as spreads continue to widen in April, we continue to see additional losses materialize. So, you might see additional losses in April and in the second quarter, that would lead to even larger reversals to the upside from that period forward.

Darren Horowitz -- Raymond James -- Analyst

Okay. Thanks.

Operator

The next question will come from Keith Stanley with Wolfe Research.

Keith Stanley -- Wolfe Research -- Analyst

Hi, good morning. Just a quick one on PDH -- should we expect another material step-up in Q2 or are you already getting most of the run rate contribution in Q1?

Randy Burkhalter -- Vice President of Investor Relations 

Yeah. You should see another step up in Q2 because really, we were operating at around 60% of capacity for February and March and now we're starting out the second quarter where we're approximately 84% in April.

Keith Stanley -- Wolfe Research -- Analyst

Okay. Great. And just a quick clarification as well -- when we're discussing all these market to market impact around the Midland-Sealy hedges, all of this is stripped out of EBITDA and DCN, so it's not really impacting those headline numbers, right?

Bryan Bulawa -- Chief Financial Officer

Keith, that is absolutely correct.

Keith Stanley -- Wolfe Research -- Analyst

Great. Thank you.

Operator

The next question will come from Barrett Blaschke with MUFG Securities.

Barrett Blaschke -- MUFG Securities -- Analyst

Hey, guys. Just with the ramp up that we saw in petrochemical, I know a lot of this is PDH, but how much of this is pure commodity sensitivity in that business line and what else is going on that's pushing that?

James Teague -- Director and Chief Executive Officer

In our petrochemicals?

Barrett Blaschke -- MUFG Securities -- Analyst

Yeah.

James Teague -- Director and Chief Executive Officer

One of the things, every pound we produce off the PDH is a bridge pound we don't have to sell. Those bridge pounds were not great deals for us. So, every time we produce a pound off a PDH, we sell a pound off the splitters at quite a bit more than we were selling it for. Is that it, Bryan?

Barrett Blaschke -- MUFG Securities -- Analyst

Yeah, that helps. Thank you.

Operator

The next question is from Vikram Bagri with Citi.

Vikram Bagri -- Citigroup -- Analyst

Good morning, guys. I have one more question on hedging -- could you talk about the extent of hedging on the basin pipeline, anything you can share on that front? We understand the hedging on Midland to Sealy very well, but anything you can talk about on the basin pipeline.

Brent Secrest -- Senior Vice President

I won't talk in volumes, but we have had some basin pipeline space out.

Vikram Bagri -- Citigroup -- Analyst

Okay. And any hedge price or average hedge price on that?

Brent Secrest -- Senior Vice President

Did you ask if there was a fixed price on that?

Vikram Bagri -- Citigroup -- Analyst

Yeah.

Brent Secrest -- Senior Vice President

It's done at various levels. I don't have the number right in front of me what the weighted average is, but it's obviously less than where the market is today.

Vikram Bagri -- Citigroup -- Analyst

The second question I have was on the Sealy pipeline, any updated on that --

James Teague -- Director and Chief Executive Officer

He needs to pick his phone up and get off the speaker.

Brent Secrest -- Senior Vice President

Seaway pipeline hedges?

Vikram Bagri -- Citigroup -- Analyst

DRAs on Seaway pipeline.

Brent Secrest -- Senior Vice President

That's a monthly optimization exercise we look at, running DRA versus running horsepower. That's just an optimization exercise.

James Teague -- Director and Chief Executive Officer

Can you pick your phone up because being on speaker? We can't hear you very well?

Vikram Bagri -- Citigroup -- Analyst

I apologize. I'm in a conference room. I'm going to try to speak loudly. I understand that Seaway pipeline can be expanded by 100,000 barrels a day. That was my understanding from your analyst day. Is that still the case? Can you expand it by 100,000 barrels a day by adding DRAs?

Graham Bacon -- Executive Vice President

We can do a little bit, but I don't know where the 100,000 barrel a day number came from. This is Graham.

James Teague -- Director and Chief Executive Officer

Maybe there were ships passing in the night because I don't remember saying we're expanding at 100,000 barrels a day.

Vikram Bagri -- Citigroup -- Analyst

I can follow up offline. Thank you very much.

Operator

The next question will come from Michael Blum with Wells Fargo.

Michael Blum -- Wells Fargo -- Analyst

Hey, good morning, everyone. I just wanted to go back to your original comments on the ethylene margins and just make sure I understand. Your view is it's a temporary issue and that globally there will be enough demand to absorb all the derivative products as you have this big ramp up in supply on the Gulf Coast. Can you go back over that?

James Teague -- Director and Chief Executive Officer

I'm going to turn it over to Tony in a minute, Michael. As we look forward -- I tell Tony all the time he's wrong, but his trend is right. What we see in ethylene derivatives and propylene derivatives over the next few years is a pretty strong growth and demand.

Tony Chovanec -- Senior Vice President

I think to Jim's point earlier, for some reason, the industry has decided to focus on ethane to ethylene margins, but that's not the endgame and really not where the focus should be because that's not where petrochemicals stop.

James Teague -- Director and Chief Executive Officer

Now, if you're a merchant producer of ethylene -- and I think there are two plants in the country that are totally merchant producers -- you're probably sweating right now. But if you're a Dow or an Exxon Chemical, you're looking at ethane to polyethylene margins of $0.50 a pound, Tony?

Tony Chovanec -- Senior Vice President

Yes.

James Teague -- Director and Chief Executive Officer

Not bad.

Michael Blum -- Wells Fargo -- Analyst

Okay. That's helpful. Thank you. My second question is I guess just in light of some of the issues in the Northeast with NLG takeaway on the Mariner systems, have you seen any renewed interest in shippers looking to maybe rejuvenate that project and try to get an ATEX or another project to move NGLs straight down to the Gulf Coast?

James Teague -- Director and Chief Executive Officer

I wish I could say yes, Michael, but I can't.

Michael Blum -- Wells Fargo -- Analyst

Okay. Thank you very much, guys.

Operator

The next question will come from Denise Coleman with Bank of America Merrill Lynch.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

That's Dennis Coleman. Thank you very much. Just one quick question, mine have mostly been hit -- Bryan, could you tell us what was the drip in the employee purchases for the quarter?

Bryan Bulawa -- Chief Financial Officer

For the first quarter, it was inclusive of the Duncan family's participation. It was $177 million.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

So, excluding, I guess, the Duncan participation, is that a good run rate for the rest of the year?

Bryan Bulawa -- Chief Financial Officer

It would appear so, yes.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Okay. I guess just sort of backing into the strength of the retained earnings not likely to need the markets at all, even for an ATM this year?

Bryan Bulawa -- Chief Financial Officer

Not at all. That's correct. And Dennis, we haven't touched on the ATM since the first week of July in 2017.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Perfect. Okay. That's it for me. Thanks.

Operator

The next question is a follow up from Chris Sighinolfi from Jefferies.

Bryan Bulawa -- Chief Financial Officer

Chris, you there?

Operator

Chris, your line is open.

Chris Sighinolfi -- Jefferies & Company -- Managing Director

Hey, guys. Sorry. All my questions were answered. Sorry about that.

Randy Burkhalter -- Vice President of Investor Relations 

Thea, do you want to give our listeners the replay information for this call? I appreciate it.

Operator

Just a moment. Ladies and gentlemen, today's conference call will be available for replay beginning today at approximately 12:00 p.m. Eastern Standard Time. If you would like to dial into the replay, that number is 855-859-2056 or 404-537-3406. Please enter conference ID #6796419.

Randy Burkhalter -- Vice President of Investor Relations 

Thank you, Thea, and thanks everyone for joining us for our conference call and have a good day. Bye, bye now.

Operator

Ladies and gentlemen, thank you for participating in today's conference call. You may not disconnect.

Duration: 48 minutes

Call participants:

Randy Burkhalter -- Vice President of Investor Relations 

James Teague -- Director and Chief Executive Officer

Bryan Bulawa -- Chief Financial Officer

Tony Chovanec -- Senior Vice President

Bradley Motal -- Senior Vice President

Brent Secrest -- Senior Vice President

Daniel Boss -- Senior Vice President

Graham Bacon -- Executive Vice President

Jeremy Toney -- J.P. Morgan -- Analyst

Tristan Richardson -- SunTrust Robinson -- Analyst

Chris Sighinolfi -- Jefferies & Company -- Managing Director

Shneur Gershuni -- UBS -- Managing Director

Colton Bean -- Tudor, Pickering, Holt & Co. -- Vice President, Equity Research

Brian Zarahn -- Mizuho -- Analyst

Matthew Phillips -- Guggenheim -- Analyst

Darren Horowitz -- Raymond James -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

Barrett Blaschke -- MUFG Securities -- Analyst

Vikram Bagri -- Citigroup -- Analyst

Michael Blum -- Wells Fargo -- Analyst

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

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