Energy Transfer/UT LTD PARTN INT (ET) Q4 2018 Earnings Conference Call Transcript

Energy Transfer LP Unit (ET 0.44%)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Greetings and welcome to the Energy Transfer Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Long, Chief Financial Officer. Thank you. Mr. Long, you may begin.

Tom Long -- Chief Financial Officer

Thank you, operator. And good morning, everyone, and welcome to the Energy Transfer Fourth Quarter 2018 Earnings Call. And thank you for joining us today. I'm also joined today be Kelcy Warren, Mackie McCrea, and other members of the senior management team who are here to help answer your questions after our prepared remarks.

As a reminder, we will be making forward-looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934. These are based on our beliefs as well as certain assumptions and information currently available to us. I'll also refer to adjusted EBITDA, distributed cash flow or DCF, and distribution coverage ratio, all of which are non-GAAP financial measures. You'll find a reconciliation of our non-GAAP measures on our website.

I just wanna start by saying that Energy Transfer saw significant growth and change in 2018. In addition to delivering strong financial performance with record adjusted EBITDA of $9.5 billion for the year, which is up nearly 30% over 2017, we successfully executed on several key initiatives, including the simplification of ETE and ETP, the completion of multiple major growth projects, and we took meaningful steps toward deleveraging the company and improving the financial flexibility of our balance sheet.

As for our fourth quarter performance, consolidated adjusted EBITDA was up almost 30% over the fourth quarter of last year, and pro forma for the merger of ETE and ETP, DCF attributable to the partners of ET as adjusted also increased almost 30%. We continue to see strong performance in all of our major businesses and reported record operating results in the NGL, interstate, and intrastate segments. Distribution coverage for the quarter was 1.9 times, which resulted in excess cash flow after distributions of approximately $715 million for the quarter. These results demonstrate our ability to internally generate a large amount of equity capital, which can fund our excellent backlog of growth projects in a credit-friendly manner and also allow us to further organically strengthen our balance sheet.

Looking ahead to 2019, we continue to expect to generate between $10.6 and $10.8 billion dollars in adjusted EBITDA, and we also still expect to expend approximately $5 billion on organic growth projects.

Before going into a more detailed discussion around fourth quarter earnings, growth Capex, guidance, and a liquidity update, I'll start with the latest developments on our growth projects. Starting with ME2 and 2X, I am pleased to say that we placed the initial capacity of ME2 into service on December 29 of 2018. Volumes are ramping up on the pipe, and we expect to be running at capacity in the near future. And on ME2X, 99% of the mainline construction is complete, and at this time we continue to target having the pipeline in service by late 2019.

Now turning to Frack VI, we are pleased to announce that this 150,000 barrel per day fractionator went into service earlier this week and is expected to be running at full capacity early in the second quarter. And in November 2018, we announced plans to construct our seventh Lone Star fractionator. Frack VII will also have a capacity of 150,000 barrels per day and is fully subscribed under long-term demand-based agreements. It is expected to be in service in the first quarter of 2020.

To accommodate this growth, we previously announced the 24-inch 352-mile Lone Star Express expansion, which will add approximately 400,000 barrels per day of NGL pipeline capacity from Lone Star's pipeline system near Wink, Texas to the Lone Star Express 30-inch pipeline south of Fort Worth, Texas and is expected to be in service in the fourth quarter of 2020. And we continue to evaluate further expansions of our frack capacity due to the strong demand from customers.

In January of 2019, we completed a successful open season on the Bakken Pipeline to bring the current system capacity to 570,000 barrels per day. This capacity is available today with new shipper commitments from the recent open season, becoming effective on or before March 1. Continued basin production growth and fourth quarter differentials drove nominations in excess of our available capacity during the fourth quarter. This demand as well as incredible demand from capacity during our recent open season further highlights the need for additional takeaway capacity out of the basin. As a result, we are looking at increasing system capacity to serve this growing demand, and we'll make that decision at the appropriate time.

And on the 30-inch Permian Gulf Coast pipeline, joint venture project with Magellan, NPLX, and Delek, we are continuing to pursue shipper commitments. This 600-mile pipeline will provide unprecedented flexibility from the Permian Basin for deliveries to both Energy Transfer's Nederland terminal as well as Magellan's East Houston terminal and ultimate delivery through our respective distribution systems. Additionally, it will provide shipper capacity to our storage facilities and pipeline header systems at Nederland.

ETC is also in discussions with Exxon in Plains to potentially join their project. We will continue to go down parallel paths in order to evaluate and achieve the most efficient and accretive for our partnership.

Now looking at Bayou Bridge, we are nearing completion of construction on the 24-inch segment from Lake Charles to St. James and expect commercial operations to begin in March. On Permian Express 3, as mentioned on the last call, the final 50,000 barrels per day of capacity went into service in September of 2018, bringing our total capacity of PE3 to 140,000 barrels per day, and PE1, PE2, and PE3 all continue to operate at full capacity.

The expansion of the 36-inch North Texas Pipeline, which we jointly own with Enterprise, was placed into service in early January. The North Texas Pipeline expansion provided approximately 160,000 MMBTUs per day of additional capacity from West Texas for delivery into Old Ocean Natural Gas Pipeline, which we also jointly own with Enterprise, and is capable of transporting 160,000 MMBTUs per day from Maypearl, Texas south 240 miles to Sweeney, Texas. Both the North Texas and Old Ocean pipelines are already running full due to strong demand driven by the wide basis differentials.

On the Rover Pipeline, we have been collecting demand charges on 100% of the long-haul contractual commitments on Rover since September 1, and in early November commenced service on the final two laterals. In the fourth quarter, volumes on Rover averaged just over 3 million MMBTUs per day.

Turning to Orbit, which is our joint venture with Satellite Petrochemical USA Corp., for which we are constructing a new ethane export terminal on the US Gulf Coast to provide ethane to Satellite, construction has begun on the project in both the US and China. The export terminal is still expected to be ready for commercial service in the fourth quarter of 2020, and we are excited to be opening a new office in Beijing next month to continue expanding our export capabilities to Asia.

Now looking at our processing plants in West Texas, the 200 million cubic foot per day Rebel II Processing Plant in the Midland Basin went into service at the end of April and is running at capacity, and the 200 million cubic foot per day Arrowhead II Cryoplant went into service at the end of October and is nearly full. During the fourth quarter, we approved Arrowhead III, another 200-a-day processing plant in the Delaware Basin. We're thoughtfully adding plants to meet growing producer demand, and Arrowhead III is expected to be in service in the third quarter of 2019. We are seeing continued demand and expect to announce another processing plant in the Permian Basin shortly. This plant will be in service in 2020 and is already full subscribed.

The Red Bluff Express Pipeline went into service in May 2018, and the second phase of the pipe is expected online in the second half of the year. Volumes during the fourth quarter averaged approximately 315,000 MMBTUs per day, and we expect volumes to more than double toward the end of the year. The majority of these volumes are also flowing through the Waha Oasis Header, thereby generating additional revenues downstream. As we have previously mentioned, our anchor shipper is Anadarko, and their affiliate Western Gas exercised their option to buy 30% interest in the Red Bluff Express Pipeline, effective January of 2019.

Lastly, just a quick update on Revolution. We are working together with the Pennsylvania DEP and have communicated to them that we are committed to bringing this project into full compliance with all environmental permits and applicable regulations. The operations of our in-service pipelines are not impacted by PDEP's recent permit hold nor are any areas of the construction where permits have already been issued.

Now let's go ahead and turn to our fourth quarter results. Today I will discuss Energy Transfer's results pro forma for the merger. Then I'll also walk you through ETO segment results for the quarter.

As a result of the merger we have reevaluated our segment reporting and now report our investment in Son and USAC as their own respective segments. In addition, Lake Charles is now reported in the intrastate segment. Additional disclosure regarding quarterly results can be found in the ET press release issued yesterday or in the ET or ETO 10K's, which are expected to be filed tomorrow.

ET's consolidated adjusted EBITDA was up almost 30% to $2.67 billion, compared to $2.08 billion for the fourth quarter of '17. This increase is due to increases in all of our core operating segments, with record operating performance in our NGL, interstate, and intrastate businesses. On a pro forma basis for the merger, ET's DCF, attributable to partners as adjusted, was $1.52 billion for the fourth quarter, up $338 million or nearly 30% compared to the same period last year, primarily due to the increases in adjusted EBITDA.

Pro forma for the merger, coverage for the fourth quarter was 1.9 times, and on the distribution in January Energy Transfer announced a distribution of $0.305 per common unit for the fourth quarter, or $1.22 per common unit on an annualized basis. This distribution is flat compared to the third quarter of 2018 and was paid on February 19 to unit holders of record as of the close of business on February 8.

Turning to our results by segment and starting with the NGL and refined product segment, adjusted EBITDA increased to $569 million compared to $433 million for the same period last year. The increase was due to record transport and frack volumes as well as increased refined products terminal volumes and stronger results from our butane blending business. NGL transportation volumes on our wholly owned and joint venture pipelines were 1.1 million barrels per day, compared to 963,000 barrels per day for the same period last year. The increase was primarily due to higher volumes on our pipelines out of the Permian Basin and on the Mariner West and Mariner South pipelines.

Fourth quarter average daily fractionated volumes increased to 594,000 barrels per day, compared to 455,000 barrels per day last year, primarily due to the increased volumes from the Permian region as well as an increase in fractionation capacity as our fifth fractionator at Mont Bellevue came online in July of 2019.

Moving on to our crude oil segment, adjusted EBITDA increased to $636 million, compared to $544 million for the same period last year. The increase between the fourth quarter of '17 and the fourth quarter of '18 was primarily due to growth in our Bakken Pipeline, increased throughput in the Permian on existing pipelines, partially offset by a decrease of $107 million in margin, excluding unrealized gains and losses from the crude oil acquisition and marketing business.

We have approximately 9 million barrels of operational inventory that is accounted for. It's available for sale product. These barrels, combined with the movement in crude oil prices that occurred during the fourth quarter, had a negative impact of approximately $150 million on our weighted average cost of sales.

Crude oil transportation volumes increased to 4.3 million barrels per day, an all-time high compared to approximately 3.9 million barrels per day for the same period last year, primarily due to volume growth in the Bakken and increased production from the Permian Basin. During the fourth quarter, volumes on our Bakken Pipeline continue to average above 500,000 barrels per day, and demand for space on both our Bakken Pipeline and Permian Express Pipes remains strong.

Now for the midstream, adjusted EBITDA was $402 million, compared to $393 million for the fourth quarter of 2017, primarily due to higher throughput volumes, partially offset by lower NGL prices, which negatively impacted results by $25 million. Gathered gas volumes also reached a record 12.8 million MMBTUs per day, compared to 11.5 million MMBTUs per day for the same period last year. This was primarily due to increased volumes in the Permian from higher producer demand, growth on the Ohio River system in the Northeast, as well as growth in North Texas.

Looking at our interstate segment, adjusted EBITDA was $479 million, compared to $342 million for the fourth quarter of 2017. This increase was primarily due to additional EBITDA from the commissioning of Rover and capacity sold at higher rates on Transwestern, Panhandle, and Trunkline. Interstate transportation volumes were at 11.1 million MMBTUs per day, compared 7.2 million MMBTUs per day for the same period last year, due to an increase of 2.2 million MMBTUs per day from the Rover pipeline as well as higher utilization on Panhandle and Trunkline, increases on Tiger due to production growth in the Haynesville shell, and increases on Transwestern as a result of favorable market opportunities due to the Permian production growth.

As for our intrastate segment, adjusted EBITDA increased to $306 million, compared to $146 million in the fourth quarter of last year. This was primarily due to a $154 million increase from commercial optimization activities due to wider basis differentials from West Texas to the Houston ship jam, as well as the acquisition of the remaining interest in the Riggs Pipeline in April. Our reported intrastate transportation volumes increased primarily to more favorable market pricing in the Texas markets, as well as Riggs now being treated as a consolidated subsidiary.

Now moving on to Sonoco and USA Compression, which are now both reported as their own segments. For investment in Son, adjusted EBITDA was $180 million, compared to $158 million a year ago, primarily due to increases in fuel margins and fuel margins, partially offset by a decrease related to Son's retail divestment in January 2018. And for investment in USA Compression, who had a very strong quarter, adjusted EBITDA was $104 million, driven by strong market backdrop, which led to increased utilization and pricing.

Now moving on to Capex and 2019 adjusted EBITDA update. For the yearend of December 31, 2018, Energy Transfer spent $4.9 billion in organic growth projects, primarily in the NGL and refined products and midstream segments, excluding Son and USAC Capex. As I mentioned earlier, we still expect to spend approximately $5 billion on organic growth projects for full year 2019, primarily in the NGL and refined product segment. For 2019, as we mentioned earlier, we continue to expect adjusted EBITDA of $10.6 to $10.8 billion as we have a number of fee-based projects coming on and ramping up in 2019. These projects include the most recent Bakken expansion, Permian Express III, Frack VI, ME2, Arrowhead II and III, Bayou Bridge phase 2, Red Bluff Express, plus full-year contributions from Rover and Frack V. This increase in fee-based earnings is expected to more than offset our assumptions around lower contributions from our optimization and marketing businesses.

Looking briefly at our liquidity position, as of December 31 of 2018, total liquidity under our revolving credit facility was approximately $2.24 billion, and our leverage ratio was 3.38 per the ETO credit facility, which excludes the debt sitting at ET. In January 2019, ETO issued an aggregate $4 billion principle amount of senior notes and used the net proceeds to repay in full ET's outstanding senior secured term loan, redeemed certain outstanding high coupon senior notes at maturity, repay a portion of the borrowings outstanding under ET's revolving credit facility, and for general partnership purposes. We expect in the near term to launch a like-kind exchange whereby we will offer the legacy ETE noteholders the ability to exchange their notes for an equivalent ETO note. This exchange will allow the ET holders to become pari passu with the ETO noteholders and will remove their structural subordination.

Before we open the call up to your questions, I just want to say that once again we are very pleased to have reported another very strong quarter. Contributions from the Bakken Crude Oil Pipeline, Rover, and other growth projects were big components of this growth and earnings. Our diverse portfolio of assets generate quality earnings, with 85% to 90% of 2019 margins expected to come from fee-based contracts, and our assets continue to internally generate a significant amount of excess cash flow.

Looking ahead to 2019, we are excited for the continue DCF growth as our backlog of accretive growth projects are completed and ramp up, which will contribute additional fee-based earnings. We have leading footprints across the midstream value chain in nearly all the major producing basins in the US, and we continue to find a significant number of accretive growth capital opportunities. Any new project announcements will be carefully evaluated, with an emphasis on prudently targeting projects with very favorable returns that will ramp up quickly, like our fractionators and Lone Star Express expansion.

For 2019, we remain very focused on project execution and safety, as well as exercising discipline when it comes to growth. In addition, we are committed to retaining a level of cash flow that allows for flexibility to fund our growth projects.

Operator, that concludes our prepared remarks. Please open the line up for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question for the queue. For the participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. One moment please while we pull for questions.

Our first question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Michael Lapides -- Goldman Sachs -- Analyst

Hey, guys. Congrats on a good quarter and good year. Easy question for you. How are you thinking about the options around the Bakken Pipeline, meaning, you know, you've obviously got incremental demand above the 570. How are you thinking about both the timeline for figuring out what expansion is possible and then the actual implementation of that?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

This is Mackie, Michael. We couldn't be more excited about how that whole project has turned out. We went out for an open season for 35,000 barrels a day, way over requests and way above what we have. We closed that open season. As part of that, we also have commitments from shippers in our next open season. So we're certainly going through all the processes to hopefully begin that open season at the right time in the future.

Michael Lapides -- Goldman Sachs -- Analyst

And can you do that expansion just using pumps or DRA, or is there something more physical to the system you'd have to do to be able to add significantly more barrels?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

We'll be able to provide, we believe, significant barrels just by adding horsepower.

Michael Lapides -- Goldman Sachs -- Analyst

Got it. Thank you, guys. Much appreciated.

Operator

Thank you. Our next question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Shneur Gershuni -- UBS -- Analyst

Hi, good morning, guys. Just to start off, you reaffirmed your guidance for 2019. I was wondering if you could give us a little bit of color around the sensitivities, guidance inputs around spread and commodity assumptions, how you could potentially achieve the upside of your guidance? Are there macro factors or timing issues that could play within the range and so forth?

Tom Long -- Chief Financial Officer

Yeah, and good morning. This is Tom Long. Let's start with, I think, let's start with the sensitivities. If you really kind of look at it just on the commodity side, we'll go to the spread side here in just a minute, but if you go to the commodity side and you look at a $1.00 move in crude oil, $1.00 per barrel, that's probably on an annual basis an impact of about $8 million to DCF. If you look at it from a gas side, a $0.10 move would be about $7 million on the annual basis. And going back to the crude just for a minute, that does assume certain correlations with the NGL, so that's the NGL baked in with that.

As far as the basis, we've not given out guidance on that at this point. We'll continue to evaluate that, but I will tell you, Shneur, in those assumptions, we have used -- Let's just call it mid-single digits. I know that we've talked before and we'll refer to the fact that we've stayed pretty conservative on that, but we didn't stretch that on that side of it. And that includes both the gas and the crude. I mean, the crude is where we stayed kind of mid-single digits. The conservative part is we've likewise stayed conservative on the gas side of it all, so on the intrastate side.

As far as the projects go, I think we've stayed down the middle of the road on these projects ramping up. So I think overall we've kind of stayed down the middle of the fairway with these, and primary reason why we're still comfortable with staying with the $10.6 to $10.8 billion for 2019.

Shneur Gershuni -- UBS -- Analyst

All right. That makes total sense. And just switching to the Capex side, you've had multiple years where you've spent in the $5+ billion range for Capex. There have been delays along the way. Some of it regulatory, some of it not. You have a $5 billion capital program this year. You're noodling some projects for the out years, as well, too. Has there been any changes in practices that Energy Transfer, learnings from the past, to execute better? How are things being planned on a go-forward basis? Just wondering if there's ways that are being taken in place where Capex could potentially come in more on time and more under budget, and just any color around that would be greatly appreciated.

Tom Long -- Chief Financial Officer

Yeah, we're all staring at each other, figuring out who's gonna answer this, and I'll start. And it's probably several people, but yeah, we've learned all kinds of lessons. And we've made mistakes, and we are correcting those mistakes and will not make those mistakes again. So yeah, we've learned a lot, you know? Every place is not Texas, and so we...We're making adjustments.

As far as our Capex goes, and Mackie I'd like you to chime in on this if you would. As far as our Capex goes, that is driven by the commercial engine of this company, and I think everybody knows Energy Transfer, in my opinion, is somewhat unique. There's a few like us that commercial drives who we are, and then the other sides of our organization support that. The commercial engine drives the growth, and so I don't really see that coming down much. Mackie, do you agree? I mean --

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

No, I don't. We've said this in the past is that we don't win everything. In fact, we don't win a lot of the bids on gathering and processing and even the big interstate gas pipelines that have been announced, but what we are winning is very accretive high-rates-return projects that in most cases are very synergistic and add revenues either upstream or downstream, so that capital could certainly change up or down. I'll give you an example. On PGC or Exxon, we're trying to decide what's the best way to go. One would require more capital with not as good a rate of return. The other's less capital with a lot better rate of return. So at the end of the day we're gonna do what's best for our partners, but that certainly could even lower some capital expectations in 2019. But we'll continue to chase every deal that's out there, but we don't expect to win a whole lot of them unless we have really good rates of return.

Tom Long -- Chief Financial Officer

But to follow back up on kind of the genesis of your question on those two discussions there, we've grown so much. We made some mistakes, and specifically now I'd like to talk about Pennsylvania. And we're gonna take our medicine and fix those mistakes and complete good projects from this point forward. Not to insinuate that everything we've done has been bad. It's just we've made some mistakes that we're not proud of. So you'll see that improved, and when we don't make those mistakes again then our costs are going to improve and the predictability of those costs are likewise gonna approve.

Shneur Gershuni -- UBS -- Analyst

Kelcy, have you expanded the management team at all in terms of project execution?

Kelcy Warren -- Chief Executive Officer

Oh, we have. We've done a reorganization. The engineering construction now reports directly to me. Operations, which is -- We're so big and just got to be overwhelming here we had so much growth, but engineering operations is under Matt Ramsay, who reports to me. Kevin Smith runs engineering and operations, and Kevin has assembled pretty much a new team, pretty much, some new faces and some just moved over. But I'm really pleased with the organization, and I'm really pleased with the approach that I'm seeing at this stage. And we'll continue to show improvement.

Shneur Gershuni -- UBS -- Analyst

Great, and just one final question. I was wondering if you can talk about your USA Compression position. If you sell back to GP, would you be able to deconsolidate the debt from your balance sheet? And secondly, would you be looking to monetize the position to improve leverage going forward?

Tom Long -- Chief Financial Officer

Yes. So your first part of your question, if you were to sell to GP, that's exactly right. It would not be consolidated. As far as the second part of the question, I think we've been pretty consistent in saying that we plan on divesting probably the two to four year timeframe as far as our position goes there. So we'll see how that goes. I think the most important point is for us to emphasize once again, we'll be very, very careful in how we do that in order not to put pressure on the enterprise, so...

Shneur Gershuni -- UBS -- Analyst

All right, and that makes perfect sense. Thank you very much for the color, guys.

Operator

Thank you. Our next question comes from the line of Michael Blum with Wells Fargo Securities. Please proceed with your question.

Michael Blum -- Wells Fargo Securities -- Analyst

Thank you. Good morning, everyone. Just wanted to talk about Mariner II for a minute. Do you have any updates on additional contracting of the pipeline now that it's up into at least in-term service? And then related to that, what's your latest thoughts in terms of how open are you to sell a stake in that enemy tube, either as a way to attract incremental volume commitment or to accelerate the leveraging process?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

Hey, Mike, this is Mackie. In regards to contracting, what we've sold already will be fully utilized on ME2 in this phase. When we bring on 2X, we've sold a significant portion of that. We continue to look and talk to other potential shippers. We also are working with more downstream markets to develop more to chilling and storage capacity of markets hook. So we're fully subscribed on what we're able to move today. When we bring 2X on, it'll give us more capacity, and we expect to continue to sign up additional customers. As we've said all along, once it's finally built, then we believe a lot of volumes will find their way. It's the best option price-wise, netback price-wise producer. Have more sales for Utica, so we expect to see continued commitments from shippers.

As far as selling a stake in Mariner, I think -- I mean, what Kelcy's always said is that we'd be open to selling a stake in something like that if somebody was willing to pay a promote and brought a significant amount of volume to that asset. Other than that, I don't think we'd be interested in divesting.

Michael Blum -- Wells Fargo Securities -- Analyst

Got it. Thank you very much.

Operator

Thank you. Our next question comes from the line of Keith Stanley with Wolfe Research. Please proceed with your question.

Keith Stanley -- Wolfe Research -- Senior Vice President

Hi. Good morning. A couple more questions on Pennsylvania first. For the Pennsylvania DEP, is restoration at the Revolution site the only thing they're asking of you guys right now to get the permits again? And just any sense at all on when you'd have permit authorization again?

Kevin Smith -- Environmental Compliance Specialist

Sure. This is Kevin Smith. We have four documents that are to PDEP on Monday the 25th, which is the date mutually agreed. We expect that they'll review and approve those documents within 30 days, which would allow us to commence the restoration effort. And yes, that is the only thing that's prohibiting us.

Keith Stanley -- Wolfe Research -- Senior Vice President

Okay. And on ME2X, I think I heard correctly, Tom, that you said 99% of the mainline construction is now done. Can you just give a little more color on what's left to be built on ME2X, if this includes of the tougher geological areas, and what permits you need from the DEP still for ME2X?

Kevin Smith -- Environmental Compliance Specialist

Sure. That is correct. 99% of the pipeline itself is installed. It's a matter now of completing the HDDs and some open cut. There are roughly 20 permit modifications required to convert from HDDs to open cut. We're processing those, submitting and processing those with PDEP. I think that we have adequate time in our schedule for the return of those to be able to execute this, and as I say we're still committed to completing 2X by the end of 2019.

Keith Stanley -- Wolfe Research -- Senior Vice President

Great. Great. One follow-up on the results, please, on Q4. So the crude marketing decline, did I hear correctly that there was a $150 million negative impact to EBITDA due to the inventory accounting on crude prices dropping?

Tom Long -- Chief Financial Officer

That is correct. It is approximately $150 million just for the quarter.

Keith Stanley -- Wolfe Research -- Senior Vice President

Okay, so marketing really would have been up a little bit if you didn't have that impact. And then did anything change -- The one thing that was a little surprising was the big increase from Texas pipelines, and Permian production was $125 million year-over-year. I'm assuming some of that's PE3, but just any other color on that strong of an increase on Permian pipes in the quarter?

Tom Long -- Chief Financial Officer

Permian pipes around crude, we brought on Permian Express III, fully loaded. We also transacted a transportation deal with Plains. We're moving more barrels really off of their system up into Wichita Falls down all the way to Nederland, so as we've said before, we're doing everything we can to fully utilize all the capacity in our pipeline. And we've done a good job of that, and we'll continue to look for further expansions and adding additional horsepower to increase our throughput.

Keith Stanley -- Wolfe Research -- Senior Vice President

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Jeremy Tonet with JP Morgan. Please proceed with your question.

Jeremy Tonet -- JP Morgan -- Analyst

Good morning. Just want to take a high level question here, and it seems like there's a big tug of war in the market now as far as wanting to grow, deploying capital and good growth projects but also looking to delever and improving financial strength. So I was just wondering if you could, you know, refresh us on your thoughts as far as kind of hurdle rates and how you think about that at this point in time.

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

This is Mackie again. As I mentioned earlier is that we have raised our hurdle rates. As I've said, we're not successful in competing for some of the interstate business, because a 11% or 12% rate of return doesn't make sense to us when we have the availability to chase so many projects throughout the country at much better rates of return, and as I've said that are synergistic. So we'll continue to be very prudent about how we spend our dollars, and we will chase the most accretive projects that are out there.

Jeremy Tonet -- JP Morgan -- Analyst

That's helpful. Thanks. And then just kind of annualizing these results put to you, it's seems like well in line with your leverage target, and your DCF targets will fund over half of your state-to-capital plan. Assuming that DCF will grow and that Capex backlog will shrink in future periods, how do you guys think about excess DCF? You know, what you will do with it in the future when all this materials.

Tom Long -- Chief Financial Officer

Yeah, and listen -- This is Tom Long. I will tell you that we do, as we look out at our projections, we -- I mean, obviously very excited to be in this position to have this much free cash flow. So we balance it between the various projects, but let's just say the overarching driver is clearly our balance sheet, our leverage metrics. So once we see that and once we kinda look out and see the kind of four-and-a-half, we're balancing all this between capital allocation, between growth projects, between unit buy back, or even debt pay-down. But remember debt pay-down is really probably not as big as the fact that our deleveraging is occurring from all the growth of our EBITDA coming on with these projects, so that's the way we'll evaluate it. We'll run the numbers based upon multiple variables, and we'll do whatever's the most accretive for unitholders.

Jeremy Tonet -- JP Morgan -- Analyst

That's helpful. That's it for me. Thanks.

Operator

Thank you. Our next question comes from the line of Jean Ann Salisbury with Bernstein. Please proceed with your question.

Jean Ann Salisbury -- Bernstein -- Analyst

Hi, good morning. To meet your 2020, mid-2020 start-up target for PDC, when is kind of the point of no return for deciding on the size and the route?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

This is Mackie again. Probably the best way to look at that is is that once we get to FID, we believe it will be built in a little less than two years. So right now we're really out of 2020. It'd be best case in 2021 if we can get the FID in the next 30 days or so.

Jean Ann Salisbury -- Bernstein -- Analyst

Got it. That's helpful. And I believe that you've said in meetings that you've been firming up some of your Waha to Katie capacity on Oasis into long-term contracts. Is there any more color that you can provide on how much you've firmed up?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

Yeah, there really isn't specifically, but we have a number of contracts that roll off two years from now, three years from now, four years from now, and what we're trying to do is do 7- and 10-year deals starting about a year from now. We've done a fair amount so far. We're also in negotiations to not only move across Texas but also to move Delaware volumes down to Oasis and then move across Texas. So we'll continue to sell a fair amount of that. We're trying to capture as much of that spread today for the next year or so. But we certainly expect as the industry always does to be overbuilt in two or three years, and by that time we'll be much more sold out at much higher spread than we've experienced in the last 10 years over the next 7 or 8 years. So we're being prudent, not selling it all up front, but we are as we do in our crude business and everything else is trying to have a mix of sales from short-term and long-term deals.

Jean Ann Salisbury -- Bernstein -- Analyst

That makes sense. Thank you. That's all for me.

Operator

Thank you. Our next question comes from the line of Elvira Scotto with RBC Capital Markets. Please proceed with your question.

Elvira Scotto -- RBC Capital Markets -- Analyst

Hey, good morning, everyone. Hey, just a quick follow-up on PCG. So do you currently have enough shipper interest to FID this pipeline and it's just a matter of size and scope or whether you combine with the Exxon deal?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

Yes, we do have enough commitments to move forward on accretive project, but the question becomes is that the best move and the best decision for our partnership when looking at, as I mentioned earlier, to apply our capital at the best rates of return. So we're in serious discussions with Exxon Plains, and if it makes more sense to join their project and have fewer projects built that are full day one, it's certainly a possible direction we'll go.

Elvira Scotto -- RBC Capital Markets -- Analyst

Thank you. And then can you provide a little more detail on the Orbit ethane export JV? Specifically around the permitting process in China and what's going on there.

Tom Long -- Chief Financial Officer

The only update I can give you on that is that we have the provincial approvals for the area. Our understanding was the government entities that approved that were in Washington this week, and a lot of that we believe still hinges on the trade issue that we have between our countries. So that could still hold up the final approval. However, we're actually going to visit here in about three weeks, but they are moving as quickly building their crackers as we are in building our tanks and chillers in Nederland.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great. Thanks. And then just the last one from me. You know, in the past few months it looks like the LNG market has been heating up with new contracts signed. Can you give us an update on Lake Charles and where you are in the process of potentially FIDing that?

Tom Mason -- Executive Vice President and General Counsel

Yeah. This is Tom Mason. We've -- I think as Kelcy expressed on our last call, we were somewhat frustrated with the progress, pace of progress, with Shell as our joint development partner on the project, but we've really turned the corner on that front and we've made a lot of progress with Shell. You know, one of the main things is driving a very competitive price for the LNG offtake, and so we spent a lot of time with Shell on value engineering to get, when you go out to get bids on EPC side that we'll get the best bid we can possibly get that will therefore allow us to sell LNG at the most competitive price in the market. So we've made a lot of progress on that. We've been out marketing LNG, particularly in Asia and in Europe, and as Mackie alluded to, the Chinese trade wars have had some impact on marketing and I think there's also been a little bit of lack of clarity with our relationship with Shell. I think that's all turning the corner. I think the Chinese trade wars will get resolved, we think, in the near future, and that's a big market. And so I think that will help us move the project forward as well, but long as short, I think we're progressing. It's a big project, and there's lots of moving parts to it. But we're pleased with the progress and we think we'll have some developments to announce in the near future, but I think we're looking at hopefully an FID in the first half of 2020. And we think that's very achievable.

Elvira Scotto -- RBC Capital Markets -- Analyst

Thank you. That's all I had.

Operator

Thank you. Our next question comes from the line of Dennis Coleman with Bank of America Merrill Lynch. Please proceed with your question.

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

Thank you. Hi, everyone. One question, I guess, on the gas pipeline side. You talked about some higher tariffs on Transwestern, Panhandle, and Trunkline, I think as a result of Rover coming on. I wonder are those in the form of long-term contracts? Is it sort of a temporary situation? And I guess, in addition, on the pipelines, any update on the 501g process and potential rate cases there?

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

Okay, this is Mackie again. I'll start with Transwestern, and we've said probably in the last call is that we kinda labored for years on Transwestern because there was very little spread other than our long-term business we had secured. And things have changed. Fortunately we used a -- It disappointed us when the markets would only do one-to-three-year deals. Thankfully that's what's now rolling off, and we're able to increase our margins in some cases by 50% to 75% of what we've done in the past and doing two- or three-year deals. So we see Transwestern continue to improve in revenue, and we're excited about that.

On Panhandle and Trunkline, both of those, to a certain degree, benefit from Rover, no doubt, on the backhaul, from the gas moving from north to south, but as far as long-term contracts, we'll continue to roll over and do business with a lot of the utilities along Panhandle and Trunkline because of our storage capabilities and our ability to provide kind of a no-notice service, especially in the wintertime. Those pipelines will continue to offer excellent value and in some cases the best options for market, so we, similar with Transwestern, we see a lot of we're excited about Pebble and Trunkline continue to grow revenues.

Around the 501g, we don't really see that. I guess I describe it as almost zero impact. We believe all of our rates are fair and reasonable, and any Intersection 5s that are issued to us by FIRK, we'll do what's necessary to contest those. And we believe at the end of the day it will have no material or zero impact to our revenues.

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

Okay. Thanks for that. I guess one more for me, if I can. Tom, there was a $431 million impairment charge in the quarter. Can you give just a little bit of color on what that was?

Tom Long -- Chief Financial Officer

Yeah. Well, as you know, every year end, we go through a, you know, extensive kind of valuation on all of the goodwill that we have recorded across the company. Some of that was really probably as much as any was related to some of the midstream up in the Northeast, and then you also had a little bit around some -- And some of this was coming around some of the delays that we've seen, like on some of the other assets that we've seen up there. So pretty much most of it that's really where it came from.

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

Okay. Thanks. That's it for me.

Operator

Thank you. Our next question comes from the line of Ross Payne with Wells Fargo Securities. Please proceed with your question.

Ross Payne -- Wells Fargo Securities -- Analyst

Hey, Tom. Thanks for all your disclosure here. I was hoping that we could get a total debt number for the quarter, and second of all with leverage approaching your target do you have any updated thoughts on where you want your credit ratings to end up? Thanks.

Tom Long -- Chief Financial Officer

Okay. Well, listen, I'll start with the latter. We've been saying out there the mid-fours. If it was 4 to 4.5, I think that would be great, but I think the mid-fours. One thing that's always, I think, very important when anyone's talking about leverage out there is that you need to look at kind of the basis of the earning stream all the way through to your contracts, et cetera. And with our 85% to 90% mostly being fee-based type earnings, you look at our sheer scale and size, you even look at our coverage ratio and the flexibility that gives us at 1.9, so you roll through a lot of that, we really feel like that a company with all these metrics and et cetera that 4.5 is a good number. But I will say that you're gonna see us target probably 4 to 4.5 or so as we look out from that standpoint.

I think the total debt, and this is the GAAP debt, you're looking kind at the mid-40s, $46 billion or so, including the complete consolidated with the Son, USAC, et cetera.

Ross Payne -- Wells Fargo Securities -- Analyst

Okay. And, Tom, more specifically, are you targeting -- you're obviously low triple by the agencies. Is it your hope at some point to get to mid, or do you feel like you just don't want -- you don't need that? Or what are your thoughts on that?

Tom Long -- Chief Financial Officer

No, we would like to be at mid. We think based upon our size and all the great projects we're working on and everything else, I think -- we do think it's important to be kind of at that mid, and we're going to work toward that. And we feel like if you get to that 4.5 and you've got coverage still sitting well above 1.5, which we're hitting that target very well right now at 1.9, as we march toward those the mid-triple D's is very much a target.

Ross Payne -- Wells Fargo Securities -- Analyst

Okay, and one final one for me. As we get toward the end of the year, you're obviously gonna be on top of your leverage metrics here in very short order. Should we be budgeting any kind of decrease in the distribution coverage as you potentially move that up?

Tom Long -- Chief Financial Officer

No. You know, I don't think so. We're gonna navigate toward that number, and it's kind of like I think I was mentioning earlier. We've got all the various allocations of capital, and we're gonna look at that. You're gonna run it through your models and based upon the variables, and one of those variables is being where you're trading on a DCF yield. You'll make those decisions at various times, but I think you're gonna see us keep a good strong coverage as we continue to fund these very, very good projects.

Ross Payne -- Wells Fargo Securities -- Analyst

All right. Thanks, Tom. Appreciate that.

Operator

Thank you. Our final question comes from the line of Ethan Bellamy with Baird. Please proceed with your question.

Ethan Bellamy -- Baird -- Analyst

Hey, guys. Thanks for taking it. Following up on Elvira's question. Kelcy, in the past you've said that industry always overbuilds. Do you see any change in behavior this cycle? Should we be encouraged by these PDC discussions? Or is it still a question of when not if long haul Permian and gas capacity specifically gets overbuilt?

Kelcy Warren -- Chief Executive Officer

Yeah, well, really great question, and it will occur again for sure. And this will go on until the end of time. That's just what pipe routers do. However, I've noticed, and Mackie kind of commented about this, I've noticed a great discipline by our group's part. I mean, it's a -- You know, think about. Energy Transfer didn't show up as one of the big 42-inch optic pipelines coming out of the Permian, and there's arguments that maybe we should've. But we couldn't reason our way through it. The returns did not justify it, and so here we look at it today and as Mackie commented on our crude oil exercise that we're going through, we're being extremely disciplined here. And I'm not saying we haven't been in the past, but I'm seeing at least in the Energy Transfer house, we are conducting ourselves in a very, very conservative way as it relates to overbuilding.

You know, I worry about fractionation overbuild, but what the heck do you do there? You've got contractual obligations with producers that expect that they signed up for something they expect you to perform. So that one is a little different. We have no choice. We have a contractual obligation to frack product, and we must honor those contracts. So there's, everyplace we're looking at, overbuilding a little bit, and we're worried about it and we're being very careful. Now there's still many places in the country that's severely underbuilt, as you know, and we're also focusing heavily on those areas, too.

Ethan Bellamy -- Baird -- Analyst

Thank you. Separate topic. Your racketeering suit against Greenpeace got tossed out about a week ago. Is that the end of the dapple legal battle? And if not what's the next move there?

Kelcy Warren -- Chief Executive Officer

No, sir. I'll let Tom Mason answer that, so I'm guiding him. No, sir.

Tom Mason -- Executive Vice President and General Counsel

So this is Tom Mason. Yeah, that was a little bit of a disappointment. It's not over, though. We're looking at other alternatives. There's a potential state court action that we're looking at, and, you know, we're just not gonna stand by and accept this kind of behavior from bad actors. And so it's not been our history or tendency to be pushovers, and so I think you'll see something coming out of it in the near future.

Ethan Bellamy -- Baird -- Analyst

Thank you, Tom. And then final question. Kelcy, are you happy with Sonoco's progress?

Kelcy Warren -- Chief Executive Officer

I'm very happy. Very happy. An incredible management team, absolutely doing everything they're being asked to do and are expected to do by their unit holders. Very pleased, very pleased with Son and look forward to a fantastic future for that entity.

Ethan Bellamy -- Baird -- Analyst

Thank you very much.

Operator

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Long for any closing remarks.

Tom Long -- Chief Financial Officer

Yeah, once again, thank all of you for joining us today. As always, we really appreciate all y'all's support. We appreciate y'all joining in. I think you can see how excited we are about the performance of our existing asset base as well as all the projects that we have coming online. So once again, thanks, and we look forward to talking to you in the near future here.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Duration: 58 minutes

Call participants:

Tom Long -- Chief Financial Officer

Mackie McCrea -- Chief Operating Officer and Chief Commercial Officer

Kelcy Warren -- Chief Executive Officer

Kevin Smith -- Environmental Compliance Specialist

Tom Mason -- Executive Vice President and General Counsel

Michael Lapides -- Goldman Sachs -- Analyst

Shneur Gershuni -- UBS -- Analyst

Michael Blum -- Wells Fargo Securities -- Analyst

Keith Stanley -- Wolfe Research -- Senior Vice President

Jeremy Tonet -- JP Morgan -- Analyst

Jean Ann Salisbury -- Bernstein -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

Ross Payne -- Wells Fargo Securities -- Analyst

Ethan Bellamy -- Baird -- Analyst

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