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Crestwood Equity Partners LP (NYSE:CEQP)
Q1 2020 Earnings Call
May 5, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thank you, operator, and good morning to everybody. Sorry for the slight delay there. We had a technical glitch. Let me welcome everybody to the call. And before we start, I just wanted to say on behalf of Crestwood, that we hope that all of you are safe and your families are healthy. We know this has been a difficult, challenging time for everybody around the world and in the United, and we are certainly thinking about all of you and your families. Now to the update. As you all know, the shutdown of the U.S. economy through the shelter in place orders due to COVID-19 has had a significant impact on our way of life and certainly on the economy's demand for hydrocarbons. Early on, we assembled a task force here at Crestwood to work with the COVID-19 issues to manage our work-from-home program to ensure compliance with government regulations and to implement even more strict health and safety practices across our organization. Those folks have done a great job for us. The impact of the pandemic on the energy industry, as you know, is unprecedented in its scope and scale with historical demand destruction in oil and gas causing to date, a 50% reduction in the U.S. horizontal rig count. And as we're seeing now, production cuts of 30% to 50% compared to first quarter volumes in the oil-weighted basins. It's had a rather dramatic and quick impact on our industry.

We expect this to continue through the second quarter and potentially into the third. Notwithstanding the last several months of pandemic related activities in the industry, we did close and deliver a very strong first quarter. It was consistent with our previous guidance, and I'm very proud of the team for being able to get that done despite all the challenges in the market. Our revised 2020 guidance is going to be very conservative, given the uncertainties of the market, but it does come in about 3% above our 2019 results at the midpoint. And it's only about 10% below our original 2020 guidance before the pandemic, which we put out back in early February. We think that this revised guidance will compare very favorably to our G&P peer group. And Robert is going to give you all the details on the first quarter results and the revised 2020 guidance in more detail when he gets to his part. Now let me turn to our response to the pandemic. Crestwood took swift action to position the company to weather this the impact on our business. We reduced remaining 2020 capital spend by $40 million, and we decreased our run rate, G&A and O&M expenses by an equal $40 million, that's $80 million in cash savings this year.

On the capital side, we revised our 2020 growth capital to a range of $140 million to $160 million, of which about $130 million will be spent in the first half of 2020. We've wound down all of our capital projects. We've just got a few bills, late bills coming in to pay here in the first half. The major projects that we've completed year-to-date in 2020 include a number of Arrow gathering system, produced water expansions and upgrades in the Bakken, the Bucking Horse two processing plant we completed in the Powder River Basin, and we just finished a brand-new Delaware Basin produce water gathering system and disposal system, including a deep Devonian saltwater disposal well in Culberson County, really pleased with the results of that project coming in on time, on budget. It will be additive to our 2020 earnings. Now that those projects are in service, our 2020 capital program is largely complete. And just to give you a sense for 2021 capital, we think at this point in time, it's less than $50 million. So we're in good shape from a capital spend standpoint. On the operating cost side, as we've already announced, we've downsized the organization by about 20%, and we expect additional cost savings through lower variable costs as we see volumes temporarily shut in during the summertime in the second and third quarters. After having done all this in response to the pandemic, I'm absolutely confident that we have a leaner, more efficient organization here at Crestwood to navigate this period of depressed prices if it lasts longer than we think. And absolutely, unequivocally, we expect to reemerge stronger once the demand for hydrocarbons picks up. So to our investors, what should you expect in the second quarter. We're clearly in a period of extreme uncertainty, and we expect the second quarter to be challenging. A lot of the detail we're going to give you today is intended to be as transparent and conservative as we possibly can be. I think that's one of the hallmarks of Crestwood's management team is our transparency. Our commercial teams have been actively working with our producers across all of our assets on incentive rates where we can maintain volumes if it's appropriate. We haven't been totally successful. We have had some incentive rates. We have kept some volume going in some key areas because of the good work that our commercial guys are doing to help our producers out. Our operating teams are doing a great job in the field. They're focusing on lower variable expenses and safe operations. They're moving equipment to standby service and they're idling facilities and furloughing employees when necessary.

Our finance team has really been on top of their game in the last six to eight weeks. They're exercising contract terms to improve Crestwood's credit protections from some of our producer customers. They're getting receivables, collect it faster. We're in really good shape from a receivable standpoint and getting paid back on capital reimbursements from a lot of our producers in areas that we operate. So I'm really pleased with how the finance team has managed our treasury and credit exposures. Now let's talk about Chesapeake. Based on their recent downgrade to CC. Again, just to be as transparent as possible, Chesapeake across the entire portfolio represents less than 15% of our total cash flow in 2020. That includes both our Jackalope joint venture in the Powder River as well as our Stagecoach joint venture up in the Northeast with Con Ed. We have put full letters of credit protection in place with Chesapeake for their current receivables outstanding. As we've mentioned a number of times, that is a relatively new contract with good contract language, covenants running with the land, a dedication that is very favorable toward us and a large wide system that has over 350 wells connected to it, it would be very difficult for that contract to get rejected in bankruptcy.

In the Bakken. Our crude marketing team has been helping producers flow product by using our 1.2 million barrels of oil storage at COLT and Arrow, and that has been invaluable in the past two months. We think it's going to be a big contributor to our revised 2020 forecast. So that's what we've been doing across the organization to mitigate the negative impact of the pandemic on our business in the short term. Let me give you some color on our portfolio as we think about mitigating the pandemic in the long term. 70% of our cash flow is driven by our G&P segment, but of that, approximately 30% of our G&P cash flow comes from our legacy dry gas assets in the Barnett, Marcellus and Fayetteville regions. These assets are uniquely stable and on our predictable PDP decline. These are older wells with a really flat decline. They likely will not incur the same level of shut ins, if any, as the oil-weighted assets, they require no incremental capital investment, and they even offer upside potential as the forward strip of natural gas continues to improve. To our storage and transportation segment, that's 15% of our cash flow, and it's anchored by our Stagecoach and our Tres Palacios joint ventures with Con Ed and Brookfield Infrastructure, respectively. Both of these are FERC-regulated natural gas storage assets with Stagecoach serving the Northeast gas markets and Tres Palacios serving the Texas Gulf Coast LNG markets. These are critical market-based infrastructure assets with stable earnings from firm services under long-term fixed peak contracts, and they are benefiting from the need for storage due to excess supplies in this market. Now to our MSL business, which contributes the last 15% of our 2020 cash flow. It's been an incredibly valuable business during this period of heightened market volatility. We're pleased to announce today that on April 1, which is the traditional beginning of the NGL storage injection season, we closed on $160 million NGL storage in terminal acquisition from Plains All American. This is a deal that we've been working on for years and assets that we've coveted for a long time. We acquired seven LPG terminals and seven million barrels of NGL storage, and this asset is highly complementary to our existing MSL platform. We also got a multiyear supply deal with Plains. And the deal makes us one of the largest NGL marketers in the eastern half of the United States with approximately 10 million barrels of LPG storage and 13 terminals. Importantly, we purchased these premium assets at a great value for us because we expect them to generate $35 million to $40 million over the next 12 months and add meaningful cash flow to our 2020 results.

So before I hand the call over to Robert, I want to thank the Crestwood leadership team and our employees for quickly adapting to and adjusting to these unprecedented events. As we navigate our way through the pandemic environment, we're going to take additional steps as needed to preserve and protect our balance sheet liquidity. We've had great support from our general partner, First Reserve, been working actively with them to develop a best path forward to capitalize on the value dislocations across our capital structure. Clearly, our distribution policy will be part of that review, and we're going to align that future payout ratio with our conservative long-term view of what we think the business can support going forward. Finally, like we did during the last downturn in 2015 and 2016, we're going to adapt and manage our way through this cycle. I want to point out that we're continuing our commitment to ESG and plan to file our 2019 sustainability report in June. And finally, the team continues to work tirelessly to rebuild some of the equity value that we've lost since mid-March due to the pandemic. Our investors know how invested we are. Insider ownerships, more than 30% of the outstanding, we're highly invested in CEQP. We have a strong alignment of interest with our partners going forward.

And with that, I'll turn it over to Robert to give you a quick update on the first quarter results and give you more details around our revised 2020 outlook.

Robert Halpin -- Executive Vice President and Chief Financial Officer

Thank you, Bob. During the first quarter, our assets generated adjusted EBITDA of $151 million, up 31% year-over-year and distributable cash flow of $94 million, up 38% year-over-year. Our first quarter results meaningfully outperformed our original guidance expectations despite the extreme market volatility that began in early March. By and large, our producer customers maintain their completion programs through the end of March. As a result of our strong financial results for the quarter, combined with our solid leverage ratio of 4 times and coverage ratio of approximately 2.1 times, we announced a flat distribution quarter-over-quarter of $0.625 per unit or $2.50 per unit on an annualized basis, which is payable on May 15 to all unitholders of record as of Friday, May 8. Now moving to our revised 2020 outlook. As we've previously disclosed, the financial guidance that we put out in February is no longer relevant in today's market. Given the extreme change in market conditions, the volatility in commodity prices and the uncertainty the industry is currently facing, we have adjusted our full year adjusted EBITDA guidance to $520 million to $570 million, which at the midpoint represents a 3% increase over 2019 adjusted EBITDA of $527 million and approximately a 10% decrease from our prior guidance range. At these ranges, distributable cash flow is expected to be between $290 million to $340 million, and our leverage ratio would be between 4.25 times and 4.75 times well below our maximum leverage covenant of 5.5 times.

I would note that we are using a slightly wider guidance range to try and capture all of the potential variables and provide our investors a transparent view of the potential outcomes that could drive our performance in 2020. At the bottom end of our guidance range, adjusted EBITDA guidance of $520 million is a conservative view that assumes 50% of our oil-weighted assets are shut in through the end of July and then return to production on August 1. As you can see in this scenario at $520 million, if we assume approximately $140 million of interest expense, $15 million of maintenance capital and $160 million of growth capital, both of those are max capital assumptions for added conservatism, Crestwood is still able to drive significant free cash flow and meet all of our financial needs through 2020. At the upper end of our guidance range of $570 million, we still forecast a 50% shut-in for the near-term of our oil-weighted assets, but expect to start seeing portions of that production return back to the system beginning in June and July. Additionally, we have a number of our producers, most notably WPX and XTO on our Arrow system and Shell on our Nautilus System in the Delaware Basin that continue to run active rigs through this cycle, but are planning to defer completions of the wells until later this year.

Based on our ongoing conversations with these larger customers, we expect some will begin to complete their substantial DUC inventory during the fourth quarter of 2020, which would drive us to the higher end of our guidance range. Again, in this scenario, Crestwood generates significant free cash flow in 2020. I think it is also important to highlight the outlook for our legacy natural gas assets and S&T segment remains unchanged at $85 million to $90 million in 2020. And our marketing, supply and logistics segment cash flow has increased to $90 million to $95 million in 2020 to include the newly acquired NGL assets, which are currently very well positioned with substantial storage capacity to capture value in light of the current volatility in contango in the market. Now looking at the balance sheet. As of March 31, Crestwood had approximately $2.4 billion of long-term debt outstanding, including $1.8 billion of fixed rate senior notes and $586 million of outstanding borrowings on our revolving credit facility. Pro forma for the NGL acquisition, the outstanding balance on the revolving credit facility was approximately $740 million with full borrowing capacity of up to $1.25 billion. Our leverage at the end of the first quarter was 4 times, and we have no debt maturities until 2023. As Crestwood becomes free cash flow positive in the third quarter, our priority will be continuing to build on our current liquidity position and optimizing our capital structure as opportunities continue to present themselves. And as Bob highlighted in his prepared remarks, continued evaluation of our distribution policies will certainly be an additional component of executing on those core objectives. Now before opening the line up for Q&A, I would like to reiterate that we are doing the best we can to communicate transparently all of the information that we have available to us. As our revised 2020 guidance demonstrates, Crestwood is positioned to absorb the impact of lower-than-expected cash flow in the second and third quarters and make it through to the recovery stage. We have a diversified business portfolio, a strong balance sheet, no near-term debt maturities, and we will still reach our goal of positive free cash flow in 2020, which gives us significant financial flexibility to allocate capital to the best returns and optimize our capital structure. We will remain singularly focused on maintaining our balance sheet and enhancing our overall liquidity position to ensure we successfully manage the partnership through this cycle and begin the process of rebuilding long-term value for our investors as our markets improve going forward.

At this time, operator, we are ready to open the line up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Shneur Gershuni with UBS. Please proceed with your question.

Shneur Gershuni -- UBS -- Analyst

Hi good morning guys. Hopefully, you're all doing well in the current environment. Just maybe to start off with a few clarification questions around your guidance. To begin, the recent acquisition from Plains, was that already baked into your guidance that you were originally provided back in February? And is today's guidance an apples-to-apples comparison to that?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Shneur, thanks for the question. Let me ask Robert to answer that question from a guidance perspective, and then Will Moore to give you some color around the timing of that transaction and how strategically important it is to us. Robert, do you want to first answer the guidance question?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. The first part of your question, Shneur, is that the guidance for the Plains assets that we acquired on April one were not included in the original guidance provided in February as the transaction had not been executed and ultimately closed upon. The amount of estimated cash flow that is incorporated into the current guidance is in a range of approximately $18 million to $20 million.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Will, you want to comment on the strategic importance of the acquisition and the timing around it?

Will Moore -- Executive Vice President, Corporate Strategy

Yes. Thanks, Bob. We signed that transaction in February and closed it April 1, as we've already talked about, but these are assets that we've coveted for a number of years because of their strategic position in our portfolio. And it was a great opportunity where Plains was deemphasizing the business, it's a very high-touch business. But fortunately for us, we're able to incorporate this high-touch business into our existing portfolio without adding any headcount on the back office or front office side. So very good fit with our existing assets and asset base that's set to outperform our original underwriting expectations, not only in the nine months that we're going to own it in 2020, but well beyond.

Shneur Gershuni -- UBS -- Analyst

Cool. I appreciate the color on that. And then maybe a follow-up clarification just with respect to your guidance. Robert, I think you sort of talked about kind of the assumptions around the high end and low end, but just to understand correctly, the midpoint of your guidance basically assumes a level of shut-ins and then a PDP decline from there. Are you able to quantify? Or is there a way for us to back in? Is it just the difference between the high end and the midpoint as to what the value of the expectation of shut-ins are so that we can sort of make our own decision around timing? I'm just wondering if you can give us a little bit of color around that.

Robert Halpin -- Executive Vice President and Chief Financial Officer

Sure. Based on our market perspective, our conversations with customers and our observations around our crude oil-weighted assets production on our systems and across the basins broadly, we expect in our guidance range to have 50% of our oil-weighted assets shut-in beginning in the month of May and extending through the end of the month of July. I think now here a little bit into May, we're trending generally ahead of that. And as prices continue to stabilize, we have increasing optimism over that assumption, over the balance of the summertime, but that is what is included in the midpoint of our guidance range. As we mentioned, we do have active rigs from a handful of our customers on Arrow as well as in the Delaware Basin, and we expect those rigs to continue building a DUC inventory that will begin resuming completions on those DUCs in the latter half of this year, largely in the fourth quarter, that having fairly minimal impact on our 2020 outlook, but a much more meaningful impact on 2021.

Shneur Gershuni -- UBS -- Analyst

Appreciate the color there. One final set of questions from me. You had mentioned in your prepared remarks to be you still expect to be free cash flow positive in 2020, and you talked about making accretive decisions and so forth. A, are you looking at potentially buying back debt in the open market given that you're trading is well below par? And then secondly, is there any covenant type issue with First Reserve that would be an obstacle to reducing the distribution?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes, Shneur. The first question is in terms of our desire to purchase that in the open market. Clearly, as we continue to build our priorities around cash flow management this year, first priority is building liquidity. Second priority is balance sheet enhancement and accelerated deleveraging. We believe we have flexibility to pursue open market transactions as we've accomplished those priorities throughout the year. On the second component, First Reserve does have a term loan on their investment up at the holding company level. It does require some amount of distribution to service it. We do not believe that any covenants around that will ultimately be an impediment to the partnership, making any decisions around how it allocates its cash going forward.

Shneur Gershuni -- UBS -- Analyst

Perfect. Thank you very much. Stay safe and spacing.

Operator

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

James Kirby -- JP Morgan -- Analyst

Good morning guys. This is James on for Jeremy. Just sticking with the deal of Plains, I guess from the guided $35 million to $40 million over the next 12 months, can you talk maybe about the assumptions and drivers of the performance in there? Is there any seasonality or I guess the price spread pricing built into that? And if you could break down the fee-based component of that, if you can?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Yes. James, this is Bob. Since we're all in different places and socially distancing for this call, let me answer the first part of the question then turn it over to John Powell who's in our Kansas City office. He runs that business, and he's the guy responsible for not only the strategy closing the integration in the transition, but he's the day-to-day manager of these assets. He's in the market every day. He understands the dynamics of the NGL market and why volatility is important to an NGL storage business.

So first, we commented that we closed the deal on April 1. And that is the traditional beginning of the NGL injection season, if you will. It's not a calendar year business, it's an April to March business on a 12-month basis. We start buying NGL product, propane and butane largely, beginning in April. We store it in our storage facilities. We hedge it forward, we roll the hedge to the extent necessary. And then during the winter months usually starting around November, December, we start withdrawing that product on behalf of our customers and deliver it to the wholesale and retail propane and butane markets. That there is some seasonality to that, but the real economic benefit of that business is, like a lot of products, it is to buy low in the injection period and sell high during the winter demand period.

So with that definition of seasonality, John, let me turn it over to you, and you can talk specifically about why the market dynamics are favorable to us for this year.

John Powell -- Senior Vice President, Chief Commercial Officer, MSL

Sure. Thank you, Bob. Yes, I think these assets are really complementary to the existing platform that we have. And so the way we think about the business is it's really just an extension of the current platform that we have with assets in completely noncompeting markets from an overlap standpoint. So it's a really good base to increase the size of the platform here with very similar assets. These assets are ones that have been around for years, if not decades, and we've been as an active player in this market, we've been in and out of these assets throughout the year. So we know them very well. So I think basically on your question there, there's really two components of it is: One, we took a conservative approach in terms of the level of contango in the market on the spreads for building inventory positions, but in addition to that, you do have a lot of volatilities, particularly with the downstream markets relative to basis in terms of what you're seeing here on production in the different fields. So having a more diverse platform really just allows you to participate in different areas and really kind of diversify your cash flow from that standpoint.

When we think of your second question there based on fee based, we look at these assets as really supporting the downstream market. These are this is a commodity that's important to the downstream market, whether it's for heating or cooking. It's really what we view as an essential item for the consumers out there. But we look at each one of these assets as when you talk about fee-based, we do lease out and we do lease out some of the storage that we have at some of these facilities to third parties. So we do have a good balance of storage positions that we take as well as third-party storage contracts, which are fixed fee. And then I would say on the terminal side, almost all of it is fixed fee going across the terminal. So it's a pretty good balance between internal positions as well as fixed fees, very similar to our legacy assets in the prior to the Plains acquisition.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

James, this is Bob. Let me just add one little piece of color. Pro forma to the Plains acquisition, it's only slightly adjusted our overall corporate portfolio from 85% fixed fee to 83% fixed fee with a slight increase in pop there. So we are just wanted to remind everybody, we are predominantly a fixed fee company across our entire portfolio. What this asset does is let us take advantage of not only the contango in the market this year and the expected future years, but it gave us a much wider supply and transportation net and connectivity to Mont Belvieu and the big hubs out there. So it makes us a much bigger, better, stronger NGL player across the entire marketplace, and we're really pleased with the opportunity to close that deal. These are good assets. Plains was exiting that part of the business. They had already announced that in their first quarter earnings release, and so we're happy to get that deal done. Quickly integrated, and John and his team are already putting low-priced product into our storage facilities and rolling that forward. So we're excited about the impact of that on our robust 2020 guidance. Okay, you had another question?

James Kirby -- JP Morgan -- Analyst

Yes. I just had a quick follow-up there. I appreciate the color. This is really helpful. The increase in the MS&L EBITDA 2020 guide, is that solely just because of the deal? Or are there other moving pieces there? And this deal is only going to impact that segment, right? It's not going to impact other parts of the business?

Robert Halpin -- Executive Vice President and Chief Financial Officer

It will from a results standpoint, only directly impact our NGL MSL platform. Obviously, we utilize our teams and assets, John and Rob de Cardenas on our crude marketing arm to gain intel around our G&P position elsewhere in our portfolio, but these assets specifically from a guidance standpoint are just embedded in the MSL segment. The change in our updated guidance versus our prior guidance, is largely, if not if the vast majority of that is driven by the Plains acquisition. We have made some slight modifications to our base business to reflect current market conditions and the value we're seeing across that portfolio, but the vast majority is from the Plains acquired asset.

James Kirby -- JP Morgan -- Analyst

Great up there. Appreciate color on.

Operator

Our next question comes from the line of Kyle May with Capital One. Please proceed with your question.

Kyle May -- Capital One -- Analyst

Good morning. I appreciate all the color and the updated outlook that you provided for the year. Can you provide any additional details about the conversations you're having with customers about their plans for this year and preliminary thoughts about production outlooks for 2021?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

We can, Kyle. Thanks for the question, and good morning to you. Diaco Aviki runs our G&P business. He has been front and center with producer conversations and optimization strategies to keep drilling, completions and volumes flowing to benefit both of us. For us, it's volume times fee. For our producers, it's volume times commodity price. So we want our producers to flow as much as they can to keep them financially healthy and sound as well as add to our bottom line. I think Diaco and his team have done a great job of really leveraging our customer relationships and the great customer service that we've provided to people. So we really feel like we're an insider with a lot of these guys. They're really telling us what they plan to do, and they're giving us good lead time when they want to change their mind or change their plans. So let me turn it over to Diaco, start maybe with the Bakken and then go to the Powder and then finally, the Delaware. Thank you, Bob. Kyle, the conversation we've had with our customers have been very constructive. And as you can expect, have changed over the last 1.5 months, actually into the from a more negative outlook to more positive outlook recently with the constructive WTI pricing that's been lifting. A lot of our producers are continuing to build the stocks and just give you a feel and a sense for that. We expect toward the fourth quarter of this year to have close to 60 DUCs in the Bakken. And as you roll into the Powder, we should have at least 10 DUCs in the Powder, and then also in the Permian, there's a good accumulation of DUCs over there. So as you look at every producer has a different target price to where they're going to complete their DUCs. And that has continued to evolve, but we do see them coming in, in the fourth quarter. And each day that goes by, we feel more and more good about our forecast. Yes. From a shedding perspective, the Bakken is really interesting. We're unique in the Bakken, especially in our area where we have three product systems with water, crude and gas. And where that helps us is on the water side, since we have a pipeline system that disposes the water, our variable costs on that are very low. So what we've seen the customers do is come to us for relief on some of the water rates in our system, and we've been able to give them rates that, quite frankly, some of our other G&P competitors can't because they don't have a 3-product system that's trucking, and there's not a low variable cost component to trucking. So what we've been able to do is provide some incentive rates on water that's helped improve our revenue well above our variable costs, and it's a win-win for both our customers and ourselves and each and every day that goes by we continue to get more constructive in that environment with the TI pricing that's out there today. Yes, and of course, as you can appreciate from an A&P perspective, GR is quite sensitive. In different parts of our Bakken footprint, we go from as low as 0.5 barrel of water to a barrel of crude to as high as five to six barrels of water to a barrel of crude. So that's where the leverage of our platform really does help.

Kyle May -- Capital One -- Analyst

Okay. Got it. That's helpful. And then one other question that I was had for my follow-up. We've seen a number of your peers to distributions to focus on strengthening the balance sheet, and you mentioned this morning talking about aligning the distribution to what the business can support. How are you thinking about the capital allocation in the distribution of Crestwood for the balance of this year?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes, Kyle, I think yes we've disclosed back when we announced our first quarter distribution in late April and then today. Our strategies around 2020 and 2021 are first and foremost, focused on prioritizing, building and enhancing liquidity, reinvesting in the business and enhancing our balance sheet strength. Based on what the business can support, as we announced our first quarter results were ahead of plan. We had significant coverage at 2.1 times, leverage at 4 times, and we're right on track, and we elected to maintain our distribution at $0.625. As we've revised our outlook for 2020 and looking forward, we're still singularly focused on our balance sheet objectives. And I think that as we continue to evaluate our distribution policies beginning in the second quarter and beyond, that will be where our priorities lie. As our capital structure continues to evolve and opportunities to invest in our capital structure continue to present themselves, that's where we're focused. And so I don't have specific conclusions around exactly our strategies at this point in time. We're working on it every single day and expect to align that later in this year.

Diaco Aviki -- Senior Vice President, Business Development & Commercial

All right great. Thanks for the answer.

Operator

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

Elvira Scotto -- RBC -- Analyst

Good morning everyone. Thanks for the information that you've provided here. I think just starting, I guess, on the cost side, it looks like you've taken out a significant amount of cost, and it sounds like that there's more that you can do. Can you quantify any of that potential cost incremental cost reduction? Or is that really that variable cost reduction that you talked about and you've already included that in your upside and downside guidance?

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thanks for the question, Elvira. Let me just say from a strategic standpoint, we cut the cost across the company by reengineering the entire Crestwood organization to reflect what we think the new model new midstream model is going to be going forward. We had, as you know, a significant technical services group that we had built up over a 3- or 4-year period as we executed on our 3-year capital build out program 2017 to 2019. We had carried over a lot of those folks and a lot of those functions into the first half of 2020 because as I said, at the beginning, we had some major projects yet to complete and place in service here in the last couple of months. We've done that. So the reengineering of the organization was likely going to occur to some extent, anyway, as we saw that big 3-year capital program decline. I think what the pandemic has done is show that it's going to be a while before we build out new facilities. We've got a lot of capacity in the areas that we operate. And now we're going to be focused on lowering our variable operating costs. So that's what I meant with the commentary. So the guy in our organization that has managed the cost structure and the cost reductions is Steven Dougherty. Doug's our Chief Accounting Officer, and he's our expert on cost in the organization and knows more about our cost cuts. So Doug, do you want to mention some of the things that we took out that we just, frankly, don't feel like we need in the new model going forward?

Steven Dougherty -- Executive Vice President and Chief Accounting Officer

Yes, absolutely. So like we announced in the press release, we believe that the cost reductions that we've already been able to achieve, we'll reduce around $40 million of cost from the organization on a run rate basis. Over half of that was due to the 20% reduction in force that we did for our employee group. So around $15 million to $20 million of that is directly related to costs that we've been able to reduce from a variable operating cost standpoint. So we do believe that there are additional costs that we can take out of the organization as well primarily from a variable operating cost standpoint that are directly related to our operations. And so if our results come in lower than what we anticipate, we believe that we will wind up having a cost reduction that will be parallel to that as well.

Elvira Scotto -- RBC -- Analyst

Great. That's very helpful. I wanted to go back to the acquired assets. You talked about the cash flow that you expect over the next 12 months, is that how do we how should we think about the incremental cash flow from these assets on a normalized basis? So I guess when we look at that MS&L segment guidance that you provided today, is that a good run rate to use forward? Or should it be higher because it's not a full year of the acquisition? Or is or should it be lower because right now it's a different time where you're experiencing a lot of opportunity?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes. Elvira, this is Robert. I'll take that one. I think that from a guidance standpoint, we only have the Plains acquired assets included for the nine months that we own them in our portfolio. And keep in mind that two of those three quarters are to the trough quarter, second and third quarter. So heading into 2021, I do think the platform will be generating higher than the $90 million to $95 million that we guided today. In terms of kind of trajectory to cash flow going forward, one of the elements of these assets that we like and we've as John Powell alluded to, we've had contractual positions in these assets for many years in our existing base business. So we know the assets very well. We have traded and built positions around those assets, and it was a really complementary deal to fold them in, but one of the elements that we like, as Bob alluded to, was the connectivity to the pipeline side and providing greater access to supply from the hub locations, most notably Mont Belvieu, in addition to the tremendous storage capacity, roughly seven million barrels that comes with the acquisition as well. So while the market environment today is certainly favorable for all that, we do believe the baseline stable set cash flow for these assets is not that far off from what we've guided to on a next 12-month basis. So we like the stability in the cash flow profile and think that will continue to hold for 2021 and beyond.

Elvira Scotto -- RBC -- Analyst

That's very helpful. And then just the last question from me, and I think you touched on this a little bit, but maybe a little more color. So in the press release, you talked about the wider guidance range also reflects possible reduced service fees as a result of short-term incentive rate arrangements with customers where appropriate. I'm assuming that's the water fees that you referenced, but if there's anything else, if you can provide some color there? And then you also mentioned the potential for certain producer customers to encounter financial difficulties. And then maybe around that, I know you've talked about Chesapeake, but maybe can you provide us an update on counterparty risk with your other counterparties as well?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Sure. So a couple of questions there, Elvira. I think that the guidance range, as you alluded to, being a little bit wider is really centered around one fact, and that one fact being the unpredictability of curtailments in production. I think that is the biggest variable that drives the wider variation. As we commented, we had an assumption of 50% shut-ins in our oil-weighted basin for the balance three months, May through July. I think we feel that as an overly conservative assumption that we believe there is definitely upside to. But given the uncertainty, we wanted to ensure that we had captured the full extent of what the impact could be.

The other commentary around producers incentive fees that is less impactful to our 2020 guidance, if impactful at all. The incentive fees that we had discussed are exactly aligned with what Diaco highlighted, and that is finding ways that we can work with our customers to incentivize production to stay on our system that might otherwise get curtailed. We've been able to accomplish that in some instances on the water fees in the Bakken. They're all short-term agreements in nature, usually on a month-to-month type basis. It's really just designed to keep product flowing if it might otherwise be curtailed. In addition to that, we've been able to work arrangements with some of our customers around our storage positions to help optimize their netback pricing. Those are other strategies that we can and we'll continue to deploy.

And then the last point on your producer counterparty commentary that we put in the press release and in our prepared remarks. As Bob alluded to, we have a couple of counterparties that are facing increased challenges to most of our other counterparties. We know who those guys are. And I think that we are extremely well positioned from a contractual standpoint with those individual counterparties. We're up-to-date from a receivable standpoint, we have credit assurances in place to the maximum degree as possible in most instances and are working very closely and collaboratively with those customers to help provide the best possible service we can for them as they navigate through these times. We do not expect any meaningful cash flow impact in 2020 and beyond as it relates to counterparty exposure to any of our G&P customers.

Elvira Scotto -- RBC -- Analyst

Great thank you very much.

Operator

Our next question comes from the line of Ned Baramov with Wells Fargo. Please proceed with your question.

Ned Baramov -- Wells Fargo -- Analyst

Hi good morning. Thanks for taking the questions my. My first question is on the potential from legacy gas basins. And more specifically, are there any discussions with your customer in the Marcellus on incentive rates or any change in their plans for the development of the acreage that's dedicated to Crestwood?

Robert Halpin -- Executive Vice President and Chief Financial Officer

Yes, Ned, it's a good question. We did comment on the upside potential around some of our legacy gas assets with associated gas likely to come down in a meaningful way. Southwest Marcellus is a good example of that. It's an asset where we've got significant capacity available to our customer up there. Certainly, the economics of rich gas production versus dry gas production has started to shift, and we do expect that there is a much higher likelihood of ongoing development in the future on the dry gas asset in that area. We don't have any specifics from our customer on exact time line, but we have had active discussions over the last couple of weeks around the return of activity to that portion of the acreage, and we have had discussions on ways we could potentially help in pushing that customer over the finish line from an incentive standpoint to accelerate production in that region.

Ned Baramov -- Wells Fargo -- Analyst

Great. That's helpful. And then switching to crude and the COLT hub. How are you thinking about the opportunity for Crestwood's 1.2 million barrels of storage? I guess, maybe if you can provide thoughts on playing the contango spreads for your own book versus just taking advantage of the increase in storage rates.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Yes, Ned, I think you answered your own question, but just to give you a little bit more color around that. Our COLT hub is not only a 1.2-million barrel storage facility, some of which was pre-leased to our refinery customers on the East Coast and West Coast, but the balance of which was free for us to use to try to balance the market up there with the pipeline connectivity that the cold hub has. We're connected to DAPL. We're connected to Tesoro. We're connected to Hiland. We're connected to Meadowlark. We've got a centrally located trucking facility. We have become a go-to buyer for barrels in the North Dakota market. Same thing, now that the market has gotten tight up there due to the shut-ins. We are a go-to guy to find a barrel if you need a barrel to balance either your pipeline nominations or otherwise. All of that is a way to use our storage capacity. And our crude marketing team, which we mentioned earlier, is optimizing not only the COLT storage capacity, but more importantly, the Arrow gathering production. They are providing both physical and financial takeaway or market clearing services to our Arrow producers to get them a higher price to ensure flow rates on the Arrow system are higher so that we can collect the oil gathering, the gas gathering and processing fee and the water fee by simply using COLT to clear those barrels for our customers. Diaco, you want to add some color to that?

Diaco Aviki -- Senior Vice President, Business Development & Commercial

Yes. Thank you, Bob. It's been a really collaborative effort between the crude marketing group and the Arrow team. And that's where we've talked about some of these incentive rates. And what the crude marketing team will do, traditionally, as you think about crude marketing, it's done on a current month average, but one of the things the crude marketing team will do is leveraging the storage assets that contain on the market. So by via fixed price, we'll take the uncertainty risk of pricing away from the customers' decision matrix, which really helps them feel good, not just about moving the barrel, but also about the price they're going to get. And so what they'll do is they use that in their storage book, and we'll match up customers with our storage assets, we'll match up customers with our rail customers. And really drive volumes into the Arrow asset. And that's where some of the incentive rates really help to make this all happen together. It's a nice leveraging effect.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

So Ned, the storage contango for crude in the Bakken Basin was huge in April and May, and we captured a large part of that using our available storage capacity, which was volumes that changed from month-to-month and week-to-week as our customers either used or did not use that capacity. That's a lot of that's good money for us. It's going to be additive to our second quarter. And as that contango month-to-month contango continues to play out, which it is in the forward markets, we'll continue to benefit from that trade, but that's not the important way that we use that. But the important way was to keep volumes flowing on Arrow and on our three gathering 3-product gathering system so that we can make additional fees there. So I know that's confusing if you're not in the market on a day-to-day basis, but we have really benefited from that storage capacity in that pipeline connectivity and the ability to take away barrels for our customers when the market got tight. And now the ability to find barrels for customers now that the market has gotten supply tight due to the shut-ins. It works both ways.

Ned Baramov -- Wells Fargo -- Analyst

Very thoroughly. Thanks for this.

Operator

We have reached the end of the question-and-answer session. Mr. Phillips, I would now like to turn the floor back over to you for closing comments.

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Thanks, operator, and thanks to everybody for hanging in there with us. We know there are other companies coming out with earnings this morning. Let me just close with three thoughts around our strategy going forward: Number one, we hit this COVID-19 pandemic very hard internally, both in terms of getting our customers ready for this, getting our operations ready for this, reengineering the organization quickly and cutting, shutting down or delaying the capital projects to preserve our precious capital. Closing the Plains transaction was an important step for us. It was a positive going on offense decision that we made to buy an asset that we've coveted for years at a very good price that was both immediately accretive as well as leverage-neutral or even potentially deleveraging throughout this year. It did not take away from the liquidity that we thought we needed, the minimum liquidity levels that Robert's comfortable with to run this business, and so we thought that was a good buy at a great time, and it's going to be really additive to our 2020 and 2021 numbers.

Number two is reforecasting our 2020 budget. And the guys have done an exceptional job, not just looking out over the market and taking woodmac forecast, but really digging deep with our producer customers to understand their drilling and completion costs, their cash cost of operations. How we can benefit them and optimize operations so that they can flow more and get more revenue at a time in which they're more financially challenged than we are. The guys have done a great job.

Now going forward, Robert and the finance team will be focused on liability management and capital allocation. We know this pandemic has changed the way investors think about the midstream business and the companies that they're going to invest in. We are going to change as well. We're going to get more liquidity. We're going to have more dry powder when we get on the other side of this downturn, and we're going to wind up being a bigger, better, stronger company so that we can take advantage of the inevitable consolidation that will take place in this market as we come out the other side of this event.

So operator, with that, we're going to close. Thanks to everybody for joining. I think we're right on time, Josh, and we're done.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Robert G. Phillips -- Chairman, President and Chief Executive Officer

Robert Halpin -- Executive Vice President and Chief Financial Officer

Will Moore -- Executive Vice President, Corporate Strategy

John Powell -- Senior Vice President, Chief Commercial Officer, MSL

Diaco Aviki -- Senior Vice President, Business Development & Commercial

Steven Dougherty -- Executive Vice President and Chief Accounting Officer

Shneur Gershuni -- UBS -- Analyst

James Kirby -- JP Morgan -- Analyst

Kyle May -- Capital One -- Analyst

Elvira Scotto -- RBC -- Analyst

Ned Baramov -- Wells Fargo -- Analyst

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