Crestwood Equity Partners LP
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good morning, and welcome to this morning's joint conference call to discuss the planned merger of Crestwood Equity Partners and Crestwood Midstream Partners, as well as their first quarter 2015 financial and operating results. In addition to the press releases announcing the merger and the quarterly results, a new slide deck was posted to Crestwood's Web site with details on today's call available for your reference. Before we begin the call, listeners are reminded that the company may make certain forward-looking statements as defined in the Securities and Exchange Act of 1934, and are based on the assumptions and information currently available at the time of today's call. Please refer to the company's latest filings with the SEC for a list of risk factors that may cause actual results to differ. Additionally, certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, and distributable cash flow will be discussed. Reconciliations to the most comparable GAAP measures are included in the news release issued this morning by both companies. Joining us this morning with prepared remarks is Chairman, President and Chief Executive Officer, Bob Phillips; Senior Vice President and Chief Financial Officer, Robert Halpin; and Senior Vice President and Chief Accounting Officer, Steven Dougherty. After the speakers remarks there will be a question-and-answer session with Crestwood's current analysts. Today's call is being recorded. At this time, I would turn the call over to Bob Phillips.

[Bob Phillips:]

Thank you, operator. Good morning, and thanks to all of you for joining us on this call. We clearly have a lot to talk about. It's a very exciting time for Crestwood. Not only did we post very strong financial and operating results for the first quarter of 2015, but we also announced today a strategic combination that will create value for all Crestwood investors going forward. The merger of Crestwood Equity Partners and Crestwood Midstream Partners, or a simplification, as we call it, is a bold step to reduce our cost of capital, streamline our corporate structure, and make Crestwood competitive again for acquisitions and organic expansions, leading to much more visible distribution growth in the future. Today, we've announced that we have signed definitive agreements to merge Crestwood Equity and Crestwood Midstream in a transaction that we believe will simplify the capital and ownership structure and create one publicly traded partnership with a consolidated enterprise value of approximately $7.5 billion. Importantly, the merger will eliminate CMLP's IDR payments, remove duplicative costs associated with running two public companies, reduce Crestwood's cost of capital, enhance our combined credit profile, and meaningfully improve our combined distribution coverage and outlook for future distribution growth. Other very successful midstream MLPs, such as Kinder Morgan, Enterprise, MarkWest, Magellan, and Buckeye have used variations of this step to substantially improve their cost of capital, and increase their competitiveness. So we are not breaking new ground here; in fact we're following a logical step to create long-term value for our investors. The transaction has been approved by both conflicts committees, comprised solely of independent directors, and the boards of directors of both partnerships, but will require approval of CMLP unit holders. Also, the transaction is supported by First Reserve directors and management, which collectively own a significant stake in both partnerships, as well as GSO and Magnetar, which own the CMLP preferred units issued in 2014. As you know, over the past year we have evaluated a number of strategic alternatives, including dropdowns, third-party mergers, new general partners sponsorship, and new capital sources. We ultimately determine that simplification offered us the best combination of a clear strategy forward, immediate coverage improvement, long-term cost of capital improvement, and more visible distribution growth, which will lead to fundamental value creation as we execute on organic expansion and acquisition opportunities around our existing portfolio of Midstream assets. With this transaction, our goal is to realign our focus, and remove the structural noise which has always surrounded Crestwood, created by the dual company structure. We want to redirect our focus back to our diversified platform of high quality midstream assets, and away from financial engineering. Simplification is simply the first step in that realignment strategy centered on value creation. Step two is to capture our share of more than $3 billion of investment opportunities that we see around our assets in the premier shale plays in North America. You know we are well positioned in great areas, and you know that our assets have great upside potential. This transaction positions Crestwood with a lower cost to capital in a streamlined, lower cost organization to be more competitive to pursue those opportunities and unlock that potential. Now, I don't want Crestwood's strong first quarter 2015 results which we announce today to be lost in all this discussion about cost of capital and improved competitiveness going forward. So before I turn it over to Steven Dougherty, our Chief Accounting Officer to review the quarterly the results, and Robert Halpin, our Chief Financial Officer to give you the details of the merger, I want to hit a few highlights for the quarter. I think we delivered an excellent quarter, showing the growing contribution of our 2013, and '14 investments in key areas such as our Arrow gathering, COLT hub -- crude by rail hub, Marcellus gathering, and Powder River Basin Niobrara gathering and processing. We also saw the value of our fixed fee contract portfolio during a period of extreme commodity volatility and the immediate and long-term impact of lower operating cost due to our first quarter 2015 cost cutting activities. In the first quarter, we delivered on all three parts of our 2015 operating strategy; and let me highlight those again for you. Number one, year-over-year volume growth from key assets; number two, downside protection from fixed fee take or pay in cost of service contracts to mitigate commodity volatility; and number three, a lower operating cost to offset the inherent slowdown caused by weak commodity prices. As a result of those three factors, Crestwood's consolidated adjusted EBITDA and distributable cash flow increased 22% and 9% respectively over last year's quarter. CMLP's coverage ratio was 1.05 times again, and CEQP's coverage ratio improved to 0.83 times. This is a trend of six consecutive quarters of cash flow growth in improving distribution coverage ratios. I am particularly proud of our cost reduction initiative in the first quarter to offset slower customer activity in some areas and improve operating efficiency across the entire company. During the first quarter we completed Phase I, which included the immediate consolidation of operations and support functions, and resulted in a 10% reduction in workforce. As a result, we reduced first quarter operating and G&A expenses by approximately $5.7 million from the fourth quarter of 2014, and we are on track to get $15 million of cost savings in 2015, and hit a run rate cost savings of $25 million to $30 million per year annually thereafter. I want to acknowledge the great work that our dedicated employees did to improve operations, increase efficiency, and provide excellent customer service during this difficult commodity price environment. We think it's an excellent start to the year, and puts us well on track to deliver on our 2015 guidance. And with that background, I'll now turn it over to Steven Dougherty to discuss our first quarter financial and operating results. Dough?

[Steven Dougherty:]

Thanks, Bob. I'll first discuss the results for CMLP, and then provide some summary remarks on CEQP. At CMLP, first quarter adjusted EBITDA totaled 125 million, a 26% increase over the first quarter of 2014. First quarter distributable cash flow totaled 93 million, representing a 34% increase from the prior year quarter. Our adjusted EBITDA in DCF growth year-over-year reflects volume growth in all three of our business segments. In our gathering and processing segment we increased first quarter gathering volumes to 1.2 billion cubic feet per day, a 10% increase over the last year. Compression volumes increased to 692 million cubic feet per day, or 54% above last year, while processing volumes increased to 203 million cubic feet per day, or 7% above last year. This volume growth resulted from facility expansions, new well connects, and improving well performance from our assets in the Marcellus, Barnett, and Niobrara shale plays. In our storage and transportation segment, firm and interruptible volumes increased to 2.1 billion cubic feet per day, or a 13% increase over the last year, which was primarily a result of pipeline expansion projects, and strong customer utilization rates on our pipeline and storage assets in the Marcellus shale. In the Bakken, we increased the total crude handled by the company to approximately 225,000 barrels a day, or a 45% increase over the first quarter of 2014. This increase is driven by a 50% increase in crude volumes, a 121% increase in gas volumes, and a 102% increase in water volumes on our Arrow systems. Also contributing to the increase was a 25% increase in rail loading, and 58% increase in pipeline volumes at our COLT hub facility. Moving to the balance sheet, as of March 31, CMLP had approximately 2.2 billion of debt outstanding, composed almost entirely of fixed rate senior notes. CMLP had no borrowings outstanding under its $1 billion revolving credit facility. During the first quarter, CMLP issued 700 million of 6.25% unsecured senior notes, due in 2023, and used the net proceeds from the offering to pay down borrowings under its revolving credit facility, and to redeem all of its outstanding 7.75% senior notes, due in 2019. Additionally, Crestwood has 60 million of remaining equity commitment under its Class A preferred agreement, and has an effective registration statement for the sale of up to 300 million of common units under an at-the-market equity offering program. To date the ATM program has not been utilized. Now, let's move to CEQP. CEQP's first quarter consolidated adjusted EBITDA totaled 142 million, a 22% increase over the first quarter of 2014. And on a standalone basis, the operating assets that reside at CEQP generated 17 million of adjusted EBITDA. CEQP's distributable cash flow totaled 21 million for the first quarter, a 9% increase over the first quarter of 2014. NGO marketing volumes largely in the Northeast region were higher in the first quarter of '15 compared to the first quarter of '14 due to the increased supplies we market for producer and processing customers from the growing Marcellus and Utica-rich gas regions. At our West Coast facility we experienced lower volumes due to supply disruptions at the Tesoro and Exxon West Coast refineries, which were offset by slightly higher per unit margins; a trend we've experienced for the past couple of quarters. Overall Crestwood's diversified Midstream portfolio delivered another strong quarter, as we benefited from year-over-year volume growth, our fixed fee contract portfolio, and the initial quarter cost cutting initiative, which is on track to capture $15 million of savings in 2015. Now, let me turn the call over to Robert Halpin, who will walk you through the simplification transaction.

[Robert Halpin:]

Thanks, Steven, and thanks again to everyone on the call for joining us this morning. I would first like to echo Bob's enthusiasm for the simplification transaction that Crestwood announced this morning. As Bob discussed, we believe the simplification repositions Crestwood to more effectively compete and unlock the full value potential of our operating platform. I would again highlight that we've posted a new slide presentation to our Web site this morning that covers a number of the key transaction terms, and strategic highlights that I will cover in my remarks. First, I will give a little color on the key transaction terms and structural steps of the transaction which are relatively straightforward. Under the terms of the merger agreement, Crestwood Midstream will merge with a newly formed subsidiary of Crestwood Equity in a tax-free unit-per-unit exchange in which Crestwood Midstream unit holders will receive 2.75 units of Crestwood Equity for each unit of Crestwood Midstream they own. The implied value of the exchange represents a 17% premium to the closing price of Crestwood Midstream's units as of yesterday afternoon, May 5, 2015. Following the completion of the merger, Crestwood Midstream will survive as a wholly-owned subsidiary of Crestwood Equity, but will no longer be a publicly traded partnership. And as discussed, the incentive distribution rights of Crestwood Midstream will be permanently eliminated. Crestwood Holdings LLC will continue to earn the general partner of Crestwood Equity, which will continue to be listed on the New York Stock Exchange under the ticker symbol CEQP. From a capital structure standpoint, the merger will not trigger any change of control provisions under Crestwood Midstream's current indentures, and at the completion of the merger, all existing and future indebtedness will sit at the Crestwood Midstream entity. Crestwood intends to refinance the existing $495 million CEQP revolving credit facility, as well as the existing $1 billion CMLP revolving credit facility with the new $1.5 billion credit facility secured by 100% of the assets of the consolidated partnership. From a process perspective, we will aim to file a joint proxy statement and prospectus toward the end of May or early June. We expect the SEC to spend June and July reviewing the proxy statement and prospectus, and would expect ultimate effectiveness in the July-August timeframe. We will then mail proxies thereafter and likely hold the unit holder approval in August or September. We expect that the transaction will close during the third quarter of 2015. Now turning the attention to the strategic highlights for the transaction, the first and primary strategic driver of this transaction is to improve the competitiveness of our cost of capital, so that we're better positioned to capture full value around our asset portfolio, where we currently see more than $3 billion of expansion opportunities. By eliminating the IDRs, which are currently $30 million, we will see an immediate and definitive cost of capital improvement. On this specific point, I would direct those that have the presentation material in front of them to page 7, where we've laid out an analysis that portrays illustrative cost of capital uplift from our pro forma structure. In short summary, we believe our simplified structure better positions us to compete for M&A and organic expansion projects as it lowers our overall hurdle rate for new investments and drives outsized returns on lower multiple expansion projects. Relative to our status quo structure, we can drive 200 basis points to up to 550 basis points of incremental growth in distributions at normalized M&A and organic investment multiples ranging from 12 times down to six times EBITDA. Next, and also of critical importance, we expect meaningful accretion from the transaction that alternatively drives visibility and stability to distribution growth. Assuming a January 2015 effective date for illustrative purposes, CEQP's coverage ratio for full year 2015 at the current $0.55 per unit distribution will be improved to approximately 1.05 times providing excess cash coverage of approximately $15 million. From a CMLP perspective, the transaction is expected to be 2% dilutive to 2016 estimated DCF per LP unit, 3% accretive to 2017 DCF per LP unit, and it's substantially accretive thereafter. A CMLP further benefits from the cost of capital advantage of removing the IDRs from its structure. With significantly improved distribution coverage, a streamlined operating structure and no IDRs, Crestwood is well positioned to get back on track towards passing future DCF growth along to our unit holders through increasing distributions. The final highlight of the transaction that I would call out is how the simplified structure helps us streamline our operations, strategic and financial objectives to drive fundamental value creation through the underlying growth of our assets. As Bob mentioned in his opening remarks, our dual stock structure adds financial complexity as to how we pursue growth opportunities and capitalize our business. With 100% of Crestwood's assets under a single operating entity, we have improved our credit profile through the elimination of structural subordination. With a single public entity, we can capture an incremental $5 million of estimated cost savings by eliminating the duplicative administrative expenses of managing a second public partnership. And with a single public currency, we would be able to provide greater transparency and clear delineation of strategy. It should resonate with a broader group of investors and other stakeholders, as well as positioning us to be a potential participant in the continued trend of industry consolidation. In closing, the simplification of our structures through the merger of CMLP and CEQP provides a number of benefits that directly combat some of the challenges we have faced in the broader industry and specifically at Crestwood over the last six to twelve months. We continue to be very optimistic about the fundamentals of our business, and believe that transaction today allows us to strengthen our competitive position in the market and create the greatest value for all stakeholders. And with that, Rob, we're ready to open the line up for questions.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Gabe Moreen with Bank of America Merrill Lynch. Please proceed with your question.

[Gabe Moreen:]

Hey, everyone. Congrats on the announcement. Just wanted to ask questions in terms of on Slide 4, the 11% pro forma DCF growth through 2017, I was just wondering if you can speak to kind of the assumptions behind that, how much CapEx, I assume that's all organic and how much CapEx you think you need to capture and get to that 11% pro forma growth?

[Robert Halpin:]

Yes, Gabe, I'll take that one, and I think that obviously, as a precursor to this comment I would encourage everyone, we will be filing a proxy here in the coming, call it months, and so there will be a significant amount of detail behind the transaction as well as the outlook for the company. But regarding the expectation for DCF growth that we provided on a consolidated basis, the primary drivers behind that from a cash flow perspective are a continued expectation of growth around our core growth assets, particularly Arrow, our Powder River Basin Niobrara asset, as well as the Marcellus and Northeast Platform around our CYNOG Storage Complex. When we think about a capital perspective we've discussed the opportunities we have in front of us, we've guided our 2015 CapEx in and around the $125 million mark. We do have our MARC II Project that we discussed in the earnings release that we put out this morning, and would expect that over the balance of the 2016 and '17 timeframe that our capital expenditures would be slightly a bit above what we would expect in 2015. From an all-in-perspective we obviously haven't provided exact guidance to the market for '16 and'17, but just order of magnitude I can tell you that it would be in the ballpark of 30% to 50% above what we're expecting in 2015.

[Gabe Moreen:]

Got it. That's helpful. And then I guess in terms of targeting different ratios, whether it's debt-to-EBITDA or coverage ratios on the former four times and the latter 1.05 times. Do you think that's kind of what you'll stick with going forward in terms of, I guess, the DCF coverage, and also to get to that four times you're not that far away pro forma, but do you think you'll need any other capital markets transactions to get there or do you just anticipate getting there by growing EBITDA?

[Robert Halpin:]

Yes, on the capital side and the leverage ratio side, we don't anticipate any significant capital markets needs. Obviously, one of the real benefits of this transaction is the ability to use our lower cost of capital to capture incremental expansion and M&A opportunities. So obviously that subject tends [ph] to change as those opportunities materialize. But in terms of our long-term targets, we remain comfortable on a consolidated basis at the 1.05 to 1.1 type area for coverage, and we maintain our strategy to ultimately drive leverage ratio down to at or below four times.

[Gabe Moreen:]

Got it. And then two quick follow-ups if I could, just your latest thinking in terms of MARC II, the CapEx you'll spend there and kind of timing on when that could come online. And then in terms of the Quicksilver and Barnett stuff, you noted in the press release, I noted the language around there, I mean is there something where -- in terms of getting paid in a timely manner, is that something where you're anticipating a payment sometime in the next couple of weeks to know that you'll be made timely based on, I guess, what Quicksilver owes you at this point?

[Bob Phillips:]

Heath, you can both of those.

[Heath Deneke:]

Okay, sure. Hey, Gabe, this is Heath Deneke. I'll start with MARC II, as we said in the press release we're continuing to make progress. I think the producers are continuing to re-rationalize their long-term drilling plans out into the '17 and '18 time period. But in the interim, we continue to believe that the project has a lot of merit, and ultimately the producers will support it, as well as the end used market. So I think we're continuing to develop the project, and at this point are expecting to have an opportunity to place a project such as that in service in '17 or '18 timeframe. As it relates to Quicksilver, I guess we have received our first post petition payment. I believe it was paid on May 1, so they are -- continue to be current, and continue to pay based on customer returns and conditions. So I think we're effectively in good shape on that end.

[Gabe Moreen:]

Okay. Thanks everyone.

[Operator:]

Our next question is from Michael Blum with Wells Fargo Advisors. Please proceed with your question.

[Michael Blum:]

Hi, good morning everybody.

[Bob Phillips:]

Good morning, Michael.

[Michael Blum:]

A couple of quick questions; one, you had guidance out there on the two respective companies for the year for 2015. Should we consider that guidance still valid, and then we could pro forma it together?

[Robert Halpin:]

Yes, Michael, we still, as Bob mentioned, we still feel very confident, particularly with the strong first quarter results in the 2015 guidance that we put out for both companies.

[Michael Blum:]

Okay. And then, part of what you've discussed in the past is looking for an additional or a different sponsor, private equity or otherwise. With this transaction, does that take that off the table or is that still something that you're looking for like a source of private capital?

[Bob Phillips:]

Michael, it absolutely does not take that off the table, but it gives me an opportunity to state a couple of things that are important. First, First Reserve has been incredibly supportive of this transaction. They, as you know, own approximately 30% of CEQP and 11% of CMLP, and they have signed a support agreement, and expect both their shares in favor of this transaction, but just anecdotally they've been very supportive throughout the entire strategic evaluation process, which you know Michael because you follow us closely, has been going on for well over a year now. So through that strategic evaluation process, as I pointed out earlier, we've looked at a number of different alternatives, including dropdowns, creating a dropdown, third-party mergers, as well as brining in a new General Partner co-sponsor, if you will, at the same time potentially bringing in additional capital. So, a very important point of the way this merger was structured is that no options are off the table. This merger does not, and would not prevent us from considering any other strategic alternatives, both during the period, as well as post simplification close, and that's an important element of the way we are managing the company, and the way First Reserve, the Board Members, the management team, all significant stakeholders in the business, as well as GSO and Magnetar as significant stakeholders in CMLP, we all look at this as the next great step in the evolution of Crestwood, but no options are off the table, and we continue to talk to relevant parties about coming in and joining with us at Crestwood to take the company to the next level. Certainly another strong General Partner co-sponsor and additional capital would be very helpful in that. So we'll continue to pursue all those same options and opportunities that we have before we announce this deal.

[Michael Blum:]

Great, thank you for that clarification. My last question is the $3 billion of identified potential opportunities. Over what timeframe is that meant to capture, (NYSE

[Robert Halpin:]

Yes, I'll take that question, Michael. I think this, from a timing perspective, this capital opportunity set would extend over the next three to five-year period. I mean a lot of these projects are significant expansions that would take 12-24 months type timeline for installation. In terms of the opportunity set and how we believe we're now better positioned to capture that, it's really a combination of all factors. I think that we do believe that cost of capital plays a big part in our ability to capture this opportunity set around our existing asset platform. We continue to maintain very strong customer relationships, very strong visibility to growth and expansion around the platform that we've built across the premier shale plays in North America, and I think that the cost of capital has been a limiting factor certainly in our ability to execute and capitalize some of the M&A and expansion opportunities. So there's a number of factors, obviously it's a competitive market, but cost of capital we certainly believe is an important determinant.

[Bob Phillips:]

Michael, let me just add quickly to that, that there are two types of growth transactions out there that are becoming apparent in this market, in the market that we're in today. Acquisitions will certainly be there, there will be a need over the next 12 to 18 months for companies, producers, and others that have Midstream assets to monetize those. We want to be in better position to compete for those acquisitions, which typically are accretive upfront, but historically have been at very high acquisition multiples. More importantly, we're seeing a trend towards significant organic projects being laid out by very qualified, financially strong producers who are using this downturn in the market to capture more acreage to use lower service cost to proceed and progress with large scale development projects, which is really our forte here at Crestwood, these large scale development projects, particularly in oil rich gas and water production areas require a certain expertise, and Crestwood has developed that expertise over the last four or five years as we develop projects in the rich gas, Marcellus, in the Bakken, and in the Niobrara, particularly. Those projects, as you know, take years of capital investment. Often times before they become particularly accretive, those are the type projects that historically we've been challenged with because of our relatively higher cost of capital, and our relatively higher coverage ratio relative to the type of guys that we compete with out there. So simplification not only improves our real cost to capital, but it also improves our coverage ratio in our distribution outlook, giving us a greater capability to pursue, frankly, what we think are higher return investment opportunities in this market, but historically because they might have been dilutive in the first year or two. It was something that was a real challenge for us here at Crestwood to invest in and compete for. So I'm very excited that the simplification transaction resolves a number of our issues, and allows us to go be more competitive on a broader spectrum throughout the industry, and we're pretty excited about that.

[Michael Blum:]

Great, thank you.

[Operator:]

Our next question is from Shneur Gershuni with UBS. Please proceed with your question.

[Shneur Gershuni:]

Hi, good morning guys. My first question, just wanted to take us back a little bit and think about the transaction little bit as to how we think about on a pro forma basis. When I think about the cash flow going out the door to unit holders at the CMLP and at the CEQP level prior to the transaction and when I think about it on a pro forma basis, is it fair to say that there is roughly about a $20 million to $25 million savings in terms of cash flow to unit holders that will now be retained at DCF on a go-forward basis? Is that a fair way to think about it?

[Robert Halpin:]

That's fair. You're in the ballpark; it's a little bit more than that, probably just north of $30 million.

[Shneur Gershuni:]

Great, and that 30 includes the five million of public savings or that would be incremental to that?

[Robert Halpin:]

That would be incremental to that.

[Shneur Gershuni:]

Okay, so net-net we're talking about a $35 million improvement in terms of cash flow out the door. Okay, great. As a follow-up to Michael's question, maybe I can ask it a little differently, and I do appreciate all the color you just provided, but when I think about the $3 billion, and I think about your lower cost to capital, how much of that $3 billion is really -- is a result of the fact that you now have lower cost of capital, were you able to charge the bucket by 500 billion, is there a way to quantify sort of how much of a quantum difference this cost of capital has on your business?

[Bob Phillips:]

No, that $3 billion comes from Slide 8 in the slide deck that we provided with this transaction announcement, but that's the same slide that we've had out since fourth quarter of last quarter, probably around the Wells Fargo conference. We've been highlighting the growth opportunities in each of the areas that we operate for really the past 12 to 18 months. And so, this is a holdover slide. The simplification transaction did not cause us to go recalculate the number of projects that we now think we might be more competitive for, and add to that list. This is the same list that we've had. There are identified projects there, potential bolt-on acquisitions, there are long-term organic build outs, and there are extensions and consolidations around our existing assets, potentially even building extensions to new supply sources or new demand markets. So it's a wide range of different investment opportunities, and it did not change as a result of this transaction.

[Shneur Gershuni:]

So it's really more for a go-forward basis that it could open up the door for more opportunities that have yet to be identified or shared with us; is that a fair way to say it?

[Bob Phillips:]

That's correct. They're real opportunities -- projects or known projects that will come to market over the next year or two. They are known activities that have been delineated by either current or future customers. And we now believe that will be competitive when trying to negotiate for those with the lower cost to capital.

[Shneur Gershuni:]

Okay. And one final question if I may; there was an initiative to save $25 million to $30 million, maybe I missed it in the prepared remarks, but are you able to quantify how much of that you have been able to achieve, and is there an opportunity to take that higher at all?

[Bob Phillips:]

You did miss it. It's exactly $5.7 million in the first quarter of this year. We highlighted that in the first part of our prepared remarks. It's also in the press release. We are on track to achieve $50 million per year in 2015 that we have previously described, and that would be an annual run rate of $25 million to $30 million per year, and that does not include the pro forma $5 million a year of cost savings associated with eliminating the duplication of services going from two public companies to one.

[Shneur Gershuni:]

Great. Thank you very much, and congratulations, guys.

[Bob Phillips:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Brian Lasky with Morgan Stanley. Please proceed with your question.

[Brian Lasky:]

Hi, good morning everyone, and congratulations.

[Bob Phillips:]

Thanks, Brian.

[Brian Lasky:]

I was just wondering if you guys could help us think through how you evaluated this transaction vis-à-vis, kind of the transaction that you were talking about last quarter; how do you think about the merits of this transaction versus that transaction, specifically using your other structure to go out and buy assets at the GP level and potentially drop those assets down. How do you guys think about the alternatives there?

[Bob Phillips:]

Yes, glad you asked that, because clearly we've been very vocal about all the different strategic alternatives that we've evaluated on behalf of our two boards. Robert pointed out that it's sometimes complicated to figure out which strategy we're trying to solve for, from deal-to-deal, acquisition-to-acquisition, organic growth opportunity to organic growth opportunity. But let me tell you from a purely strategic standpoint, we have evaluated a very wide range of alternatives with the help of the investment banking team at Citi over the past 12 to 18 months. Many of the -- as we discussed over a year ago, the Devon Crosstex style merger partners basically completed their own IPOs last year, and we lost those opportunities against much stronger IPO market economics than we could have proposed in some type of Devon Crosstex type structural merger. Most recently we've been very vocal about trying to bring in additional General Partners' sponsorship and potentially additional capital. Will Moore runs our Cooperative Development Team. The purpose of that sponsorship was to bring in the capital, so that we could be more effective and competitive in auctions. And so, I want Will to lay out for you how challenging it's been for us working with partners in a challenging and competitive acquisition environment to try to find the right combination of excess to capital, cost to capital, who the partners are going to be, where we're going to stick the asset if we require it, and how all that's going to result in a more efficient structure, given the dual stock nature. And I think when you think through some of the anecdotes that Will will give you, you'll realize how really impressive this single stock streamline efficient corporate in capital structure will be for us going forward, reminding that, that structure simplification does not eliminate bringing in new GP sponsorship or capitals. So Will, you want to share some anecdotes on the acquisition front?

[Will Moore:]

Yes. Thanks, Bob. Brian, I think when you think about bringing in new equity at either CEQP or CMLP in conjunction with the use of proceeds around a potential acquisition, I think when you look at what has to go on there from a complication standpoint, not only do you have to work side-by-side with your new sponsor on diligence seeing the asset, you have to get agreement on, what does the equity commitment look like? What are the control and governance items of that equity? Is that would be shared with our current sponsor? And then, not only that, but then agreeing on the value for the asset and then ultimately winning that transaction; when you look at all those steps that you have to accomplish, and especially adding in the fact that you have to make a decision there, which [indiscernible] used to make the acquisition and to finance the acquisition, this has got a lot of moving pieces that have to line-up perfectly in order for you to be successful. And we have some great partners come to us, and want to work with us as potentially new sponsors, and bring a lot of capitals to the table. And so we think that appetite is still there, but given how competitive the market is remaining for assets, winning these opportunities at the prices that they're going at has just not been attractive for us, and not to really be able to line-up all the other pieces that need to come together in order to bring in a new sponsor. And so, we think not only the simplification allow us to be in a better position to finance things off our balance sheet, but also remove some of the structural complexity that exists on bringing in a new sponsor as well. And so the acquisition market is still highly competitive, but we think in looking at the deals with potentially new sponsors will be much more competitive around there, and have a hopefully an easier task of getting into something that works for everyone.

[Brian Lasky:]

Got it, so beyond, Will, beyond having one class of stock at this point, would you say your -- oh, sorry, [indiscernible] one class of stock. But would you say your biggest impediment before was, was that identifying those assets that would work for bringing out the partner and the two securities, was that kind of the biggest bottleneck, or was it more a breakdown around the economics? How does this new partners split with First Reserve and the existing unit holders?

[Robert Halpin:]

Yes. I think, Brian, it's more of the latter. The identification hasn't been a problem for us, given our expensive footprint and capabilities across the Midstream value chain. The opportunities that we're seeing are -- there are quite a few out there, I think it's more of getting incentives aligned between all the parties whether it's new sponsor or existing sponsor, and the public as well as frankly winning the transaction in this environment. So I think the identification I think we'll still see an immense amount of opportunities with the new sponsors that we're talking to, sometimes those guys bring us opportunities that may be we haven't seen yet either. So I expect the pipeline, so to speak, to be very full. I just think now we're going to have a greater ability to hopefully be competitive work from a structural standpoint and from an economic standpoint.

[Brian Lasky:]

Got it. And then, just really a quick one in terms of distribution, growth from here, what's your kind of the expectations either in terms of resumption of growth, how are you guys thinking about like given the pro forma coverage at the CEQP level?

[Robert Halpin:]

Sure, I think just to hit on that point, Brian, as you'll see in the merger agreement, both partnerships have agreed to sustain the current distribution levels during the pendency period. I mean as we discussed on the call and in the presentation materials today, the pro forma partnership on a full year 2015 basis for illustrative [ph] purposes would have a coverage ratio of 1.05 times with $15 million of excess DCF coverage, which clearly is in line with the targets we just said into a prior question of 1.05 to 1.1 times. So heading into 2016, as we look out and see the DCF growth, while we haven't given specific guidance at this point we would expect to provide distribution growth to our combined unit holders that I believe is more in line with the rest of the kind of the GMP peer comp group that we participate with.

[Brian Lasky:]

Got it. Thank you very much.

[Operator:]

Our next question is from J.R. Weston with Raymond James and Associates. Please proceed with your question.

[J.R. Weston:]

Hi, good morning guys. I really appreciate all the color, especially on 3 billion and expansion potential. My first question is, when you're running through the accretion analysis that you lay out in your slide deck, can you offer any more color beyond what was already discussed, may be on the assumptions that are made driving that model, that strip pricing or different price forecast, and then is there any more detail that you can provide in terms of volumetric or margin assumptions along with that?

[Robert Halpin:]

Yes, I would probably say at this point, as I mentioned earlier, we are going to have the proxy statement filed here within the next 30 days. There clearly will be a tremendous amount of detail for the public to evaluate as part of those materials, not only on the forecast and the assumptions, but also kind of the background leading up to the transaction. So at this time I may just defer you to 30 days from now when you can read about everything. I think from a general perspective, we provided a lot of color around the growth in our assets and expectations. I think that as we stated, we still have a strong degree of confidence in the footprint that we've put together here. This transaction just helps us better compete and unlock the real value of that footprint. The greatest fear we've had with our structure has been seeing this opportunity set come and go by us, and not being able to capture the full extend of it, and we believe that simplifying helps us to capture our fair share. And so, not in directly answering your question, but I promise you'll get plenty of detail here in the coming days.

[J.R. Weston:]

Sure. I understand the answer there. And trying again, and maybe we will get a similar answer, but just kind of curious; is there any color you guys can provide maybe on the metrics you were looking at just in terms of setting the deal structure with the exchange ratio that you guys take in the 17% premium, and then leading to the slight dilution of 16% [ph] accretion in 2017, just curious maybe why you guys landed at that math, is there anything else you guys are going to say on that front?

[Bob Phillips:]

Sure. I think that's a great area to discuss for everybody, it gives me a chance to reemphasize the great governance process that we utilized here to come to this agreement about what was best for all the Crestwood shareholders, and I will give Robert an opportunity to think about mathematically how this played out over the course of the past few weeks, given the market volatility that has existed; no doubt about that, so you will all take these premium calculations little bit with a grain of salt given that volatility that's existed in both stocks. But we have employed a classic and traditional conflicts committee process. Those conflicts committees for CEQP and CMLP were comprised of independent directors with substantial experience in this business, and I can't begin to tell you how much experience the gentlemen that form those committees and walk through that process have, not only in the Midstream world, but in the MLP world, and you will see when the proxy material is filed. I think you will be impressed with the quality of those independent directors. They had strong financial and legal advice, and they conducted an extensive process utilizing information provided my management and coordinating that with their own financial advisors view of the world, not only from their individual unit holders' perspective, but from the collective Crestwood perspective as well. We spent a tremendous amount of time talking about this strategic importance of this transaction, and how it solves a number of current problems for each partnership, but resolves collectively the greatest number of issues, and best positions both partnerships for success going forward, and I was impressed by and struck given my 37 years in the business, 28 years being a public company CEO and having experience as an MLP CEO since 1998 and the numerous dropdown and conflicts committee transactions that I've managed over the years and been a part of billions of dollars I was impressed by the quality of the evaluation and the negotiation that went on here. The ultimate resolution of the exchange price was an absolute negotiation in every sense of the word, one that was based upon fully informed and solid analysis through an extensive period of time. So the resulting premiums and the mathematical conclusions are largely -- not sure I'm saying this in the right way an investment banker would, but there the largely outcomes of a process. And it was a thorough process. It was a thoroughly vetted process supported by strong analytics, and strong discussion, and negotiation. Robert, you want to speak to the outcomes?

[Robert Halpin:]

Yes, I think you hit on most of it, and obviously as you indicated in the entry to your question, there will be a lot of detail behind that very process and the proxy. In the background of merger sections you can see how the committees arrived at the ultimate settlement at 2.75 times. But I think that one of the primary objectives of the committees, the Board and the management team was to provide an outcome here to best position both partnerships to capture opportunity sets going forward. And I think that as we look at the pro forma math that we currently agree to deal and look at the streamlined operations across the business, we believe that we've solved a number of the challenges that we face and can get now into more of a forward-leaning posture again to deliver return to our shareholders and capture the extend of that expansion and M&A opportunities around our portfolios.

[J.R. Weston:]

Great. I really appreciate the commentary there, thank you. That's all I had.

[Bob Phillips:]

Thanks, J.R.

[Operator:]

Next question is from Jeremy Tonet with JP Morgan. Please proceed with your question.

[Jeremy Tonet:]

Good morning. Thanks for all the color this morning; very helpful. I just had one last housekeeping question, would you be able to tell us for CEQP where the leverage set at quarter end debt-to-EBITDA for covenant calculations?

[Robert Halpin:]

Yes, 3.25 times.

[Bob Phillips:]

Yes.

[Robert Halpin:]

We have got that disclosed in the press release.

[Bob Phillips:]

3.25 on the CEQP leverage ratio in the first quarter.

[Jeremy Tonet:]

Got you, and what about fully consolidated? What would leverage look like post this transaction?

[Robert Halpin:]

Post this transaction, we are looking at between 4.4 and 4.5 on a consolidated basis.

[Jeremy Tonet:]

Okay, great. Thank you very much.

[Bob Phillips:]

Thanks, Jeremy.

[Operator:]

There are no further questions, at this time I'd like to turn the call back over to management for closing remarks. Bob Phillips Great. Thanks, operator, and thanks to all the analysts for asking some really good questions today. I think you know how excited we are by the body language and the color. This has been a wide-open transparent process, one in which management versus our boards have worked together very, very closely and collectively to evaluate a very wide range of strategic alternatives, and we have come up with this best-in-class simplification strategy as the one alternative that really positions Crestwood to move forward and create value for our investors. The proxy will be full of information. We are anxious to get it out there, move forward, and get this transaction closed as quickly as possible. We have some exciting things on the horizon for us, and we believe that this theoretically lower cost to capital that we will enjoy post close will be very useful over the summer months as we compete for more and more transactions that are coming to market literally right around the assets that we own and operate today. And Robert said it best, we were fearful of missing this opportunity to compete for growth in another market correction simply because cost of capital was just not competitive. And so we think we will resolve that issue going forward. We will look forward to a broad CMLP unit holder support for the transaction as the best way to reposition the company in an exciting time in our market. So with that, operator, we will close the call, and thank everybody for their participation this morning. Thank you.

[Operator:]

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.