Summit Midstream Partners, LP
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Summit Midstream Partners LP, Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I will now like to turn the call over to Mr. Blake Motley, Vice President of Strategy and Head of Investor Relations. You may begin.

[Blake Motley:]

Thanks, operator, and good morning, everyone. If you don't already have copies of the press releases that were issued earlier this morning, please visit our website at www.summitmidstream.com, where you'll you find it on the homepage or in the News section. With me today to discuss the strategic actions in the fourth quarter of 2018 financial and operating results that were included in those press releases is Leonard Mallett, our Interim President, Chief Executive Officer; Marc Stratton, our Chief Financial Officer; Brad Graves, our Chief Commercial Officer; Brock Degeyter, our General Counsel; Ryan Simmons, Senior Vice President of Corporate Development; and other members of our senior management team. Before we start, I'd like to remind you that our discussion today may contain forward-looking statements. These statements may include but are not limited to our estimates of future volumes, operating expenses and capital expenditures. They may also include statements concerning anticipated cash flow, liquidity, business strategy, and other plans and objectives for future operations. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct. Please see our 2017 Annual Report on Form 10-K, which was filed with the SEC on February 26, 2018, as well as our other SEC filings for a listing of factors that could cause actual results to differ materially from expected results. Please also note that on this call, we use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures, and we have provided reconciliations to the most directly comparable GAAP measures in our earnings release. And with that, I'll turn the call over to Leonard Mallett.

[Leonard Mallett:]

Thanks, Blake, and good morning, everyone. Thank you for joining us on this call. I look forward to discussing the highlights about fourth quarter and full-year results in more detail in a moment. First, I want to acknowledge the other announcements we've made this morning about Steve Newby stepping down from his positions with Summit and about our strategic actions. Steve and the Board mutually agreed that as we move forward with this next phase of Summit strategic plan and evaluate opportunities for enhancing its operational and financial performance that this was the right time to make a leadership change. Steve helped create Summit nearly a decade ago, and he has overseen a period of remarkable growth and change for the Company, transforming Summit into a leading independent gathering and processing company. On behalf of the Board in Summit employees, I would like to thank Steve for his dedication, vision, and leadership and wish him well in the future. While the search is underway for a permanent CEO, the Board has asked me to take charge this interim period. And that is what I planned to do. I know our team and I know our operations well and I'm excited to serve in this role driving the Company forward. By way of background, I have served as Summit’s Chief Operations Officer since joining the Company in 2015, with responsibility and oversight for all engineering, construction and operations activities. I have more than three decades of experience in the midstream industry, including senior leadership roles at Enterprise and TEPPCO, all of which have prepared me for this opportunity. We have a deep bench here at Summit, with a strong capable and experienced management team. In addition, the Board will continue to act in the best interest of SMLP, keeping our unitholders foremost in mind. In this period, we will be undertaking a series of strategic actions designed to place Summit and a stronger financial position to enable us to better serve our customers and enhanced value for our unitholders. Importantly, we will be enhancing our flexibility to fund several franchise enhancing projects and our core focus areas as well as our DPPO payment due in 2020. And we will of course continue to operate our assets safely and efficiently. With regard to the strategic actions described in our press release this morning, I want to underscore that these actions are designed to accomplish a number of key objectives, including, first, to increase Summit's financial flexibility and improve our balance sheet. Second, to reduce Summit’s reliance on the public equity capital markets; third, to enhance distribution coverage by retaining and redeploying cash flow to strategic growth projects; and fourth, to simplify and improve Summit’s capital structure and reposition it as more attractive investment opportunity. The achievement of these four key objectives will be realized through the following transactions

[Marc Stratton:]

Thanks, Leonard and good morning, everyone. SMLP reported net income of $38.7 million for the fourth quarter of 2018, compared to a net loss of $18.3 million in the prior-year period. Fourth quarter results included $32.8 million of non-cash income related to a decrease in the present value of the Deferred Purchase Price Obligation or DPPO. In conjunction with the 2016 dropdown, we recognize the DPPO liability on our balance sheet to reflect SMLP’s estimate of the remaining consideration to be paid in 2020 for our acquisition of the 2016 dropdown assets. We discount the estimated DPPO on the balance sheet and recognize the change in present value of the DPPO on the income statement. The change in present value comprises both the time value of money concept as well as any adjustments to the expected value of the DPPO. Adjusted EBITDA totaled $76.9 million for the fourth quarter of 2018, and compared to $72.9 million of adjusted EBITDA for the prior-year period. The increase was primarily due to a 47% increase in Williston liquids volumes, which averaged 109,000 barrels per day in the quarter. Total operated natural gas volumes averaged 1.53 Bcf a day in the fourth quarter, a decrease of 12.9% compared to the prior year period, and was primarily impacted by production declines in our Marcellus and Utica segments. Adjusted EBITDA in the fourth quarter included $17.5 billion related to MVC mechanisms from our natural gas gathering and crude oil transportation agreements. Now I’ll take a few minutes to walk through our reportable segments that comprise our core focus areas. Starting with our Utica Shale segment, our wholly-owned and operated Summit Midstream Utica system gathered 309 million cubic feet per day in the fourth quarter, down from 369 million cubic feet per day in the prior year period. Four new wells were commissioned late in the fourth quarter, which are the first new wells turned in line from a drilling program that was initiated by our anchor customer last spring. SMU's fourth quarter volumes missed our quarterly expectations due to well commissioning delays together with approximately 35 million cubic a day, a volume curtailments related to infill drilling and completion activities on existing pad sites. We anticipate that these curtailments will continue in 2019, but we'll be more than offset by new production beginning in the second quarter of 2019 as our anchor customer begins turning wells in line on a more regular cadence. While these curtailments have resulted in some volatility during 2018, we remain very excited about the growth on this system. We expect 15 new wells on SMU in 2019. And we expect that these new wells will lead to an annualized segment adjusted EBITDA run rate in the second half of 2019 that is more than 50% higher than annualized fourth quarter 2018 run rate of $23.3 million. Recall that compared to our Ohio Gathering segment, 100% of SMU’s volumes accrue to our benefit and the dry gas wells in SMU are highly prolific, with initial production rates, often exceeding 15 million cubic feet per day and holding flat for initial periods of six to nine months. Turning to our Ohio Gathering segment. Gross volume throughput in the fourth quarter of 2018 averaged 780 million cubic feet a day, down from 825 million cubic feet a day in the prior-year period. Lower volumes resulted from natural gas production declines of existing wells on the system, partially offset by the commissioning of three new wet gas wells during the quarter. On our November earnings call, we highlighted the shift in drilling activity from the dry gas window of the Utica to liquids rich and condensate windows of the play. That trend is still underway and recently our customers have been running one to three rigs behind the system. We expect that our customers will commission more than 50 new wells in 2019, which will keep volumes on the system relatively flat with 2018, which together with planned expense reductions will lead to EBITDA growth in this segment in 2019. Our Williston segment had a tremendous year in 2018 capped by a fourth quarter was record liquids volumes and marked by high levels of drilling and completion activity throughout the year. We expanded our Williston systems to connect five new acreage dedications during the year and our customers operated two to three rigs consistently throughout the year. Our liquid systems averaged 109,000 barrels per day in the fourth quarter, which was up 47% over the prior year period and at 12.4% over the third quarter of 2018. Fourth quarter liquids volumes benefited from 18 new wells commissioned in the quarter. Currently our customers are operating two rigs in our Williston service areas. We're very encouraged by the well results that our customers are generating both in our core acreage and in service areas that have historically been considered a step out from the core. Since providing our preliminary guidance on our third quarter earnings call, the crude strip has decreased by nearly 20% which in turn has caused some of our customers to delay well completions in 2019 relative to prior expectations. However, productivity gains together with an expectation for 70 new wells in 2019 are expected to facilitate another year of liquids volume growth behind our systems. We expect that the majority of this growth will be weighted towards the middle and second half of the year. Now turning to the DJ. Our DJ Basin segment average 21 million cubic feet of gas per day in the fourth quarter of 2018, which was an excessive or existing plants nameplate capacity. Our team is working diligently to commission our new 60 million cubic feet per day processing plants, which is expected to be operational in the second quarter of 2019. This plant start up delay is primarily a result of delays in the permitting process which have now been resolved. Our customers are temporarily diverting approximately 5 million to 10 million cubic feet per day to a third-party processing plant and we'll begin utilizing our new plant as soon as this is commissioned in the second quarter. Once our plant starts up, we will see an immediate uplift from the return of these volumes to our system along with new volumes that will originate from a backlog of ducks that our customers are currently building. The pace of drilling on our system remains ahead of our prior expectations with customers currently drilling five rigs. We expect our customers to commission 130 new wells in 2019, which will enable our plant to reach nearly full capacity by the end of the year. As such, we announced plans today to develop the second 60 million a day plant to accommodate incremental volumes from this area. As Leonard mentioned, this expansion just received Board approval and we expect this plant to be in service in the third quarter of 2020. Moving to the Permian, we are excited to announce the commissioning of our 60 million a day Lane processing plant in mid-December and we have already seen a steady ramping volume is behind that system. We are currently processing approximately 15 million cubic feet a day. The Lane processing plant is underpinned by XTO and we expanded our service offering to include three additional customers. We are engaged encouraging commercial discussions with multiple other parties that may create opportunities for future plant expansions and service offerings. We expect volumes on the Permian system to continue to ramp throughout the 2019 with 15 new wells expected to be commissioned. Our customers are currently running two rigs in our service area. Now turning back to the partnership, distributable cash flow total of $44.4 million in the fourth quarter, which included $7.9 million of maintenance CapEx. Maintenance CapEx was $2 million to $3 million higher than normal during the quarter due to the timing of spend related to compressor overhauls right away improvements and measurement related software investments. Our distribution coverage ratio for the quarter was 0.98x relative to the fourth quarter 2018 distribution of $0.575 per unit paid on February 14. Pro forma for today's strategic announcements, including the IDR exchange and distribution reduction, distribution coverage for the fourth quarter of 2018 would have been 1.88x. Capital expenditures for the fourth quarter of 2018 totaled $63.6 million. We also have $4.9 million of capital contributions to Ohio Gathering. The majority of our capital spending in the fourth quarter was related to the development and commissioning of the Lane processing plant in the Permian and the continued development of our processing plant in the DJ. We have $466 million outstanding under our $1.25 billion revolving credit facility at December 31, 2018 and $784 million available borrowing capacity. Total leverage at year-end 2018 was 4.23x. Pro forma for today's strategic announcements including the sale of Tioga, total average would have been 4.4x. With respect to our 2019 outlook, we expect adjusted EBITDA to range from $295 million to $315 million in 2019. This guidance reflects the sale of Tioga Midstream and at the midpoint represents the growth rate of approximately 7% if our 2018 results were adjusted to exclude Tioga’s financial results. This guidance incorporates our revised second quarter of 2019 startup of the new DJ processing plant. As well as current drilling and production expectations from our customers, which in some cases have been reduced relative to our preliminary 2019 guidance, primarily due to decreasing in commodity prices. We have based our 2019 guidance on current strip pricing, including natural gas pricing of $2.80 per MMBtu and crude pricing of $53 per barrel. Compared to when we issued our preliminary 2019 guidance, natural gas prices have held relatively steady and crude oil prices have weakened by approximately 20%. As a result of today's strategic announcements, distribution coverage for 2019 is expected to range from 1.7x to 1.95x. We expect capital expenditures to range between $150 million and $175 million in 2019, including $15 million to $25 million of maintenance CapEx. The majority of our capital expenditures in 2019 are expected to be focused in the Williston, DJ and Permian segments, including approximately $35 million related to our second plant expansion in the DJ. We expect to be disciplined with our CapEx spend and allocate capital to our highest returning projects for which we see a broad opportunity set in our core focus area over the next several years. And with that, I'll turn the call back over to Leonard.

[Leonard Mallett:]

Thanks, Marc. I know many of you were eager for an update on the Double E project, so I'd like to provide you with as much detail as I can at this time. As a reminder, we announced a binding open season in the third quarter of 2018 for Double E, a project to provide up to 1.5 Bcf per day of residue natural gas transportation capacity from the Delaware Basin to the Waha Hub. We discussed on last quarter's call that the binding open season affirmed our investment thesis and that a pipeline solution is indeed required to transport a significant amount of residue natural gas out of New Mexico. Encouraging discussions continue with potential shippers and I am confident that we will add to our backlog of commitments in the near-term. We saw some shift in momentum at the end of 2018 as crude oil prices softened, but as the market has begun to stabilize, shipper interest and discussions have strengthened. While we're not in a position to provide specific details at this time, we are working hard to push this project across the finish line and we hope to have more details in the near future. In the meantime, we are moving forward with our FERC 7(c) application and expect to file that by the end of March. Also, we continue to work closely with Exxon on their option to participate as an equity partner in the project. With respect to asset sales, our announced sale of Tioga Midstream is occurring at an attractive value for Summit. We believe that Tioga is step one of a more systematic program that we will devote even more time and attention to in the near-term as we consider alternative ways in which to streamline our focus and reallocate capitol to core focus areas. Our legacy areas which are our most logical divestiture candidates, include our Piceance, Barnett and Marcellus segments. These are relatively low growth segments and are attractive in the sense that they have generally low volume decline rates, generate significant free cash flow and have higher MVC underpinnings relative to current volume throughput. These are all very attractive characteristics for stable midstream business and we’re actively evaluating next steps to rationalize our portfolio and redeploy capital to our core focus areas and to further strengthen our balance sheet. Along with today's announced transactions, we have fully funded the equity portion of our 2019 capital program, so any additional assets sales would be geared toward balance sheet improvement or capital expenditures in 2020 and beyond. To wrap up, I’d like to reiterate that the fundamentals of our business are strong and we have a robust long-term outlook. Double E, our newly commissioned Lane processing plant, our ongoing plant expansions in the DJ are key markers of our development plan for 2019. We will remain focused in our core areas and the attractive risk adjusted returns they can provide to our unitholders. In addition, with today's strategic announcements, we have fortified our capital position, simplified our capital structure, and reduced our reliance on external funding sources, all positioning us closer to a self funding model. We will remain laser focused on executing our growth strategy with a renewed commitment towards strengthening the balance sheet, improving our distribution coverage and enhancing unitholder value. The future for Summit is bright. And with that, I'll turn it over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Tristan Richardson from SunTrust. Please go ahead.

[Tristan Richardson:]

Hey, good morning guys. Just on the Tioga asset sale, could you talk a little bit more about the structure of that deal? I think the buyer announced the transaction this morning and presented a purchase price at just a different number than you guys have talked about.

[Leonard Mallett:]

Sure. So the sale of Tioga, again a non-core asset Williston Basin, the sale – to answer your question, it was $90 million to an affiliate Hess. And this is an asset that fits Hess quite well in that. They have the midstream system stream of it. And so I'm not sure what was announced by the other party, but our number is $90 million. So Marc, you want to…

[Marc Stratton:]

Yes. That's right Tristan. So the sale was actually comprised of two different PSAs. One, related to the hydrocarbon assets. So this is the crude oil and natural gas related gathering assets as part of our Tioga system. The other being the produced water gathering system, which was bought by a separate affiliate of Hess infrastructure. So the total sale proceeds from the sale of that system is $90 million.

[Tristan Richardson:]

Understood. That makes sense. And then in terms of the decision to fix the DPPO, I think we always thought of the purported positives of the structure was the obligation would track the performance of the asset as you locked in sort of the fixed prices that suggested that you see the outlook perhaps improving for those assets and you wanted to take advantage of where the DPPO sits today?

[Marc Stratton:]

Yes. So Tristan, we looked at this partial prepayment of the DPPO. The decision was really more to make a down payment on an obligation that's coming due in a little over a year. So this prepayment was really enabled through the sale of Tioga and the distribution reduction that were announced this morning, enabled us to make the prepayment and then fix the amount without significantly increasing leverage here. So what it does is it removes the volatility of the DPPO that has really been somewhat distracting to investors and has really generated a lot of conversation between the investment community and management over the last several years and really diverted attention away from what we believe are some of the more important and more relevant parts of our story. So this decision really provides certainty around our future financing obligation and also removes the risk that these assets do outperform and the DPPO moves higher in the future. So we saw as an attractive opportunity and did all this in conjunction with our budget process, but no other terms of the contribution agreements were amended.

[Tristan Richardson:]

Marc, appreciate it. And then just last one for me. Can you talk about sort of other opportunities you see in terms of non-core assets within the portfolio?

[Leonard Mallett:]

Yes. This is Leonard. I'll address that. So as we enter into 2019, we will be taking a close look at our non-core assets. As far as trying to rank them or tell you which ones are probably our target areas, I don't want to do that. Don't feel like that's appropriate. But needless to say that if there's an asset out there that proves to be a more value to another entity and it doesn't fit our strategic go-forward plan, then we would definitely entertain divestiture of that asset. I also want to add that we are an opportunistic seller, certainly not a forced seller. And so, again, the situation has to be advantageous to us if those assets represent an attractive value to another entity, then we would attain – we’ll look at that.

[Tristan Richardson:]

Helpful. Thank you guys very much.

[Marc Stratton:]

Thanks Tristan.

[Operator:]

Our next question comes from Mirek Zak from Citi. Please go ahead.

[Mirek Zak:]

Hi. Good morning, guys. With the new processing plants announcements, I was wondering if you could provide any sort of color going into 2020 at this point on the budget, considering the new processing plant funding, the DPPO coming due and potentially Double E spend coming at that point, and if there's any sort of a assets sales assumed in your expectations there?

[Leonard Mallett:]

Yes. I'll start and I'll let Marc add some color. So the new processing plant in the DJ coming online here in the next month or so, in addition to the plants that was announced in this morning's earnings release, a firmly establishes Summit as a processor in the DJ area. So we'll go from a 20 million plant to 120 million plant and allowed us to touch the molecule twice. And by touch the molecule, I mean we will have fees for both gathering and processing. With regard to the capital for that, we have fully funded 2019s capital program. So any asset sales that we were talking about or any other – equity issuance, anything like that is it will all be toward either 2020 and beyond a capital programs.

[Mirek Zak:]

Got it. And regarding the DPPO payments in 2020, are those still able to be paid in pieces throughout the year? And is there any potential ability to defer that payment further, maybe into 2021 or so depending on maybe that will come up Double E when that comes into service and if that goes forward?

[Marc Stratton:]

Yes. Mirek, this is Marc. So the plan is, is to finance the DPPO with revolver borrowings, which through leverage capacity, created through a combination of this increasing internally generated cash from today's strategic announcements, increasing EBITDA in 2019 and 2020 and proceeds from non-core assets sales. So as you know, we do have an option under the contribution agreement to extend that payment throughout 2020. But the contribution agreement requires that the full amount is paid by the end of 2020 with at least 50% paid by June 30 of 2020. So no plans and no ability, really at this point to extend it beyond that point in time, but we do feel like with today's strategic announcements that gives us a long runway to build up a cumulative amount of benefit from retaining those cash and putting our balance sheet in a better position to finance, not only our growth projects, but also finance the DPPO. And as Leonard mentioned, non-core asset sales will be a part of that.

[Mirek Zak:]

Okay, great. And just one last quick one, what percentage of your Williston crude and gas volumes that you reported today were actually associated with the Tioga assets?

[Marc Stratton:]

Yes. It's low. It's less than 5%, I'd say.

[Mirek Zak:]

Okay, all right. Great, thank you very much.

[Operator:]

Our next question comes from Elvira Scotto from RBC Capital Markets. Please go ahead.

[Elvira Scotto:]

Hi. I have a few questions for you. I guess first, can you provide a little bit more detail on how you arrived at the payment for the IDR collapse and then also what is the sponsor's plan for sort of ultimate monetization of all of these SMLP units that it will own?

[Marc Stratton:]

Sure. Elvira, this is Marc. So look, the IDR a restructuring was really evaluated on a holistic basis, really in connection with a series of announcements, including the time of the sale, the DPPO amendment and the revision to the distribution policies. So we've recognized here for some time that the IDR structure is out of favor with investors and really has been one of the factors adversely impacting Summit with some investors, really even requiring the IDR elimination as a prerequisite to fund the future investment. So look, we looked at this decision. It's a decision that we made to simplify and streamline our corporate structure, results in improvement in our SMLP’s cost of capital. And we reviewed a number of scenarios here including not announcing these decisions and maintaining the current distribution, but that would have resulted in SMLP having to pass on some attractive risk adjusted and accretive growth projects in the future. So we made the decision that it was in the best long-term interest of SMLP and it's unitholders to restructure the economic GP interest and IDRs and reallocate those – the capital to a strategic growth plan.

[Leonard Mallett:]

Yes, Elvira, with regard to, I think it was your last question ECP’s go forward participation. So ECP really does want to participate in the value creation that it believes the strategic announcements will result in. And so with the restructuring of the economic GP and IDRs SMLP units held by ECP is up to 49%. So definitely a significant unitholder and certainly wants to see the value in Summit growth over time. And certainly, aligns the company, the GP, with the common unitholders. Now that being said in the long-term ECP will be ultimately looking to exit, but that'll be determined by our performance SMLP’s performance in certainly market conditions.

[Elvira Scotto:]

Okay. Sorry. So just to be clear, I just wanted to clarify one point that you made earlier. So the consideration that was paid for the IDR elimination was in conjunction with all of these strategic initiatives. But one thing you guys considered was to not pursue these strategic initiatives and just keep the distribution where it was?

[Leonard Mallett:]

We've considered that really every quarter for our distribution has always a decision that is made on a quarter-by-quarter basis. And the takeout of the IDRs was evaluated holistically was with all these other transactions and have we not made the decision that we're announcing today to pursue these strategic actions. It would have resulted in us having to pass on some fairly attractive and accretive growth projects.

[Elvira Scotto:]

And then I guess just a follow-up on that. What sort of when we think about some of these growth projects, what are sort of the build multiples that you're looking at here?

[Leonard Mallett:]

Yes. So the one that we announced today, Elvira, the second 60 million a day plant expansion in the DJ Basin, we're looking at that plant on a sub five times build multiple. It's an expansion of the 60 million a day plant that we're currently putting in place today. And it is a very attractive returning project for us to expand that plant the additional processing capacity. And we've seen over the last three months, our customers running anywhere from five to six rigs behind that system, building a backlog of ducks and really foreshadowing a need for incremental process capacity.

[Elvira Scotto:]

Gotcha. Okay. And then is there any CapEx in 2019 for Double E?

[Marc Stratton:]

Yes, there is the CapEx for Double E will be about $20 million, $25 million. And again, that's engineering environmental, following our FERC 7(c) preparatory work.

[Elvira Scotto:]

Got it. And then just, I'm sorry, just a couple of more quick ones. Can you provide any more detail around the Tioga sale? You guys said that you sold it's sort of an attractive value. What I mean, can you help us with maybe what an EBITDA impact is there anything a little incremental color?

[Leonard Mallett:]

Elvira, we do have some provisions of our PSAs that that really private us from sharing too many details. But I'd say, the best we can say is it's an attractive multiple and I think we've provided some markers with respect to a pro forma growth rates in 2019 verses 2018 as well as a leverage that could probably help you triangulate around the impact, yes.

[Elvira Scotto:]

Sure. And then just the last question for me, I think you said that your plan is to settle the DPPO payment with revolver capacity, but can you still settle that with units?

[Leonard Mallett:]

Yes. There was no change to the contribution agreement with respect to the timing of when that DPPO is due by or the consideration mix. And so we've always had the ability to issue up to a 100% of the consideration in equity and we continue to maintain that that option.

[Elvira Scotto:]

Great, thanks. That's all I had.

[Leonard Mallett:]

Thank you.

[Operator:]

Our next question comes from Chris Tillett from Barclays. Please go ahead.

[Christopher Tillett:]

Hi. Good morning, guys.

[Leonard Mallett:]

Good morning, Chris.

[Christopher Tillett:]

First, I guess on as it relates to asset sales, does the DPPO prevent you from making a sale of any or all of the Marcellus, Utica assets?

[Leonard Mallett:]

No, it does not Chris.

[Christopher Tillett:]

Okay, thanks for that. And then on the IDR transaction, so I guess looking at it, the multiple was lower than what we've seen from others do, assuming you didn't have a distribution cut. But given that you did, if you knew that was coming, you've essentially paid for something that doesn't have any cash flow. So I was just wondering if maybe you could explain why you felt that was the right path, at this time or why not wait and eliminate down the road, since with the cut announced today, you're still well below the MQD?

[Marc Stratton:]

Yes, Chris. This is Marc. I mean I just reiterate that that this decision around the IDR and simplifying that structure was really made in conjunction with all these other transactions and announcements that we've made today. It's really more of a holistic approach that was negotiated between the Conflicts Committee of SMLP’s Board have their own financial advisors and Summit Investments and so, they determined that holistically it was a negotiated transaction and was fair when taking into account, the totality of the announcements.

[Christopher Tillett:]

Okay. Thanks. And then you mentioned that, you see that as a measure of improving your cost of capital. I was just curious if you could maybe give us an estimate, in terms of what you're seeing. How much either on a percentage basis or basis point wise, how much you think that has improved your cost of capital by?

[Marc Stratton:]

I think it remains to be seen how the market's going to view this. Chris, we certainly view it as favorable, and improving our cost by removing that the IDR drag. But we do expect growth to increase with our cost of capital to improve and with IDRs coming out of the mix over time.

[Christopher Tillett:]

Okay. That was it for me. Thanks, guys.

[Marc Stratton:]

Thank you.

[Operator:]

Our next question comes from Mirek Zak from Citi. Please go ahead.

[Mirek Zak:]

Hi, guys. Just one quick follow-up on leverage. What is your updated leverage target? Is this still 4x or perhaps a little bit lower than that? And do you guys have an idea of the pace you're expecting to a reduce leverage to or leverage by?

[Marc Stratton:]

Yes. Mirek, so I mentioned, our reported leverage as of 12/31 was a 4.23x pro forma for the Tioga sale and partial prepayment of the DPPO closer to 4.4x. I just tell you as we kind of think through 2019, we would expect leverage to be in cost of 4.5x to 4.7x range throughout the year with leverage trending down closer to 4.5x times by the end of the year as cash flows ramp throughout the year and the cumulative impact of retained cash flow kicks in. So I'd also point out that our current leverage is somewhat skewed. We've been building out our Permian and DJ plants over the past 15 months with really limited associated cash flows. So we do expect to see some natural deleveraging throughout the year. But our long-term targets, I would tell you, continue to be 4x, but we may see some volatility in the leverage ratio here in the near-term, particularly as we pursue some of these growth projects and execute on the DPPO repayment. But again, we'll look to manage that leverage ratio over the course of 2019 and into 2020 through non-core asset sales.

[Mirek Zak:]

Okay, great. Thank you for the time.

[Operator:]

I will now turn the call over to Mr. Leonard Mallett for closing comments.

[Leonard Mallett:]

Yes. So we've given you a lot to think about, so I'm sure there'll be some follow-up calls and we certainly welcome those and we thank everybody for participating on today's call.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.