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NRGM > SEC Filings for NRGM > Form 10-Q on 3-May-2012All Recent SEC Filings

Show all filings for INERGY MIDSTREAM, L.P.

Form 10-Q for INERGY MIDSTREAM, L.P.


3-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

"Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the accompanying consolidated financial statements.

The statements in this Quarterly Report on Form 10-Q that are not historical facts, including most importantly, those statements preceded by, or that include the words "believe," "expect," "may," "will," "should," "could," "anticipate," "estimate," "intend" or the negation thereof, or similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such forward-looking statements include, but are not limited to, our belief that we will complete our growth projects; our belief that we will have the capacity to fund internal growth projects and acquisitions; our belief that we will be able to generate stable cash flows; and our belief that Anadarko's litigation claims are without merit. Such forward-looking statements involve risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: changes in general and local economic conditions; competitive conditions within our industry, including natural gas production levels and prices; our ability to complete internal growth projects on time and on budget; the price and availability of debt and equity financing; the effects of existing and future governmental legislation and regulations; and natural disasters, weather-related delays, casualty losses and other matters beyond our control. We will not undertake and specifically decline any obligation to publicly release the result of any revisions to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect events or circumstances after anticipated or unanticipated events.

Overview

We are a fee-based, growth-oriented Delaware limited partnership formed to own, operate, develop and acquire midstream energy assets. Our current asset base consists of natural gas and NGL storage and transportation assets located in the Northeast region of the United States. We own and operate four natural gas storage facilities located in New York and Pennsylvania that have an aggregate working gas storage capacity of 41.0 Bcf with high peak injection and withdrawal capabilities. We also own natural gas pipelines located in New York and Pennsylvania with 355 MMcf/d of interstate and intrastate transportation capacity and, upon completion of our MARC I pipeline that is currently under construction, we will own a total of 875 MMcf/d of interstate transportation capacity. In addition, we own and operate a 1.5 million barrel NGL storage facility located near Bath, New York. Our near-term strategy is to continue to develop a platform of interconnected natural gas assets that can be operated as an integrated Northeast storage and transportation hub.

Our business has expanded rapidly through internal growth initiatives and acquisitions since its inception in 2005. We have grown our natural gas storage capacity from 13.0 Bcf as of September 30, 2005 to 41.0 Bcf as of March 31, 2012. We believe that our current asset base enables us to significantly expand our storage and transportation capacity through continued investment in attractive growth projects. We expect these growth projects will further increase connectivity among our natural gas facilities and with third-party pipelines, thereby resulting in increased demand for our services.

Our significant growth projects primarily include:

MARC I Pipeline

We are constructing the MARC I pipeline, a fully contracted natural gas transmission pipeline with 550 MMcf/d of interstate transportation service, which we expect to complete and place into service in 2012 with contracts extending to 2022. We obtained our FERC certificate order authorizing the MARC I project in November 2011, and commenced full-scale construction in February 2012.

On February 13, 2012, the FERC denied an intervener's request to stay and rehear the MARC I certificate order. On February 14, the intervener filed an appeal and emergency motion for stay of the MARC I certificate order with the Second Circuit Court of Appeals, and a temporary stay was granted on February 17. The temporary stay remained in place until it was vacated by a three-judge panel following oral arguments on February 28, 2012.


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On March 6, 2012, the Second Circuit granted the intervener's request for an expedited briefing schedule. The intervener filed its brief on March 23, and we and the FERC filed responses on April 27. The intervener's reply must be filed by May 4, and oral arguments are scheduled for May 31. We expect the appellate court to issue a ruling in calendar 2012. In the meantime, we continue to construct the MARC I pipeline. We expect to complete and place into service the north 20 miles of the MARC I pipeline by July 2012, and to complete and place into service the rest of the pipeline by September 2012.

Watkins Glen NGL Storage Project

We are developing a 2.1 million barrel NGL storage facility located near Watkins Glen, New York, which is approximately 95% contracted under a contract extending to 2016. We continue to face delays in the permitting process due to other regulatory priorities (e.g., implementation of "fracking" regulations) and other reasons. We expect to receive the underground storage permit required for the project in the third calendar quarter of this year, and to complete and place into service the storage facility in 2012.

North/South II Expansion Project

We are developing the North/South II expansion project, which is expected to enable shippers to move higher volumes of natural gas bi-directionally through our Stagecoach facility from Millennium to TGP's 300 Line, and all points in between. As part of this project, we plan to (i) extend the Stagecoach north lateral approximately three miles to interconnect with our East Pipeline, which will allow shippers to transport volumes from TGP's 300 Line (as well as intermediate points, including Millennium) to the point of interconnection between the East Pipeline and the Dominion transmission system in Tompkins County, New York, and (ii) expand, through the installation of additional compression or looping, the capacity of the Stagecoach laterals, which will enable shippers to move higher volumes of natural gas over the existing North/South pipeline route. We are working to acquire the land required to complete the 3-mile lateral extension under CNYOG's blanket authority, and working with potential shippers on precedent agreements related to the North/South II expansion capacity. We expect to request FERC authorization for CNYOG in the second half of calendar 2012 to expand the North/South pipeline capacity and lease all of the East Pipeline's available capacity.

Commonwealth Pipeline

On February 29, 2012, we announced plans to explore the marketing and development of a new interstate natural gas pipeline ("Commonwealth Pipeline") with affiliates of UGI Corporation and WGL Holdings, Inc. As proposed, Commonwealth Pipeline would run approximately 200 miles from the southern terminus of our MARC I pipeline to a point of interconnection with Washington Gas Light's distribution system in Maryland. We are exploring costs, route options and other information required to complete a feasibility study, and assessing market demand for the proposed transportation capacity. To the extent the partners determine that the project is economically feasible, affiliates of UGI Corporation and WGL Holdings, Inc. are expected to become anchor shippers on the new pipeline.

In addition to our significant growth projects, we are working on a number of initiatives that we expect to enhance customer flexibility, deliver operational synergies and augment our platform of future growth opportunities. For example, in the second calendar quarter of 2012, we expect to request FERC authorization to (i) expand the Seneca Lake gas storage facility by approximately 0.5 Bcf, and
(ii) effectively convert our Steuben gas tariff from cost-based rates to market-based rates, by merging the entity that owns our Steuben gas storage facility into the entity that owns our Thomas Corner and Seneca Lake gas storage facilities.

We believe the key factors that impact our business are (i) the anticipated long-term supply and demand for natural gas and NGLs in the markets we serve, which determine the amount of volatility in natural gas and NGL prices and drive month-to-month differentials in the forward curve for natural gas prices;
(ii) our ability to capitalize on internal growth projects; (iii) the needs of our customers and the competitiveness of our service offerings; and
(iv) government regulation, including our ability to obtain the permits required to build new infrastructure. These factors, discussed in more detail below, play an important role in how we evaluate our operations and implement our long-term strategies.


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We evaluate our business performance on the basis of the following key measures:

revenues derived from firm storage contracts and the percentage of physical capacity deliverability sold;

revenues derived from transportation contracts and the percentage of physical capacity sold;

our operating and administrative expenses; and

our EBITDA and Adjusted EBITDA.

We do not utilize depreciation, depletion and amortization expense in our key measures because we focus our performance management on cash flow generation and our assets have long useful lives.

Firm Storage Contracts

A substantial majority of our revenues is derived from storage services we provide under firm contracts. We seek to maximize the portion of our physical capacity sold under firm contracts. With respect to our natural gas storage operations, to the extent that physical capacity that is contracted for firm service is not being fully utilized, we attempt to contract available capacity for interruptible service. The table below sets forth the percentage of physical capacity or deliverability sold under firm storage contracts, as of March 31, 2012:

                                         Percentage          Weighted-Average
                                        Contractually            Maturity
        Storage Facility                  Committed               (Year)
        Stagecoach (Natural Gas)                    95 %                  2016
        Thomas Corners (Natural Gas)               100 %                  2015
        Seneca Lake (Natural Gas)(1)                59 %                  2018
        Steuben (Natural Gas)                      100 %                  2013
        Bath (NGL)(2)                              100 %                  2016

(1) We did not acquire Seneca Lake until July 2011 and are currently in the process of leasing out the remaining storage capacity at the facility.

(2) We have contracted 100% of the operationally available storage capacity at our Bath storage facility to an affiliate, Inergy.

Transportation Contracts

Our North/South expansion project and the East Pipeline, together with our MARC I pipeline when completed, are expected to provide material earnings to our operations. We will seek to maximize the portion of physical capacity sold on the pipelines under firm contracts. To the extent the physical capacity that is contracted for firm service is not being fully utilized, we plan to contract available capacity on an interruptible basis. As of March 31, 2012, our existing transportation assets and our MARC I project were 100% contracted and committed.

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

The following table summarizes the consolidated statement of operations
components for the three months ended March 31, 2012 and 2011, respectively (in
millions):



                                               Three Months Ended
                                                   March 31,                          Change
                                               2012           2011         In Dollars         Percentage
Revenues                                    $      33.5      $  25.5      $        8.0               31.4 %
Service related costs                               3.0          3.8              (0.8 )            (21.1 )
Operating and administrative expenses               5.9          3.3               2.6               78.8
Depreciation and amortization                      11.2          9.1               2.1               23.1

Net income                                  $      13.4      $   9.3      $        4.1               44.1 %


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Revenue. Revenues for the three months ended March 31, 2012, were $33.5 million, an increase of $8.0 million, or 31.4%, from $25.5 million during the same three-month period in 2011.

Revenues from firm storage were $23.5 million for the three months ended March 31, 2012, an increase of $1.6 million, or 7.3%, from $21.9 million during the same three-month period in 2011. Natural gas firm storage revenues increased $0.3 million, primarily due to the acquisition of our Seneca Lake storage facility in July 2011. NGL firm storage revenues also increased $1.3 million due to the contractual / customer mix of customers at our Bath facility.

Revenues from transportation were $7.6 million for the three months ended March 31, 2012, an increase of $5.0 million, or 192.3%, from $2.6 million during the same three-month period in 2011. Transportation revenues increased $4.6 million due to the placement into service of our North/South expansion project and $1.2 million due to the acquisition of our Seneca Lake storage facility. The increase in transportation revenues is also offset by the reduction of revenues derived from marketing to Stagecoach storage customers capacity we held on TGP's 300 Line.

Revenues from hub services were $2.4 million for the three months ended March 31, 2012, an increase of $1.4 million, or 140.0%, from $1.0 million during the same three-month period in 2011. This increase resulted primarily from an increase in interruptible services at our Stagecoach facility due to an increase in demand for interruptible wheeling service as a result of customer demand to move gas to and from our interconnecting pipes primarily due to increasing natural gas development in Pennsylvania.

Service Related Costs. Service related costs, including storage and transportation costs, for the three months ended March 31, 2012, were $3.0 million, a decrease of $0.8 million, or 21.1%, from $3.8 million during the same three-month period in 2011.

Storage related costs were $1.6 million for the three months ended March 31, 2012, a decrease of $0.9 million, or 36.0%, from $2.5 million during the same three-month period in 2011. Natural gas storage cost decreased $1.0 million, primarily comprised of a $1.8 million decrease due to operational efficiencies at our Stagecoach facility, partially offset by a $0.4 million increase resulting from storage related costs incurred as a result of placing into service our North/South expansion project. Additionally NGL storage cost increased $0.1 million during the period.

Transportation related costs were $1.4 million for the three months ended March 31, 2012, an increase of $0.1 million, or 7.7%, from $1.3 million during the same three-month period in 2011. Transportation related costs are primarily comprised of fixed costs for leasing transportation capacity on a non-affiliated interconnecting pipe.

Our storage related costs consist primarily of direct costs to run the storage facilities, including electricity, contractor and fuel costs. Our transportation related costs consist primarily of our costs to procure firm transportation capacity on certain pipelines. These costs are offset by any fuel-in-kind collections made during the period.

Operating and Administrative Expenses. Operating and administrative expenses were $5.9 million for the three months ended March 31, 2012, compared to $3.3 million during the same three-month period in 2011, an increase of $2.6 million, or 78.8%. Operating expenses increased $0.6 million due to the acquisition of our Seneca Lake facility in July 2011 and increased $0.2 million due to the North/South expansion project which was placed into full service in December 2011. Operating expenses also increased $0.9 million due to an increase in personnel costs and property taxes at our various facilities.

Depreciation and Amortization. Depreciation and amortization increased to $11.2 million for the three months ended March 31, 2012, from $9.1 million during the same three-month period in 2011. This $2.1 million, or 23.1%, increase resulted from the Seneca Lake acquisition in July 2011 and the North/South expansion project which was placed into full service in December 2011, which resulted in increased depreciation of $1.1 million and $1.0 million, respectively.

Net Income. Net income for the three months ended March 31, 2012, was $13.4 million compared to net income of $9.3 million during the same three-month period in 2011. The $4.1 million, or 44.1%, increase in net income was primarily attributable to higher revenue during the three months ended March 31, 2012, partially offset by increased operating and administrative costs and depreciation and amortization.


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EBITDA and Adjusted EBITDA. The following table summarizes EBITDA and Adjusted EBITDA for the three months ended March 31, 2012 and 2011, respectively (in millions):

                                                             Three Months Ended
                                                                 March  31,
                                                           2012             2011
   EBITDA:
   Net income                                            $    13.4       $      9.3
   Depreciation and amortization                              11.2              9.1

   EBITDA                                                $    24.6       $     18.4

   Long-term incentive and equity compensation expense         0.7              0.4

   Adjusted EBITDA                                       $    25.3       $     18.8

                                                            Three Months Ended
                                                                March  31,
                                                          2012              2011
  EBITDA:
  Net cash provided by operating activities             $    28.6        $     15.3
  Net changes in working capital balances                    (3.0 )             3.1
  Amortization of deferred financing costs                   (0.3 )              -
  Long-term incentive and equity compensation expense        (0.7 )              -

  EBITDA                                                $    24.6        $     18.4

  Long-term incentive and equity compensation expense         0.7               0.4

  Adjusted EBITDA                                       $    25.3        $     18.8

EBITDA is defined as income (loss) before income taxes, plus net interest expense and depreciation and amortization expense. For the three months ended March 31, 2012 and 2011, EBITDA was $24.6 million and $18.4 million, respectively. As indicated in the table, Adjusted EBITDA represents EBITDA excluding long-term incentive and equity compensation expenses. Adjusted EBITDA was $25.3 million for the three months ended March 31, 2012, compared to $18.8 million in the same three-month period in 2011. EBITDA and Adjusted EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with generally accepted accounting principles as those items are used to measure operating performance, liquidity or the ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make the minimum quarterly distribution and is presented solely as a supplemental measure. We believe that Adjusted EBITDA provides additional information for evaluating our financial performance without regard to our financing methods, capital structure and historical cost basis. EBITDA and Adjusted EBITDA, as we define them, may not be comparable to EBITDA and Adjusted EBITDA or similarly titled measures used by other corporations or partnerships.

Six Months Ended March 31, 2012 Compared to Six Months Ended March 31, 2011

The following table summarizes the consolidated statement of operations
components for the six months ended March 31, 2012 and 2011, respectively (in
millions):



                                               Six Months Ended
                                                  March 31,                         Change
                                              2012          2011         In Dollars         Percentage
Revenues                                    $   67.2      $   51.4      $       15.8               30.7 %
Service related costs                            6.6           7.6              (1.0 )            (13.2 )
Operating and administrative expenses           11.1           7.3               3.8               52.1
Depreciation and amortization                   21.7          18.2               3.5               19.2

Net income                                  $   27.8      $   18.3      $        9.5               51.9 %


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Revenue. Revenues for the six months ended March 31, 2012, were $67.2 million, an increase of $15.8 million, or 30.7%, from $51.4 million during the same six-month period in 2011.

Revenues from firm storage were $46.4 million for the six months ended March 31, 2012, an increase of $2.7 million, or 6.2%, from $43.7 million during the same six-month period in 2011. Natural gas firm storage revenues increased primarily due to the acquisition of our Seneca Lake storage facility in July 2011. NGL firm storage revenues also increased $1.4 million due to the contractual /customer mix at our Bath facility.

Revenues from transportation were $14.1 million for the six months ended March 31, 2012, an increase of $8.5 million, or 151.8%, from $5.6 million during the same six-month period in 2011. Transportation revenues increased $6.1 million due to the placement into service of our North/South expansion project and $2.3 million due to the acquisition of our Seneca Lake storage facility.

Revenues from hub services were $6.7 million for the six months ended March 31, 2012, an increase of $4.6 million, or 219.0%, from $2.1 million during the same six-month period in 2011. This increase resulted primarily from an increase in interruptible services at our Stagecoach facility due to an increase in demand for interruptible wheeling service as a result of customer demand to move gas to and from our interconnecting pipes primarily due to increasing natural gas development in Pennsylvania.

Service Related Costs. Service related costs, including storage and transportation costs, for the six months ended March 31, 2012, were $6.6 million, a decrease of $1.0 million, or 13.2%, from $7.6 million during the same six-month period in 2011.

Storage related costs were $3.5 million for the six months ended March 31, 2012, a decrease of $1.1 million, or 23.9%, from $4.6 million during the same six-month period in 2011. Natural gas storage cost decreased $1.2 million, comprised of a $2.1 million decrease due to operational efficiencies primarily at our Stagecoach facility, partially offset by a $0.7 million increase resulting from storage related costs incurred as a result of placing into service our North/South expansion project and a $0.2 million increase due to the acquisition of our Seneca Lake storage facility. Additionally NGL storage cost increased $0.1 million during the period.

Transportation related costs were $3.1 million for the six months ended March 31, 2012, an increase of $0.1 million, or 3.3%, from $3.0 million during the same six-month period in 2011. Transportation related costs are primarily comprised of fixed costs for leasing transportation capacity on a non-affiliated interconnecting pipe.

Our storage related costs consist primarily of direct costs to run the storage facilities, including electricity, contractor and fuel costs. Our transportation related costs consist primarily of our costs to procure firm transportation capacity on certain pipelines. These costs are offset by any fuel-in-kind collections made during the period.

Operating and Administrative Expenses. Operating and administrative expenses were $11.1 million for the six months ended March 31, 2012, compared to $7.3 million during the same six-month period in 2011, an increase of $3.8 million, or 52.1%. Operating expenses increased $1.6 million due to the acquisition of Seneca Lake in July 2011, and $0.2 million due to the North/South expansion project which was placed into full service in December 2011. Operating expenses also increased $0.2 million due to corporate overhead allocations and $0.9 million due to an increase in personnel costs and property taxes at our various facilities.

Depreciation and Amortization. Depreciation and amortization increased to $21.7 million for the six months ended March 31, 2012, from $18.2 million during the same six-month period in 2011. This $3.5 million, or 19.2%, increase resulted from the Seneca Lake acquisition in July 2011 and the North/South expansion project which was placed into full service in December 2011, which resulted in increased depreciation of $2.3 and $1.3 million, respectively.

Net Income. Net income for the six months ended March 31, 2012, was $27.8 million compared to net income of $18.3 million during the same six-month period in 2011. The $9.5 million, or 51.9%, increase in net income was primarily attributable to higher revenue during the six months ended March 31, 2012, partially offset by increased operating and administrative costs and depreciation and amortization.


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EBITDA and Adjusted EBITDA. The following table summarizes EBITDA and Adjusted EBITDA for the six months ended March 31, 2012 and 2011, respectively (in millions):

                                                             Six Months Ended
                                                                March  31,
                                                           2012            2011
   EBITDA:
   Net income                                            $    27.8      $     18.3
   Depreciation and amortization                              21.7            18.2

   EBITDA                                                $    49.5      $     36.5

   Long-term incentive and equity compensation expense         1.5             0.7

   Adjusted EBITDA                                       $    51.0      $    37.2

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