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

Show all filings for INERGY MIDSTREAM, L.P.

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


3-Aug-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, as well as salt production 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. We also own and operate a 1.5 million barrel NGL storage facility located near Bath, New York. In addition, we own a solution mined salt production facility in New York, which creates salt caverns that can be developed into natural gas and NGL storage. Our near-term strategy is to continue to develop a platform of interconnected natural gas and related midstream 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 June 30, 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, 2012, 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, 2012. The temporary stay remained in place until it was vacated by a three-judge panel following oral arguments on February 28, 2012. On March 6, 2012, the Second Circuit granted the intervener's request for an expedited


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briefing schedule. Briefs were filed by all parties in March and April, and oral arguments were held on May 31, 2012. On June 12, 2012, the appellate court held that FERC had properly discharged its responsibilities and denied with prejudice the intervener's petition challenging FERC's MARC I certificate order.

We continue to construct the pipeline and expect to place into service the north 20-mile segment by September 1, 2012, and to complete and place into service the rest of the pipeline by October 1, 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 this calendar year, and to complete and place into service the storage facility within 120 days of the final permit being granted.

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, evaluating uprating options for the East Pipeline, and discussing commercial commitments with potential shippers.

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. The project sponsors held a non-binding open season for capacity on the Commonwealth Pipeline in the second calendar quarter, and on June 18, 2012, announced that the initial results from the open season were positive. The project sponsors are working to finalize route information and have commenced negotiating precedent agreements with potential shippers.

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 we (i) filed applications requesting FERC authorization to 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, and (ii) interconnected our Seneca Lake west lateral pipeline and the Millennium Pipeline, thus enhancing deliverability and receipt flexibility for our Seneca Lake natural gas storage customers.

We believe the key factors that impact our storage and transportation operations 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. We believe the key factors that impact our salt operations are (a) our ability to continue to satisfy customer demand at existing production levels; (b) actual


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and forecast costs, including freight and other transportation costs, that directly impact customer decision making and competition in the markets we serve; (c) customer and consumer trends with respect to use of salt products; and (d) our ability to control major production costs including labor, fuel costs and raw materials. These factors, discussed in more detail below, play an important role in how we evaluate our operations and implement our long-term strategies.

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 June 30, 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)                   80 %                  2016
        Steuben (Natural Gas)                      100 %                  2016
        Bath (NGL)(1)                              100 %                  2016

(1) 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 June 30, 2012, our existing transportation assets and our MARC I project were 100% contracted and committed.


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Results of Operations

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

The following table summarizes the consolidated statement of operations
components for the three months ended June 30, 2012 and 2011, respectively (in
millions):



                                               Three Months Ended
                                                    June 30,                          Change
                                               2012           2011        In Dollars         Percentage
Revenues                                     $    48.6       $  42.0      $       6.6               15.7 %
Service/product related costs                      9.0          12.1             (3.1 )            (25.6 )
Operating and administrative expenses              8.1           3.7              4.4              118.9
Depreciation and amortization                     12.8          10.7              2.1               19.6

Operating income                                  18.7          15.5              3.2               20.6
Interest expense, net                              0.7            -               0.7                  *

Net income                                   $    18.0       $  15.5      $       2.5               16.1 %

* Not meaningful

Revenue. Revenues for the three months ended June 30, 2012, were $48.6 million, an increase of $6.6 million, or 15.7%, from $42.0 million during the same three-month period in 2011.

Revenues from firm storage were $24.1 million for the three months ended June 30, 2012, an increase of $1.6 million, or 7.1%, from $22.5 million during the same three-month period in 2011. Natural gas firm storage revenues increased $1.0 million primarily due to the acquisition of our Seneca Lake storage facility in July 2011. NGL firm storage revenues also increased $1.5 million due to the contractual / customer mix of customers at our Bath facility, partially offset by a $0.9 million reduction of butane product sales which were completed during the same three-month period in 2011.

Revenues from transportation were $7.1 million for the three months ended June 30, 2012, an increase of $3.2 million, or 82.1%, from $3.9 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. These increases in transportation revenues were partially offset by the reduction of revenues derived from marketing to Stagecoach storage customer's capacity we held on TGP's 300 Line due to the non-renewal of certain capacity held by us.

Revenues from hub services were $4.4 million for the three months ended June 30, 2012, an increase of $1.9 million, or 76.0%, from $2.5 million during the same three-month period in 2011. This increase resulted primarily from additional 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. Additionally, hub services revenue increased $0.9 million due to insurance reimbursements related to the Stagecoach central compressor loss.

Revenues from salt were $13.0 million for the three months ended June 30, 2012, a decrease of $0.1 million, or 0.8%, from $13.1 million during the same three-month period in 2011.

Service/Product Related Costs. Service/product related costs, including storage, transportation and salt costs, for the three months ended June 30, 2012, were $9.0 million, a decrease of $3.1 million, or 25.6%, from $12.1 million during the same three-month period in 2011.

Storage related costs were $0.4 million for the three months ended June 30, 2012, a decrease of $1.8 million, or 81.8%, from $2.2 million during the same three-month period in 2011. Storage related costs decreased primarily due to a $2.7 million decrease in storage related costs as a result of insurance reimbursements related to the Stagecoach central compressor loss. Additionally, NGL storage costs decreased $0.9 million during the period due to a reduction of butane product sales from the same three-month period in 2011, partially offset by a $1.6 million increase in storage related costs incurred as a result of placing our North/South expansion project into service in December 2011.


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Transportation related costs were $1.0 million for the three months ended June 30, 2012, a decrease of $1.1 million, or 52.4%, from $2.1 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. This decrease was due to the non-renewal of certain TGP capacity held by us.

Salt related costs were $7.6 million for the three months ended June 30, 2012, a decrease of $0.2 million, or 2.6%, from $7.8 million during the same three-month period in 2011.

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

Operating and Administrative Expenses. Operating and administrative expenses were $8.1 million for the three months ended June 30, 2012, compared to $3.7 million during the same three-month period in 2011, an increase of $4.4 million, or 118.9%. Operating expenses increased $1.3 million due to an increase in unit based compensation expenses, $0.8 million due to the acquisition of our Seneca Lake facility in July 2011, $0.6 million due to acquisition related expenses associated with US Salt and $0.6 million due to an increase in property taxes and personnel costs at our various facilities.

Depreciation and Amortization. Depreciation and amortization increased to $12.8 million for the three months ended June 30, 2012, from $10.7 million during the same three-month period in 2011. This $2.1 million, or 19.6%, increase resulted primarily 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 $1.2 million and $1.0 million, respectively.

Interest Expense. Interest expense was $0.7 million for the three months ended June 30, 2012 related to interest incurred on outstanding borrowings on our revolving Credit Facility. There was no interest expense in the prior period due to no outstanding debt, as Inergy previously funded our operations.

Net Income. Net income for the three months ended June 30, 2012, was $18.0 million compared to net income of $15.5 million during the same three-month period in 2011. The $2.5 million, or 16.1%, increase in net income was primarily attributable to higher revenue and lower service/product related costs during the three months ended June 30, 2012, partially offset by increased operating and administrative costs and depreciation and amortization.

EBITDA and Adjusted EBITDA. The following table summarizes EBITDA and Adjusted EBITDA for the three months ended June 30, 2012 and 2011, respectively (in millions):

                                                             Three Months Ended
                                                                 June  30,
                                                           2012             2011
   EBITDA:
   Net income                                            $    18.0       $     15.5
   Depreciation and amortization                              12.8             10.7
   Interest expense, net                                       0.7               -

   EBITDA                                                $    31.5       $     26.2

   Long-term incentive and equity compensation expense         1.3              0.2
   Transaction costs                                           0.6               -

   Adjusted EBITDA                                       $    33.4       $     26.4


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                                                            Three Months Ended
                                                                June  30,
                                                          2012             2011
  EBITDA:
  Net cash provided by operating activities             $    35.7       $     36.5
  Net changes in working capital balances                    (3.4 )          (10.3 )
  Amortization of deferred financing costs                   (0.2 )             -
  Interest expense, net                                       0.7               -
  Long-term incentive and equity compensation expense        (1.3 )             -

  EBITDA                                                $    31.5       $     26.2

  Long-term incentive and equity compensation expense         1.3              0.2
  Transaction costs                                           0.6               -

  Adjusted EBITDA                                       $    33.4       $     26.4

EBITDA is defined as income (loss) before income taxes, plus net interest expense and depreciation and amortization expense. For the three months ended June 30, 2012 and 2011, EBITDA was $31.5 million and $26.2 million, respectively. As indicated in the table, Adjusted EBITDA represents EBITDA excluding long-term incentive and equity compensation expenses and transaction costs. Transaction costs are third party professional fees and other costs that are incurred in conjunction with closing a transaction. Adjusted EBITDA was $33.4 million for the three months ended June 30, 2012, compared to $26.4 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.

Nine Months Ended June 30, 2012 Compared to Nine Months Ended June 30, 2011

The following table summarizes the consolidated statement of operations
components for the nine months ended June 30, 2012 and 2011, respectively (in
millions):



                                               Nine Months Ended
                                                    June 30,                        Change
                                               2012          2011        In Dollars        Percentage
Revenues                                     $   142.3     $  119.5     $       22.8              19.1 %
Service/product related costs                     31.1         35.1             (4.0 )           (11.4 )
Operating and administrative expenses             21.0         12.7              8.3              65.4
Depreciation and amortization                     37.5         32.0              5.5              17.2

Operating income                                  52.7         39.7             13.0              32.7
Interest expense, net                              0.7           -               0.7                 *

Net income                                   $    52.0     $   39.7     $       12.3              31.0 %

* Not meaningful

Revenue. Revenues for the nine months ended June 30, 2012, were $142.3 million, an increase of $22.8 million, or 19.1%, from $119.5 million during the same nine-month period in 2011.

Revenues from firm storage were $70.5 million for the nine months ended June 30, 2012, an increase of $4.3 million, or 6.5%, from $66.2 million during the same nine-month period in 2011. Natural gas firm storage revenues increased $2.3 primarily due to the acquisition of our Seneca Lake storage facility in July 2011. NGL firm storage revenues also increased $2.0 million due to the contractual /customer mix at our Bath facility.


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Revenues from transportation were $21.2 million for the nine months ended June 30, 2012, an increase of $11.7 million, or 123.2%, from $9.5 million during the same nine-month period in 2011. Transportation revenues increased $10.6 million due to the placement into service of our North/South expansion project and $3.5 million due to the acquisition of our Seneca Lake storage facility. These increases in transportation revenues were partially offset by the reduction of revenues derived from marketing to Stagecoach storage customer's capacity we held on TGP's 300 Line due to the non-renewal of certain capacity held by us.

Revenues from hub services were $11.1 million for the nine months ended June 30, 2012, an increase of $6.5 million, or 141.3%, from $4.6 million during the same nine-month period in 2011. This increase resulted primarily from additional 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. Additionally, hub services revenue increased $0.9 million due to insurance reimbursements related to the Stagecoach central compressor loss.

Revenues from salt were $39.5 million for the nine months ended June 30, 2012, an increase of $0.3 million, or 0.8%, from $39.2 million during the same nine-month period in 2011.

Service/Product Related Costs. Service/product related costs, including storage, transportation and salt costs, for the nine months ended June 30, 2012, were $31.1 million, a decrease of $4.0 million, or 11.4%, from $35.1 million during the same nine-month period in 2011.

Storage related costs were $3.9 million for the nine months ended June 30, 2012, . . .

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