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NRGM > SEC Filings for NRGM > Form 10-Q on 6-Feb-2013All Recent SEC Filings

Show all filings for INERGY MIDSTREAM, L.P.

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


6-Feb-2013

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 crude oil and 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 predominantly fee-based, growth-oriented limited partnership that develops, acquires, owns and operates midstream energy assets. We own and operate natural gas and NGL storage and transportation facilities, a salt production business located in the Northeast region of the United States, and a crude oil loading and storage terminal in North Dakota. We own and operate four natural gas storage facilities that have an aggregate working gas storage capacity of approximately 41.0 Bcf; natural gas pipeline facilities with 905 MMcf/d of transportation capacity; a 1.5 million barrel NGL storage facility; US Salt, a leading solution mining and salt production company; and the COLT Hub, a crude oil distribution hub located in North Dakota.

Our primary business objective is to increase the cash distributions that we pay to our unitholders by growing our business through the development, acquisition and operation of additional midstream assets near production and demand centers. An integral part of our growth strategy is the continued development of our platform of interconnected natural gas assets in the Northeast that can be operated as an integrated storage and transportation hub. For example, because we believe storage and transportation customers value operating flexibility, we expect to increase the interconnectivity between our natural gas assets and third-party pipelines, thereby resulting in increased demand for our services. We also expect our growth strategy to reflect our desire to diversify our operations, in terms of both our geographic footprint and the type of midstream services we provide to customers. Our recent acquisition of the COLT Hub is consistent with these objectives.

Organic growth projects, including both expansions and greenfield development projects, have recently provided cost-effective options for us to grow our midstream infrastructure base. In general, purchasers of midstream infrastructure have paid relatively high prices (measured in terms of a multiple of EBITDA or another financial metric) to acquire midstream assets and operations in recent arms-length transactions. Although the prices paid for certain types of midstream assets are likely to remain robust for the foreseeable future, acquisitions will continue to permit us to gain access to new markets (with respect to geographic footprint and product offerings) and develop the scale required to grow our business quickly and successfully. We therefore expect to grow our business in the near term through both organic growth projects and acquisitions.

Our operations include (i) the storage and transportation of natural gas and NGLs, which are reported in our storage and transportation reporting segment,
(ii) US Salt's production and wholesale distribution of evaporated salt products, which are reported in our salt reporting segment, and (iii) the COLT Hub operations, which are reported in our crude reporting segment. The cash flows from our storage and transportation operations are predominantly fee-based under one to ten year contracts with creditworthy counterparties and, therefore, are generally economically stable and not significantly affected in the short term by changing commodity prices, seasonality or weather fluctuations. The cash flows from our salt operations represent sales to creditworthy customers typically under contracts that are less than one year in duration, and these cash flows tend to be relatively stable and not subject to seasonal or cyclical variation due to the use of, and demand for salt products in everyday life. The cash flows from our crude operations represent sales to creditworthy customers typically under contracts that are multiple years in duration.


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A substantial percentage of our operating cash flows are generated by our natural gas storage operations. Our natural gas storage revenues are driven in large part by competition and demand for our storage capacity and deliverability. Demand for storage in the Northeast is projected to continue to be strong, driven by a shortage in storage capacity and a higher than average annual growth in natural gas demand. This demand growth is primarily driven by the natural gas-fired electric generation sector and conversion from petroleum-based fuels. Due to the high percentage of our cash flows generated by our natural gas storage operations, we have attempted to diversify our asset base recently by developing natural gas transportation assets and NGL storage assets.

Our ability to market available transportation capacity is impacted by supply and demand for natural gas, competition from other pipelines, natural gas price volatility, the price differential between physical locations on our pipeline systems (basis spreads), economic conditions, and other factors. Our transportation facilities have benefited from, and we expect our pipelines to continue to benefit from, the development of the Marcellus shale as a significant supply basin. As LDCs and other customers increasingly utilize short-haul transportation options to satisfy their transportation needs, we believe the location of our transportation assets relative to the Marcellus shale will enable us to realize additional benefits.

Our long-term profitability will be influenced primarily by (i) successfully executing our existing development projects and continuing to develop new organic growth projects in our markets; (ii) pursuing strategic acquisitions from third parties, including Inergy, to grow our business; (iii) contracting and re-contracting storage and transportation capacity with our customers; and
(iv) managing increasingly difficult regulatory processes, particularly in permitting and approval proceedings at the federal and state levels.

How We Evaluate Our Operations

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 and / or deliverability sold;

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

operating and administrative expenses; and

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 percentage of our revenues are derived from storage services that
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
operationally available physical capacity or deliverability sold under firm
storage contracts, as of December 31, 2012:
                                Percentage     Weighted-Average
                               Contractually       Maturity
Storage Facility (Commodity)     Committed          (Year)
Stagecoach (Natural Gas)           100%              2016
Thomas Corners (Natural Gas)       100%              2015
Seneca Lake (Natural Gas)          100%              2016
Steuben (Natural Gas)              100%              2017
Bath (NGL)(1)                      100%              2016

(1) We have contracted 100% of our Bath storage facility to an affiliate, Inergy Services.

Transportation Contracts

The North-South Facilities, the MARC I Pipeline, and the East Pipeline 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. Our existing transportation assets are 89% contracted and committed.


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Crude Contracts

A substantial majority of our revenues from the COLT Hub are derived from multi-year contracts with minimum throughput commitments. We seek to maximize the throughput capacity of the loading facility sold under contracts with a minimum throughput commitment, and sell the hub's available storage capacity under take-or-pay contracts to the extent storage capacity is not a bundled component of our customer's throughput contracts. As of December 31, 2012, 59% of the COLT Hub's rail loading capacity (or giving effect to contracted throughput increases described below, 89%) was sold under long-term take-or-pay contracts with minimum throughput commitments. A majority of current customer contracts for rail loading capacity increase through the duration of the contracts to where contractual rail loading commitments approximate the rail loading capacity of the facility.

Operating and Administrative Expenses

Operating and administrative expenses consist primarily of wages, repair and maintenance costs, and professional fees. With the exception of our COLT Hub, these expenses typically do not vary significantly based upon the amount of commodities that we store or transport. Operating and administrative expenses at our COLT Hub are more closely correlated to the quantity of crude oil loaded, stored or transported. We obtain in-kind fuel reimbursements from natural gas shippers in accordance with our FERC gas tariffs and individual contract terms. The timing of our expenditures may fluctuate with planned maintenance activities that take place during off-peak periods, and changes in regulation also impact our expenditures. In addition, fluctuations in project development costs are impacted by the level of development activity during a period. Our operating and administrative expenses have also increased following our initial public offering due to an increase in legal and accounting costs and related public company regulatory and compliance expenses.

EBITDA and Adjusted EBITDA

We define EBITDA as income before income taxes, plus net interest expense and depreciation and amortization expense. We define Adjusted EBITDA as EBITDA excluding the gain or loss on the disposal of assets, long-term incentive and equity compensation expense, and transaction costs. Transaction costs are third-party professional fees and other costs that are incurred in conjunction with closing a transaction.

Adjusted EBITDA is a non-GAAP supplemental financial measure that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or financing methods;

the ability of our assets to generate sufficient cash flow to make distributions to our common unitholders;

our ability to incur and service debt and fund capital expenditures; and

the viability of acquisitions and other capital expenditure projects and the returns on investment in various opportunities.

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 GAAP, as those items are used to measure operating performance, liquidity and our ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make distributions to our common unitholders 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. You should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. 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 in our industry, thereby diminishing such measures' utility.


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Results of Operations

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

The following table summarizes the consolidated statement of operations
components for the three months ended December 31, 2012 and 2011, respectively
(in millions):
                                       Three Months Ended December 31,               Change
                                             2012              2011        In Dollars      Percentage
Revenues                              $           50.4     $     46.8     $       3.6           7.7  %
Service/product related costs                     10.9           11.1            (0.2 )        (1.8 )
Operating and administrative expenses             11.7            6.1             5.6          91.8
Depreciation and amortization                     15.2           12.0             3.2          26.7
Loss on disposal of assets                         0.6              -             0.6             *
Operating income                                  12.0           17.6            (5.6 )       (31.8 )
Interest expense, net                              5.5              -             5.5             *

Net income $ 6.5 $ 17.6 $ (11.1 ) (63.1 )%

* Not meaningful

Revenue. Revenues for the three months ended December 31, 2012, were $50.4 million, an increase of $3.6 million, or 7.7%, from $46.8 million during the same three-month period in 2011.

Revenues from firm storage were $23.6 million for the three months ended December 31, 2012, an increase of $0.7 million, or 3.1%, from $22.9 million during the same three-month period in 2011. NGL firm storage revenues increased $1.3 million due to the changes in the contracts and customer mix at our Bath facility, partially offset by a $0.9 million reduction of firm storage revenues at our Stagecoach storage facility.

Revenues from transportation were $8.2 million for the three months ended December 31, 2012, an increase of $1.7 million, or 26.2%, from $6.5 million during the same three-month period in 2011. Transportation revenues increased $2.9 million and $2.8 million due to the placement into service of our North-South Facilities and MARC I Pipeline, respectively; and are partially offset by $4.0 million due to changes in the capacity we held on TGP's 300 Line.

Revenues from hub services were $3.2 million for the three months ended December 31, 2012, a decrease of $1.1 million, or 25.6%, from $4.3 million during the same three-month period in 2011. This decrease is primarily a result of firm wheeling service shippers utilizing their firm capacity in lieu of interruptible capacity, thus reducing the volume of interruptible wheeling services compared to the prior year.

Revenues from salt were $12.6 million for the three months ended December 31, 2012, a decrease of $0.5 million, or 3.8%, from $13.1 million during the same three-month period in 2011.

Revenues from crude were $2.8 million for the three months ended December 31, 2012. We acquired the COLT Hub in December 2012 and thus no revenues were generated in the prior period.

Service/Product Related Costs. Service and product related costs, including storage, transportation, salt costs and crude costs, for the three months ended December 31, 2012, were $10.9 million, a decrease of $0.2 million, or 1.8%, from 11.1 million during the same three-month period in 2011.

Storage related costs were $2.2 million for the three months ended December 31, 2012, an increase of $0.3 million, or 15.8%, from $1.9 million during the same three-month period in 2011. Storage related costs increased $0.7 million due to compression related costs incurred primarily as a result of placing our North-South Facilities into service in December 2011.

Transportation related costs were $1.0 million for the three months ended December 31, 2012, a decrease of $0.7 million, or 41.2%, from $1.7 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 transportation capacity held by us.


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Salt related costs were $7.4 million for the three months ended December 31, 2012, a decrease of $0.1 million, or 1.3%, from $7.5 million during the same three-month period in 2011.

Crude related costs were $0.3 million for the three months ended December 31, 2012. We acquired the COLT Hub in December 2012 and thus crude related costs were not generated in the prior period.

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. Our crude related costs consist primarily of our costs to operate the COLT Hub (namely rail terminal operations).

Operating and Administrative Expenses. Operating and administrative expenses were $11.7 million for the three months ended December 31, 2012, compared to $6.1 million during the same three-month period in 2011, an increase of $5.6 million, or 91.8%. Operating expenses increased $1.7 million due to an increase in unit based compensation expenses, $2.6 million due to acquisition related expenses associated with the COLT Hub, $1.3 million in increased operating costs due to placing our North-South Facilities and our MARC I Pipeline into service, and $0.3 million due to an increase in allocated administrative expenses from Inergy.

Depreciation and Amortization. Depreciation and amortization increased to $15.2 million for the three months ended December 31, 2012, from $12.0 million during the same three-month period in 2011. This $3.2 million, or 26.7%, increase is primarily due to placing our Marc I Pipeline and North-South Facilities into service in December 2012 and December 2011, respectively and our acquisition of the COLT Hub in December 2012, which increased depreciation and amortization by $1.2 million, $0.8 million, and $1.0 million, respectively.

Interest Expense. Interest expense was $5.5 million for the three months ended December 31, 2012. There was no net interest expense for the three months ended December 31, 2011 due to interest which was capitalized to projects during the prior period.

Net Income. Net income for the three months ended December 31, 2012, was $6.5 million compared to net income of $17.6 million during the same three-month period in 2011. The $11.1 million, or 63.1%, decrease in net income was primarily attributable to increased operating and administrative costs and depreciation and amortization, partially offset by higher revenue.

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

                                                            Three Months Ended December 31,
                                                                  2012              2011
EBITDA:
Net income                                                 $            6.5     $     17.6
Depreciation and amortization                                          15.2           12.0
Interest expense, net                                                   5.5              -
EBITDA                                                     $           27.2     $     29.6
Long-term incentive and equity compensation expense                     2.6            0.9
Loss on disposal of assets                                              0.6              -
Transaction costs (a)                                                   2.6              -
Adjusted EBITDA                                            $           33.0     $     30.5


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                                                               Three Months Ended December 31,
                                                                  2012                  2011
EBITDA:
Net cash provided by operating activities                  $         22.2         $         31.9
Net changes in working capital balances                               5.3                   (1.4 )
Amortization of deferred financing costs                             (2.6 )                    -
Interest expense, net                                                 5.5                      -
Long-term incentive and equity compensation expense                  (2.6 )                 (0.9 )
Loss on disposal of assets                                           (0.6 )                    -
EBITDA                                                     $         27.2         $         29.6
Long-term incentive and equity compensation expense                   2.6                    0.9
Loss on disposal of assets                                            0.6                      -
Transaction costs (a)                                                 2.6                      -
Adjusted EBITDA                                            $         33.0         $         30.5

(a) Transaction costs are third party professional fees and other costs that are incurred in conjunction with closing a transaction.

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 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.

Liquidity and Sources of Capital

Cash Flows and Contractual Obligations

Net operating cash inflows were $22.2 million and $31.9 million for the three-month periods ended December 31, 2012 and 2011, respectively. The $9.7 million decrease in operating cash flows was primarily attributable to the increase in cash interest paid and increased operating expenses as a result of the placement into service of our North-South Facilities and MARC I Pipeline as well as our acquisition of the COLT Hub, partially offset by an increase in gross profit associated with the aforementioned capital projects and acquisition.

Net investing cash outflows were $467.1 million and $39.4 million for the three-month periods ended December 31, 2012 and 2011, respectively. Net cash outflows were primarily impacted by the acquisition of the COLT Hub in December 2012.

Net financing cash inflows were $444.9 million and $7.6 million for the three-month periods ended December 31, 2012 and 2011, respectively. The net change was primarily attributable to proceeds from the issuance of our senior unsecured notes in December 2012 to fund the acquisition of the COLT Hub, along with an increase in net borrowings on our Credit Facility. In addition, we had a $255.0 million decrease in principal payments on our promissory note assumed from Inergy, which occurred as part of our IPO, as well as a $95.4 million decrease in distributions to Inergy.

We believe that anticipated cash from operations and borrowing capacity under our Credit Facility will be sufficient to meet our liquidity needs for the foreseeable future. If our plans or assumptions change or are inaccurate, or we make acquisitions, we may need to raise additional capital. While global financial markets and economic conditions have been disrupted and volatile in the past, the conditions have improved more recently. However, we give no assurance that we can raise additional capital to meet these needs. As of December 31, 2012, we have firm purchase commitments totaling approximately $7.9 million related to certain of these projects. Additional commitments or expenditures, if any, we may make toward any one or more of these projects are at the discretion of the Company. Any discontinuation of the construction of these projects will likely result in less future cash flow and earnings than we have indicated previously.

See Note 5 for a description of our Credit Facility and Senior Notes.


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