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CMLP > SEC Filings for CMLP > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for CRESTWOOD MIDSTREAM PARTNERS LP

Form 10-Q for CRESTWOOD MIDSTREAM PARTNERS LP


8-Aug-2013

Quarterly Report


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

On June 19, 2013, Crestwood Holdings acquired the general partner of Inergy, L.P. (NRGY) and contributed its ownership of our General Partner and incentive distribution rights to NRGY in exchange for NRGY common units. On May 5, 2013, we entered into a definitive merger agreement under which we will be merged with a subsidiary of Inergy Midstream, L.P. (NRGM) in a merger in which our unitholders will receive 1.07 units of NRGM for each unit of CMLP they own. Additionally, under the merger agreement, our unitholders (other than Crestwood Holdings) will receive a one-time approximately $35 million cash payment at closing of the merger transaction, or $1.03 per unit, $25 million of which will be payable by NRGM and approximately $10 million of which will be payable by Crestwood Holdings. The merger of NRGM and CMLP is conditioned upon the approval of the holders of a majority of the limited partner interests of CMLP and other customary closing conditions.

Overview and Performance Metrics

We are a growth-oriented midstream master limited partnership which owns and operates predominately fee-based gathering, processing, treating and compression assets servicing producers in the Marcellus Shale in northern West Virginia, the Barnett Shale in north Texas, the Fayetteville Shale in northwestern Arkansas, the Granite Wash in the Texas Panhandle, the Avalon Shale/Bone Spring in southeastern New Mexico and the Haynesville/Bossier Shale in western Louisiana. We provide midstream services to various producers that focus on developing unconventional resources across the United States. Our largest producer is Quicksilver Resources Inc. (Quicksilver). For the six months ended June 30, 2013 and 2012, services provided to Quicksilver accounted for approximately 34% and 54% of our total revenues.

We conduct all of our operations in the midstream sector in eight operating segments, four of which are reportable. Our operating segments reflect how we manage our operations and are generally reflective of the geographic areas in which we operate. Our reportable segments consist of Marcellus, Barnett, Fayetteville and Granite Wash. Our operating segments are engaged in gathering, processing, treating, compression, transportation and sales of natural gas and delivery of NGLs in the United States. Our Other operating segment consists of those operating segments or reporting units that did not meet quantitative reporting thresholds.

The results of our operations are significantly influenced by the volumes of natural gas gathered and processed through our systems. We gather, process, treat, compress, transport and sell natural gas pursuant to fixed-fee and percent-of-proceeds contracts. Under our fixed-fee contracts, we do not take title to the natural gas or associated NGLs. For the six months ended June 30, 2013, approximately 98% of our gross margin, which we define as total revenue less product purchases, is derived from fixed-fee service contracts, which minimizes our commodity price exposure and provides us with less volatile operating performance and cash flows. Under our percent-of-proceeds contracts, we take title to the residue gas, NGLs and condensate and remit a portion of the sale proceeds to the producer based on prevailing commodity prices. For the six months ended June 30, 2013, the net revenues from percent-of-proceeds contracts accounted for approximately 2% of our gross margin.

Although we do not have significant direct commodity price exposure, lower natural gas prices could have a potential negative impact on the pace of drilling in dry gas areas - such as areas in the Barnett Shale (gathered by the Alliance and Lake Arlington Systems), the Fayetteville Systems and the Sabine System (part of the Haynesville/Bossier Shale). We operate five systems located in basins that include NGL rich gas shale plays: (i) the Cowtown System in the Barnett Shale; (ii) the Granite Wash System; (iii) the Las Animas Systems in the Avalon Shale; and (iv) two systems in the Marcellus segment. For the three and six months ended June 30, 2013, our systems located in NGL rich gas basins contributed approximately 72% and 71% of our total revenues and 65% and 64% of our total gathering volumes. A prolonged decrease in the commodity price environment could result in our customers reducing their production volumes which would result in a decrease in our revenues.

Our management uses a variety of financial and operational measures to analyze our performance. We view these measures as important factors affecting our profitability and unitholder value and therefore we review them monthly for consistency and to identify trends in our operations. These performance measures are outlined below.

Volumes - We must continually obtain new supplies of natural gas to maintain or increase throughput volumes on our gathering and processing systems. We routinely monitor producer activity in the areas we serve to identify new supply opportunities. Our ability to achieve these objectives is impacted by:

the level of successful drilling and production activity in areas where our systems are located;

our ability to compete with other midstream companies for production volumes; and

our pursuit of new acquisition opportunities.


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Operations and Maintenance Expenses - We consider operations and maintenance expenses in evaluating the performance of our operations. These expenses are comprised primarily of labor, parts and materials, insurance, taxes other than income taxes, repair and maintenance costs, utilities and contract services. Our ability to manage operations and maintenance expenses has a significant impact on our profitability and ability to pay distributions.

EBITDA and Adjusted EBITDA - We believe that EBITDA and Adjusted EBITDA are widely accepted financial indicators of a company's operational performance and its ability to incur and service debt, fund capital expenditures and make distributions. EBITDA and Adjusted EBITDA are not measures calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), as they do not include deductions for items such as depreciation, amortization and accretion, interest and income taxes, which are necessary to maintain our business. In addition, Adjusted EBITDA considers the impact of certain significant items, such as third party costs incurred related to potential and completed acquisitions and other transactions identified in a specific reporting period. EBITDA and Adjusted EBITDA should not be considered an alternative to net income, operating cash flow or any other measure of financial performance presented in accordance with GAAP. EBITDA and Adjusted EBITDA calculations may vary among entities, so our computation may not be comparable to measures used by other companies.

See our reconciliation of Net Income to EBITDA and Adjusted EBITDA in Results of Operationsbelow.

Current Year Highlights

Below is a discussion of events that highlight our core business and financing activities.

Operational and Industry Highlights

Shale gas production in the United States has grown rapidly in recent years as the natural gas industry has improved drilling and extraction methods while increasing exploration efforts. The United States has a wide distribution of shale formations containing vast resources of natural gas, NGLs and oil. Led by the rapid development of the Barnett Shale in Texas, shale gas activity has expanded into other areas such as the Marcellus, Fayetteville and Haynesville/Bossier shale plays.

Growth through Diversification - Our operating results reflect our ability to diversify our shale play portfolio and increase volumes not only through our base business located in the Barnett Shale, but also through strategic acquisitions in a number of attractive shale plays in the United States. We believe that our experience and market position will allow us to realize significant ongoing growth opportunities by developing new greenfield projects in NGL and oil plays in areas with limited or constrained infrastructure which offer attractive returns on investment and seeking bolt-on acquisitions that provide operating synergies and allow for the development of our business in rich gas infrastructure plays. Our acquisition strategy includes diversifying and extending our geographic, customer and business profile and developing organic growth opportunities along the midstream value chain.

Our systems gathered 993 MMcf/d and 984 MMcf/d during the three and six months ended June 30, 2013, which is an increase of 21% and 37% from the same periods in 2012. During the three and six months ended June 30, 2013, our Marcellus systems' compression volumes were 284 MMcf/d and 277 MMcf/d. Additionally, our processed volumes were 217 MMcf/d and 221 MMcf/d for the three and six months ended June 30, 2013, an increase of 51% compared to the same periods in 2012, respectively. The increase in volumes resulted in a 29% and 32% increase in our overall revenues for the three and six months ended June 30, 2013 compared to the same periods in 2012.

Distribution Growth - For the three months ended June 30, 2013, we declared a distribution of $0.51 per limited partner unit compared to $0.50 per limited partner unit during the same period in 2012.

Antero Agreements

In March 2013, Crestwood Marcellus Midstream LLC (CMM) entered into a seven year agreement with Antero Resources Appalachian Corporation (Antero) to provide natural gas compression services on developing rich gas acreage in Doddridge County, West Virginia (Compression Services Agreement). The Compression Services Agreement provides for the construction and operation of compressor stations on Antero's Western Area acreage (Western Area) which is not dedicated to us under the existing GGA which covers the Eastern Area of Dedication (Eastern AOD). We will provide fixed-fee compression services to Antero under the Compression Services Agreement, which provides for minimum fees based on the capacity of the compressor stations constructed under the agreement. The Compression Services Agreement does not impact our seven year right of first offer to acquire midstream infrastructure from Antero in the Western Area and is in addition to the previously announced construction of two compressor stations we are constructing in the Eastern AOD during 2013.


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The West Union compressor station to be constructed under the Compression Services Agreement will be a two phase project adding approximately 120 MMcf/d of flow capacity at an estimated cost of $35 million. Phase I will add 55 MMcf/d of capacity and is expected to be in service during the third quarter of 2013. Phase II will add 65 MMcf/d and is expected to be in service by the end of 2013. The Victoria compressor station to be constructed will add approximately 120 MMcf/d of flow capacity at an estimated cost of $41 million. Phase I is expected to be in service during the first quarter of 2014 and Phase II is expected to be in service during the third quarter of 2014. The Compression Services Agreement also provides for the construction of additional compression facilities if agreed to by Antero and CMM in the future.

In December 2012, CMM completed the acquisition of natural gas compression and dehydration assets from Enerven Compression, LLC (Enerven) for approximately $95 million expanding the value chain and range of services we provide in the high growth Marcellus Shale. The acquisition included four compression stations connected to CMM's low pressure gathering systems and a five-year minimum term compression services agreement with Antero which expires in 2018. In addition, CMM provides compression services to Antero under a 20 year, fixed fee, Gas Gathering and Compression Agreement (GGA), which became effective in January 2012. We believe the Enerven assets will provide an excellent opportunity for organic growth as gathering infrastructure in the Marcellus rich gas region continues to be built at a rapid pace.

RKI Exploration and Production (RKI) Agreement

On July 19, 2013, Crestwood Niobrara LLC (Crestwood Niobrara), our consolidated subsidiary, paid approximately $108 million to acquire a 50% interest in a gathering system located in the Powder River Basin of the Niobrara play from RKI, an affiliate of our General Partner. The joint venture gathering system has 20 year gathering and processing agreements with Chesapeake Energy Corporation (Chesapeake) and RKI under which it receives cost-of-service based fees with annual redeterminations. The gathering and processing agreements provide for an area of dedication of approximately 311,000 gross acres located in the core of the Powder River Basin Niobrara Shale. This acquisition further diversifies our portfolio and positions us to participate in additional greenfield development opportunities in the core of the Powder River Basin Niobrara Shale which currently has limited midstream infrastructure.

Financing Activities

Equity Offering

On March 22, 2013, we completed a public offering of 4,500,000 common units, representing limited partner interests in us at a price of $23.90 per common unit ($23.00 per common unit, net of underwriting discounts) providing net proceeds of approximately $103.5 million. We granted the underwriters a 30 day option to purchase up to 675,000 additional common units if the underwriters sold more than 4,500,000 common units in the offering. The underwriters exercised this option on April 5, 2013, providing net proceeds of approximately $15.5 million. The net proceeds from these transactions were used to reduce indebtedness under each of the CMM and CMLP Credit Facilities. In connection with the issuance of the common units, our General Partner did not make an additional capital contribution to us resulting in a reduction in their general partner interest in us to approximately 1.8%.

Unit Issuances

On January 8, 2013, we acquired Crestwood Holdings' 65% membership interest in CMM for approximately $258 million. We funded the purchase price through $129 million of borrowings under our CMLP credit facility, the issuance of 6,190,469 Class D units, representing limited partner interests in us to Crestwood Holdings, and the issuance of 133,060 general partner units to our General Partner.

Preferred Interest Issuance

In July 2013 Crestwood Niobrara acquired a 50% interest in a joint venture which was funded through our contribution of approximately $27 million (which was borrowed under the CMLP Credit Facility) and an additional $81 million obtained through Crestwood Niobrara's issuance of a preferred interest to a subsidiary of General Electric Capital Corporation and GE Structured Finance, Inc. (collectively, GE EFS). Crestwood Niobrara will fund 75% of future capital contributions to the gathering system joint venture through additional preferred interest issuances to GE EFS (up to a maximum of $69 million), with the remainder to be funded through our capital contributions to Crestwood Niobrara. We serve as the managing member of Crestwood Niobrara and we have the ability to redeem GE EFS's preferred security in either cash or CMLP common units, subject to certain restrictions.


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Results of Operations

Three and Six Months Ended June 30, 2013 Compared with Three and Six Months
Ended June 30, 2012

The following table summarizes our results of operations (In thousands):



                                            Three Months Ended June 30,           Six Months Ended June 30,
                                             2013                 2012              2013               2012
Operating revenues                      $       71,099       $       55,229     $     143,515       $  108,962
Product purchases                               14,032                7,441            27,537           16,414
Operations and maintenance expense              12,592                9,400            25,608           19,111
General and administrative expense              10,380                8,657            18,169           15,395
Depreciation, amortization and
accretion expense                               17,701               13,695            35,061           24,341

Operating income                                16,394               16,036            37,140           33,701
Interest and debt expense                       11,185                8,963            22,635           16,520
Income tax expense                                 339                  275               677              578

Net income                              $        4,870       $        6,798     $      13,828       $   16,603
Add:
Interest and debt expense                       11,185                8,963            22,635           16,520
Income tax expense                                 339                  275               677              578
Depreciation, amortization and
accretion expense                               17,701               13,695            35,061           24,341

EBITDA                                  $       34,095       $       29,731     $      72,201       $   58,042
Expenses associated with significant
items                                            4,799                2,295             5,517            2,346

Adjusted EBITDA                         $       38,894       $       32,026     $      77,718       $   60,388


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EBITDA in the table above includes operating results from our Marcellus, Barnett, Fayetteville and Granite Wash segments and other operations, and general and administrative expenses. The following table summarizes the results of our Barnett, Marcellus, Fayetteville and Granite Wash segments and other operations (In thousands):

                                                            For the Three Months Ended June 30, 2013
                                      Marcellus      Barnett      Fayetteville       Granite Wash       Other       Total
Gathering revenues                   $    11,524     $ 23,568     $       6,140     $          478     $ 1,459     $ 43,169
Processing revenues                           -         9,440                -                   1          -         9,441
Compression revenues                       3,873           -                 -                  -           -         3,873
Product sales                                 -            64               191             13,157       1,204       14,616

Total operating revenues             $    15,397     $ 33,072     $       6,331     $       13,636     $ 2,663     $ 71,099
Product purchases                             -           146               190             12,492       1,204       14,032
Operations and maintenance expense         2,545        6,312             2,310                685         740       12,592

EBITDA                               $    12,852     $ 26,614     $       3,831     $          459     $   719

Gathering volumes (in MMcf)               37,765       39,833             7,696              1,870       3,176       90,340
Processing volumes (in MMcf)                  -        17,913                -               1,864          -        19,777
Compression volumes (in MMcf)             25,882           -                 -                  -           -        25,882




                                                            For the Three Months Ended June 30, 2012
                                      Marcellus      Barnett      Fayetteville       Granite Wash       Other       Total
Gathering revenues                   $     7,027     $ 23,771     $       6,228     $          270     $ 2,081     $ 39,377
Processing revenues                           -         7,732                -                  16          -         7,748
Product sales                                 -            -                102              7,436         566        8,104

Total operating revenues             $     7,027     $ 31,503     $       6,330     $        7,722     $ 2,647     $ 55,229
Product purchases                             -            -                124              6,732         585        7,441
Operations and maintenance expense           513        5,345             2,231                541         770        9,400

EBITDA                               $     6,514     $ 26,158     $       3,975     $          449     $ 1,292

Gathering volumes (in MMcf)               23,424       36,529             7,112              1,367       6,044       74,476
Processing volumes (in MMcf)                  -        11,765                -               1,362          -        13,127


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                                                              For the Six Months Ended June 30, 2013
                                      Marcellus      Barnett       Fayetteville       Granite Wash       Other         Total
Gathering revenues                   $    21,872     $ 47,910     $       13,099     $          992     $  3,199     $  87,072
Processing revenues                           -        19,168                 -                   3           -         19,171
Compression revenues                       7,799           -                  -                  -            -          7,799
Product sales                                 -           544                485             26,490        1,954        29,473

Total operating revenues             $    29,671     $ 67,622     $       13,584     $       27,485     $  5,153     $ 143,515
Product purchases                             -           401                483             24,699        1,954        27,537
Operations and maintenance expense         4,942       13,567              4,444              1,293        1,362        25,608

EBITDA                               $    24,729     $ 53,654     $        8,657     $        1,493     $  1,837

Gathering volumes (in MMcf)               71,674       80,206             15,141              3,905        7,115       178,041
Processing volumes (in MMcf)                  -        36,235                 -               3,709           -         39,944
Compression volumes (in MMcf)             50,157           -                  -                  -            -         50,157




                                                              For the Six Months Ended June 30, 2012
                                      Marcellus      Barnett       Fayetteville       Granite Wash       Other         Total
Gathering revenues                   $     7,027     $ 49,830     $       12,994     $          409     $  4,800     $  75,060
Processing revenues                           -        15,616                 -                  99           -         15,715
Product sales                                 -            -                 200             16,811        1,176        18,187

Total operating revenues             $     7,027     $ 65,446     $       13,194     $       17,319     $  5,976     $ 108,962
Product purchases                             -            -                 206             15,033        1,175        16,414
Operations and maintenance expense           513       11,475              4,544              1,059        1,520        19,111

EBITDA                               $     6,514     $ 53,971     $        8,444     $        1,227     $  3,281

Gathering volumes (in MMcf)               23,424       77,182             14,647              2,720       12,107       130,080
Processing volumes (in MMcf)                  -        23,822                 -               2,707           -         26,529

EBITDA and Adjusted EBITDA - EBITDA for the three and six months ended June 30, 2013 was approximately $34 million and $72 million, an increase of approximately $4 million and $14 million compared to same periods in 2012. In the same manner, Adjusted EBITDA for the three and six months ended June 30, 2013 was approximately $39 million and $78 million, an increase of approximately $7 million and $17 million compared to the same periods in 2012. Adjusted EBITDA considers expenses for evaluating certain transaction opportunities, which were approximately $5 million and $6 million for the three and six months ended June 30, 2013 and $2 million for the same periods in 2012, respectively.

Below is a discussion of the factors that impacted EBITDA by segment for the three and six months ended June 30, 2013 compared to the same periods in 2012.

Marcellus:

EBITDA for our Marcellus segment was approximately $13 million and $25 million for the three and six months ended June 30, 2013. On March 26, 2012, CMM acquired gathering assets from Antero, which contributed approximately $7 million to our Marcellus segment EBITDA for the three and six months ended June 30, 2012.

Revenues and Volumes - Revenues in our Marcellus segment increased by approximately $8 million and $23 million during the three and six months ended June 30, 2013 compared to the same periods in 2012 primarily due to the increase in gathering volumes. During 2013, we experienced gathering system and compression capacity constraints in our Marcellus segment, however we have several projects with anticipated in-service dates during the third and fourth quarters of 2013 that we believe will mitigate those capacity constraints, which we anticipate will result in higher gathering volumes during the last half of 2013. For the three and six months ended June 30, 2013, we gathered 415 MMcf/d and 396 MMcf/d in our Marcellus segment compared to 257 MMcf/d for the three months ended June 30, 2012. In addition, we recognized gathering revenues for the entire first half of 2013 versus three months during the same period in 2012. During the three and six months ended June 30, 2013, we connected 15 and 30 new wells in our Marcellus segment which contributed to the increase in gathering volumes and revenues.


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In addition to the increase in gathering revenues, our compression volumes increased due to CMM's acquisition of E. Marcellus Asset Company, LLC (EMAC) from Enerven in December 2012. The acquisition of these natural gas compression and dehydration assets has expanded the value chain and range of services we provide in the high growth Marcellus Shale. The acquisition included four compression stations connected to CMM's low pressure gathering systems and a five-year minimum term compression services agreement with Antero which expires in 2018. During the three and six months ended June 30, 2013, our compression volumes under this agreement were 284 MMcf/d and 277 MMcf/d. In addition, for the remainder of 2013, we anticipate an increase in our compression revenues as a result of a compressor station that will be placed in service during the third quarter of 2013.

Operations and Maintenance Expense - Operations and maintenance expenses in our Marcellus segment increased by approximately $2 million and $4 million for the three and six months ended June 30, 2013 when compared to the same periods in 2012 primarily due to the acquisition of the Enerven assets discussed above.

Barnett:

For the three and six months ended June 30, 2013, our Barnett segment's EBITDA was relatively consistent with the same periods in 2012, primarily due to higher processing revenues being offset by lower gathering revenues and higher operations and maintenance expenses.

Revenues and Volumes - Our processing revenues increased by approximately $2 . . .

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