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

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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 October 7, 2013, CMLP completed the merger (the Merger) with a subsidiary of Inergy Midstream, L.P. (NRGM) pursuant to a merger agreement dated as of May 5, 2013. Immediately following the Merger, NRGM and CMLP merged, with NRGM continuing as the surviving entity and changing its name to Crestwood Midstream Partners LP. The common units of the combined partnership are listed on the NYSE under the symbol "CMLP." Under the merger agreement, CMLP unitholders received 1.07 units of NRGM units for each unit of CMLP they owned and as a result, there were no CMLP common or Class D units outstanding immediately following the Merger. Additionally, CMLP unitholders (other than Crestwood Holdings), received a one-time approximately $35 million cash payment at the closing of the Merger, or $1.03 per unit, $25 million of which was paid by NRGM and approximately $10 million of which was paid by Crestwood Holdings. Also in conjunction with the Merger, CMLP was delisted on the NYSE.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read keeping in mind that we became a wholly-owned subsidiary of NRGM subsequent to the periods covered hereby. Except as otherwise specifically provided, this discussion and analysis relates to the business and operations of Crestwood Midstream Partners LP, a Delaware limited partnership and its consolidated subsidiaries for the periods prior to the closing of the Merger.

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 oil and gas producers that focus on developing unconventional resources across the United States.

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 nine months ended September 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 nine months ended September 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 or have an interest in six 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; (iv) two systems in the Marcellus segment; and (v) the Jackalope Gas Gathering Services, L.L.C. (Jackalope) system (our unconsolidated affiliate). For both the three and nine months ended September 30, 2013, our systems located in NGL rich gas basins contributed approximately 71% of our total revenues and 65% 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.

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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.

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. Adjusted EBITDA also considers the adjusted earnings impact of our unconsolidated affiliate by adjusting our equity earnings or losses from our unconsolidated affiliate for our proportionate share of its depreciation and interest. 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 Operations below.

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 987 MMcf/d during the three and nine months ended September 30, 2013, which is an increase of 11% and 27% from the same periods in 2012. This increase was largely due to a 47% increase in our Marcellus segment volumes, partially offset by a 4% decrease in our Barnett segment volumes during the three months ended September 30, 2013 compared to the same period in 2012. During the three and nine months ended September 30, 2013, our Marcellus systems' compression volumes were 267 MMcf/d and 274 MMcf/d. Additionally, our processed volumes were 202 MMcf/d and 214 MMcf/d for the three and nine months ended September 30, 2013, an increase of 12% and 36% compared to the same periods in 2012, respectively. The increase in volumes resulted in a 13% and 25% increase in our overall revenues for the three and nine months ended September 30, 2013 compared to the same periods in 2012.

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Marcellus Segment Update

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 Gas Gathering and Compression Agreement (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.

On August 1, 2013, we placed the initial phase of the Tichenal to Trent low pressure trunkline system in service. This new pipeline system is a 12-mile, 20 inch diameter pipeline located in Harrison County, West Virginia. The system is located in the Eastern AOD under the existing GGA with Antero and has a capacity of approximately 400 MMcf/d and extends our low pressure gathering into the Greenbrier area of our AOD. The pipeline system is expected to result in approximately 80 MMcf/d to 100 MMcf/d of incremental throughput during the remainder of 2013, with gathering volumes continuing to increase as additional wells and compressor stations are connected to the system.

Additionally, on August 8, 2013, we completed phase I of the West Union compressor station, adding 55 MMcf/d of capacity to serve Antero's rich gas production to Doddridge County, West Virginia. Phase II of the West Union compressor station 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. 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 second 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, 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.

Powder River Basin/Niobrara Update

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 Shale play from RKI Exploration and Production, LLC (RKI). During the three months ended September 30, 2013, we contributed an additional $20 million to our unconsolidated affiliate to fund its construction projects. During 2014, we intend to expand the gathering system from the current capacity of 60 MMcf/d to 180 MMcf/d. In addition, the joint venture is constructing a 120 MMcf/d gas processing facility. Both of these expansions are targeted to be completed during the third quarter of 2014.

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 liquids rich core of the Powder River Basin Niobrara Shale which currently has limited midstream infrastructure.

Financing Activities

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.

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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 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 an additional $69 million), with the remainder to be funded through our capital contributions to Crestwood Niobrara. During the three months ended September 30, 2013, GE EFS contributed an additional $15 million to Crestwood Niobrara in exchange for an equivalent number of preferred units. We serve as the managing member of Crestwood Niobrara and, subject to certain restrictions, we have the ability to redeem GE EFS's preferred security in either cash or CMLP common units of the combined partnership.

Results of Operations

Three and Nine Months Ended September 30, 2013 Compared with Three and Nine
Months Ended September 30, 2012

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

                                                       Three Months Ended             Nine Months Ended
                                                         September 30,                  September 30,
                                                      2013            2012          2013            2012
Operating revenues                                  $  71,138       $ 63,013      $ 214,653       $ 171,975
Product purchases                                      12,851         10,341         40,388          26,755
Operations and maintenance expense                     14,895         10,942         40,503          30,053
General and administrative expense                     10,367          6,570         28,536          21,965
Depreciation, amortization and accretion expense       14,557         11,568         49,618          35,909
Goodwill impairment                                    (4,053 )           -          (4,053 )            -
Gain on sale of asset                                   4,392             -           4,392              -

Operating income                                       18,807         23,592         55,947          57,293
Loss from unconsolidated affiliate                       (447 )           -            (447 )            -
Interest and debt expense                              11,625          8,905         34,260          25,425
Income tax expense                                        347            306          1,024             884

Net income                                          $   6,388       $ 14,381      $  20,216       $  30,984
Interest and debt expense                              11,625          8,905         34,260          25,425
Income tax expense                                        347            306          1,024             884
Depreciation, amortization and accretion expense       14,557         11,568         49,618          35,909

EBITDA                                              $  32,917       $ 35,160      $ 105,118       $  93,202
Expenses associated with significant items              5,143            954         10,660           3,300
Goodwill impairment                                     4,053             -           4,053              -
Gain on sale of asset                                  (4,392 )           -          (4,392 )            -
Loss from unconsolidated affiliate                        447             -             447              -
EBITDA from unconsolidated affiliate                      573             -             573              -

Adjusted EBITDA                                     $  38,741       $ 36,114      $ 116,459       $  96,502

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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 September 30, 2013
                                      Marcellus      Barnett      Fayetteville       Granite Wash       Other         Total
Gathering revenues                   $    11,913     $ 22,687     $       7,548     $          495     $  1,271      $ 43,914
Processing revenues                           -         8,968                -                   1           -          8,969
Compression revenues                       4,075           -                 -                  -            -          4,075
Product sales                                 -           226               251             12,686        1,017        14,180

Total operating revenues             $    15,988     $ 31,881     $       7,799     $       13,182     $  2,288      $ 71,138
Product purchases                             -           157               249             11,428        1,017        12,851
Operations and maintenance expense         2,832        7,717             2,303                810        1,233        14,895
Goodwill impairment                           -            -                 -                  -        (4,053 )      (4,053 )
Gain on sale of asset                         -            -                 -               4,392           -          4,392
Loss from unconsolidated affiliate            -            -                 -                  -          (447 )        (447 )

EBITDA                               $    13,156     $ 24,007     $       5,247     $        5,336     $ (4,462 )

Gathering volumes (in MMcf)               39,041       38,643             9,538              1,829        2,286        91,337
Processing volumes (in MMcf)                  -        16,710                -               1,831           -         18,541
Compression volumes (in MMcf)             24,569           -                 -                  -            -         24,569

                                                          For the Three Months Ended September 30, 2012
                                      Marcellus      Barnett      Fayetteville       Granite Wash       Other         Total
Gathering revenues                   $     7,976     $ 24,737     $       7,043     $          465     $  3,152      $ 43,373
Processing revenues                           -         8,540                -                  29           -          8,569
Product sales                                 -            69               131             10,208          663        11,071

Total operating revenues             $     7,976     $ 33,346     $       7,174     $       10,702     $  3,815      $ 63,013
Product purchases                             -            60               137              9,481          663        10,341
Operations and maintenance expense           815        6,963             1,855                560          749        10,942

EBITDA                               $     7,161     $ 26,323     $       5,182     $          661     $  2,403

Gathering volumes (in MMcf)               26,585       40,252             8,403              1,856        5,041        82,137
Processing volumes (in MMcf)                  -        14,671                -               1,859           -         16,530

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                                                            For the Nine Months Ended September 30, 2013
                                     Marcellus       Barnett       Fayetteville       Granite Wash       Other          Total
Gathering revenues                   $   33,785     $  70,597     $       20,647     $        1,487     $  4,470      $ 130,986
Processing revenues                          -         28,136                 -                   4           -          28,140
Compression revenues                     11,874            -                  -                  -            -          11,874
Product sales                                -            770                736             39,176        2,971         43,653

Total operating revenues             $   45,659     $  99,503     $       21,383     $       40,667     $  7,441      $ 214,653
Product purchases                            -            558                732             36,127        2,971         40,388
Operations and maintenance expense        7,774        21,284              6,747              2,103        2,595         40,503
Goodwill impairment                          -             -                  -                  -        (4,053 )       (4,053 )
Gain on sale of asset                        -             -                  -               4,392           -           4,392
Loss from unconsolidated affiliate           -             -                  -                  -          (447 )         (447 )

EBITDA                               $   37,885     $  77,661     $       13,904     $        6,829     $ (2,625 )

Gathering volumes (in MMcf)             110,715       118,849             24,679              5,734        9,401        269,378
Processing volumes (in MMcf)                 -         52,945                 -               5,540           -          58,485
Compression volumes (in MMcf)            74,726            -                  -                  -            -          74,726

                                                            For the Nine Months Ended September 30, 2012
                                     Marcellus       Barnett       Fayetteville       Granite Wash       Other          Total
Gathering revenues                   $   15,003     $  74,568     $       20,037     $          873     $  7,952      $ 118,433
Processing revenues                          -         24,156                 -                 128           -          24,284
Product sales                                -             68                331             27,020        1,839         29,258

Total operating revenues             $   15,003     $  98,792     $       20,368     $       28,021     $  9,791      $ 171,975
Product purchases                            -             60                343             24,514        1,838         26,755
Operations and maintenance expense        1,328        18,438              6,399              1,619        2,269         30,053

EBITDA                               $   13,675     $  80,294     $       13,626     $        1,888     $  5,684

Gathering volumes (in MMcf)              50,009       117,434             23,049              4,576       17,149        212,217
Processing volumes (in MMcf)                 -         38,493                 -               4,566           -          43,059

EBITDA and Adjusted EBITDA - EBITDA decreased approximately $2 million for the three months ended September 30, 2013 compared to the same period in 2012. However, we experienced an increase of approximately $12 million for the nine months ended September 30, 2013 compared to same period in 2012. In the same manner, Adjusted EBITDA for the three and nine months ended September 30, 2013 was approximately $39 million and $116 million, an increase of approximately $3 million and $20 million compared to the same periods in 2012. Adjusted EBITDA includes expenses for merger-related costs and evaluating certain investment opportunities, which were approximately $5 million and $11 million for the three . . .

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