Attached files
file | filename |
---|---|
EX-3.3 - EX-3.3 - Crestwood Midstream Partners LP | h77430exv3w3.htm |
EX-3.2 - EX-3.2 - Crestwood Midstream Partners LP | h77430exv3w2.htm |
EX-3.4 - EX-3.4 - Crestwood Midstream Partners LP | h77430exv3w4.htm |
EX-31.1 - EX-31.1 - Crestwood Midstream Partners LP | h77430exv31w1.htm |
EX-31.2 - EX-31.2 - Crestwood Midstream Partners LP | h77430exv31w2.htm |
EX-10.1 - EX-10.1 - Crestwood Midstream Partners LP | h77430exv10w1.htm |
EX-32.1 - EX-32.1 - Crestwood Midstream Partners LP | h77430exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2010 | ||
or | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number: 001-33631
Crestwood Midstream Partners LP
(Exact name of registrant as specified in its charter)
Delaware | 56-2639586 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
717 Texas Avenue, Suite 3150, Houston, Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) |
(832) 519-2200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
f/k/a Quicksilver Gas Services LP
801 Cherry Street
Suite 3400, Unit 20
801 Cherry Street
Suite 3400, Unit 20
Fort Worth, Texas 76102
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common units, as
of the latest practicable date:
Title of Class | Outstanding as of October 29, 2010 | |
Common Units | 19,670,029 |
Table of Contents
DEFINITIONS
As used in this report, unless the context otherwise requires:
Bbl or Bbls means barrel or barrels
Btu means British Thermal units, a measure of heating value
EBITDA means earnings before interest, taxes, depreciation and accretion
LIBOR means London Interbank Offered Rate
Management means management of Crestwood Midstream Partners LPs General Partner
MMBtu means million Btu
MMBtud means million Btu per day
Mcf means thousand cubic feet
MMcf means million cubic feet
MMcfd means million cubic feet per day
MMcfe means MMcf of natural gas equivalents, calculated as one Bbl of oil or NGLs equaling
six Mcf of gas
MMcfed means MMcfe per day
NGL or NGLs means natural gas liquids
Oil includes crude oil and condensate
COMMONLY USED TERMS
Other commonly used terms and their definitions follow:
Alliance Midstream Assets means gathering and treating assets purchased from
Quicksilver in January 2010 in the Alliance Airport area of Tarrant and Denton Counties,
Texas
Alliance System means the Alliance Midstream Assets and subsequent additions
CMLP means Crestwood Midstream Partners LP and our wholly owned subsidiaries, formerly
known as Quicksilver Gas Services LP (KGS), which now trades under the ticker symbol
CMLP
Credit Facility means, prior to October 1, 2010, our senior secured credit facility, as
amended, dated August 10, 2007; and effective October 1, 2010, means our new senior
secured credit facility filed as Exhibit 10.1 on Form 8-K dated October 6, 2010
Crestwood means Crestwood Holdings Partners LLC and its affiliates
Crestwood Holdings means Crestwood Holdings LLC and its affiliates
Crestwood Transaction means the sale to Crestwood by Quicksilver of all its interests in
CMLP that closed on October 1, 2010
Exchange Act means the Securities Exchange Act of 1934, as amended
FASB means the Financial Accounting Standards Board, which promulgates accounting
standards
FASC means the FASB Accounting Standards Codification
GAAP means generally accepted accounting principles in the U.S.
General Partner means Crestwood Gas Services GP LLC, formerly known as Quicksilver Gas
Services GP LLC, a Delaware limited liability company
HCDS means Hill County Dry System
IPO means our initial public offering completed on August 10, 2007
KGS means Quicksilver Gas Services L.P. (now known as CMLP or Crestwood Midstream
Partners LP) and its wholly owned subsidiaries
LADS means Lake Arlington Dry System
Omnibus Agreement means the Omnibus Agreement, dated October 8, 2010, among our General
Partner and Crestwood Holdings
Partnership Agreement means the Second Amended and Restated Agreement of Limited
Partnership of Quicksilver Gas Services LP, dated February 19, 2008, as amended
Quicksilver means Quicksilver Resources Inc. and its wholly owned subsidiaries
Quicksilver Counties means Hood, Somervell, Johnson, Tarrant, Hill, Parker, Bosque and
Erath Counties in Texas where Quicksilver conducts the majority of its U.S. operations
Repurchase Obligation Waiver means the waiver, dated November 2009, in which we and
Quicksilver mutually agreed to waive all rights and obligations to transfer ownership
of HCDS to KGS.
SEC means the U.S. Securities and Exchange Commission
SFAS means Statement of Financial Accounting Standards issued by the FASB
2
CRESTWOOD MIDSTREAM PARTNERS LP
INDEX TO FORM 10-Q
For the Period Ended September 30, 2010
INDEX TO FORM 10-Q
For the Period Ended September 30, 2010
PART I. FINANCIAL INFORMATION | ||||||||
Financial Statements (Unaudited) | 6 | |||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | |||||||
Quantitative and Qualitative Disclosures About Market Risk | 27 | |||||||
Controls and Procedures | 27 | |||||||
PART II. OTHER INFORMATION | ||||||||
Legal Proceedings | 28 | |||||||
Risk Factors | 28 | |||||||
Unregistered Sales of Equity Securities and Use of Proceeds | 29 | |||||||
Defaults Upon Senior Securities | 29 | |||||||
(Removed and Reserved) | 29 | |||||||
Other Information | 29 | |||||||
Exhibits | 30 | |||||||
Signatures | 31 | |||||||
Certification Pursuant to Section 302 | ||||||||
Certification Pursuant to Section 302 | ||||||||
Certification Pursuant to Section 906 | ||||||||
EX-3.2 | ||||||||
EX-3.3 | ||||||||
EX-3.4 | ||||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
3
Table of Contents
EXPLANATORY NOTE
On October 1, 2010, the Crestwood Transaction closed and Quicksilver sold all of its ownership
interests in CMLP to Crestwood. The Crestwood Transaction includes Crestwoods purchase of a 100%
interest in our General Partner, 5,696,752 common units and 11,513,625 subordinated limited partner
units in CMLP and a note payable by CMLP which had a carrying value of approximately $58 million at
closing. Quicksilver received from Crestwood $701 million cash and has the right to receive
additional cash payments from Crestwood in 2012 and 2013 of up to $72 million in the aggregate.
The additional payments will be determined by an earn-out formula which is based upon our actual
gathering volumes during 2011 and 2012. The earn-out provision was designed to provide additional
incentive for our largest customer, Quicksilver, to maximize volumes through our pipeline systems
and processing facilities. The costs associated with the additional earn-out payments will not be
future obligations of CMLP but will be obligations of Crestwood.
We are affiliated with Crestwood Holdings Partners LLC, and funds managed by First Reserve
Corporation who own a significant equity position in Crestwood Holdings Partners LLC., which
currently owns approximately 8 million common units, 11.5 million subordinated units and all of the
equity interests in our general partner, which holds the incentive distribution rights in us. We
anticipate Crestwood Holdings Partners LLC will continue to be a substantial owner of our common
units and our entire general partner.
We expect that our relationship with Crestwood Holdings Partners LLC and First Reserve
Corporation may provide us with several significant benefits, including strong industry management
experience and increased exposure to acquisition opportunities and access to an experienced
transactional and financial professionals with a proven track record of investing in energy
assets. First Reserve is a private equity firm in the energy industry, making both private equity
and infrastructure investments throughout the energy value
chain. Crestwood Holdings Partners LLC,
headquartered in Houston, Texas, is a private energy company formed to pursue the acquisition and
development of North American midstream assets and businesses.
On October 4, 2010, our name changed from Quicksilver Gas Services L.P. to Crestwood Midstream
Partners LP and our ticker symbol on the New York Stock Exchange for our publicly traded common
units changed from KGS to CMLP.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report and other materials we file with the SEC, or in
other written or oral statements made or to be made by us, other than statements of historical
fact, are forward-looking statements as defined in the Private Securities Litigation Reform Act
of 1995. Forward-looking statements reflect our current expectations or forecasts of future
events. Words such as may, assume, forecast, predict, strategy, expect, intend,
plan, aim, estimate, anticipate, believe, project, budget, potential, or
continue, and similar expressions are used to identify forward-looking statements.
Forward-looking statements can be affected by assumptions used or by known or unknown risks or
uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may
vary materially. You are cautioned not to place undue reliance on any forward-looking statements
and should also understand that it is not possible to predict or identify all such factors and
should not consider the following list to be a complete statement of all potential risks and
uncertainties. Factors that could cause our actual results to differ materially from the results
contemplated by such forward-looking statements include:
| changes in general economic conditions; | ||
| fluctuations in natural gas prices; | ||
| failure or delays by our customers in achieving expected production from natural gas projects; | ||
| competitive conditions in our industry; | ||
| actions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters and customers; | ||
| fluctuations in the value of certain of our assets and liabilities; | ||
| changes in the availability and cost of capital; | ||
| operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control; | ||
| construction costs or capital expenditures exceeding estimated or budgeted amounts; | ||
| the effects of existing and future laws and governmental regulations, including environmental and climate change requirements; | ||
| the effects of existing or future litigation; and | ||
| certain factors discussed elsewhere in this Quarterly Report. |
The list of factors is not exhaustive, and new factors may emerge or changes to these factors
may occur that would impact our business. Additional information regarding these and other factors
may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. All such
risk factors are difficult to predict and are subject to material uncertainties that may
4
Table of Contents
affect actual results and may be beyond our control. The forward-looking statements included in this
report are made only as of the date of this report, and we undertake no obligation to update any of
these forward-looking statements to reflect subsequent events or circumstances except to the extent
required by applicable law.
All forward-looking statements are expressly qualified in their entirety by the foregoing
cautionary statements.
5
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In thousands, except for per unit data - Unaudited
In thousands, except for per unit data - Unaudited
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
||||||||||||||||
Gathering revenue - Quicksilver |
$ | 20,670 | $ | 13,759 | $ | 55,464 | $ | 41,018 | ||||||||
Gathering revenue |
1,710 | 336 | 4,165 | 1,496 | ||||||||||||
Processing revenue - Quicksilver |
7,372 | 8,155 | 20,625 | 25,541 | ||||||||||||
Processing revenue |
614 | 295 | 2,045 | 1,344 | ||||||||||||
Other revenue - Quicksilver |
- | 691 | - | 1,141 | ||||||||||||
Total revenue |
30,366 | 23,236 | 82,299 | 70,540 | ||||||||||||
Expenses |
||||||||||||||||
Operations and maintenance |
7,205 | 6,485 | 21,806 | 17,656 | ||||||||||||
General and administrative |
2,011 | 1,727 | 6,285 | 5,463 | ||||||||||||
Depreciation and accretion |
5,689 | 5,565 | 16,696 | 15,410 | ||||||||||||
Total expenses |
14,905 | 13,777 | 44,787 | 38,529 | ||||||||||||
Operating income |
15,461 | 9,459 | 37,512 | 32,011 | ||||||||||||
Other income |
- | - | - | 1 | ||||||||||||
Interest expense |
3,185 | 1,738 | 8,808 | 6,216 | ||||||||||||
Income from continuing operations before income taxes |
12,276 | 7,721 | 28,704 | 25,796 | ||||||||||||
Income tax provision |
45 | 235 | 171 | 446 | ||||||||||||
Net income from continuing operations |
12,231 | 7,486 | 28,533 | 25,350 | ||||||||||||
Loss from discontinued operations |
- | (348 | ) | - | (1,802 | ) | ||||||||||
Net income |
$ | 12,231 | $ | 7,138 | $ | 28,533 | $ | 23,548 | ||||||||
General partner interest in net income |
$ | 743 | $ | 353 | $ | 1,777 | $ | 850 | ||||||||
Common and subordinated unitholders interest
in net income |
$ | 11,488 | $ | 6,785 | $ | 26,756 | $ | 22,698 | ||||||||
Basic earnings (loss) per limited partner unit: |
||||||||||||||||
From continuing operations per common and
subordinated unit |
$ | 0.40 | $ | 0.29 | $ | 0.94 | $ | 1.02 | ||||||||
From discontinued operations per common and
subordinated unit |
$ | - | $ | (0.01 | ) | $ | - | $ | (0.07 | ) | ||||||
Net earnings per common and subordinated unit |
$ | 0.40 | $ | 0.28 | $ | 0.94 | $ | 0.95 | ||||||||
Diluted earnings (loss) per limited partner unit: |
||||||||||||||||
From continuing operations per common and
subordinated unit |
$ | 0.38 | $ | 0.27 | $ | 0.90 | $ | 0.92 | ||||||||
From discontinued operations per common and
subordinated unit |
$ | - | $ | (0.01 | ) | $ | - | $ | (0.06 | ) | ||||||
Net earnings per common and subordinated unit |
$ | 0.38 | $ | 0.26 | $ | 0.90 | $ | 0.86 | ||||||||
Weighted average number of common and subordinated units outstanding: |
||||||||||||||||
Basic |
28,502 | 23,827 | 28,502 | 23,827 | ||||||||||||
Diluted |
31,561 | 27,981 | 31,783 | 28,319 | ||||||||||||
Distributions per unit (attributable to the period ended) |
$ | 0.42 | $ | 0.39 | $ | 1.23 | $ | 1.13 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data - Unaudited
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data - Unaudited
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 57 | $ | 746 | ||||
Accounts receivable |
1,962 | 1,342 | ||||||
Prepaid expenses and other |
1,062 | 180 | ||||||
Total current assets |
3,081 | 2,268 | ||||||
Property, plant and equipment, net |
524,239 | 482,497 | ||||||
Other assets |
2,196 | 2,859 | ||||||
Total assets |
$ | 529,516 | $ | 487,624 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current liabilities |
||||||||
Current maturities of debt |
$ | 3,300 | $ | 2,475 | ||||
Accounts payable to Quicksilver |
1,033 | 1,727 | ||||||
Accrued additions to property, plant and equipment |
5,689 | 8,015 | ||||||
Accounts payable and other |
6,844 | 2,240 | ||||||
Total current liabilities |
16,866 | 14,457 | ||||||
Long-term debt |
238,500 | 125,400 | ||||||
Note payable to Quicksilver |
54,309 | 53,243 | ||||||
Asset retirement obligations |
9,722 | 8,919 | ||||||
Deferred income taxes |
940 | 768 | ||||||
Commitments
and contingent liabilities (Note 10) |
||||||||
Partners capital |
||||||||
Common unitholders (16,988,429 and 16,313,451 units issued and
outstanding at September 30, 2010 and December 31, 2009, respectively) |
208,834 | 281,239 | ||||||
Subordinated unitholders (11,513,625 units issued and outstanding at
September 30, 2010 and December 31, 2009) |
(366 | ) | 3,040 | |||||
General partner |
711 | 558 | ||||||
Total partners capital |
209,179 | 284,837 | ||||||
$ | 529,516 | $ | 487,624 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Unaudited
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Unaudited
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 28,533 | $ | 23,548 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation |
16,321 | 17,223 | ||||||
Accretion of asset retirement obligations |
375 | 295 | ||||||
Deferred income taxes |
171 | 446 | ||||||
Equity-based compensation |
2,001 | 1,289 | ||||||
Non-cash interest expense |
3,323 | 4,535 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(620 | ) | 1,554 | |||||
Prepaid expenses and other |
(923 | ) | 234 | |||||
Accounts receivable and payable with Quicksilver |
(8,117 | ) | (2,248 | ) | ||||
Accounts payable and other |
3,809 | 3,405 | ||||||
Net cash provided by operating activities |
44,873 | 50,281 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(52,470 | ) | (50,067 | ) | ||||
Distribution to Quicksilver for Alliance Midstream Assets |
(80,276 | ) | (5,645 | ) | ||||
Net cash used in investing activities |
(132,746 | ) | (55,712 | ) | ||||
Financing activities: |
||||||||
Proceeds from revolving credit facility borrowings |
143,200 | 46,500 | ||||||
Repayments of credit facility |
(30,100 | ) | (14,500 | ) | ||||
Proceeds from issuance of equity |
11,088 | - | ||||||
Issuance costs of equity units paid |
(34 | ) | - | |||||
Contributions by Quicksilver |
- | 987 | ||||||
Distributions to unitholders |
(35,826 | ) | (27,248 | ) | ||||
Taxes paid for equity-based compensation vesting |
(1,144 | ) | (63 | ) | ||||
Net cash provided by financing activities |
87,184 | 5,676 | ||||||
Net cash increase (decrease) |
(689 | ) | 245 | |||||
Cash at beginning of period |
746 | 303 | ||||||
Cash at end of period |
$ | 57 | $ | 548 | ||||
Cash paid for interest |
$ | 5,485 | $ | 3,700 | ||||
Cash paid for income taxes |
- | - | ||||||
Non-cash transactions: |
||||||||
Working capital related to capital expenditures |
15,269 | 4,502 | ||||||
Contribution of property, plant and equipment from Quicksilver |
- | 46,970 | ||||||
Disposition of property, plant and equipment under
repurchase obligation, net |
- | 47,577 | ||||||
Equity impact of not purchasing assets subject to repurchase
obligations |
- | 11,809 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
In thousands Unaudited
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
In thousands Unaudited
Limited Partners | ||||||||||||||||
General | ||||||||||||||||
Common | Subordinated | Partner | Total | |||||||||||||
Balance at December 31, 2009 |
$ | 281,239 | $ | 3,040 | $ | 558 | $ | 284,837 | ||||||||
Equity-based compensation expense recognized |
2,001 | - | - | 2,001 | ||||||||||||
Distributions paid to partners |
(20,387 | ) | (13,815 | ) | (1,624 | ) | (35,826 | ) | ||||||||
Distribution to Quicksilver for Alliance Midstream Assets |
(80,276 | ) | - | - | (80,276 | ) | ||||||||||
Net income |
16,347 | 10,409 | 1,777 | 28,533 | ||||||||||||
Public offering of units, net of offering costs |
11,054 | - | - | 11,054 | ||||||||||||
Taxes paid for stock-based compensation vesting |
(1,144 | ) | - | - | (1,144 | ) | ||||||||||
Balance at September 30, 2010 |
$ | 208,834 | $ | (366 | ) | $ | 711 | $ | 209,179 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CRESTWOOD MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization Crestwood Midstream Partners LP (CMLP) is a Delaware limited partnership
formed for the purpose of completing a public offering of common units and concurrently acquiring
and operating midstream assets. As of September 30, 2010 our General Partner was owned
by Quicksilver.
On October 1, 2010, the Crestwood Transaction closed and Quicksilver sold all of its ownership
interests in CMLP to Crestwood. The Crestwood Transaction includes Crestwoods purchase
of a 100% interest in our General Partner, 5,696,752 common units and 11,513,625 subordinated
limited partner units in CMLP and a note payable by CMLP which had a carrying value of
approximately $58 million at closing. Quicksilver received from Crestwood $701 million
cash and has the right to receive additional cash payments from Crestwood in 2012 and 2013 of up to
$72 million in the aggregate. The additional payments will be determined by an earn-out
formula which is based upon our actual gathering volumes during 2011 and 2012.
On October 4, 2010, our name changed from Quicksilver Gas Services L.P. to Crestwood Midstream
Partners LP and our ticker symbol on the New York Stock Exchange for our publicly traded common
units changed from KGS to CMLP.
The Crestwood Transaction did not have any direct impact to our historical financial
statements as previously reported. However, during October 2010, the following
significant matters occurred:
| recognition of approximately $3.6 million of costs associated with the vesting of equity-based compensation of our phantom units upon the closing of the Crestwood Transaction in accordance with the change-in-control provisions of our 2007 Equity Plan; |
| acceleration of amounts due under our old $320 million credit facility, which was replaced with a new $400 million Credit Facility; |
| termination of our omnibus agreement with Quicksilver, which was replaced with a new Omnibus Agreement; |
| termination of our Services and Secondment Agreement with Quicksilver which we replaced, on a temporary basis, with a Transition Services Agreement with Quicksilver; |
| extension of the tenor of all of our gathering and processing agreements with Quicksilver to 2020; and |
| change to a fixed gathering rate of $0.55 per Mcf for the Alliance System for Quicksilver to replace the variable rate which had a range of $0.40 to $0.55 per Mcf. |
On December 10, 2009, we entered into an underwriting agreement to offer 4,000,000 common
units at a price to the public of $21.10 per common unit. The total net proceeds that we
received from the equity offering during December 2009, before expenses, were approximately $81
million. In January 2010, the underwriters exercised their option to purchase an
additional 549,200 common units, which resulted in additional proceeds of $11.1
million. During December 2009, we used the proceeds from our equity offering to
temporarily pay down our old credit facility before finalizing our purchase of the Alliance
Midstream Assets for $84.4 million during 2010. Also in January 2010, we used $11
million from the sale of additional units to the underwriters to pay
down our old credit facility.
Immediately following the Crestwood Transaction, our ownership is as follows:
Ownership Percentage | ||||||||||||
Crestwood | Public | Total | ||||||||||
General partner interest |
1.5 | % | - | 1.5 | % | |||||||
Limited partner interest: |
||||||||||||
Common unitholders |
25.3 | % | 36.8 | % | 62.1 | % | ||||||
Subordinated unitholders |
36.4 | % | - | 36.4 | % | |||||||
Total interests |
63.2 | % | 36.8 | % | 100.0 | % | ||||||
Neither CMLP nor our General Partner has any employees. Employees of Crestwood
provide services to our General Partner pursuant to an Omnibus Agreement.
The full accounting for the Crestwood Transaction is incomplete which makes it impracticable
for us to make certain disclosures. Additional information will be provided in future
filings.
10
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Description of Business We are engaged in the gathering, processing, compression and
treating of natural gas and the delivery of NGLs produced from the Barnett Shale formation in the
Fort Worth Basin located in Texas. We provide these midstream services under contracts,
whereby we receive fees for performing gathering, processing, compression and treating
services. We do not take title to the natural gas or associated NGLs thereby avoiding
direct commodity price exposure.
Our assets include or formerly included:
Cowtown System
The Cowtown System, located principally in Hood and Somervell counties in the southern portion of the Fort Worth Basin, which includes:
The Cowtown System, located principally in Hood and Somervell counties in the southern portion of the Fort Worth Basin, which includes:
- | the Cowtown Pipeline, consisting of a gathering system and related gas compression facilities. This system gathers natural gas produced by our customers and delivers it to the Cowtown and Corvette Plants for processing; |
- | the Cowtown Plant, consisting of two natural gas processing units with a total capacity of 200 MMcfd that extract NGLs from the natural gas stream and deliver customers residue gas and extracted NGLs to unaffiliated pipelines for sale downstream; and |
- | the Corvette Plant, placed in service during 2009, consisting of a 125 MMcfd natural gas processing unit that extracts NGLs from the natural gas stream and delivers customers residue gas and extracted NGLs to unaffiliated pipelines for sale downstream. |
Lake Arlington Dry System
The LADS, located in eastern Tarrant County, consists of a gas gathering system and related gas compression facility with capacity of 180 MMcfd. This system gathers natural gas produced by our customers and delivers it to unaffiliated pipelines for sale downstream.
The LADS, located in eastern Tarrant County, consists of a gas gathering system and related gas compression facility with capacity of 180 MMcfd. This system gathers natural gas produced by our customers and delivers it to unaffiliated pipelines for sale downstream.
Alliance System
During 2010, we completed the purchase of the Alliance Midstream Assets from Quicksilver for a purchase price of $84.4 million, which with subsequent additions, we refer to as the Alliance System. The Alliance System consists of a gathering system and related compression facility with a capacity of 300 MMcfd, an amine treating facility with capacity of 360 MMcfd and a dehydration treating facility with capacity of 300 MMcfd. This system gathers natural gas produced by our customers and delivers it to unaffiliated pipelines for sale downstream. The majority of the Alliance Midstream Assets operations commenced service in September 2009, although less significant operations had been conducted prior to that time. Because the purchase of the Alliance Midstream Assets was conducted among entities then under common control, GAAP requires the inclusion of the Alliance Systems revenue and expenses in our income statements for all periods presented, including periods prior to our purchase of the system. The following summarizes the impact of this inclusion:
During 2010, we completed the purchase of the Alliance Midstream Assets from Quicksilver for a purchase price of $84.4 million, which with subsequent additions, we refer to as the Alliance System. The Alliance System consists of a gathering system and related compression facility with a capacity of 300 MMcfd, an amine treating facility with capacity of 360 MMcfd and a dehydration treating facility with capacity of 300 MMcfd. This system gathers natural gas produced by our customers and delivers it to unaffiliated pipelines for sale downstream. The majority of the Alliance Midstream Assets operations commenced service in September 2009, although less significant operations had been conducted prior to that time. Because the purchase of the Alliance Midstream Assets was conducted among entities then under common control, GAAP requires the inclusion of the Alliance Systems revenue and expenses in our income statements for all periods presented, including periods prior to our purchase of the system. The following summarizes the impact of this inclusion:
Three Months Ended September 30, 2009 | ||||||||||||
As Previously | ||||||||||||
Presented | Alliance System | Combined | ||||||||||
(In thousands) | ||||||||||||
Revenue |
$ | 23,216 | $ | 20 | $ | 23,236 | ||||||
Operating expenses |
(12,242 | ) | (1,535 | ) | (13,777 | ) | ||||||
Operating income (loss) |
$ | 10,974 | $ | (1,515 | ) | $ | 9,459 | |||||
Basic earnings (loss) per limited partner unit: |
$ | 0.35 | $ | (0.07 | ) | $ | 0.28 | |||||
Diluted earnings (loss) per limited partner unit: |
$ | 0.31 | $ | (0.05 | ) | $ | 0.26 |
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Nine Months Ended September 30, 2009 | ||||||||||||
As Previously | ||||||||||||
Presented | Alliance System | Combined | ||||||||||
(In thousands) | ||||||||||||
Revenue |
$ | 70,036 | $ | 504 | $ | 70,540 | ||||||
Operating expenses |
(36,074 | ) | (2,455 | ) | (38,529 | ) | ||||||
Operating income (loss) |
$ | 33,962 | $ | (1,951 | ) | $ | 32,011 | |||||
Basic earnings (loss) per limited partner unit: |
$ | 1.03 | $ | (0.08 | ) | $ | 0.95 | |||||
Diluted earnings (loss) per limited partner unit: |
$ | 0.92 | $ | (0.06 | ) | $ | 0.86 | |||||
As of December 31, 2009 | ||||||||||||
As Previously | ||||||||||||
Presented | Alliance System | Combined | ||||||||||
(In thousands) | ||||||||||||
Assets |
||||||||||||
Property, plant and equipment, net |
$ | 396,952 | $ | 85,545 | $ | 482,497 | ||||||
Total assets |
$ | 396,952 | $ | 85,545 | $ | 482,497 | ||||||
Liabilities |
||||||||||||
Accrued additions to property, plant and
equipment |
$ | 4,011 | $ | 4,004 | $ | 8,015 | ||||||
Asset retirement obligations |
7,654 | 1,265 | 8,919 | |||||||||
Partners capital |
204,561 | 80,276 | 284,837 | |||||||||
Total liabilities and partners capital |
$ | 216,226 | $ | 85,545 | $ | 301,771 | ||||||
Hill County Dry System
As more fully described in Note 2, our financial information through November 2009 also included the operations of a gathering system in Hill County, Texas. The HCDS gathers natural gas and delivers it to unaffiliated pipelines for further transport and sale downstream. As of November 2009, the assets, liabilities, revenue and expenses directly attributable to the HCDS for the periods prior to November 2009 have been retrospectively reported as discontinued operations based upon the execution of the Repurchase Obligation Waiver. The HCDS had previously been subject to a repurchase obligation since its 2007 sale to Quicksilver.
As more fully described in Note 2, our financial information through November 2009 also included the operations of a gathering system in Hill County, Texas. The HCDS gathers natural gas and delivers it to unaffiliated pipelines for further transport and sale downstream. As of November 2009, the assets, liabilities, revenue and expenses directly attributable to the HCDS for the periods prior to November 2009 have been retrospectively reported as discontinued operations based upon the execution of the Repurchase Obligation Waiver. The HCDS had previously been subject to a repurchase obligation since its 2007 sale to Quicksilver.
All repurchase obligations to Quicksilver were concluded by December 31,
2009. Notes 2 and 4 to the consolidated financial statements in our 2009 Annual Report
on Form 10-K contain more information regarding the Repurchase Obligation Waiver.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying condensed consolidated interim financial statements
and related notes present the financial position, results of operations, cash flows and changes in
partners capital of our natural gas gathering and processing assets. In managements
opinion, all necessary adjustments to fairly present our results of operations, financial position
and cash flows for the periods presented have been made and all such adjustments are of a normal
and recurring nature.
Use of Estimates The preparation of financial statements in accordance with GAAP requires
management to make estimates and judgments that affect the reported amount of assets, liabilities,
revenue and expenses and disclosure of contingent assets and liabilities that exist at the date of
the financial statements. Estimates and judgments are based on information available at
the time such estimates and judgments are made. Although management believes the
estimates are appropriate, actual results can differ from those estimates.
Certain disclosures normally included in financial statements prepared in accordance with GAAP
have been condensed or omitted. Accordingly, these financial statements should be read
in conjunction with our consolidated financial statements and notes thereto included in our 2009
Annual Report on Form 10-K.
Discontinued Operations In November 2009, Quicksilver and our then General Partner mutually
agreed to waive both parties rights and obligations to transfer ownership of the HCDS from
Quicksilver to us, which we refer to as the Repurchase Obligation Waiver. The Repurchase
Obligation Waiver caused derecognition of the assets and liabilities directly attributable to
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the
HCDS, most significantly the property, plant and equipment and repurchase obligation, beginning in
November 2009. In addition, the Repurchase Obligation Waiver caused the elimination of
the HCDS revenue and expenses from our consolidated results of operations beginning in November
2009. The assets, liabilities, revenue and expenses directly attributable to the HCDS
for the periods prior to November 2009 have been retrospectively reported as discontinued
operations.
Our 2007 sale of the HCDS to Quicksilver was not treated as a sale for accounting purposes
because we operated it and originally intended to repurchase the assets. Accordingly,
the original cost and subsequently incurred costs were recognized in both our property, plant and
equipment and our repurchase obligations to Quicksilver prior to their reclassification to
discontinued operations. Similarly, our results of operations included the revenue and
expenses for these operations prior to their reclassification to discontinued operations.
Net Income per Limited Partner Unit The following is a reconciliation of the components of
the basic and diluted earnings per unit calculations for the three and nine months ended September
30, 2010 and 2009.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except per unit data) | ||||||||||||||||
Common and subordinated unitholders interest in net income from
continuing operations |
$ | 11,488 | $ | 7,126 | $ | 26,756 | $ | 24,466 | ||||||||
Common and subordinated unitholders interest in net loss from
discontinued operations |
- | (341 | ) | - | (1,768 | ) | ||||||||||
Common and subordinated unitholders interest in net income |
$ | 11,488 | $ | 6,785 | $ | 26,756 | $ | 22,698 | ||||||||
Impact of interest on subordinated note to Quicksilver |
647 | 416 | 1,860 | 1,490 | ||||||||||||
Income available assuming conversion of convertible debt |
$ | 12,135 | $ | 7,201 | $ | 28,616 | $ | 24,188 | ||||||||
Weighted-average common and subordinated units - basic |
28,502 | 23,827 | 28,502 | 23,827 | ||||||||||||
Effect of unvested phantom units |
516 | 486 | 516 | 486 | ||||||||||||
Effect of subordinated note to Quicksilver (1) |
2,543 | 3,668 | 2,765 | 4,006 | ||||||||||||
Weighted-average common and subordinated units - diluted |
31,561 | 27,981 | 31,783 | 28,319 | ||||||||||||
Basic earnings per unit: |
||||||||||||||||
From continuing operations per common and subordinated unit |
$ | 0.40 | $ | 0.29 | $ | 0.94 | $ | 1.02 | ||||||||
From discontinued operations per common and subordinated unit |
$ | - | $ | (0.01 | ) | $ | - | $ | (0.07 | ) | ||||||
Net earnings per common and subordinated unit |
$ | 0.40 | $ | 0.28 | $ | 0.94 | $ | 0.95 | ||||||||
Diluted earnings per unit: |
||||||||||||||||
From continuing operations per common and subordinated unit |
$ | 0.38 | $ | 0.27 | $ | 0.90 | $ | 0.92 | ||||||||
From discontinued operations per common and subordinated unit |
$ | - | $ | (0.01 | ) | $ | - | $ | (0.06 | ) | ||||||
Net earnings per common and subordinated unit |
$ | 0.38 | $ | 0.26 | $ | 0.90 | $ | 0.86 | ||||||||
Conversion price of convertible debt (1) |
$ | 22.65 | $ | 15.04 | $ | 20.84 | $ | 13.77 |
(1) Assumes that convertible debt is converted using the lesser of average closing
price per unit during the period ended or final closing price on September 30
Comprehensive Income Comprehensive income is equal to net income for the periods presented
due to the absence of any other comprehensive income.
Recently Issued Accounting Standards
Accounting standard-setting organizations frequently issue new or revised accounting
rules. We regularly review all new pronouncements to determine their impact, if any, on
our financial statements. No pronouncements materially affecting our financial
statements have been issued since the filing of our 2009 Annual Report on Form 10-K.
3. PARTNERS CAPITAL AND DISTRIBUTIONS
Our Partnership Agreement requires that we make distributions within 45 days after the end of
each quarter to unitholders of record on the applicable record date selected by the general
partner.
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The following table presents cash distributions attributable to quarters ended in 2010 and
2009:
Attributable to the | Per Unit | Total Cash | ||||||||
Payment Date | Quarter Ended | Distribution (1) | Distribution | |||||||
(In millions) | ||||||||||
Pending Distribution |
||||||||||
November 12, 2010 (2) |
September 30, 2010 | $ | 0.420 | $ | 13.9 | |||||
Completed Distributions |
||||||||||
August 13, 2010 (3) |
June 30, 2010 | $ | 0.420 | $ | 12.7 | |||||
May 14, 2010 (4) |
March 31, 2010 | $ | 0.390 | $ | 11.6 | |||||
February 12, 2010 (4) |
December 31, 2009 | $ | 0.390 | $ | 11.6 | |||||
November 13, 2009 (5) |
September 30, 2009 | $ | 0.390 | $ | 9.7 | |||||
August 14, 2009 (6) |
June 30, 2009 | $ | 0.370 | $ | 9.1 | |||||
May 15, 2009 (6) |
March 31, 2009 | $ | 0.370 | $ | 9.1 |
(1) | Represents common and subordinated unitholders | |
(2) | Total cash distribution includes an Incentive Distribution Rights amount of approximately $570,000 to the general partner | |
(3) | Total cash distribution includes an Incentive Distribution Rights amount of approximately $522,000 to the general partner | |
(4) | Total cash distribution includes an Incentive Distribution Rights amount of approximately $261,000 to the general partner | |
(5) | Total cash distribution includes an Incentive Distribution Rights amount of approximately $219,000 to the general partner | |
(6) | Total cash distribution includes an Incentive Distribution Rights amount of approximately $90,000 to the general partner |
The September 30, 2010 distribution calculation includes additional shares related to the
conversion of the Subordinated Note and vesting of all previously unvested equity
units. Note 6 contains for more information about the conversion.
The subordination period will end, and the subordinated units will convert to an equal number
of common units, when we have earned and paid at least $0.30 per quarter on each common unit,
subordinated unit and general partner unit for any three consecutive years. Under the
terms of our partnership agreement and upon the payment of our upcoming quarter cash distribution
to unitholders on November 12, 2010, our subordination period will end. As a result, our
11,513,625 subordinated units held by Crestwood will be converted into common units on a one-for
one basis on November 15, 2010. The conversion of the subordinated units does not impact
the amount of cash distributions paid or the total number of outstanding units. The
conversion will have no impact on our calculation of net income per limited partner unit since the
subordinated units have been previously included in our historical net income per limited partner
unit calculation.
4. DISCONTINUED OPERATIONS
As more fully discussed in Notes 1 and 2, based upon the Repurchase Obligation Waiver, the
revenue and expenses directly attributable to the HCDS for the periods prior to November 2009 have
been retrospectively reported as discontinued operations as follows:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2009 | |||||||
(In thousands) | (In thousands) | |||||||
Revenue |
$ | 1,082 | $ | 2,957 | ||||
Operating expenses |
(930 | ) | (3,051 | ) | ||||
Interest expense |
(500 | ) | (1,708 | ) | ||||
Loss from discontinued operations |
$ | (348 | ) | $ | (1,802 | ) | ||
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5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Gathering systems |
$ | 138,794 | $ | 135,128 | ||||
Processing plants and compression
facilities |
361,093 | 332,053 | ||||||
Construction in progress - gathering |
28,190 | 17,693 | ||||||
Rights-of-way and easements |
29,435 | 27,788 | ||||||
Pipe and pipeline equipment |
13,023 | - | ||||||
Land |
4,251 | 4,251 | ||||||
Buildings and other |
2,921 | 2,732 | ||||||
577,707 | 519,645 | |||||||
Accumulated depreciation |
(53,468 | ) | (37,148 | ) | ||||
Net property, plant and equipment |
$ | 524,239 | $ | 482,497 | ||||
Our pipe and pipeline equipment consists of pipe, pipeline parts and fittings that were
purchased from Quicksilver
6. DEBT
Debt consisted of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Credit Facility |
$ | 238,500 | $ | 125,400 | ||||
Subordinated Note to Quicksilver |
57,609 | 55,718 | ||||||
296,109 | 181,118 | |||||||
Current maturities of debt |
(3,300 | ) | (2,475 | ) | ||||
Debt |
$ | 292,809 | $ | 178,643 | ||||
The weighted-average interest rate as of September 30, 2010 was 3.4% on our old Credit
Facility. Note 7 to the consolidated financial statements in our 2009 Annual Report on
Form 10-K contains a more complete description of our indebtedness.
As a result of the Crestwood Transaction our old credit facility terminated and we entered
into our new five-year senior secured revolving Credit Facility. Our new Credit Facility
allows for revolving loans, letters of credit and swingline loans in an aggregate amount of up to
$400 million. The new Credit Facility is secured by substantially all of CMLPs and its subsidiaries assets and is guaranteed by CMLPs subsidiaries.
Borrowings under the new Credit Facility bear interest at LIBOR plus an
applicable margin or a base rate as defined in the credit agreement. Under the terms of
the new Credit Facility, the initial applicable margin under LIBOR borrowings is 2.75%.
Our new Credit Facility requires us to maintain:
| a ratio of our consolidated trailing 12-month EBITDA (as defined in the credit agreement) to our net interest expense of not less than 2.5 to 1.0, and |
| a ratio of total indebtedness to consolidated trailing 12-month EBITDA of not more than 5.0 to 1.0. |
Our new Credit Facility also contains certain other customary affirmative and negative
covenants that could restrict the payment of distributions and permit the acceleration of
outstanding borrowings by the lenders upon events of default. Our new Credit Facility
permits us to expand our borrowing capacity up to $500 million, if certain financial ratios are
obtained and we seek and receive lender approval.
Our
new Credit Facility required us to terminate the Subordinated Note that had been payable
to Quicksilver through the issuance of additional common units during the fourth quarter of
2010. The conversion into common units was determined based upon the average closing
common unit price for a 20 trading-day period that ended October 15, 2010. The
conversion of the Subordinated Note was unanimously approved by the conflicts committee of our
General Partners board of directors and resulted in the issuance of 2,333,712 of our common units
in exchange for the outstanding balance of the Subordinated Note at the time of the conversion.
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7. ASSET RETIREMENT OBLIGATIONS
Activity for asset retirement obligations is as follows:
September 30, 2010 | ||||
(In thousands) | ||||
Beginning asset retirement obligations as reported at
December 31, 2009 |
$ | 7,654 | ||
Alliance Midstream Asset obligations at December 31, 2009 |
1,265 | |||
Adjusted asset retirement obligations at December 31, 2009 |
$ | 8,919 | ||
Incremental liability incurred |
428 | |||
Accretion expense |
375 | |||
Ending asset retirement obligations at September 30, 2010 |
$ | 9,722 | ||
As of September 30, 2010, no assets are legally restricted for use in settling asset retirement
obligations.
8. EQUITY-BASED COMPENSATION
Awards of phantom units have been granted under our amended 2007 Equity Plan. The
following table summarizes information regarding 2010 phantom unit activity:
Payable in cash | Payable in units | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average Grant | Average Grant | |||||||||||||||
Units | Date Fair Value | Units | Date Fair Value | |||||||||||||
Unvested phantom units - January 1, 2010 |
33,240 | $ | 20.90 | 485,672 | $ | 12.75 | ||||||||||
Vested |
(25,925 | ) | 22.37 | (179,886 | ) | 13.74 | ||||||||||
Issued |
- | - | 211,600 | 21.15 | ||||||||||||
Cancelled |
- | - | (1,690 | ) | 16.75 | |||||||||||
Unvested phantom units - September 30,
2010 |
7,315 | (1) | $ | 19.04 | 515,696 | (1) | $ | 15.83 | ||||||||
(1) | All units vested on October 1, 2010 due to the change in control of our General Partner |
At January 1, 2010, we had total unvested compensation cost of $2.9 million related to phantom
units. We recognized compensation expense of approximately $2.8 million during the nine
months ended September 30, 2010, including $0.3 million related to Quicksilver equity grants issued
to employees seconded to us. Grants of phantom units during the nine months ended
September 30, 2010 had an estimated grant date fair value of $4.5 million. We had
unearned compensation expense of $3.6 million at September 30, 2010. Phantom units that
vested during the nine months ended September 30, 2010 had a fair value of $3.1 million on their
vesting date.
On January 4, 2010, we awarded annual equity grants totaling 211,600 phantom units to the
non-management directors, executive officers of our general partner and employees seconded to
us. Each phantom unit settled in CMLP units and had a grant date fair value of $21.15,
which were generally expected to be recognized over the vesting period of three years except for
grants to non-employee directors of our general partner in lieu of cash compensation, which vest
after one year. At September 30, 2010, 594,198 units were available for issuance under
the amended 2007 Equity Plan.
As a result of the Crestwood Transaction which closed on October 1, 2010, during the fourth
quarter we recognized compensation expense of approximately $3.6 million, resulting in 523,011
units vesting and 347,888 units issued after the effect of taxes paid, which is attributable to the
acceleration of CMLPs equity-based compensation program resulting from the change-in-control of
provisions of our amended 2007 Equity Plan. This affected all outstanding units and
results in there being no unvested units outstanding immediately thereafter.
For a more complete description of our Equity Plan, see Note 11 to the consolidated financial
statements in our 2009 Annual Report on Form 10-K.
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9. INCOME TAXES
No provision for federal income taxes is included in our results of operations as such income
is taxable directly to the partners holding interests in us.
The closing of the Crestwood Transaction caused a technical termination of CMLP as defined by
the Internal Revenue Code. One of the significant consequences of a technical
termination is its impact on the partnerships filing requirement for federal income tax
purposes. Generally, the partnership taxable year closes with respect to all partners on
the date on which a partnership terminates. A terminated partnership must file a federal
income tax return for the short period ending on the date of the sale that resulted in the
technical termination. A second short period return is then required to be filed for the
remainder of the taxable year of that new partnership. Our tax status is, however,
unaffected by these filings and the technical termination.
We do not expect to make a cash payment for any 2009 liability for Texas margin tax, based
upon Texas filing rules. All effects of the 2009 Texas margin tax calculation are
captured in deferred income taxes. However, for 2010 and future years, we may have cash
payments due to the State of Texas.
Note 10 to the consolidated financial statements in our 2009 Annual Report on Form 10-K
contains more information about our income taxes.
10. COMMITMENTS AND CONTINGENT LIABILITIES
Note 9 to the consolidated financial statements in our 2009 Annual Report on Form 10-K
contains a description of our commitments and contingencies.
11. RELATED-PARTY TRANSACTIONS
We routinely conduct business with Quicksilver and its affiliates. For a more
complete description of our agreements with Quicksilver, see Note 2 and Note 12 to the consolidated
financial statements in our 2009 Annual Report on Form 10-K.
During the quarter and nine months ended September 30, 2010, Quicksilver accounted for more
than 90% of our total revenue. All cash disbursements for our operations and maintenance
expenses and general and administrative expenses for the quarter and nine months ended September
30, 2010 were paid to Quicksilver, which processes such amounts on our behalf.
With the purchase of the Alliance Midstream Assets, we also entered into an agreement with
Quicksilver to lease pipeline assets attached to the Alliance System that we did not
purchase. We have recognized $1.6 million of expense related to this agreement during
the nine months ended September 30, 2010.
The Crestwood Transaction was funded by an equity contribution from funds managed by First
Reserve Corporation and a $180 million senior secured Term B loan obtained by Crestwood Holdings
payable to multiple financial investors. Crestwood Holdings ownership in us is pledged
as collateral and is dependent on distributions from us to service the debt obligations which is
not included in our financial position.
Note 1 and Note 6 contain additional information about changes to our relationship with
Quicksilver and other transactions upon closing of the Crestwood Transaction.
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated interim financial statements, and
notes thereto, and the other financial data included elsewhere in this Quarterly
Report. The following discussion should also be read in conjunction with our audited
consolidated financial statements, and notes thereto, and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in our 2009 Annual Report on
Form 10-K.
Form 10-K.
Overview
We are a growth-oriented Delaware limited partnership engaged in gathering, processing,
compression and treating of natural gas and delivery of NGLs produced from the Barnett Shale
geologic formation of the Fort Worth Basin located in North Texas. We began operations
in 2004 to provide midstream services primarily to Quicksilver as well as to other natural gas
producers in this area. Additionally, all our revenues are derived from operations in
the Fort Worth Basin. During the quarter and nine months ended September 30, 2010,
approximately 90% of our total gathering and processing volumes were comprised of natural gas owned
or controlled by Quicksilver.
Our Operations
Our results of our operations are significantly influenced by the volumes of natural gas
gathered and processed through our systems. We gather, process, compress and treat
natural gas pursuant to fee-based contracts. We do not take title to the natural gas
or associated NGLs that we gather and process, and therefore, we avoid direct commodity price
exposure. However, a prolonged low in commodity price environment could result in our
customers reducing their production volumes which would cause a resulting decrease in our
revenue. All of our natural gas volumes gathered and processed during the quarter and
nine months ended September 30, 2010 were subject to fee-based contracts.
Operational Measurement
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:
Volume We must continually obtain new supplies of natural gas to maintain or increase
throughput volumes on our gathering and processing systems. We are dependent on
Quicksilver for approximately 90% of our throughput volumes. 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 opportunities. |
Adjusted Gross Margin We use adjusted gross margin information to evaluate the relationship
between our gathering and processing revenue and the cost of operating our facilities, including
our general and administrative overhead. Adjusted gross margin is not a measure
calculated in accordance with GAAP as it does not include deductions for expenses such as interest
and income tax which are necessary to maintain our business. In measuring our
operating performance, adjusted gross margin should not be considered an alternative to, or more
meaningful than, net income or operating cash flow determined in accordance with GAAP.
Our adjusted gross margin may not be comparable to a similarly titled measure of another company
because other entities may not calculate adjusted gross margin in the same manner. A
reconciliation of adjusted gross margin to amounts reported under GAAP is presented in Results of
Operations.
Operating Expenses We consider operating expenses in evaluating the performance of our
operations. These expenses are comprised primarily of direct labor, insurance,
property taxes, repair and maintenance expense, utilities and contract services, and are largely
independent of the volumes through our systems, but may fluctuate depending on the scale of our
operations during a specific period. Our ability to manage operating expenses has a
significant impact on our profitability and ability to pay distributions.
EBITDA We believe that EBITDA is a widely accepted financial indicator of a companys
operational performance and its ability to incur and service debt, fund capital expenditures and
make distributions. EBITDA is not a measure calculated in accordance with GAAP, as it
does not include deductions for items such as depreciation, interest and income taxes, which are
necessary to maintain our business. EBITDA should not be considered an alternative to
net income, operating cash flow or any
18
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other measure of financial performance presented in
accordance with GAAP. EBITDA calculations may vary among entities, so our computation
may not be comparable to EBITDA measures of other entities. In evaluating EBITDA, we
believe that
investors should also consider, among other things, the amount by which EBITDA exceeds
interest costs, how EBITDA compares to principal payments on debt and how EBITDA compares to
capital expenditures for each period. A reconciliation of EBITDA to amounts reported
under GAAP is presented in Results of Operations.
EBITDA is also used as a supplemental performance measure by our management and by external
users of our financial statements such as investors, commercial banks, research analysts and
others, to assess:
| financial performance of our assets without regard to financing methods, capital structure or historical cost basis; | ||
| our operating performance as compared to those of other companies in the midstream industry without regard to financing methods, capital structure or historical cost basis; and | ||
| the viability of acquisitions and capital expenditure projects and the rates of return on investment opportunities. |
2010 Highlights
Alliance Midstream Assets Acquisition
During January 2010, we completed the purchase of the Alliance Midstream Assets, located in Tarrant
and Denton counties of Texas, from Quicksilver for $84.4 million. Subsequent to the
acquisition, we have invested approximately $42 million in capital to expand the gathering system
and increase the capacity of the facility to 300 MMcfd. Gathered volumes on the
Alliance System in the nine months ended September 30, 2010 averaged 133 MMcfd. The
Alliance System has contributed $19.8 million in revenue and incurred $8.5 million in expense for
2010.
Equity Offering
In January 2010, the underwriters of our equity offering exercised their option to purchase an
additional 549,200 common units, which resulted in additional proceeds of $11.1
million. We used $11 million from the sale of the additional units to pay down our old
credit facility.
Crestwood Transaction
On October 1, 2010, the Crestwood Transaction closed and Quicksilver sold all of its ownership
interests in us to Crestwood. The Crestwood Transaction includes Crestwoods purchase
of a 100% interest in our General Partner, 5,696,752 common units and 11,513,625 subordinated
limited partner units in CMLP and a note payable by CMLP which had a balance of approximately $58
million at closing. Quicksilver received from Crestwood $701 million cash and has the
right to receive additional cash payments from Crestwood in 2012 and 2013 of up to $72 million in
the aggregate. The additional payments will be determined by an earn-out formula which
is based upon our actual gathering volumes during 2011 and 2012. The earn-out provision
was designed to provide additional incentive for our largest customer, Quicksilver, to maximize
volumes through our pipeline systems and processing facilities. The costs associated
with the additional earn-out payments will not be future obligations of CMLP but will be
obligations of Crestwood.
Under the agreements governing the Crestwood Transaction, Quicksilver and Crestwood have agreed for
two years not to solicit each others employees and Quicksilver has agreed not to compete with us
with respect to gathering, treating and processing of natural gas and the transportation of natural
gas liquids in Denton, Hood, Somervell, Johnson, Tarrant, Parker, Bosque and Erath Counties in
Texas. Quicksilver is entitled to appoint a director to our General Partners board of
directors until the later of the second anniversary of the closing and such time as Quicksilver
generates less than 50% of our consolidated revenue in any fiscal year. Pursuant to
this provision, Thomas Darden, our former CEO, was appointed to serve on our board of
directors. Our current independent directors continue to serve as directors after the
closing of the Crestwood Transaction.
In connection with the closing of the Crestwood Transaction, Quicksilver is providing us with
transitional services on a temporary basis on customary terms. More than 100
experienced midstream employees who had previously been seconded to us from Quicksilver became
employees of Crestwood. We also entered into an agreement with Quicksilver for the
joint development of areas governed by certain of our existing commercial agreements and amended
certain of our existing commercial agreements, most significantly to extend the terms of all
Quicksilver gathering agreements to 2020 and to establish a fixed gathering rate of $0.55 Mcf at
the Alliance System.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009
The following discussion compares the results of operations for the three months ended
September 30, 2010 to the three months ended September 30, 2009, which we refer to as the 2010
quarter and the 2009 quarter, respectively.
Three Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Total revenue |
$ | 30,366 | $ | 23,236 | ||||
Operations and maintenance expense |
7,205 | 6,485 | ||||||
General and administrative expense |
2,011 | 1,727 | ||||||
Adjusted gross margin |
21,150 | 15,024 | ||||||
Other income |
- | - | ||||||
EBITDA |
21,150 | 15,024 | ||||||
Depreciation and accretion expense |
5,689 | 5,565 | ||||||
Interest expense |
3,185 | 1,738 | ||||||
Income tax provision |
45 | 235 | ||||||
Net income from continuing operations |
$ | 12,231 | $ | 7,486 | ||||
The following table summarizes our volumes:
Gathering | Processing | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(MMcf) | ||||||||||||||||
Cowtown System |
12,415 | 13,238 | 12,339 | 13,197 | ||||||||||||
Lake Arlington Dry System |
7,887 | 6,302 | - | - | ||||||||||||
Alliance System |
13,089 | 52 | - | - | ||||||||||||
Total |
33,391 | 19,592 | 12,339 | 13,197 | ||||||||||||
The following table summarizes the changes in our revenue:
Gathering | Processing | Other | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue for the three
months ended September
30, 2009 |
$ | 14,095 | $ | 8,450 | $ | 691 | $ | 23,236 | ||||||||
Volume changes |
9,927 | (550 | ) | - | 9,377 | |||||||||||
Price changes |
(1,642 | ) | 86 | (691 | ) | (2,247 | ) | |||||||||
Revenue for the three
months ended September
30, 2010 |
$ | 22,380 | $ | 7,986 | $ | - | $ | 30,366 | ||||||||
Total Revenue and Volumes The increase in revenue was principally due to
$7.2 million in
higher revenue due to increased volumes on the Alliance System and $1.0 million in higher revenues
on the LADS. The increase in revenue was partially offset by approximately $0.4
million in reduced revenue due to lower processed volumes at Cowtown System, primarily due to
Quicksilvers drilling program being focused on the Alliance area since September 30, 2009.
Operations and Maintenance Expense The increase in operations and maintenance expense
was
mainly due to $0.9 million of higher costs attributable to the expansion of the Alliance System due
to the addition of a compression facility and an
expanded gathering system. The increase was partially offset by lower costs to
operate our plant facilities on the Cowtown System.
General and Administrative Expense The increase in general and administrative expense was
due to equity compensation expense, as a result of additional phantom unit grants issued in January
2010. General and administrative expense includes $0.7 million and $0.4 million of
equity-based compensation expense for the quarters ended September 30,
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2010 and 2009,
respectively. With the closing of the Crestwood Transaction, we expect that our
recurring general and administrative expenses will change and may increase due to our bearing the
full burden of general and administrative costs, including compensation of Crestwood executives.
Adjusted Gross Margin and EBITDA Adjusted gross margin and EBITDA increased
primarily as a
result of the increase in revenue described above. As a percentage of revenue,
adjusted gross margin and EBITDA increased from 65% in the 2009 quarter to 70% in the 2010 quarter.
Depreciation and Accretion Expense Depreciation and accretion expense increased primarily
as
a result of continuing expansion of our asset base, which included the expansion of the Alliance
System.
Interest Expense Interest expense increased primarily due to the increases in the borrowings
under our old credit facility, principally used to fund capital projects, partially offset by the
absence of any liability related to repurchase obligations. During December 2009, we
used $80.5 million of proceeds from our equity offering to temporarily pay down our old credit
facility. During January 2010, we borrowed $95 million to purchase the Alliance
Midstream Assets and repaid $11 million upon the underwriters exercise of their over-allotment
option.
The following table summarizes the details of interest expense for the three months ended
September 30, 2010 and 2009. With the conclusion of our repurchase obligations during
2009, we have no interest expense for such items in 2010.
Three Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Interest cost: |
||||||||
Revolving credit facility |
$ | 2,527 | $ | 1,001 | ||||
Repurchase obligation |
- | 314 | ||||||
Subordinated note to Quicksilver |
658 | 423 | ||||||
Interest expense |
$ | 3,185 | $ | 1,738 | ||||
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Nine months Ended September 30, 2010 Compared with Nine months Ended September 30, 2009
The following discussion compares the results of operations for the nine months ended
September 30, 2010 to the nine months ended September 30, 2009, which we refer to as the 2010
period and the 2009 period, respectively.
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Total revenue |
$ | 82,299 | $ | 70,540 | ||||
Operations and maintenance expense |
21,806 | 17,656 | ||||||
General and administrative expense |
6,285 | 5,463 | ||||||
Adjusted gross margin |
54,208 | 47,421 | ||||||
Other income |
- | 1 | ||||||
EBITDA |
54,208 | 47,422 | ||||||
Depreciation and accretion expense |
16,696 | 15,410 | ||||||
Interest expense |
8,808 | 6,216 | ||||||
Income tax provision |
171 | 446 | ||||||
Net income from continuing operations |
$ | 28,533 | $ | 25,350 | ||||
The following table summarizes our volumes:
Gathering | Processing | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(MMcf) | ||||||||||||||||
Cowtown System |
35,458 | 42,771 | 35,076 | 41,958 | ||||||||||||
Lake Arlington Dry System |
16,920 | 17,237 | - | - | ||||||||||||
Alliance System |
36,419 | 6,786 | - | - | ||||||||||||
Total |
88,797 | 66,794 | 35,076 | 41,958 | ||||||||||||
The following table summarizes the changes in our revenue:
Gathering | Processing | Other | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue for the nine
months ended
September 30, 2009 |
$ | 42,514 | $ | 26,885 | $ | 1,141 | $ | 70,540 | ||||||||
Volume changes |
14,005 | (4,410 | ) | - | 9,595 | |||||||||||
Price changes |
3,110 | 195 | (1,141 | ) | 2,164 | |||||||||||
Revenue for the nine
months ended
September 30, 2010 |
$ | 59,629 | $ | 22,670 | $ | - | $ | 82,299 | ||||||||
Total Revenue and Volumes The increase in revenue was principally due to
$19.3 million in
higher revenue due to an increase in volumes on the Alliance System. The increase in
revenue was partially offset by approximately $6.6 million in lower revenue due to a reduction in
volumes at Cowtown System, primarily due to Quicksilvers drilling program being focused in the
Alliance area since September 30, 2009. In addition, the increase in revenue relates
to higher fees associated with the commencement of compression and treating services on the
Alliance System beginning in September 2009 as well as additional compression assets that were
placed into service on the Cowtown System during the 2009 period.
Operations and Maintenance Expense The increase in operations and maintenance expense
was
mainly due to the $4.3 million of higher costs attributable to the expansion of the Alliance System
due to the addition of a compression and treating facility and an expanded gathering
system. The increase was partially offset by lower costs to operate our plant
facilities on the Cowtown System.
General and Administrative Expense The increase in general and administrative expense was
due to higher advertising cost and equity compensation expense, as a result of additional phantom
unit grants issued in January 2010. General and administrative expense includes $2.0
million and $1.3 million of equity-based compensation expense for the nine months ended
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September
30, 2010 and 2009, respectively. With the closing of the Crestwood Transaction, we
expect that our recurring general and administrative expenses will change and may increase due to
our bearing the full burden of general and administrative costs, including compensation of
Crestwood executives.
Adjusted Gross Margin and EBITDA Adjusted gross margin and EBITDA decreased
primarily as a
result of the increase in expenses described above. As a percentage of revenue,
adjusted gross margin and EBITDA decreased from 67% in the 2009 period to 66% in the 2010 period,
primarily due to the increase in operations and maintenance expense associated with our current
scale of operations and higher general and administrative expense, which were partially offset by
the increase in revenue.
Depreciation and Accretion Expense Depreciation and accretion expense increased primarily
as
a result of continuing expansion of our asset base, which included the expansion of the Alliance
System.
Interest Expense Interest expense increased primarily due to the increases in the borrowings
under our old credit facility, principally used to fund capital projects, partially offset by the
absence of any repurchase obligations. During December 2009, we used $80.5 million of
proceeds from our equity offering to temporarily pay down our old credit facility.
During January 2010, we borrowed $95 million to purchase the Alliance Midstream Assets and repaid
$11 million upon the underwriters exercise of their over-allotment option.
The following table summarizes the details of interest expense for the nine months ended September
30, 2010 and 2009. With the conclusion of our repurchase obligations during 2009, we
have no interest expense for such items in 2010.
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Interest cost: |
||||||||
Revolving credit facility |
$ | 6,917 | $ | 3,325 | ||||
Repurchase obligation |
- | 1,681 | ||||||
Subordinated note to Quicksilver |
1,891 | 1,520 | ||||||
Total cost |
8,808 | 6,526 | ||||||
Less interest capitalized |
- | (310 | ) | |||||
Interest expense |
$ | 8,808 | $ | 6,216 | ||||
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Liquidity and Capital Resources
The volumes of natural gas that we gather and process are dependent upon the natural gas
volumes produced by our customers, which may be affected by prevailing natural gas prices, their
derivative programs, the availability and cost of capital, their level of successful drilling
activity and other factors beyond their control. We cannot predict future changes to
natural gas prices or how any such pricing changes will influence producers behaviors.
If reduced drilling and development conditions were to persist or worsen over a prolonged period
of time, we could experience a reduction in volumes through our system and therefore reductions of
revenue and cash flows.
Our sources of liquidity include:
| cash generated from operations; | ||
| borrowings under our new Credit Facility; and | ||
| future capital market transactions. |
We believe that the cash generated from these sources will be sufficient to meet our current
level of quarterly cash distributions of $0.42 per unit and satisfy our short-term working capital
and maintenance capital expenditure requirements. In funding the purchase of the
Alliance Midstream Assets in January 2010, we borrowed from our old credit facility and repaid $11
million upon the underwriters exercise of their over-allotment option.
Subsequent to the closing of the Crestwood Transaction, we have increased the amount of
liquidity available as a result of the new $400 million Credit Facility. Additionally,
we have reduced our outstanding debt on our balance sheet due to the conversion of the subordinated
note into common units. See further discussion in the Debt section below.
Our cash flows are significantly influenced by our customers production in the Fort Worth
Basin, particularly Quicksilver. As Quicksilver and others have developed the Fort
Worth Basin, we have expanded our gathering and processing facilities to serve the additional
volumes produced by such development.
Cash Flows
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities |
$ | 44,873 | $ | 50,281 | ||||
Net cash used in investing activities |
(132,746 | ) | (55,712 | ) | ||||
Net cash provided by financing activities |
87,184 | 5,676 |
Cash Flows Used in Operating Activities The decrease in cash flows from operating activities
resulted from a decrease in the collections from Quicksilver primarily related to the growth in
accounts receivable from them.
Cash Flows Used in Investing Activities The increase in cash flows used in investing
activities resulted from the distribution to Quicksilver of $80.3 million related to the purchase
of the Alliance Midstream Assets. Additionally, for the 2010 period, we spent $52.5
million for gathering assets and processing facilities, of which
approximately $42 million is due
to the expansion of the gathering system at Alliance.
Cash Flows Provided by Financing Activities Changes in cash flows provided by financing
activities during the 2010 period resulted primarily from the net borrowings under our old credit
facility of $113.1 million compared with the 2009 period net borrowings of $32 million.
This change is largely reflective of our funding of the purchase of the Alliance Midstream Assets
for $84.4 million. In addition, we distributed $8.6 million more to our unitholders
during the 2010 period. We have increased our quarterly distribution by 7.7% from
September 30, 2009 to September 30, 2010. In January 2010, the underwriters of our
equity offering exercised their option to purchase an additional 549,200 common units, which
generated proceeds of $11.1 million for which there was no comparable 2009 event.
Information regarding historical and pending cash distributions is included in Note 3 to our
condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly
Report.
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Capital Expenditures
The midstream energy business is capital intensive, requiring significant investment for the
acquisition or development of new facilities. We categorize our capital expenditures
as either:
| expansion capital expenditures, which are made to construct additional assets, expand and upgrade existing systems, or acquire additional assets; or | ||
| maintenance capital expenditures, which are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and extend their useful lives, or to maintain existing system volumes and related cash flows. |
We anticipate that we will continue to make capital expenditures to develop our gathering and
processing network as Quicksilver and other producers continue to expand their development efforts
in the Fort Worth Basin. Consequently, our ability to develop and maintain sources of
funds to meet our capital requirements is critical to our ability to meet our growth objectives and
to maintain our distribution levels.
We
currently forecast approximately $75 million in capital expenditures for 2010, of which we
classify $6.6 million as maintenance capital expenditures. These amounts exclude the
acquisition of the Alliance Midstream Assets of $84.4 million, but include expected
post-acquisition capital expenditures on the Alliance System. The capital forecast
includes $36 million for the construction of pipelines and gathering
systems and $39 million for
plant and compression assets.
During the nine months ended September 30, 2010, we increased gross property, plant and
equipment by $58.1 million, including expansion capital expenditures of approximately $52.7
million, $5.0 million in maintenance capital expenditures and $0.4 million in asset retirement
cost.
Other Matters
We regularly review opportunities for both organic growth projects and acquisitions that will
enhance our financial performance. Since we distribute all of our available cash to
our unitholders, we will depend on a combination of borrowings under our new Credit Facility,
operating cash flows and debt or equity offerings to finance any future growth capital expenditures
or acquisitions.
Debt
Credit Facility At September 30, 2010, we had $238.5 million outstanding under our
old $320
million credit facility. The weighted-average interest rate as of September 30, 2010
was 3.4% on our old credit facility.
As a result of the Crestwood Transaction our old Credit Facility terminated and we entered
into our new five-year senior secured revolving Credit Facility. Our new Credit
Facility allows for revolving loans, letters of credit and swingline loans in an aggregate amount
for up to $400 million. Borrowings under the new Credit Facility bear interest at LIBOR
plus an applicable margin or a base rate as defined in the credit agreement. Under the
terms of the new Credit Agreement, the initial applicable margin under LIBOR borrowings is 2.75%.
Our new Credit Facility requires us to maintain:
| a ratio of our consolidated trailing 12-month EBITDA (as defined in the credit agreement) to our net interest expense of not less than 2.5 to 1.0, and | ||
| a ratio of total indebtedness to consolidated trailing 12-month EBITDA of not more than 5.0 to 1.0. |
Our new Credit Facility also contains certain other customary affirmative and negative
covenants that could restrict the payment of distributions and permit the acceleration of
outstanding borrowings by the lenders upon events of default. Our new Credit Facility
permits us to expand our borrowing capacity up to $500 million, if certain financial ratios are
obtained and we seek and receive lender approval.
Subordinated Note For the 2010 quarter, the debt ratio requirement was not met, which
resulted in no principal payment. Interest expense of $0.7 million was added to the
outstanding principal amount. The interest rate at September 30, 2010 was 4.4%.
Our
new Credit Facility required us to terminate the Subordinated Note that had been payable to
Quicksilver through the issuance of additional common units during the fourth quarter of
2010. The conversion into common units was determined based upon the average closing
common unit price for a 20 trading-day period that ended October 15, 2010. The
conversion of the Subordinated Note was unanimously approved by the conflicts committee of our
General Partners board of
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directors and resulted in the issuance of 2,333,712 of our common units in exchange for the
outstanding balance of the Subordinated Note at the time of conversion.
For a more complete description of our indebtedness, see Note 7 to the consolidated financial
statements in our 2009 Annual Report on Form 10-K.
Contractual Obligations and Commercial Commitments
In August 2010, we entered into a lease of office space for a term of five years commencing in
August 2010. Aggregate rentals over the life of the lease will total approximately
$2.0 million.
In October 2010, the Omnibus Agreement was entered into among our General Partner and
Crestwood Holdings.
There have been no other significant changes to our contractual obligations and commercial
commitments as disclosed in Item 7 in our 2009 Annual Report on Form 10-K except for the
satisfaction of the contractual obligations related to the Alliance Midstream Assets as disclosed
in Item 8 in our 2009 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of SEC
Regulation S-K.
Recently Issued Accounting Standards
The information regarding recent accounting pronouncements is included in Note 2 to our
condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly
Report.
Critical Accounting Estimates
Managements discussion and analysis of financial condition and results of operations are
based on our condensed consolidated interim financial statements and related footnotes contained
within Item 1 of Part I of this Quarterly Report. The process of preparing financial
statements in conformity with GAAP requires the use of estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses. Our critical accounting
estimates used in the preparation of the consolidated financial statements were discussed in Item 7
in our 2009 Annual Report on Form 10-K. These critical estimates, for which no
significant changes have occurred in the nine months ended September 30, 2010, include estimates
and assumptions pertaining to:
| depreciation expense for property, plant and equipment; | ||
| asset retirement obligations; and | ||
| equity-based compensation. |
These estimates and assumptions are based upon what we believe is the best information
available at the time of the estimates or assumptions. The estimates and assumptions
could change materially as conditions within and beyond our control change.
Accordingly, actual results could differ materially from those estimates.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have established policies and procedures for managing risk within our organization,
including internal controls. The level of risk assumed by us is based on our objectives and
capacity to manage risk.
Credit Risk
Our primary credit risk relates to our dependency on Quicksilver for the majority of our
natural gas volumes, which causes us to be subject to the risk of nonpayment or late payment by
Quicksilver for gathering and processing fees. Quicksilvers credit ratings are below
investment grade, where they may remain for the foreseeable future. Accordingly, this risk
could be higher than it might be with a more creditworthy customer or with a more diversified group
of customers. Unless and until we significantly diversify our customer base, we expect to
continue to be subject to non-diversified risk of nonpayment or late payment of our
fees. Additionally, we perform credit analyses of our customers on a regular basis pursuant
to our corporate credit policy. We have not had any significant losses due to counter-party
failures to perform.
Interest Rate Risk
Although our base interest rates remain low, our leverage ratios directly influence the
spreads charged by lenders. The credit markets could also drive the spreads charged by
lenders upward. As base rates or spreads increase, our financing costs will increase
accordingly. Although this could limit our ability to raise funds in the capital markets, we
expect that our competitors would face similar challenges with respect to funding acquisitions and
capital projects. We are exposed to variable interest rate risk as a result of borrowings
under our Credit Facility.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the period covered
by this report pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010,
our disclosure controls and procedures were effective to provide reasonable assurance that material
information required to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms and that information required to be disclosed by us in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter
ended September 30, 2010, that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1.
Legal Proceedings
Our operations are subject to a variety of risks and disputes normally incident to our
business. As a result, we may, at any given time, be a defendant in various legal proceedings
and litigation arising in the ordinary course of business. However, we are not currently a
party to any material litigation.
Item 1A. Risk Factors
There have been no material changes in the risk factors from those described in Part I, Item
1A. Risk Factors included in our 2009 Annual Report on Form 10-K with the exception of
additional risk factors related to the Crestwood Transaction. Some of the incremental risks
which may be relevant to us include:
Our ability to operate our business effectively may suffer if we do not, quickly and cost
effectively, establish our own operating, maintenance, general and administrative and other
functions to operate as a company not controlled by Quicksilver.
Historically, we have relied on certain general and administrative, operating, maintenance,
and other resources of Quicksilver to operate our business. Quicksilver performed many
important corporate functions for our operations pursuant to the services and secondment agreement
we had with Quicksilver and which terminated upon the closing of the Crestwood
Transaction. While we have entered into an agreement with Quicksilver to provide transitional
services to us for up to six months after the closing of the Crestwood Transaction, Quicksilver
will not provide those services on an ongoing basis after the expiration or termination of the
transition services agreement. We will need to enhance certain financial, legal and
compliance, administrative, maintenance, information technology and other support systems and
processes or to contract with third parties to provide those services.
Any failure or significant downturn in Quicksilvers financial, operational or general and
administrative policies and systems during the term of the transitional services agreement or in
our financial, operational or general and administrative policies and systems after the term of the
transition services agreement could have a material adverse effect on our business, financial
condition or results of operations.
We may incur additional general and administrative costs as a result of the Crestwood
Transaction.
Historically, we have relied on certain operating, maintenance, general and administrative and
other resources of Quicksilver to operate our business. Costs allocated to us were based on
identification of Quicksilvers resources which directly benefit us and our estimated usage of
shared resources and functions. As a result of the closing of the Crestwood Transaction, and
upon completion or termination of the transition services agreement with Quicksilver, we expect we
will be obligated to bear the full burden of general and administrative costs for Crestwood
executives.
As a result of the closing of the Crestwood Transaction and the conversion of the Subordinated
Note, Crestwood owns approximately 62% of our common units outstanding and controls our General
Partner, which has sole responsibility for conducting our business and managing our operations.
As a result of the closing of the Crestwood Transaction and the conversion of the Subordinated
Note, Crestwood owns all of Quicksilvers interests in CMLP, including approximately 62% of our
common units outstanding and controls our General Partner. Although our General Partner has a
fiduciary duty to manage us in a manner beneficial to us and our unitholders, after the closing of
the Crestwood Transaction, the directors and officers of our General Partner will have a fiduciary
duty to manage our General Partner in a manner beneficial to its owner, Crestwood. Conflicts
of interest may arise between Crestwood and its affiliates, including our General Partner, on the
one hand, and us, on the other hand. In resolving these conflicts of interest, our General
Partner may favor its own interests and the interests of its affiliates over our
interests. These conflicts include, among others, the following situations:
| neither our partnership agreement nor any other agreement requires Crestwood or its affiliates to pursue a business strategy that favors us; | ||
| our General Partner is allowed to take into account the interests of parties other than us, such as Crestwood, in resolving conflicts of interest; | ||
| our General Partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings and repayments of debt, issuance of additional partnership securities, and cash reserves, each of which can affect the amount of cash available for distribution; | ||
| our General Partner determines which costs incurred by it and its affiliates are reimbursable by us; |
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| our partnership agreement does not restrict our General Partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf; | ||
| our General Partner intends to limit its liability regarding our contractual and other obligations; and | ||
| our General Partner controls the enforcement of obligations owed to us by our General Partner and its affiliates. |
Crestwood and its affiliates may compete directly with us.
Crestwood and its affiliates will not be prohibited from owning assets or engaging in
businesses that compete directly or independently with us. Affiliates of Crestwood currently
own various midstream assets and conduct midstream business that may potentially compete with
us. In addition, Crestwood or its affiliates may acquire, construct or dispose of any
additional midstream or other assets in the future, without any obligation to offer us the
opportunity to purchase or construct or dispose of those assets. We cannot assure you that
Crestwood and its affiliates will enter into any agreement with us that will limit their ability to
directly compete with us or govern the resolution of any conflicts of interest.
Quicksilver entering into a confidentiality agreement.
In October 2010, members of the Darden family sent a letter to Quicksilvers board of
directors in which they expressed an interest in pursuing strategic alternatives for Quicksilver,
including potentially taking Quicksilvers equity interests private. Additionally,
Quicksilvers board of directors formed a transaction committee, which retained independent legal
and investment banking firms to assist it in evaluating potential and any prospective outcomes
pursuant to any strategic alternative. Should the process result in significant changes to
Quicksilvers organizational structure or financial condition, this could have a material effect on
our business and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits:
Exhibit No. | Description | |
3.1
|
Certificate of Amendment to the Certificate of Limited Partnership of Quicksilver Gas Services LP (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 7, 2010). | |
*3.2
|
First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Quicksilver Gas Services LP. | |
*3.3
|
Certificate of Amendment to the Certificate of Formation of Quicksilver Gas Services GP LLC | |
*3.4
|
First Amendment to the First Amended and Restated Limited Liability Company Agreement of Quicksilver Gas Services GP LLC | |
*10.1
|
Credit Agreement, dated as of October 1, 2010, among Crestwood Midstream Partners LP , BNP Paribas as administrative agent and collateral agent, Banc of America Securities LLC, BNP Paribas Securities Corp. and RBC Capital Markets Corporation, as joint lead arrangers and joint bookrunners, Bank of America, N.A. and Royal Bank of Canada, as syndication agents, and UBS Securities and The Royal Bank of Scotland PLC as co-documentation agents. | |
10.2
|
Omnibus Agreement, dated October 8, 2010, by and among Crestwood Midstream Partners LP, Crestwood Gas Services GP LLC and Crestwood Holdings Partners, LLC (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 13, 2010). | |
*31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith |
30
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 8, 2010
CRESTWOOD MIDSTREAM PARTNERS LP | ||||
By: CRESTWOOD GAS SERVICES GP LLC, its General Partner |
||||
By: | /s/ William G. Manias | |||
Senior Vice President Chief Financial Officer | ||||
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EXHIBIT INDEX
Exhibit No. | Description | |
3.1
|
Certificate of Amendment to the Certificate of Limited Partnership of Quicksilver Gas Services LP (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 7, 2010). | |
*3.2
|
First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Quicksilver Gas Services LP. | |
*3.3
|
Certificate of Amendment to the Certificate of Formation of Quicksilver Gas Services GP LLC | |
*3.4
|
First Amendment to the First Amended and Restated Limited Liability Company Agreement of Quicksilver Gas Services GP LLC | |
*10.1
|
Credit Agreement, dated as of October 1, 2010, among Crestwood Midstream Partners LP , BNP Paribas as administrative agent and collateral agent, Banc of America Securities LLC, BNP Paribas Securities Corp. and RBC Capital Markets Corporation, as joint lead arrangers and joint bookrunners, Bank of America, N.A. and Royal Bank of Canada, as syndication agents, and UBS Securities and The Royal Bank of Scotland PLC as co-documentation agents. | |
10.2
|
Omnibus Agreement, dated October 8, 2010, by and among Crestwood Midstream Partners LP, Crestwood Gas Services GP LLC and Crestwood Holdings Partners, LLC (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 13, 2010). | |
*31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith |