Attached files
file | filename |
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EX-32.1 - EX-32.1 - Crestwood Midstream Partners LP | h85535exv32w1.htm |
EX-31.2 - EX-31.2 - Crestwood Midstream Partners LP | h85535exv31w2.htm |
EX-31.1 - EX-31.1 - Crestwood Midstream Partners LP | h85535exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Crestwood Midstream Partners LP | Financial_Report.xls |
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, 2011
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 (State or other jurisdiction of incorporation or organization) |
56-2639586 (I.R.S. Employer Identification No.) |
717 Texas Avenue, Suite 3150, Houston, Texas (Address of principal executive offices) |
77002 (Zip Code) |
(832) 519-2200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
None
(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
þ 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 the issuers common units and Class C units, as
of the latest practicable date:
Title of Class | Outstanding as of October 28, 2011 | |
Common Units | 32,992,696 | |
Class C Units | 6,452,233 |
Table of Contents
DEFINITIONS
As used in this report, unless the context otherwise requires:
Bbl(s) means barrel or barrels
EBITDA means earnings before interest, taxes, depreciation, amortization and accretion
hp means horsepower
LIBOR means London Interbank Offered Rate
Management means management of Crestwood Midstream Partners LPs General Partner
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(s) 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
Barnett Shale means our Cowtown System, Lake Arlington System and Alliance System
CMLP means Crestwood Midstream Partners LP and our wholly owned subsidiaries, which trades
under the ticker symbol CMLP
Credit Facility means our senior secured credit facility, as amended, dated effective
October 1, 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 was completed on October 1, 2010
Exchange Act means the Securities Exchange Act of 1934, as amended
Fayetteville Shale System means the pipeline, compression and treating assets located in
Arkansas that were acquired in the Frontier Gas Acquisition and subsequent additions
Frontier means Frontier Gas Services, LLC, a Delaware limited liability company
Frontier Gas Acquisition means the purchase of midstream assets in the Fayetteville Shale
and Granite Wash from Frontier that was completed on April 1, 2011
GAAP means generally accepted accounting principles in the United States
General Partner means Crestwood Gas Services GP LLC
Granite Wash System means the pipeline, compression and processing assets and subsequent
additions located in Roberts County, Texas, that were acquired in the Frontier Gas
Acquisition
Joinder Agreement means the additional commitments received from certain lenders under our
Credit Facility, dated April 1, 2011, which expanded the total borrowing capacity under
our Credit Facility to $500 million
Lake Arlington System means gathering and compression assets purchased from
Quicksilver in 2008 located in eastern Tarrant County, Texas
Las Animas System means the gathering assets acquired in February 2011, located in
Eddy County, New Mexico and subsequent additions
Omnibus Agreement means the Omnibus Agreement, dated October 8, 2010, among our General
Partner and Crestwood
Partnership Agreement means the Second Amended and Restated Agreement of Limited
Partnership of Crestwood Midstream Partners LP, dated February 19, 2008, as amended
Tristate means Tristate Sabine, LLC
Sabine System means the gathering and treating assets located in Sabine Parish, Louisiana,
acquired on November 1, 2011
Senior Notes means the $200 million aggregate principal amount of 7.75% Senior Notes due
2019 issued by CMLP on April 1, 2011
Quicksilver means Quicksilver Resources Inc. and its affiliates
SEC means the U.S. Securities and Exchange Commission
2
CRESTWOOD MIDSTREAM PARTNERS LP
INDEX TO FORM 10-Q
For the Period Ended September 30, 2011
INDEX TO FORM 10-Q
For the Period Ended September 30, 2011
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Certification(s) Pursuant to Section 302 |
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Certification Pursuant to Section 906 |
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
3
Table of Contents
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 in their natural gas projects; | ||
| competitive conditions in our industry; | ||
| actions or inactions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters and customers; | ||
| our ability to consummate acquisitions, successfully integrate acquired business and realize any cost savings and other synergies from any acquisition; | ||
| 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 and future litigation; | ||
| risks related to our substantial indebtedness; 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 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.
4
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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
||||||||||||||||
Gathering revenue related party |
$ | 27,840 | $ | 20,670 | $ | 75,706 | $ | 55,464 | ||||||||
Gathering revenue |
8,007 | 1,710 | 17,908 | 4,165 | ||||||||||||
Processing revenue related party |
7,183 | 7,372 | 21,723 | 20,625 | ||||||||||||
Processing revenue |
692 | 614 | 1,867 | 2,045 | ||||||||||||
Product sales |
14,893 | | 29,326 | | ||||||||||||
Total revenue |
58,615 | 30,366 | 146,530 | 82,299 | ||||||||||||
Expenses |
||||||||||||||||
Operations and maintenance |
10,573 | 6,564 | 26,165 | 19,979 | ||||||||||||
Product purchases |
13,482 | | 26,010 | | ||||||||||||
General and administrative |
5,566 | 2,652 | 17,996 | 8,112 | ||||||||||||
Depreciation, amortization and accretion |
9,595 | 5,689 | 23,981 | 16,696 | ||||||||||||
Total expenses |
39,216 | 14,905 | 94,152 | 44,787 | ||||||||||||
Gain from exchange of property, plant and equipment |
1,106 | | 1,106 | | ||||||||||||
Operating income |
20,505 | 15,461 | 53,484 | 37,512 | ||||||||||||
Interest expense |
7,100 | 3,185 | 19,925 | 8,808 | ||||||||||||
Income from continuing operations before income
taxes |
13,405 | 12,276 | 33,559 | 28,704 | ||||||||||||
Income tax provision |
347 | 45 | 898 | 171 | ||||||||||||
Net income |
$ | 13,058 | $ | 12,231 | $ | 32,661 | $ | 28,533 | ||||||||
General partner interest in net income |
$ | 2,426 | $ | 743 | $ | 4,942 | $ | 1,777 | ||||||||
Limited partners interest in net income |
$ | 10,632 | $ | 11,488 | $ | 27,719 | $ | 26,756 | ||||||||
Basic income per unit: |
||||||||||||||||
Net income per limited partner unit basic |
$ | 0.27 | $ | 0.40 | $ | 0.76 | $ | 0.94 | ||||||||
Diluted income per unit: |
||||||||||||||||
Net income per limited partner unit diluted |
$ | 0.27 | $ | 0.38 | $ | 0.76 | $ | 0.90 | ||||||||
Weighted average number of common units
outstanding: |
||||||||||||||||
Basic |
39,388 | 28,502 | 36,424 | 28,502 | ||||||||||||
Diluted |
39,504 | 31,561 | 36,540 | 31,783 | ||||||||||||
Distributions declared per unit (attributable to
the
period ended) |
$ | 0.48 | $ | 0.42 | $ | 1.38 | $ | 1.23 |
The accompanying notes are an integral part of these condensed consolidated financial
statements.
5
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data Unaudited
In thousands, except for unit data Unaudited
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 58 | $ | 2 | ||||
Accounts receivable |
7,373 | 1,679 | ||||||
Accounts receivable related party |
28,678 | 23,003 | ||||||
Prepaid expenses and other |
2,254 | 1,052 | ||||||
Total current assets |
38,363 | 25,736 | ||||||
Property, plant and equipment, net |
682,000 | 531,371 | ||||||
Intangible assets, net |
112,739 | | ||||||
Goodwill |
93,628 | | ||||||
Other assets |
18,132 | 13,520 | ||||||
Total assets |
$ | 944,862 | $ | 570,627 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current liabilities |
||||||||
Accounts payable and other |
$ | 27,650 | $ | 2,917 | ||||
Accrued additions to property, plant and
equipment |
7,873 | 11,309 | ||||||
Accounts payable related party |
1,918 | 4,267 | ||||||
Capital leases |
2,672 | | ||||||
Total current liabilities |
40,113 | 18,493 | ||||||
Long-term debt |
428,000 | 283,504 | ||||||
Long-term capital leases |
4,610 | | ||||||
Asset retirement obligations |
10,822 | 9,877 | ||||||
Commitments and contingent liabilities (Note 13) |
||||||||
Partners capital |
||||||||
Common unitholders (32,992,696 and
31,187,696,units issued
and outstanding at September 30, 2011 and
December 31, 2010) |
294,756 | 258,069 | ||||||
Class C unit holders (6,452,233 and 0 units
issued and outstanding at
September 30, 2011 and December 31, 2010,
respectively) |
155,795 | | ||||||
General partner |
10,766 | 684 | ||||||
Total partners capital |
461,317 | 258,753 | ||||||
$ | 944,862 | $ | 570,627 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Unaudited
In thousands Unaudited
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 32,661 | $ | 28,533 | ||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
23,554 | 16,321 | ||||||
Accretion of asset retirement obligations |
427 | 375 | ||||||
Deferred income taxes |
| 171 | ||||||
Equity-based compensation |
851 | 2,001 | ||||||
Non-cash interest expense |
2,542 | 3,323 | ||||||
Gain from exchange of plant, property and equipment |
(1,106 | ) | | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(5,359 | ) | (620 | ) | ||||
Prepaid expenses and other |
(447 | ) | (923 | ) | ||||
Accounts receivable related party |
(5,675 | ) | (8,117 | ) | ||||
Accounts payable related party |
(2,349 | ) | | |||||
Accounts payable and other |
23,366 | 3,809 | ||||||
Net cash provided by operating activities |
68,465 | 44,873 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(31,256 | ) | (52,470 | ) | ||||
Proceeds from exchange of plant, property and equipment |
5,943 | | ||||||
Acquisitions, net of cash acquired |
(349,662 | ) | | |||||
Distribution to Quicksilver for Alliance Midstream Assets |
| (80,276 | ) | |||||
Net cash used in investing activities |
(374,975 | ) | (132,746 | ) | ||||
Financing activities: |
||||||||
Proceeds from senior notes |
200,000 | | ||||||
Proceeds from credit facility |
100,200 | 143,200 | ||||||
Repayments of credit facility |
(155,704 | ) | (30,100 | ) | ||||
Debt issuance costs paid |
(6,982 | ) | | |||||
Proceeds from issuance of Class C units, net |
152,671 | | ||||||
Proceeds from issuance of Common units, net |
53,550 | 11,054 | ||||||
Contributions by partners |
8,741 | | ||||||
Distributions paid |
(45,910 | ) | (35,826 | ) | ||||
Taxes paid for equity-based compensation vesting |
| (1,144 | ) | |||||
Net cash provided by financing activities |
306,566 | 87,184 | ||||||
Net cash increase (decrease) |
56 | (689 | ) | |||||
Cash and cash equivalents at beginning of period |
2 | 746 | ||||||
Cash and cash equivalents at end of period |
$ | 58 | $ | 57 | ||||
Cash paid for interest |
$ | 9,380 | $ | 5,485 | ||||
Non-cash transactions: |
||||||||
Working capital related to capital expenditures |
7,873 | 15,269 | ||||||
PIK value to Class C unitholders |
6,050 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
In thousands Unaudited
In thousands Unaudited
Limited Partners | ||||||||||||||||
Common | Subordinated | General Partner | Total | |||||||||||||
Balance at December 31, 2009 |
$ | 281,239 | $ | 3,040 | $ | 558 | $ | 284,837 | ||||||||
Equity-based compensation |
2,001 | | | 2,001 | ||||||||||||
Distributions paid |
(20,387 | ) | (13,815 | ) | (1,624 | ) | (35,826 | ) | ||||||||
Distributions to Quicksilver |
(80,276 | ) | | | (80,276 | ) | ||||||||||
Net income |
16,347 | 10,409 | 1,777 | 28,533 | ||||||||||||
Issuance of units, net of offering costs |
11,054 | | | 11,054 | ||||||||||||
Taxes paid for equity-based
compensation vesting |
(1,144 | ) | | | (1,144 | ) | ||||||||||
Balance at September 30, 2010 |
$ | 208,834 | $ | (366 | ) | $ | 711 | $ | 209,179 | |||||||
Limited Partners | ||||||||||||||||
Common | Class C | General Partner | Total | |||||||||||||
Balance at December 31, 2010 |
$ | 258,069 | $ | | $ | 684 | $ | 258,753 | ||||||||
Equity-based compensation |
851 | | | 851 | ||||||||||||
Distributions paid |
(42,309 | ) | | (3,601 | ) | (45,910 | ) | |||||||||
Net income |
24,595 | 3,124 | 4,942 | 32,661 | ||||||||||||
Issuance of units, net of offering costs |
53,550 | 152,671 | | 206,221 | ||||||||||||
Contributions by partners |
| | 8,741 | 8,741 | ||||||||||||
Balance at September 30, 2011 |
$ | 294,756 | $ | 155,795 | $ | 10,766 | $ | 461,317 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
UNAUDITED
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization Crestwood Midstream Partners LP is a publicly traded Delaware limited
partnership formed for the purpose of acquiring and operating midstream assets. Our common units
are listed on the New York Stock Exchange under the symbol CMLP. In this report, unless the
context requires otherwise, references to we, us, our or the Partnership are intended to
mean the business and operations of Crestwood Midstream Partners LP and its subsidiaries.
As of September 30, 2011 our ownership is as follows:
Ownership Percentage | ||||||||||||
Crestwood | Public | Total | ||||||||||
General partner interest |
1.9 | % | | 1.9 | % | |||||||
Limited partner interest: |
||||||||||||
Common unitholders |
48.6 | % | 33.5 | % | 82.1 | % | ||||||
Class C unitholders |
0.5 | % | 15.5 | % | 16.0 | % | ||||||
Total |
51.0 | % | 49.0 | % | 100.0 | % | ||||||
Description of Business We are primarily engaged in the gathering, compression, processing
and treating of natural gas and the delivery of NGLs produced in the Barnett Shale, Fayetteville
Shale, Avalon Shale and Granite Wash areas. We provide these midstream services under long-term
contracts, whereby we receive fees for performing gathering, compression, processing and treating
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying financial statements and related notes present the
unaudited condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010.
They also include the unaudited condensed consolidated statements of income for the three and nine
month periods ended September 30, 2011 and 2010, the unaudited condensed consolidated statements of
cash flows and unaudited changes in partners capital for the nine month periods ended September
30, 2011 and 2010.
The accompanying condensed consolidated financial statements were prepared in accordance with
GAAP for the interim financial information and in accordance with the rules and regulations of the
SEC. 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. 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 2010 Annual Report on Form 10-K.
Changes in Presentation Certain changes have been made to the 2010 financial statements for
presentations adopted in 2011. The amount of the change is approximately $0.6 million and $1.8
million for the three and nine months ended September 30, 2010, respectively, from operations and
maintenance expense to general and administrative expense.
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.
Fair Value of Financial Instruments The fair value of cash and cash equivalents, accounts
receivable, accounts payable and Credit Facility debt approximate their carrying amounts as of
September 30, 2011. The fair value of our Senior Notes was $192 million as of September 30, 2011.
Revenue Recognition Our primary service offerings are the gathering, compression,
processing and treating of natural gas. We have fixed-fee contracts under which we receive revenue
based on the volume of natural gas gathered and processed. We also have percent-of-proceeds
contracts where we receive revenue based on the value of products sold to third parties which we
present as Product Sales. We recognize revenue when all of the following criteria are met:
| persuasive evidence of an exchange arrangement exists; | ||
| services have been rendered; | ||
| the price for its services is fixed or determinable; and | ||
| collectability is reasonably assured. |
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Table of Contents
Segment Information Our operations include three reportable operating segments. These
operating segments reflect how we manage our operations. Our business segments reflect the primary
geographic areas in which we operate and consist of the Barnett Shale, the Fayetteville Shale and
the Granite Wash. Our business segments are engaged in the gathering, compression, processing and
treating of natural gas and delivery of NGLs.
Net Income per Limited Partner Unit The following is a reconciliation of the components of
the basic and diluted net income per limited partner unit calculations for the three and nine
months ended September 30, 2011 and 2010. There have not been any units excluded due to being
anti-dilutive.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per unit data) | ||||||||||||||||
Limited partners interest in net income |
$ | 10,632 | $ | 11,488 | $ | 27,719 | $ | 26,756 | ||||||||
Impact of interest on subordinated note (1) |
| 647 | | 1,860 | ||||||||||||
Income available assuming conversion of convertible
debt |
$ | 10,632 | $ | 12,135 | $ | 27,719 | $ | 28,616 | ||||||||
Weighted-average common units basic (2) |
39,388 | 28,502 | 36,424 | 28,502 | ||||||||||||
Effect of unvested phantom units and Class C units |
116 | 516 | 116 | 516 | ||||||||||||
Effect of subordinated note (1) |
| 2,543 | | 2,765 | ||||||||||||
Weighted-average common units diluted |
39,504 | 31,561 | 36,540 | 31,783 | ||||||||||||
Basic earnings per unit: |
||||||||||||||||
Net income per limited partner unit basic |
$ | 0.27 | $ | 0.40 | $ | 0.76 | $ | 0.94 | ||||||||
Diluted earnings per unit: |
||||||||||||||||
Net income per limited partner unit diluted |
$ | 0.27 | $ | 0.38 | $ | 0.76 | $ | 0.90 | ||||||||
Conversion price (1) |
N/A | $ | 22.65 | N/A | $ | 20.84 |
(1) Assumes that convertible debt is converted using the lesser of average closing price per unit or final closing price on September 30, 2010. See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for a more complete description of our subordinated note that terminated during the fourth quarter of 2010. | ||
(2) Includes 6,398,418 and 4,253,787 shares of Class C units for the three and nine months ended September 30, 2011, respectively. |
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 2010 Annual Report on Form 10-K.
3. ACQUISITIONS
Las Animas Acquisition
Effective February 1, 2011, we acquired natural gas gathering pipelines near the emerging
Avalon Shale and Bone Spring trends in Southeastern New Mexico for $5.1 million. The pipelines,
which we refer to as the Las Animas System, are supported by long-term, primarily fixed-fee
contracts which include existing Morrow/Atoka production. The Avalon Shale is a liquids-rich oil
and gas producing formation that is part of the Permian basin located in West Texas.
Las Animas System |
The Las Animas System, located in Eddy County, New Mexico, near the emerging Avalon Shale and Bone Spring trends in Southeastern New Mexico, consists of natural gas gathering pipelines that deliver gas to El Paso Natural Gas and Southern Union Gas Services. The Las Animas System is reflected in the Barnett Shale for segment reporting. |
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Frontier Gas Acquisition
On April 1,
2011, we completed the Frontier Gas Acquisition including assets in the
Fayetteville Shale and the Granite Wash. The Fayetteville
Shale is a dry gas formation in the Arkoma basin located in Arkansas. The Granite Wash is a
liquids-rich oil and gas producing formation in the Anadarko basin located in the Texas Panhandle.
Fayetteville Shale System | ||
The Fayetteville Shale System, located in Arkansas, consists of high pressure and low pressure gathering pipelines with a capacity of approximately 510 MMcfd, treating capacity of approximately 165 MMcfd and approximately 35,000 hp of compression. This system interconnects with multiple interstate pipelines and is supported by long-term, primarily fixed-fee contracts with producers in the core of the Fayetteville Shale, with initial terms through 2020 with five year extensions. |
- | Twin Groves / Prairie Creek / Woolly Hollow System. Located in Conway and Faulkner Counties, Arkansas and consists of a gathering system and a related gas compression facility with a capacity of 350 MMcfd and a dehydration and treating facility with capacity of 165 MMcfd. This system gathers natural gas produced by BHP Billiton Petroleum, a wholly owned subsidiary of BHP Billiton Limited (BHP), BP p.l.c. (BP) and XTO Energy, Inc., a subsidiary of Exxon Mobil Corporation (ExxonMobil) and interconnects with interstate pipelines including Boardwalk Gas Transmission, Ozark Gas Transmission and Fayetteville Express Pipeline. | ||
- | Rose Bud System. Located in White County, Arkansas and consists of a gathering system and a related gas compression facility with a capacity of 60 MMcfd. This system gathers natural gas produced by BHP / BP and ExxonMobil, and interconnects with Ozark Gas Transmission. | ||
- | Wilson Creek System. Located in Van Buren County, Arkansas and consists of a gathering system and a related compression facility with a capacity of 100 MMcfd. This system gathers natural gas produced by BHP and SH Exploration and interconnects with Ozark Gas Transmission. |
Granite Wash System |
The Granite Wash System, located in Roberts County, Texas, consists of a gathering system and NGL pipeline system, approximately 9,000 hp of compression, and the Indian Creek Plant consisting of a 36 MMcfd natural gas processing unit that extracts NGLs from the natural gas stream. This system gathers natural gas produced by Chesapeake Energy Corporation and others and delivers NGLs to the Mid-America Pipeline for ultimate delivery to the Mt. Belvieu or Conway NGL market centers. Residue gas is delivered into ANR Pipeline Company and Northern Natural Gas Company. |
The final purchase price allocation is as follows ($ in thousands): |
Purchase Price: |
||||
Total purchase price |
$ | 344,562 | ||
Preliminary Purchase Price Allocation: |
||||
Accounts receivable |
335 | |||
Prepaid expenses and other |
750 | |||
Capital lease asset |
8,587 | |||
Property, plant and equipment |
135,918 | |||
Intangible assets |
114,200 | |||
Other assets |
178 | |||
Total assets |
$ | 259,968 | ||
Current portion of capital leases |
2,576 | |||
Other payables |
64 | |||
Capital leases |
6,011 | |||
Asset Retirement Obligations |
383 | |||
Total liabilities |
$ | 9,034 | ||
Goodwill |
$ | 93,628 | ||
The $338 million purchase price paid at closing was financed through a combination of equity
and debt as described in Notes 4 and 7 to our condensed consolidated interim financial statements
in this Quarterly Report. The total purchase price paid of $345
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million also includes $4 million in
capital expenditures and $3 million of inventory purchased. Transaction costs for the nine months
ended September 30, 2011 were $5.7 million of which $3.2 million was recorded in general and
administrative expense and $2.5 million was recorded in interest expense.
The following is the presentation of income as if we had owned the Fayetteville and Granite
Wash Systems for the three and nine months ended September 30, 2010 and for nine months ended
September 30, 2011:
Three Months Ended September 30, 2010 | ||||||||||||
Crestwood | Fayetteville | |||||||||||
Midstream | and Granite | |||||||||||
Partners LP | Wash | Combined | ||||||||||
(In thousands) | ||||||||||||
Revenue |
$ | 30,366 | $ | 16,702 | $ | 47,068 | ||||||
Operating expenses |
(14,905 | ) | (11,246 | ) | (26,151 | ) | ||||||
Operating income |
$ | 15,461 | $ | 5,456 | $ | 20,917 | ||||||
Basic earnings per limited partner unit: |
$ | 0.40 | $ | 0.19 | $ | 0.59 | ||||||
Diluted earnings per limited partner unit: |
$ | 0.38 | $ | 0.17 | $ | 0.55 | ||||||
Nine Months Ended September 30, 2010 | ||||||||||||
Crestwood | Fayetteville | |||||||||||
Midstream | and Granite | |||||||||||
Partners LP | Wash | Combined | ||||||||||
(In thousands) | ||||||||||||
Revenue |
$ | 82,299 | $ | 48,432 | $ | 130,731 | ||||||
Operating expenses |
(44,787 | ) | (32,416 | ) | (77,203 | ) | ||||||
Operating income |
$ | 37,512 | $ | 16,016 | $ | 53,528 | ||||||
Basic earnings per limited partner unit: |
$ | 0.94 | $ | 0.55 | $ | 1.49 | ||||||
Diluted earnings per limited partner unit: |
$ | 0.90 | $ | 0.50 | $ | 1.40 | ||||||
Nine Months Ended September 30, 2011 | ||||||||||||
Crestwood Midstream | Fayetteville and | |||||||||||
Partners LP(1) | Granite Wash(2) | Combined | ||||||||||
(In thousands) | ||||||||||||
Revenue |
$ | 146,530 | $ | 17,002 | $ | 163,532 | ||||||
Operating expenses |
(94,152 | ) | (12,420 | ) | (106,572 | ) | ||||||
Gain from exchange of property, plant and
equipment |
1,106 | | 1,106 | |||||||||
Operating income |
$ | 53,484 | $ | 4,582 | $ | 58,066 | ||||||
Basic earnings per limited partner unit: |
$ | 0.76 | $ | 0.14 | $ | 0.90 | ||||||
Diluted earnings per limited partner unit: |
$ | 0.76 | $ | 0.13 | $ | 0.89 |
(1) | Includes six months of operating income for Fayetteville and Granite Wash, from April 1, 2011 to September 30, 2011, subsequent to acquisition. | |
(2) | Represents the first quarter of 2011, prior to the acquisition of Fayetteville and Granite Wash. |
4. PARTNERS CAPITAL AND DISTRIBUTIONS
On April 1, 2011, we issued 6,243,000 Class C units, representing limited partner interests,
in a private placement. The negotiated purchase price for the Class C units was $24.50 per unit,
resulting in net proceeds to us of approximately $153 million which was used to finance a portion
of our Frontier Gas Acquisition. The Class C units are substantially similar in all respects to our
existing common units, representing limited partner interests, except that we can elect to pay
distributions for our Class C units through the issuance of additional Class C units or cash. The
Class C units will convert into common units on a one-for-one basis on the second anniversary of
the date of issuance.
In connection with the issuance of the Class C units, our General Partner made an additional
capital contribution of $8.7 million to us in exchange for the issuance of an additional 293,948
general partner units, increasing the General Partner interest to 2%.
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On May 4, 2011, we completed a public offering of 1,800,000 common units, representing limited
partner interests, under an existing shelf registration statement at a price of $30.65 per common
unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net
proceeds of approximately $53 million. The net proceeds from the offering were used to reduce
indebtedness under our Credit Facility and for general partnership purposes. In connection with
the issuance of the common units, our
General Partner did not make an additional capital contribution resulting in a reduction of
the General Partners interest to approximately 1.9%.
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.
The following table presents distributions attributable to quarters ended in 2011 and 2010:
PIK Value | ||||||||||||||||||||||||
Attributable to the | Per Unit | Total Cash | to Class C | Total IDR | ||||||||||||||||||||
Payment Date | Quarter Ended | Distribution | Distribution | unitholders | Total | Distribution | ||||||||||||||||||
(In millions, except per unit information) | ||||||||||||||||||||||||
Pending Distributions |
||||||||||||||||||||||||
November 10, 2011 |
September 30, 2011 | $ | 0.48 | $ | 18.1 | $ | 3.5 | $ | 21.6 | $ | 2.2 | |||||||||||||
Completed Distributions |
||||||||||||||||||||||||
2011 |
||||||||||||||||||||||||
August 12, 2011 |
June 30, 2011 | $ | 0.46 | $ | 16.8 | $ | 3.1 | $ | 19.9 | $ | 1.5 | |||||||||||||
May 13, 2011 |
March 31, 2011 | $ | 0.44 | $ | 14.8 | $ | 2.9 | $ | 17.7 | $ | 0.8 | |||||||||||||
February 11, 2011 |
December 31, 2010 | $ | 0.43 | $ | 14.3 | $ | | $ | 14.3 | $ | 0.7 | |||||||||||||
2010 |
||||||||||||||||||||||||
November 12, 2010 |
September 30, 2010 | $ | 0.42 | $ | 13.9 | $ | | $ | 13.9 | $ | 0.6 | |||||||||||||
August 13, 2010 |
June 30, 2010 | $ | 0.42 | $ | 12.7 | $ | | $ | 12.7 | $ | 0.5 | |||||||||||||
May 14, 2010 |
March 31, 2010 | $ | 0.39 | $ | 11.6 | $ | | $ | 11.6 | $ | 0.3 |
Cash distributions included amounts paid to common and subordinated unitholders. Beginning
with the distributions for the quarter ended December 31, 2010, we no longer have any subordinated
units due to the conversion of all subordinated units into common units. See Note 13 to the
consolidated financial statements in our 2010 Annual Report on Form 10-K for a more complete
description of our conversion of the subordinated units. We have the option to pay distributions
to our Class C unitholders with cash or by issuing additional Class C units based upon the volume
weighted average price of our common units for the 10 trading days immediately preceding the date
the distribution is declared. For the distribution that was paid August 12, 2011, attributable to
the quarter ended June 30, 2011, we issued 115,140 additional Class C units. For the distribution
that will be paid November 10, 2011, attributable to the quarter ended September 30, 2011, we will
issue 144,402 additional Class C units.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Gathering systems |
$ | 265,722 | $ | 158,975 | ||||
Processing plants and compression
facilities |
403,390 | 365,208 | ||||||
Construction in progress gathering |
37,120 | 26,385 | ||||||
Rights-of-way and easements |
46,966 | 32,054 | ||||||
Land |
4,511 | 4,251 | ||||||
Buildings and other |
5,380 | 3,494 | ||||||
763,089 | 590,367 | |||||||
Accumulated depreciation |
(81,089 | ) | (58,996 | ) | ||||
Net property, plant and equipment |
$ | 682,000 | $ | 531,371 | ||||
With the Frontier Gas Acquisition we have leased compressors which are accounted for as
capital leases for a total of $8.6 million less accumulated amortization of $1.3 million as of
September 30, 2011.
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During the quarter we had a gain from exchange of property, plant and equipment due to an
agreement with PVR Midstream, LLC, on August 18, 2011, to exchange the delivery of certain
processing plants that were under contract with Exterran Energy Solutions, L.P. resulting in
proceeds of $5.9 million and a gain of $1.1 million.
6. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of gas contracts. The following table summarizes the intangibles
and goodwill associated with the purchase of the Frontier Gas Acquisition.
Accumulated | Net Book | |||||||||||
Cost | Amortization | Value | ||||||||||
(In thousands) | ||||||||||||
Intangibles subject to amortization: |
||||||||||||
Gas contracts |
$ | 114,200 | $ | 1,461 | $ | 112,739 | ||||||
Intangibles not subject to amortization: |
||||||||||||
Goodwill |
93,628 | | 93,628 | |||||||||
$ | 207,828 | $ | 1,461 | $ | 206,367 | |||||||
The intangible assets have useful lives of 6 to 17 years. Amortization expense recorded for
the three and nine months ended September 30, 2011 was approximately $0.7 million and $1.5 million,
respectively. The expected amortization of the intangible assets is as follows:
Years Ending (in thousands) | ||||
2011 (remaining) |
$ | 718 | ||
2012 |
4,295 | |||
2013 |
5,772 | |||
2014 |
7,039 | |||
2015 |
7,896 | |||
Thereafter |
87,019 | |||
Total |
$ | 112,739 | ||
7. DEBT
Debt consisted of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Credit Facility |
$ | 228,000 | $ | 283,504 | ||||
Senior Notes |
200,000 | | ||||||
428,000 | 283,504 | |||||||
Current maturities of debt |
| | ||||||
Total |
$ | 428,000 | $ | 283,504 | ||||
Credit Facility At September 30, 2011, we had $228 million outstanding under our $500
million Credit Facility at the weighted-average interest rate of 3.6%. Borrowings under the Credit
Facility bear interest at LIBOR plus an applicable margin or a base rate as defined in the Credit
Facility. Under the terms of the Credit Facility, the applicable margin under LIBOR borrowings is
3.25%. On April 1, 2011, we entered into a Joinder Agreement with certain lenders of our Credit
Facility, which expanded our borrowing capacity from $400 million to $500 million. See Note 7 to
the consolidated financial statements in our 2010 Annual Report on Form 10-K for a more complete
description of our indebtedness.
The Credit Facility contains provisions that trigger an acceleration of indebtedness based
solely on the occurrence of a material adverse change in our financial condition or results of
operations.
Bridge Loans In February 2011, in connection with the Frontier Gas Acquisition, we obtained
commitments from multiple lenders for senior unsecured bridge loans in an aggregate amount up to
$200 million. The commitment was not drawn and was terminated on April 1, 2011 in connection with
the issuance of the Senior Notes described below. We recognized $2.5 million of commitment fees in
the second quarter of 2011, which is included in interest expense, related to the bridge loans.
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Senior Notes On April 1, 2011, we issued the Senior Notes. Our obligations under the
Senior Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries.
The proceeds were used to partially finance the Frontier Gas Acquisition. The Senior Notes accrue
interest at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1
and October 1 of each year, commencing on October 1, 2011, and mature April 2019. Our Senior Notes
require us to maintain a ratio of our consolidated trailing 12-month EBITDA (as defined in the
senior notes indenture) to fixed charges of at least 1.75 to 1.0.
8. ACCOUNTS PAYABLE AND OTHER
Accounts payable and other consist of the following: |
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Accrued operating expenses |
$ | 2,206 | $ | 1,736 | ||||
Accrued property taxes |
4,134 | | ||||||
Product purchases payable |
3,869 | | ||||||
Compensation and benefits payable |
2,106 | | ||||||
Tax payable |
1,042 | 280 | ||||||
Interest payable |
8,852 | 726 | ||||||
Accounts payable |
5,179 | | ||||||
Other |
262 | 175 | ||||||
$ | 27,650 | $ | 2,917 | |||||
9. CAPITAL LEASES
With the Frontier Gas Acquisition we acquired compressor leases which are accounted for as
capital leases. The total liability outstanding at September 30, 2011 related to these leases is
$7.3 million. Future minimum lease payments related to capital leases are as follows (in
thousands):
Years Ending | ||||
2011 (remaining) |
$ | 716 | ||
2012 |
2,860 | |||
2013 |
2,860 | |||
2014 |
1,161 | |||
Total payments |
7,597 | |||
Imputed interest |
(315 | ) | ||
Present value of future payments |
$ | 7,282 | ||
10. ASSET RETIREMENT OBLIGATIONS
Activity for asset retirement obligations is as follows (in thousands):
Asset retirement obligations as of December 31, 2010 |
$ | 9,877 | ||
Incremental liability |
518 | |||
Accretion expense |
427 | |||
Asset retirement obligations as of September 30, 2011 |
$ | 10,822 | ||
Accretion expense for the three months ended was approximately $0.2 million. As of September
30, 2011, no assets are legally restricted for use in settling asset retirement obligations.
11. EQUITY-BASED COMPENSATION
Awards of phantom units have been granted under our Third Amended and Restated 2007 Equity
Plan (the 2007 Equity Plan). The following table summarizes information regarding 2011 phantom
unit activity:
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Payable in cash | Payable in units | |||||||||||||||
Weighted Average | Weighted | |||||||||||||||
Grant Date Fair | Average Grant | |||||||||||||||
Units | Value | Units | Date Fair Value | |||||||||||||
Unvested phantom units January 1, 2011 |
| $ | | 121,526 | $ | 27.11 | ||||||||||
Vested |
| | | | ||||||||||||
Issued |
11,777 | 27.56 | 24,411 | 27.10 | ||||||||||||
Cancelled |
| | (20,287 | ) | 27.17 | |||||||||||
Unvested phantom units September 30,
2011 |
11,777 | $ | 27.56 | 125,650 | $ | 27.10 | ||||||||||
At January 1, 2011, we had total unvested compensation cost of $2.6 million related to phantom
units. We recognized compensation expense of approximately $0.3 million and $0.9 million during
the three and nine months ended September 30, 2011. Grants of phantom units during the nine months
ended September 30, 2011 had an estimated grant date fair value of $1.0 million. We had unearned
compensation expense of $2.6 million at September 30, 2011, which is 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. No phantom units
vested during the nine months ended September 30, 2011. At September 30, 2011, 636,356 units were
available for issuance under the 2007 Equity Plan.
See Note 11 to the consolidated financial statements in our 2010 Annual Report on Form 10-K,
for a more complete description of our 2007 Equity Plan.
12. INCOME TAXES
No provision for federal or state income taxes is included in our results of operations as
such income is taxable directly to the partners.
However, we are subject to Texas Margin tax and our current tax liability will be assessed
based on 0.7% of the gross revenue apportioned to Texas.
See Note 10 to the consolidated financial statements in our 2010 Annual Report on Form 10-K
for more information about our income taxes.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
In May 2011, a class action lawsuit, Ginardi v. Frontier Gas Services,
LLC, et al, was filed in the United States District Court of the Eastern District of Arkansas
against Frontier Gas Services, LLC; Chesapeake Energy Corporation, BHP Billiton Petroleum, No
4:11-cv-0420 BRW alleging that defendants, including Crestwood Arkansas Pipeline LLC (Crestwood Arkansas) which was
served in August 2011, operations pollute the atmosphere, groundwater, and soil with allegedly
harmful gases, chemicals, and compounds and the facilities create excessive noise levels
constituting trespass, nuisance and annoyance. The plaintiffs seek compensatory and punitive
damages of loss of use and enjoyment of property, contamination of soil and ground water, air and
atmosphere and seek future monitoring. Crestwood Arkansas has filed an answer in the matter
denying liability. This case has not had, and is not expected to have, a material impact on our
results of the operation or financial condition. We intend to vigorously defend against the claims.
At September 30, 2011, we are not currently subject to any material lawsuits or other legal
proceedings that could have a material effect on our results of operations, cash flows or financial
condition or for which disclosure is required by Item 103 of Regulation S-K.
Casualties or Other Risks We maintain coverage in various insurance programs, which provide
us with property damage and other coverages which are customary for the nature and scope of our
operations.
Management of our General Partner believes that we have adequate insurance coverage, although
insurance will not cover every type of loss that might occur. As a result of insurance market
conditions, premiums and deductibles for certain insurance policies have increased substantially
and, in some instances, certain insurance may become unavailable, or available for only reduced
amounts of coverage. As a result, we may not be able to renew existing insurance policies or
procure other desirable insurance on commercially reasonable terms, if at all.
If we were to incur a significant loss for which we were not adequately insured, the loss
could have a material impact on our consolidated financial condition and results of operations and
cash flows. In addition, the proceeds of any available insurance may not be paid in a timely
manner and may be insufficient if such an event were to occur. Any event that interrupts our
revenues, or which causes us to make significant expenditures not covered by insurance, could
reduce our ability to meet our financial obligations.
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Regulatory Compliance In the ordinary course of our business, we are subject to various
laws and regulations. In the opinion of management of our General Partner, compliance with current
laws and regulations will not have a material adverse effect on our financial condition or results
of operations and cash flows.
Environmental Compliance Our operations are subject to stringent and complex laws and
regulations pertaining to health, safety, and the environment. As an owner or operator of these
facilities, we are subject to laws and regulations at the federal, state and local levels that
relate to air and water quality, hazardous and solid waste management and disposal and other
environmental matters. The cost of planning, designing, constructing and operating our facilities
must incorporate compliance with environmental laws and regulations and safety standards. Failure
to comply with these laws and regulations may trigger a variety of administrative, civil and
potentially criminal enforcement measures. At September 30, 2011, we had recorded no liabilities
for environmental matters.
14. RELATED-PARTY TRANSACTIONS
We routinely conduct
business with Quicksilver and its affiliates.
Quicksilver remains a
related party as Thomas F. Darden, a member of our General Partners
board of directors until September 6, 2011, is Chairman of the Board of Quicksilver and beneficially holds a greater than
10% interest in Quicksilver. However, Quicksilver does not own any interest in us.
For a more complete
description of our agreements with Quicksilver, see Note 12 to the consolidated financial
statements in our 2010 Annual Report on Form 10-K.
During the quarter and nine
months ended September 30, 2011, Quicksilver accounted for 60% and
66%, respectively of our total revenue. Approximately 6% of our revenue for the nine months ended
September 30, 2011 are comprised of natural gas purchased by Quicksilver from Eni SpA and gathered
under Quicksilvers Alliance System gathering agreement.
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 $0.4 million of expense related to this agreement during the nine months ended
September 30, 2011.
15. SUBSEQUENT EVENTS
On November 1, 2011, we acquired Tristate from affiliates of Energy Spectrum Capital, Zwolle
Pipeline, LLC and the Tristate management for $65 million of cash paid at closing and a deferred
payment of approximately $8 million one year following the closing date, subject to customary
post-closing adjustments. The final purchase price allocation is pending the finalization of the
appraisal valuations.
Tristate owns the Sabine System which consists of approximately 61 miles of high-pressure
natural gas gathering pipelines located in Sabine Parish, Louisiana. The Sabine System provides
gathering and treating services for Haynesville and Bossier Shale production from the Toledo Bend
South field area for redelivery to Gulf South Pipeline and Tennessee Gas Pipeline. We have
contracts on the Sabine System with multiple producers with dedications of approximately 20,000
acres under long term, fixed-fee arrangements. The acquisition was financed with borrowings under
our Credit Facility.
16. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 1, 2011, we issued the Senior Notes. Our obligations under the Senior Notes are
guaranteed on an unsecured basis by our current and future domestic subsidiaries. Condensed
consolidated financial information for CMLP is presented below:
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Condensed Consolidated Statements of Income
For the Three Months Ended September 30, 2011 | |||||||||||||||||||||||||
Crestwood | |||||||||||||||||||||||||
Crestwood | Restricted | Midstream | |||||||||||||||||||||||
Midstream | Guarantor | Partners LP | |||||||||||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||
Revenue |
$ | | $ | 58,615 | $ | | $ | 58,615 | |||||||||||||||||
Operating expenses |
5,573 | 33,643 | | 39,216 | |||||||||||||||||||||
Gain from exchange of plant, property and
equipment |
1,106 | | | 1,106 | |||||||||||||||||||||
Operating income |
(4,467 | ) | 24,972 | | 20,505 | ||||||||||||||||||||
Interest expense |
7,040 | 60 | | 7,100 | |||||||||||||||||||||
Income before income tax |
(11,507 | ) | 24,912 | | 13,405 | ||||||||||||||||||||
Income tax provision |
| 347 | | 347 | |||||||||||||||||||||
Net income before equity in net earnings of
subsidiaries |
(11,507 | ) | 24,565 | | 13,058 | ||||||||||||||||||||
Equity in net earnings of subsidiaries |
24,565 | | (24,565 | ) | | ||||||||||||||||||||
Net Income |
$ | 13,058 | $ | 24,565 | $ | (24,565 | ) | $ | 13,058 | ||||||||||||||||
For the Three Months Ended September 30, 2010 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 30,366 | $ | | $ | 30,366 | ||||||||
Operating expenses |
2,652 | 12,253 | | 14,905 | ||||||||||||
Operating income |
(2,652 | ) | 18,113 | | 15,461 | |||||||||||
Interest expense |
3,185 | | | 3,185 | ||||||||||||
Income before income tax |
(5,837 | ) | 18,113 | | 12,276 | |||||||||||
Income tax provision |
| 45 | | 45 | ||||||||||||
Net income before equity in net earnings of
subsidiaries |
(5,837 | ) | 18,068 | | 12,231 | |||||||||||
Equity in net earnings of subsidiaries |
18,068 | | (18,068 | ) | | |||||||||||
Net Income |
$ | 12,231 | $ | 18,068 | $ | (18,068 | ) | $ | 12,231 | |||||||
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For the Nine Months Ended September 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 146,530 | $ | | $ | 146,530 | ||||||||
Operating expenses |
18,014 | 76,138 | | 94,152 | ||||||||||||
Gain from exchange of plant, property and
equipment |
1,106 | | | 1,106 | ||||||||||||
Operating income |
(16,908 | ) | 70,392 | | 53,484 | |||||||||||
Interest expense |
19,800 | 125 | | 19,925 | ||||||||||||
Income before income tax |
(36,708 | ) | 70,267 | | 33,559 | |||||||||||
Income tax provision |
| 898 | | 898 | ||||||||||||
Net income before equity in net earnings of
subsidiaries |
(36,708 | ) | 69,369 | | 32,661 | |||||||||||
Equity in net earnings of subsidiaries |
69,369 | | (69,369 | ) | | |||||||||||
Net Income |
$ | 32,661 | $ | 69,369 | $ | (69,369 | ) | $ | 32,661 | |||||||
For the Nine Months Ended September 30, 2010 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 82,299 | $ | | $ | 82,299 | ||||||||
Operating expenses |
8,112 | 36,675 | | 44,787 | ||||||||||||
Operating income |
(8,112 | ) | 45,624 | | 37,512 | |||||||||||
Interest expense |
8,808 | | | 8,808 | ||||||||||||
Income before income tax |
(16,920 | ) | 45,624 | | 28,704 | |||||||||||
Income tax provision |
| 171 | | 171 | ||||||||||||
Net income before equity in net earnings of
subsidiaries |
(16,920 | ) | 45,453 | | 28,533 | |||||||||||
Equity in net earnings of subsidiaries |
45,453 | | (45,453 | ) | | |||||||||||
Net Income |
$ | 28,533 | $ | 45,453 | $ | (45,453 | ) | $ | 28,533 | |||||||
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Condensed Consolidated Balance Sheet
September 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
ASSETS |
||||||||||||||||
Current assets |
$ | 344,132 | $ | 66,620 | $ | (372,389 | ) | $ | 38,363 | |||||||
Properties, plant and equipment, net |
7,910 | 674,090 | | 682,000 | ||||||||||||
Intangible assets, net |
| 112,739 | | 112,739 | ||||||||||||
Goodwill |
| 93,628 | | 93,628 | ||||||||||||
Investment in subsidiaries |
582,763 | | (582,763 | ) | | |||||||||||
Other assets |
17,333 | 799 | | 18,132 | ||||||||||||
Total assets |
$ | 952,138 | $ | 947,876 | $ | (955,152 | ) | $ | 944,862 | |||||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||||||||||
Current liabilities |
$ | 62,821 | $ | 349,681 | $ | (372,389 | ) | $ | 40,113 | |||||||
Long-term liabilities |
428,000 | 15,432 | | 443,432 | ||||||||||||
Partners capital |
461,317 | 582,763 | (582,763 | ) | 461,317 | |||||||||||
Total liabilities and partners capital |
$ | 952,138 | $ | 947,876 | $ | (955,152 | ) | $ | 944,862 | |||||||
December 31, 2010 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
ASSETS |
||||||||||||||||
Current assets |
$ | 291,637 | $ | 23,843 | $ | (289,744 | ) | $ | 25,736 | |||||||
Properties, plant and equipment, net |
11,142 | 520,229 | | 531,371 | ||||||||||||
Investment in subsidiaries |
228,587 | | (228,587 | ) | | |||||||||||
Other assets |
12,890 | 630 | | 13,520 | ||||||||||||
Total assets |
$ | 544,256 | $ | 544,702 | $ | (518,331 | ) | $ | 570,627 | |||||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||||||||||
Current liabilities |
$ | 1,999 | $ | 306,238 | $ | (289,744 | ) | $ | 18,493 | |||||||
Long-term liabilities |
283,504 | 9,877 | | 293,381 | ||||||||||||
Partners capital |
258,753 | 228,587 | (228,587 | ) | 258,753 | |||||||||||
Total liabilities and partners capital |
$ | 544,256 | $ | 544,702 | $ | (518,331 | ) | $ | 570,627 | |||||||
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Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (9,886 | ) | $ | 78,351 | $ | | $ | 68,465 | |||||||
Capital expenditures |
(265 | ) | (30,991 | ) | | (31,256 | ) | |||||||||
Proceeds from exchange of plant, property and
equipment |
5,943 | | | 5,943 | ||||||||||||
Acquisitions, net of cash acquired |
| (349,662 | ) | | (349,662 | ) | ||||||||||
Net cash (used in) provided by investing activities |
5,678 | (380,653 | ) | | (374,975 | ) | ||||||||||
Proceeds from Senior Notes |
200,000 | | | 200,000 | ||||||||||||
Proceeds from Credit Facility |
100,200 | | | 100,200 | ||||||||||||
Repayments of Credit Facility |
(155,704 | ) | | | (155,704 | ) | ||||||||||
Debt issuance costs paid |
(6,982 | ) | | | (6,982 | ) | ||||||||||
Proceeds from issuance of equity |
206,221 | | | 206,221 | ||||||||||||
Contributions by other partners |
8,741 | | | 8,741 | ||||||||||||
Distributions to unitholders |
(45,910 | ) | | | (45,910 | ) | ||||||||||
Advances to Affiliates |
38,290 | (38,290 | ) | | | |||||||||||
Net cash (used in) provided by financing activities |
344,856 | (38,290 | ) | | 306,566 | |||||||||||
Net cash increase (decrease) |
340,648 | (340,592 | ) | | 56 | |||||||||||
Cash and cash equivalents at beginning of period |
2 | | | 2 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 340,650 | $ | (340,592 | ) | $ | | $ | 58 | |||||||
For the Nine Months Ended September 30, 2010 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Net cash (used in) provided by operating
activities |
$ | (4,989 | ) | $ | 49,862 | $ | | $ | 44,873 | |||||||
Capital expenditures |
| (52,470 | ) | | (52,470 | ) | ||||||||||
Distributions to Quicksilver for Alliance
Midstream Assets |
| (80,276 | ) | | (80,276 | ) | ||||||||||
Net cash used in investing activities |
| (132,746 | ) | | (132,746 | ) | ||||||||||
Proceeds from Credit Facility |
143,200 | | | 143,200 | ||||||||||||
Repayments of Credit Facility |
(30,100 | ) | | | (30,100 | ) | ||||||||||
Proceeds from issuance of equity |
11,088 | | | 11,088 | ||||||||||||
Equity issuance cost paid |
(34 | ) | | | (34 | ) | ||||||||||
Distributions to unitholders |
(35,826 | ) | | | (35,826 | ) | ||||||||||
Taxes paid for equity-based compensation vesting |
(1,144 | ) | | | (1,144 | ) | ||||||||||
Advances to Affiliates |
123,741 | (123,741 | ) | | ||||||||||||
Net cash (used in) provided by financing
activities |
210,925 | (123,741 | ) | | 87,184 | |||||||||||
Net cash increase (decrease) |
205,936 | (206,625 | ) | | (689 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
746 | | 746 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 206,682 | $ | (206,625 | ) | $ | | $ | 57 | |||||||
17. SEGMENT INFORMATION
Our operations include three reportable operating segments. These operating segments reflect
the way we manage our operations. We evaluate the performance of our operating segments based on
EBITDA. Our business segments reflect the primary geographic areas in which we operate and consist
of the Barnett Shale, the Fayetteville Shale and the Granite Wash. Each of our business segments
are engaged in the gathering, compression, processing and treating of natural gas and delivery of
NGLs.
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The following tables summarize the reportable segment data for the three and nine months ended
September 30, 2011 and September 30, 2010:
Three Months Ended September 30, 2011 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 3,836 | $ | 7,081 | $ | 12,675 | $ | | $ | 23,592 | ||||||||||
Revenue related party |
35,023 | | | | 35,023 | |||||||||||||||
Total revenues |
$ | 38,859 | $ | 7,081 | $ | 12,675 | $ | | $ | 58,615 | ||||||||||
Operations and maintenance expense |
6,109 | 3,965 | 499 | | 10,573 | |||||||||||||||
Product purchases |
1,764 | 454 | 11,264 | | 13,482 | |||||||||||||||
General and administrative expense |
| | | 5,566 | 5,566 | |||||||||||||||
Gain from exchange of property,
plant and equipment |
| | | 1,106 | 1,106 | |||||||||||||||
EBITDA |
30,986 | 2,662 | 912 | (4,460 | ) | 30,100 | ||||||||||||||
Depreciation, amortization and
accretion expense |
6,185 | 2,895 | 508 | 7 | 9,595 | |||||||||||||||
Operating income (loss) |
$ | 24,801 | $ | (233 | ) | $ | 404 | $ | (4,467 | ) | $ | 20,505 | ||||||||
Goodwill |
$ | | $ | 76,767 | $ | 16,861 | $ | | $ | 93,628 | ||||||||||
Total assets |
$ | 556,399 | $ | 296,771 | $ | 73,156 | $ | 18,536 | $ | 944,862 | ||||||||||
Capital Expenditures |
$ | 3,876 | $ | 9,806 | $ | 421 | $ | 265 | $ | 14,368 |
Three Months Ended September 30, 2010 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 2,324 | $ | | $ | | $ | | $ | 2,324 | ||||||||||
Revenue related party |
28,042 | | | | 28,042 | |||||||||||||||
Total revenues |
$ | 30,366 | $ | | $ | | $ | | $ | 30,366 | ||||||||||
Operations and maintenance expense |
6,564 | | | | 6,564 | |||||||||||||||
General and administrative expense |
| | | 2,652 | 2,652 | |||||||||||||||
EBITDA |
23,802 | | | (2,652 | ) | 21,150 | ||||||||||||||
Depreciation, amortization and
accretion expense |
5,689 | | | | 5,689 | |||||||||||||||
Operating income (loss) |
$ | 18,113 | $ | | $ | | $ | (2,652 | ) | $ | 15,461 | |||||||||
Total assets |
$ | 528,845 | $ | | $ | | $ | 670 | $ | 529,515 | ||||||||||
Capital Expenditures |
$ | 17,625 | $ | | $ | | $ | | $ | 17,625 |
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Nine Months Ended September 30, 2011 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale(1) | Wash(1) | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 9,727 | $ | 14,164 | $ | 25,210 | $ | | $ | 49,101 | ||||||||||
Revenue related party |
97,429 | | | | 97,429 | |||||||||||||||
Total revenues |
$ | 107,156 | $ | 14,164 | $ | 25,210 | $ | | $ | 146,530 | ||||||||||
Operations and maintenance expense |
18,811 | 6,356 | 998 | | 26,165 | |||||||||||||||
Product purchases |
3,259 | 1,012 | 21,739 | | 26,010 | |||||||||||||||
General and administrative expense |
| | | 17,996 | 17,996 | |||||||||||||||
Gain from exchange of property,
plant and equipment |
| | | 1,106 | 1,106 | |||||||||||||||
EBITDA |
85,086 | 6,796 | 2,473 | (16,890 | ) | 77,465 | ||||||||||||||
Depreciation, amortization and
accretion expense |
18,459 | 4,604 | 900 | 18 | 23,981 | |||||||||||||||
Operating income (loss) |
$ | 66,627 | $ | 2,192 | $ | 1,573 | $ | (16,908 | ) | $ | 53,484 | |||||||||
Goodwill |
$ | | $ | 76,767 | $ | 16,861 | $ | | $ | 93,628 | ||||||||||
Total assets |
$ | 556,399 | $ | 296,771 | $ | 73,156 | $ | 18,536 | $ | 944,862 | ||||||||||
Capital Expenditures |
$ | 15,696 | $ | 12,134 | $ | 3,161 | $ | 265 | $ | 31,256 |
(1) | Includes six months of operating income for Fayetteville and Granite Wash, from April 1, 2011 to September 30, 2011, subsequent to acquisition. |
Nine Months Ended September 30, 2010 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 6,210 | $ | | $ | | $ | | $ | 6,210 | ||||||||||
Revenue related party |
76,089 | | | | 76,089 | |||||||||||||||
Total revenues |
$ | 82,299 | $ | | $ | | $ | | $ | 82,299 | ||||||||||
Operations and maintenance expense |
19,979 | | | | 19,979 | |||||||||||||||
General and administrative expense |
| | | 8,112 | 8,112 | |||||||||||||||
EBITDA |
62,320 | | | (8,112 | ) | 54,208 | ||||||||||||||
Depreciation, amortization and
accretion expense |
16,696 | | | | 16,696 | |||||||||||||||
Operating income (loss) |
$ | 45,624 | $ | | $ | | $ | (8,112 | ) | $ | 37,512 | |||||||||
Total assets |
$ | 528,845 | $ | | $ | | $ | 670 | $ | 529,515 | ||||||||||
Capital Expenditures |
$ | 52,470 | $ | | $ | | $ | | $ | 52,470 |
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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 2010 Annual Report on Form 10-K.
Overview
We are a growth-oriented publicly traded Delaware master limited partnership engaged in
gathering, compression, processing and treating of natural gas and delivery of NGLs produced in the
Barnett Shale, Fayetteville Shale, Avalon Shale and in Granite Wash. We began operations in 2004
to provide midstream services primarily to Quicksilver as well as to other natural gas producers in
the Barnett Shale. During the quarter and nine months ended September 30, 2011, Quicksilver
accounted for 60% and 66%, respectively of our total revenue. Approximately 6% of our revenue for
the nine months ended September 30, 2011 are comprised of natural gas purchased by Quicksilver from
Eni SpA and gathered under Quicksilvers Alliance System gathering agreement.
Our Operations
Our results of 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
primarily to long term, fixed fee-based contracts. However, a prolonged low commodity price
environment could result in our customers reducing their production volumes which would cause a
decrease in our revenue. All of our natural gas volumes gathered and processed in the Barnett
Shale, Fayetteville Shale, Avalon Shale and Granite Wash during the three and nine months ended
September 30, 2011 were subject to a mixture of percent-of-proceeds and 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 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. |
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, amortization and accretion, 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 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. |
24
Table of Contents
ADJUSTED EBITDA We define adjusted EBITDA as net income from continuing operations plus,
interest expense, provision for income taxes, depreciation, amortization and accretion expense and
non-recurring expenses. Adjusted EBITDA is commonly used as a supplemental financial measure by
senior management and by external users of our financial statements, such as investors, research
analysts and rating agencies, to assess the financial performance of our assets without regard to
financing methods, capital structures or historical cost basis. A reconciliation of adjusted
EBITDA to amounts reported under GAAP is presented in Results of Operations.
2011 Developments
Las Animas Acquisition - Effective February 1, 2011, we acquired approximately 46 miles of natural
gas gathering pipelines near the emerging Avalon Shale and Bone Spring trends in Southeastern New
Mexico for $5.1 million. The pipelines are supported by long-term, fixed-fee contracts which
include existing Morrow/Atoka production and dedications of approximately 55,000 acres.
Bridge Loans - In February 2011, in connection with the Frontier Gas Acquisition, we obtained
commitments from multiple lenders for senior unsecured bridge loans in an aggregate amount up to
$200 million. On April 1, 2011, the commitment was not drawn and was terminated in connection with
the closing of the Senior Notes described below. We recognized $2.5 million of commitment fees in
the second quarter of 2011, which is included in interest expense, related to the bridge loans.
Frontier Gas Acquisition On April 1, 2011, we completed the Frontier Gas Acquisition for a
purchase price of approximately $338 million. The $338 million purchase price paid at closing was
financed through a combination of equity and debt as described in Notes 4 and 7 to our condensed
consolidated interim financial statements in this Quarterly Report.
The Fayetteville Shale System, located in Arkansas, consists of approximately 127 miles of high
pressure and low pressure gathering pipelines with capacity of approximately 510 MMcfd, treating
capacity of approximately 165 MMcfd and approximately 35,000 hp of compression. The Fayetteville
Shale System which interconnects with multiple interstate pipelines are supported by long-term,
fixed-fee contracts with producers who have dedicated approximately 100,000 acres in the core of
the Fayetteville Shale System to Frontier. These contracts have initial terms that extend through
2020 with a five year extension.
The Granite Wash System, located in the Texas Panhandle, consist of a 28 mile pipeline system and a
36 MMcfd natural gas processing unit. This area has emerged as a highly economic liquids-rich
natural gas play with active drilling programs and the Granite Wash System is supported by
long-term contracts. We have made progress payments for a delivery of a second processing plant
with 60 MMcfd of capacity to support growth in volumes from this region.
With the completion of the Frontier Gas Acquisition, we own and/or operate over 700 miles of
natural gas gathering pipelines, and NGL, gas lift, residue and production lines.
Class C Units On April 1, 2011, we issued 6,243,000 Class C units, representing limited partner
interests, in a private placement. The negotiated purchase price for the Class C units was $24.50
per unit, resulting in net proceeds to us of approximately $153 million which was used to finance a
portion of our Frontier Gas Acquisition. The Class C units are substantially similar in all
respects to our existing common units, representing limited partner interests, except that we can
elect to pay distributions for our Class C units through the issuance of additional Class C units
or cash. The Class C units will convert into common units on a one-for-one basis on April 1, 2013.
In connection with the issuance of the Class C units, our General Partner made an additional
capital contribution of $8.7 million to us in exchange for an additional 293,948 general partner
units, increasing the General Partner interest to 2%.
Senior Notes On April 1, 2011, we issued the Senior Notes. Our obligations under the Senior
Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries. The
proceeds were used to partially finance the Frontier Gas Acquisition. The Senior Notes accrue
interest at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1
and October 1 of each year, commencing on October 1, 2011, and mature April 2019.
Joinder Agreement to Credit Facility On April 1, 2011, we entered into a Joinder Agreement with
certain lenders under our Credit Facility, which expanded our borrowing capacity from $400 million
to $500 million.
Offering of Common Units On May 4, 2011, we completed a public offering of 1,800,000 common
units, representing limited partner interests, under an existing shelf registration statement at a
price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and
commissions), providing net proceeds of approximately $53 million. The net proceeds from the
offering were used to reduce indebtedness under our Credit Facility and for general partnership
purposes. In connection with the issuance of the common units, our General Partner did not make an
additional capital contribution resulting in a reduction of our General Partners interest to
approximately 1.9%.
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Table of Contents
Tristate Acquisition - On November 1, 2011, we acquired Tristate from affiliates of Energy Spectrum
Capital, Zwolle Pipeline, LLC and the Tristate management for $65 million of cash paid at closing
and a deferred payment of approximately $8 million one year following the closing date, subject to
customary post-closing adjustments. Tristate owns the Sabine System which consists of
approximately 61 miles of high-pressure natural gas gathering pipelines located in Sabine Parish,
Louisiana. The Sabine System provides gathering and treating services for Haynesville and Bossier
Shale production from the Toledo Bend South field area for redelivery to Gulf South Pipeline and
Tennessee Gas Pipeline. We have contracts on the Sabine System with multiple producers with
dedications of approximately 20,000 acres under long term, fixed-fee arrangements. The acquisition
was financed with borrowings under our Credit Facility.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010
The following discussion compares the results of operations for the three months ended
September 30, 2011 to the three months ended September 30, 2010, which we refer to as the 2011
quarter and the 2010 quarter, respectively.
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Total revenues |
$ | 58,615 | $ | 30,366 | ||||
Operations and maintenance expense |
10,573 | 6,564 | ||||||
Product purchases |
13,482 | | ||||||
General and administrative expense |
5,566 | 2,652 | ||||||
Gain from exchange of property, plant and equipment |
1,106 | | ||||||
EBITDA |
30,100 | 21,150 | ||||||
Non-recurring expenses |
129 | | ||||||
Gain from exchange of property, plant and equipment |
(1,106 | ) | | |||||
Adjusted EBITDA |
29,123 | 21,150 | ||||||
Depreciation, amortization and accretion expense |
9,595 | 5,689 | ||||||
Interest expense |
7,100 | 3,185 | ||||||
Income tax provision |
347 | 45 | ||||||
Net income |
$ | 13,058 | $ | 12,231 | ||||
The following table summarizes our volumes:
Gathering | Processing | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(MMcf) | ||||||||||||||||
Barnett Shale |
47,678 | 33,391 | 11,975 | 12,339 | ||||||||||||
Fayetteville Shale |
7,813 | | | | ||||||||||||
Granite Wash |
1,473 | | 1,475 | | ||||||||||||
Total |
56,964 | 33,391 | 13,450 | 12,339 | ||||||||||||
The following table summarizes our revenue:
Gathering | Processing | Product Sales | Total | |||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Barnett Shale |
$ | 29,200 | $ | 22,380 | $ | 7,842 | $ | 7,986 | $ | 1,817 | $ | | $ | 38,859 | $ | 30,366 | ||||||||||||||||
Fayetteville Shale |
6,534 | | | | 547 | | 7,081 | | ||||||||||||||||||||||||
Granite Wash |
113 | | 33 | | 12,529 | | 12,675 | | ||||||||||||||||||||||||
Total |
$ | 35,847 | $ | 22,380 | $ | 7,875 | $ | 7,986 | $ | 14,893 | $ | | $ | 58,615 | $ | 30,366 | ||||||||||||||||
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The following table summarizes our operations and maintenance expense:
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Barnett Shale |
$ | 6,109 | $ | 6,564 | ||||
Fayetteville Shale |
3,965 | | ||||||
Granite Wash |
499 | | ||||||
$ | 10,573 | $ | 6,564 | |||||
Total Revenue and Volumes Revenues related to the Fayetteville Shale totaled $7.1
million. Revenues related to the Granite Wash totaled $12.6 million primarily related to product
sales to third parties. The increase in revenue related to the Barnett Shale was $8.5 million due
to increased volumes primarily in the Alliance System of the Fort Worth Basin.
Operations and Maintenance Expense The increase in operations and maintenance expense of
$4.0 million was primarily attributable to the Frontier Gas Acquisition, partially offset by lower
costs in the Barnett Shale due to lower head count and lower operation costs at the facilities.
Product purchases The increase in product purchases of $13.5 million was due primarily to
the cost of gas purchased from local producers under percent-of-proceeds contracts, primarily
related to Granite Wash.
General and Administrative Expense The increase in general and administrative expense of
$2.9 million was primarily due to an increase in compensation and benefits costs, costs of a new
corporate location and costs related to professional services. General and administrative expense
included $0.2 million and $0.7 million of equity-based compensation expense for the quarters ended
September 30, 2011 and 2010, respectively.
Gain
from exchange of property, plant and equipment The gain from exchange of property,
plant and equipment was due to an agreement with PVR Midstream, LLC, (PVR) on August 18, 2011, to
exchange the delivery of certain processing plants that were under contract with Exterran Energy
Solutions, L.P. resulting in proceeds of $5.9 million and a gain of $1.1 million. Our original
plant was delivered to PVR during the third quarter 2011, and our new plant is scheduled to be
received by the second quarter of 2012. We continue to make progress payments on our new plant.
EBITDA EBITDA increased primarily as a result of the increase in revenues described above.
As a percentage of revenue, EBITDA decreased from 70% of revenues in the 2010 quarter to 51% in the
2011 quarter. Increased revenues and expenses include product sales and product purchases
primarily related to Granite Wash, which decreased EBITDA as a percent of revenue. Barnett
Shales EBITDA increased from 78% to 80% of revenues was primarily due to higher revenues offset by
product purchases. Fayetteville Shales EBITDA was 38% and Granite Washs EBITDA was 7% of revenue
for the 2011 quarter.
Depreciation, Amortization and Accretion Expense Depreciation, amortization and accretion
expense increased primarily as a result of the Frontier Gas Acquisition and the continuing
expansion of our Barnett Shale asset base. Fayetteville Shale and Granite Wash contributed $2.9
million and $0.5 million, respectively, to depreciation, amortization and accretion expense.
Interest Expense Interest expense increased primarily due to the increases in the
borrowings under our Credit Facility, which were principally used to fund capital projects and the
addition of the Senior Notes. These increases were partially offset by the termination of the
subordinated note in October 2010.
The following table summarizes the details of interest expense for the three months ended
September 30, 2011 and 2010.
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Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Interest: |
||||||||
Revolving Credit Facility |
$ | 3,089 | $ | 2,527 | ||||
Senior Notes |
4,005 | | ||||||
Capital lease interest |
60 | | ||||||
Subordinated note |
| 658 | ||||||
Total |
7,154 | 3,185 | ||||||
Less interest capitalized |
(54 | ) | | |||||
Interest expense |
$ | 7,100 | $ | 3,185 | ||||
Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010
The following discussion compares the results of operations for the nine months ended
September 30, 2011 to the nine months ended September 30, 2010, which we refer to as the 2011
period and the 2010 period, respectively.
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Total revenues |
$ | 146,530 | $ | 82,299 | ||||
Operations and maintenance expense |
26,165 | 19,979 | ||||||
Product purchases |
26,010 | | ||||||
General and administrative expense |
17,996 | 8,112 | ||||||
Gain from exchange of property, plant and equipment |
1,106 | | ||||||
EBITDA |
77,465 | 54,208 | ||||||
Non-recurring expenses |
3,166 | | ||||||
Gain from exchange of property, plant and equipment |
(1,106 | ) | | |||||
Adjusted EBITDA |
79,525 | 54,208 | ||||||
Depreciation, amortization and accretion expense |
23,981 | 16,696 | ||||||
Interest expense |
19,925 | 8,808 | ||||||
Income tax provision |
898 | 171 | ||||||
Net income |
$ | 32,661 | $ | 28,533 | ||||
The following table summarizes our volumes:
Gathering | Processing | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(MMcf) | ||||||||||||||||
Barnett Shale |
129,126 | 88,797 | 36,028 | 35,076 | ||||||||||||
Fayetteville Shale |
15,146 | | | | ||||||||||||
Granite Wash |
3,011 | | 2,941 | | ||||||||||||
Total |
147,283 | 88,797 | 38,969 | 35,076 | ||||||||||||
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The following table summarizes our revenue:
Gathering | Processing | Product Sales | Total | |||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Barnett Shale |
$ | 80,311 | $ | 59,629 | $ | 23,552 | $ | 22,670 | $ | 3,293 | $ | | $ | 107,156 | $ | 82,299 | ||||||||||||||||
Fayetteville Shale |
13,095 | | | | 1,069 | | 14,164 | | ||||||||||||||||||||||||
Granite Wash |
208 | | 38 | | 24,964 | | 25,210 | | ||||||||||||||||||||||||
Total |
$ | 93,614 | $ | 59,629 | $ | 23,590 | $ | 22,670 | $ | 29,326 | $ | | $ | 146,530 | $ | 82,299 | ||||||||||||||||
The following table summarizes our operations and maintenance expense:
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Barnett Shale |
$ | 18,811 | $ | 19,979 | ||||
Fayetteville Shale |
6,356 | | ||||||
Granite Wash |
998 | | ||||||
$ | 26,165 | $ | 19,979 | |||||
Total Revenue and Volumes Operations related to the Fayetteville Shale contributed
$14.2 million to gathering revenue. Operations related to Granite Wash contributed $25.2 million
to revenue primarily related to product sales to third parties. The increase in revenue related to
the Barnett Shale was $24.8 million due to increased volumes on all the systems.
Operations and Maintenance Expense The increase in operations and maintenance expense of
$6.2 million was primarily attributable to the Frontier Gas Acquisition, partially offset by lower
costs in the Barnett Shale due to lower head count and lower operation costs at the facilities.
Product purchases The increase in product purchases of $26.0 million was due primarily to
the cost of gas purchased from local producers under percent-of-proceeds contracts, primarily
related to Granite Wash.
General and Administrative Expense The increase in general and administrative expense of
$9.9 million was primarily due to transaction costs associated with the Frontier Gas Acquisition,
an increase in compensation and benefits costs, costs of a new corporate location, costs related to
professional services and transition costs related to the transition services agreement with
Quicksilver, which expired March 31, 2011. Transaction costs related to the Crestwood Transaction
and Frontier Gas Acquisition amounted to approximately $3.2 million for the 2011 period. General
and administrative expense included $0.6 million and $2.0 million of equity-based compensation
expense for the periods ended September 30, 2011 and 2010, respectively.
Gain from exchange of
property, plant and equipment The gain from exchange of property,
plant and equipment was due to an agreement with PVR on August 18, 2011, to
exchange the delivery of certain processing plants that were under contract with Exterran Energy
Solutions, L.P. resulting in proceeds of $5.9 million and a gain of $1.1 million. Our original
plant was delivered to PVR during the third quarter 2011, and our new plant is scheduled to be
received by the second quarter of 2012. We continue to make progress payments on our new plant.
EBITDA EBITDA increased primarily as a result of the increase in revenues described above.
As a percentage of revenue, EBITDA decreased from 66% of revenues in the 2010 period to 53% in the
2011 period. Increased revenues and expenses include product sales and product purchases
primarily related to Granite Wash, which decreases EBITDA as a percent of revenue. Barnett Shales
EBITDA increased from 76% to 79% of revenues was primarily due to higher revenues offset by product
purchases. Fayetteville Shales EBITDA was 48% and Granite Washs EBITDA 10% of revenue for the
2011 period.
Depreciation, Amortization and Accretion Expense Depreciation, amortization and accretion
expense increased primarily as a result of the Frontier Gas Acquisition and the continuing
expansion of our Barnett Shale asset base. Fayetteville Shale and Granite Wash contributed $4.6
million and $0.9 million, respectively, to depreciation, amortization and accretion expense.
Interest Expense Interest expense increased primarily due to the increases in the
borrowings under our Credit Facility, which were principally used to fund capital projects, the
addition of the Senior Notes and expenses related to the bridge loans commitments. These increases
were partially offset by the termination of the subordinated note in October 2010.
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The following table summarizes the details of interest expense for the nine months ended September
30, 2011 and 2010.
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Interest cost: |
||||||||
Revolving Credit Facility |
$ | 9,325 | $ | 6,917 | ||||
Senior Notes |
8,097 | | ||||||
Bridge Loan |
2,500 | | ||||||
Capital lease interest |
125 | | ||||||
Subordinated note |
| 1,891 | ||||||
Total cost |
20,047 | 8,808 | ||||||
Less interest capitalized |
(122 | ) | | |||||
Interest expense |
$ | 19,925 | $ | 8,808 | ||||
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Liquidity and Capital Resources
Our sources of liquidity include:
| cash generated from operations; |
| borrowings under our Credit Facility; and |
| future capital market transactions. |
We believe that the cash generated from these sources will be sufficient to meet our expected
$0.48 per unit quarterly cash distributions during 2011 and satisfy our short-term working capital
and maintenance capital expenditure requirements.
Since the inception of operations in 2004, our cash flows have been significantly influenced
by Quicksilvers production in the Barnett Shale. As Quicksilver and others have developed the
Barnett Shale, we have expanded our gathering and processing facilities to serve the additional
volumes produced by such development. We expect to benefit from the Frontier Gas Acquisition and the acquisition of Tristate which
will result in lower dependency on Quicksilver and our Barnett Shale operations. During the quarter ended September 30, 2011, Quicksilver accounted for 60%
of our total revenue, which has decreased approximately 32% from 92% in the third quarter of 2010.
Known Trends and Uncertainties
Our financial condition and results of operations, including our liquidity and profitability,
can be significantly affected by the following:
| natural gas prices; | ||
| dependency on Quicksilver and the Barnett Shale; and | ||
| regulatory requirements. |
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, and the availability and cost of their capital. We cannot predict future
changes to natural gas prices or how any such pricing changes will influence producers behaviors.
If reduced drilling and development programs were to be sustained over a prolonged period of time,
we could experience a reduction in volumes through our systems and therefore reductions of revenue
and cash flows.
For the nine months ended September 30, 2011, approximately 73% of our revenue was derived
from our operations in the Barnett Shale, including approximately 66% associated with Quicksilver.
The risk of revenue fluctuations in the near-term is somewhat mitigated by the use of predominantly
fixed-fee contracts for providing gathering and processing and treating services to our customers,
but we are still susceptible to volume fluctuations. While the Frontier Gas Acquisition and the
acquisition of Tristate reduce the concentration risk associated with our dependency on one
producer and one geographic area, we continue to regularly review opportunities for both organic
growth projects and acquisitions in other producing basins and with other producers.
We are subject to environmental laws, regulations and permits, including greenhouse gas
requirements that may expose us to significant costs or obligations. In general, these laws,
regulations, and permits have become more stringent over time and are subject to further changes
and could materially affect our financial condition and results of operations in the future.
Significant Economic Factors That Impact our Business
Changes in natural gas supply such as new discoveries of natural gas reserves, declining
production in older fields and the introduction of new sources of natural gas supply, such as
non-conventional and emerging natural gas shale plays, affect the demand from producers for our
services. As these supply dynamics change, we anticipate that we will actively pursue projects
that will allow us to provide midstream services to producers associated with the growth of new
sources of supply. Changes in demographics, the amount of natural gas fired power generation,
liquefied natural gas imports and exports and shifts in industrial and residential usage affect the
overall demand for natural gas.
We believe that the key factors that impact our business are natural gas prices, our
customers drilling and completion activities, and government regulation on natural gas pipelines.
These key factors play an important role in how we evaluate our operations and implement our
long-term strategies.
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Cash Flows
Nine Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities |
$ | 68,465 | $ | 44,873 | ||||
Net cash used in investing activities |
(374,975 | ) | (132,746 | ) | ||||
Net cash provided by financing activities |
306,566 | 87,184 |
Cash Flows Provided by Operating Activities The increase in cash flows provided by
operating activities is the result of an increase in operating income as a result of the Frontier
Gas Acquisition and improved performance by our Barnett Shale operations. The income also reflects
an increase in accrued expenses related to operations, ad valorem tax, interest expense and
incentive compensation, partially offset by higher receivables from the Fayetteville Shale and
Granite Wash operations and the gain on exchange of property, plant and equipment.
Cash Flows Used in Investing Activities The increase in cash flows used in investing
activities resulting from the Frontier and Las Animas System acquisitions were approximately $349.7
million, offset by the proceeds received with the exchange of property, plant and equipment of
$5.9 million and the distribution to Quicksilver of $80.3 million related to the purchase of the
Alliance Midstream Assets in the prior year. For the 2011 period, we spent $31.3 million for
gathering assets and processing facilities.
Cash Flows Provided by Financing Activities Changes in cash flows provided by financing
activities during the 2011 period resulted primarily from the net borrowings under our Senior Notes
and Credit Facility of $144.5 million compared with the 2010 period net borrowings of $113.1
million. This change is largely reflective of our Frontier Gas Acquisition in the 2011 period
compared to the purchase of the Alliance Midstream Assets for $84.4 million in the 2010 period. We
also had $206.2 million in proceeds from issuance of common and Class C units. In addition, we
distributed $10.1 million more to our unitholders during the 2011 period. We have increased our
distributions by 14.3% from the 2010 quarter to the 2011 quarter. 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 2011 event.
Information regarding historical and pending cash distributions is included in Note 4 to our
condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly
Report.
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. |
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 Barnett Shale, Fayetteville Shale, Avalon Shale and the Granite Wash areas. 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.
For the full year of 2011, we plan
capital spending to total approximately $40 to $50
million, including approximately $2 to $3 million for maintenance capital projects. The
approximate $15 million reduction from previous estimates is primarily attributable to delayed
timing of expenditures related to expansion projects on the Alliance System. These
expenditures are currently expected to be incurred in the first half of 2012.
During the nine months
ended September 30, 2011, we increased gross property, plant and
equipment by $172.7 million, including $144.5 million for the Frontier Gas Acquisition, $5.1
million for the Las Animas Acquisition, expansion capital expenditures of approximately $22.0
million, $1.0 million in maintenance capital expenditures and $0.1 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 Credit Facility, operating
cash flows and debt or equity offerings to finance any future growth capital expenditures or
acquisitions.
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Debt
Credit Facility At September 30, 2011, we had $228 million outstanding under our $500
million Credit Facility at a weighted-average interest rate of 3.6%. Our average outstanding debt
was $238 million for the three months ended September 30, 2011. Note 7 to the consolidated
financial statements in our 2010 Annual Report on Form 10-K contains a more complete description of
our indebtedness. On April 1, 2011, we entered into a Joinder Agreement with certain lenders under
our Credit Facility, which expanded our borrowing capacity from $400 million to $500 million.
Our Credit Facility requires us to maintain:
| a ratio of our consolidated trailing 12-month EBITDA (as defined in the Credit Facility) 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 or not more than 5.5 to 1.0 for up to nine months following certain acquisitions. |
As of September 30, 2011, we were in compliance with
these financial covenants. The Credit Facility contains provisions that trigger an acceleration of indebtedness based
solely on the occurrence of a material adverse change in our financial condition or results of
operations.
Bridge Loans In February 2011, in connection with the Frontier Gas Acquisition, we obtained
commitments from multiple lenders for senior unsecured bridge loans in an aggregate amount up to
$200 million. On April 1, 2011, the commitment was not drawn and was terminated in connection with
the closing of the Senior Notes described below. We recognized $2.5 million of commitment fees in
the second quarter of 2011, which is included in interest expense, related to the bridge loans.
Senior Notes On April 1, 2011, we issued the Senior Notes. Our obligations under the
Senior Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries.
The proceeds were used to partially finance the Frontier Gas Acquisition. The Senior Notes accrue
at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and
October 1 of each year, commencing on October 1, 2011, and mature April 2019.
Our Senior Notes require us to maintain a ratio of our consolidated trailing 12-month EBITDA
(as defined in the senior notes indenture) to fixed charges of at least 1.75 to 1.0. As of
September 30, 2011, we were in compliance with this covenant.
Contractual Obligations and Commercial Commitments
The following table summarizes our total contractual cash obligations as of September 30,
2011.
Payments Due by Period | ||||||||||||||||||||||||||||
Contractual Obligations | Total | 2011 (remaining) | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Long-term debt (1) |
$ | 428.0 | $ | | $ | | $ | | $ | | $ | 228.0 | $ | 200.0 | ||||||||||||||
Scheduled interest obligations
(2) |
148.7 | 5.9 | 23.6 | 23.6 | 23.6 | 21.6 | 50.4 | |||||||||||||||||||||
Contractual obligations (3) |
12.6 | 3.5 | 5.9 | 2.0 | 0.8 | 0.4 | | |||||||||||||||||||||
Capital lease obligations (4) |
7.3 | 0.7 | 2.7 | 2.7 | 1.2 | | | |||||||||||||||||||||
Asset retirement obligations
(5) |
10.8 | | | | | | 10.8 | |||||||||||||||||||||
Total contractual obligations |
$ | 607.4 | $ | 10.1 | $ | 32.2 | $ | 28.3 | $ | 25.6 | $ | 250.0 | $ | 261.2 | ||||||||||||||
(1) | As of September 30, 2011, we had $228.0 million outstanding under our Credit Facility and $200 million outstanding on our Senior Notes. | |
(2) | Based on our debt outstanding and interest rates in effect at September 30, 2011, we would anticipate interest payments to be approximately $8.1 million annually on our Credit Facility and $15.5 million annually on our Senior Notes. For each additional $10.0 million in borrowings on our Credit Facility, annual interest payments will increase by approximately $0.4 million. If the committed amount under our Credit Facility were to be fully utilized by year-end 2011 at interest rates in effect at September 30, 2011, we estimate that annual interest expenses would increase by approximately $9.7 million. If interest rates on our September 30, 2011 variable debt balance of $228.0 million increase or decrease by one percentage point, our annual income will decrease or increase by $2.3 million. | |
(3) | We lease office buildings and other property under operating leases, including a contract to purchase a second processing plant at Granite Wash. |
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(4) | We lease compressors which are accounted for as capital leases, see Note 9 to our condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report. | |
(5) | For more information regarding our asset retirement obligations, see Note 10 to our condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the definition 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 2010 Annual
Report on Form 10-K. These critical estimates, for which no significant changes have occurred in
the nine months ended September 30, 2011, 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
analysis 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 defined in Rules 13a-15(e) and
15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2011, our disclosure controls and procedures were effective to provide reasonable
assurance that 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
During the quarter ended September 30, 2011, we have continued to migrate our financial
systems to a hosted environment. In connection with this implementation and resulting business
process changes, we continue to enhance the design and documentation of our internal control
processes to ensure suitable controls over our financial reporting.
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Table of Contents
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. We are not currently subject to any material
lawsuits or other legal proceedings that could have a material adverse effect on our results of
operations, cash flows or financial condition or for which disclosure is required by Item 103 of
Regulation S-K.
Ginardi v. Frontier Gas Services, LLC, et al. In May 2011, a
class action lawsuit was
filed in the United States District Court of the Eastern District of Arkansas against Frontier Gas
Services, LLC; Chesapeake Energy Corporation, BHP Billiton Petroleum, No 4:11-cv-0420 BRW alleging
that defendants, including Crestwood Arkansas which was served in August 2011,
operations pollute the atmosphere, groundwater, and soil with allegedly harmful gases, chemicals,
and compounds and the facilities creates excessive noise levels constituting trespass, nuisance and
annoyance. The plaintiffs seek compensatory and punitive damages of loss of use and enjoyment of
property, contamination of soil and ground water, air and atmosphere and seek future monitoring.
Crestwood Arkansas has filed an answer in the matter denying liability. This case has not had, and
is not expected to have, a material impact on our results of the operation or financial condition.
We intend to vigorously defend against the claims.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2010, which could materially affect our business, results of operations
and cash flows, except that the following risk factors are no longer applicable:
| Our pending acquisition of Frontier may not be consummated; | ||
| The closing of the Frontier Acquisition is not subject to a financing condition and the Bridge Loans do not backstop the equity portion of the purchase price or our equity commitments; and | ||
| Financing the Frontier Acquisition will substantially increase our leverage. We may not be able to obtain debt financing for the acquisition on expected or acceptable terms. |
Except as set forth above and as disclosed in Part II, Item 1A. Risk Factors included in our
Quarterly Report for the quarter ended September 30, 2011, there have been no material changes to
the risks factors previously described in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2010.
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.
36
Table of Contents
Item 6. Exhibits:
The exhibit index is incorporated herein by reference into this quarterly report on Form 10-Q.
37
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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, 2011
CRESTWOOD MIDSTREAM PARTNERS LP |
||||
By: | CRESTWOOD GAS SERVICES GP LLC, its General Partner |
|||
By: | /s/ William G. Manias | |||
William G. Manias | ||||
Senior Vice President Chief Financial Officer | ||||
38
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EXHIBIT INDEX
Exhibits designated by an asterisk (*) are filed herewith and those with (**)
are furnished and not filed herewith, all exhibits not so designated are
incorporated herein by reference to a prior filing as indicated.
Exhibit No. | Description | |
**10.1 | Separation Agreement and Release, dated October 29, 2011,
by and among Crestwood Midstream Partners, LP, Crestwood Gas Services GP. LLC, Crestwood Holdings Partners,
LLC, Crestwood Midstream Partners II, LLC and Terry L. Morrison (incorporated by reference herein to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on November 1, 2011). |
|
*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. |
|
**101.INS | XBRL Instance Document |
|
**101.SCH | XBRL Taxonomy Extension Schema Linkbase Document |
|
**101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|
**101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
|
**101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
|
**101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |