Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - Crestwood Midstream Partners LP | Financial_Report.xls |
EX-31.1 - EX-31.1 - Crestwood Midstream Partners LP | h85699exv31w1.htm |
EX-32.1 - EX-32.1 - Crestwood Midstream Partners LP | h85699exv32w1.htm |
EX-31.2 - EX-31.2 - Crestwood Midstream Partners LP | h85699exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 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 | 56-2639586 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
717 Texas Avenue, Suite 3150, Houston, Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) |
(832) 519-2200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 (Do not check if a smaller reporting company) | Smaller reporting company o |
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 July 29, 2011 | ||
Common Units | 32,987,696 | ||
Class C Units | 6,337,093 |
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, formerly
known as Quicksilver Gas Services LP, 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
Northwest Arkansas that were purchased in the Frontier Gas Acquisition on April 1, 2011
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, formerly known as Quicksilver Gas
Services GP LLC
Granite Wash System means the pipeline, compression and processing assets and subsequent
additions located in Roberts County, Texas, that were purchased in the Frontier Gas
Acquisition on April 1, 2011
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
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
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
Table of Contents
Explanatory Note
Crestwood Midstream Partners LP is filing this Amendment No. 1 on Form 10-Q/A (this
Amendment) to amend its Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2011, filed with the Securities and Exchange Commission on August 8, 2011 (the Original 10-Q) to
correct an error in the pro forma presentation of income table within footnote 3 Acquisitions. This
Amendment has no impact on our previously reported statements of income, balance sheets, statements of
cash flows, statements of changes in partners' capital, results of operations or liquidity and does not affect our Credit Facility.
In addition, this Amendment amends and restates
Part I Item 4. Controls and Procedures and Part II Item IA Risk Factors to account for the error noted in this Amendment.
This Amendment also amends and restates the exhibit list in Part II, Item 6 of the Original
10-Q and re-files certain exhibits specified herein, including currently dated certifications of our chief executive officer and chief financial officer as
set forth as Exhibits 31.1, 31.2 and 32.1 hereto, and corrects information presented within footnote 2.
Except as described above, we have not modified or updated other disclosures contained in the
Original 10-Q. Accordingly, this Amendment, with the exception of the foregoing, does not reflect
events occurring after the date of filing of the Original 10-Q, or modify or update those
disclosures affected by subsequent events. Consequently, all other information not affected by the
corrections described above is unchanged and reflects the disclosures and other information made at
the date of the filing of the Original 10-Q and should be read in conjunction with our filings with
the SEC subsequent to the filing of the Original 10-Q, including amendments to those filings, if
any.
Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under
those sections.
3
CRESTWOOD MIDSTREAM PARTNERS LP
INDEX TO FORM 10-Q/A
For the Period Ended June 30, 2011
INDEX TO FORM 10-Q/A
For the Period Ended June 30, 2011
6 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
9 | ||||||||
10 | ||||||||
25 | ||||||||
34 | ||||||||
34 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
36 | ||||||||
37 | ||||||||
Certification(s) Pursuant to Section 302 |
||||||||
Certification Pursuant to Section 906 |
||||||||
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 |
4
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 from 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; | ||
| ability to consummate acquisitions and successfully integrate the acquired business and our ability to realize any cost savings and other synergies from such acquisitions; | ||
| any disruption from the Frontier Gas Acquisition making it more difficult to maintain relationships with customers, employees or suppliers; | ||
| fluctuations in the value of certain of our assets and liabilities; | ||
| changes in the availability and cost of capital; | ||
| operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control; | ||
| construction costs or capital expenditures exceeding estimated or budgeted amounts; | ||
| the effects of existing and future laws and governmental regulations, including environmental and climate change requirements; | ||
| the effects of existing or future litigation; | ||
| risks related to the substantial indebtedness incurred as a result of the Frontier Gas Acquisition; 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.
5
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In thousands, except for per unit data Unaudited
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In thousands, except for per unit data Unaudited
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
||||||||||||||||
Gathering revenue related party |
$ | 24,515 | $ | 18,405 | $ | 47,866 | $ | 34,794 | ||||||||
Gathering revenue |
8,425 | 1,340 | 9,901 | 2,455 | ||||||||||||
Processing revenue related party |
7,903 | 6,774 | 14,540 | 13,253 | ||||||||||||
Processing revenue |
659 | 675 | 1,175 | 1,431 | ||||||||||||
Product sales |
14,033 | | 14,433 | | ||||||||||||
Total revenue |
55,535 | 27,194 | 87,915 | 51,933 | ||||||||||||
Expenses |
||||||||||||||||
Operations and maintenance |
8,634 | 6,022 | 15,592 | 13,415 | ||||||||||||
Product purchases |
12,105 | | 12,528 | | ||||||||||||
General and administrative |
6,060 | 2,399 | 12,430 | 5,460 | ||||||||||||
Depreciation, amortization and accretion |
8,361 | 5,642 | 14,386 | 11,007 | ||||||||||||
Total expenses |
35,160 | 14,063 | 54,936 | 29,882 | ||||||||||||
Operating income |
20,375 | 13,131 | 32,979 | 22,051 | ||||||||||||
Interest expense |
9,819 | 2,945 | 12,825 | 5,623 | ||||||||||||
Income from continuing operations before income
taxes |
10,556 | 10,186 | 20,154 | 16,428 | ||||||||||||
Income tax provision |
329 | 73 | 551 | 126 | ||||||||||||
Net income |
$ | 10,227 | $ | 10,113 | $ | 19,603 | $ | 16,302 | ||||||||
General partner interest in net income |
$ | 1,628 | $ | 677 | $ | 2,516 | $ | 778 | ||||||||
Limited partners interest in net income |
$ | 8,599 | $ | 9,436 | $ | 17,087 | $ | 15,524 | ||||||||
Basic income per unit: |
||||||||||||||||
Net income per limited partner unit basic |
$ | 0.22 | $ | 0.33 | $ | 0.49 | $ | 0.54 | ||||||||
Diluted income per unit: |
||||||||||||||||
Net income per limited partner unit diluted |
$ | 0.22 | $ | 0.31 | $ | 0.49 | $ | 0.52 | ||||||||
Weighted average number of common units
outstanding: |
||||||||||||||||
Basic |
38,558 | 28,502 | 34,893 | 28,502 | ||||||||||||
Diluted |
38,694 | 31,958 | 35,029 | 31,952 | ||||||||||||
Distributions declared per unit (attributable to
the
period ended) |
$ | 0.46 | $ | 0.42 | $ | 0.90 | $ | 0.81 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data Unaudited
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 551 | $ | 2 | ||||
Accounts receivable |
8,582 | 1,679 | ||||||
Accounts receivable related party |
26,002 | 23,003 | ||||||
Prepaid expenses and other |
2,578 | 1,052 | ||||||
Total current assets |
37,713 | 25,736 | ||||||
Property, plant and equipment, net |
688,398 | 531,371 | ||||||
Intangible assets, net |
115,471 | | ||||||
Goodwill |
91,168 | | ||||||
Other assets |
19,905 | 13,520 | ||||||
Total assets |
$ | 952,655 | $ | 570,627 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current liabilities |
||||||||
Capital leases |
$ | 2,652 | $ | | ||||
Accounts payable related party |
4,048 | 4,267 | ||||||
Accrued additions to property, plant and equipment |
10,331 | 11,309 | ||||||
Accounts payable and other |
17,421 | 2,917 | ||||||
Total current liabilities |
34,452 | 18,493 | ||||||
Long-term debt |
437,500 | 283,504 | ||||||
Long-term capital leases |
5,286 | | ||||||
Asset retirement obligations |
10,664 | 9,877 | ||||||
Commitments and contingent liabilities (Note 13) |
||||||||
Partners capital |
||||||||
Common unitholders (32,987,696 and
31,187,696 units issued
and outstanding at June 30, 2011 and December 31,
2010) |
300,752 | 258,069 | ||||||
Class C unit holders (6,337,093 and 0 units
issued and outstanding at
June 30, 2011 and December 31, 2010, respectively) |
154,056 | | ||||||
General partner |
9,945 | 684 | ||||||
Total partners capital |
464,753 | 258,753 | ||||||
$ | 952,655 | $ | 570,627 | |||||
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 CASH FLOWS
In thousands Unaudited
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net income |
$ | 19,603 | $ | 16,302 | ||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
14,110 | 10,765 | ||||||
Accretion of asset retirement obligations |
276 | 242 | ||||||
Deferred income taxes |
| 126 | ||||||
Equity-based compensation |
565 | 1,334 | ||||||
Non-cash interest expense |
1,610 | 2,709 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(6,568 | ) | 141 | |||||
Prepaid expenses and other |
(1,612 | ) | (1,011 | ) | ||||
Accounts receivable related party |
(2,999 | ) | (6,323 | ) | ||||
Accounts payable related party |
(219 | ) | | |||||
Accounts payable and other |
13,791 | 2,464 | ||||||
Net cash provided by operating activities |
38,557 | 26,749 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(16,888 | ) | (34,845 | ) | ||||
Acquisitions, net of cash acquired |
(353,966 | ) | | |||||
Distribution to Quicksilver for Alliance Midstream Assets |
| (80,276 | ) | |||||
Net cash used in investing activities |
(370,854 | ) | (115,121 | ) | ||||
Financing activities: |
||||||||
Proceeds from senior notes |
200,000 | | ||||||
Proceeds from credit facility |
64,200 | 124,500 | ||||||
Repayments of credit facility |
(110,204 | ) | (23,100 | ) | ||||
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 |
(29,130 | ) | (23,128 | ) | ||||
Taxes paid for equity-based compensation vesting |
| (1,144 | ) | |||||
Net cash provided by financing activities |
332,846 | 88,182 | ||||||
Net cash increase (decrease) |
549 | (190 | ) | |||||
Cash and cash equivalents at beginning of period |
2 | 746 | ||||||
Cash and cash equivalents at end of period |
$ | 551 | $ | 556 | ||||
Cash paid for interest |
$ | 7,357 | $ | 2,914 | ||||
Non-cash transactions: |
||||||||
Working capital related to capital expenditures |
10,331 | 12,112 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
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 |
1,334 | | | 1,334 | ||||||||||||
Distributions paid |
(13,251 | ) | (8,980 | ) | (897 | ) | (23,128 | ) | ||||||||
Distributions to Quicksilver |
(80,276 | ) | | | (80,276 | ) | ||||||||||
Net income |
9,253 | 6,271 | 778 | 16,302 | ||||||||||||
Issuance of units, net of offering costs |
11,054 | | | 11,054 | ||||||||||||
Taxes paid for equity-based
compensation vesting |
(1,144 | ) | | | (1,144 | ) | ||||||||||
Balance at June 30, 2010 |
$ | 208,209 | $ | 331 | $ | 439 | $ | 208,979 | ||||||||
Limited Partners | ||||||||||||||||
Common | Class C | General Partner | Total | |||||||||||||
Balance at December 31, 2010 |
$ | 258,069 | $ | | $ | 684 | $ | 258,753 | ||||||||
Equity-based compensation |
565 | | | 565 | ||||||||||||
Distributions paid |
(27,134 | ) | | (1,996 | ) | (29,130 | ) | |||||||||
Net income |
15,702 | 1,385 | 2,516 | 19,603 | ||||||||||||
Issuance of units, net of offering costs |
53,550 | 152,671 | | 206,221 | ||||||||||||
Contributions by partners |
| | 8,741 | 8,741 | ||||||||||||
Balance at June 30, 2011 |
$ | 300,752 | $ | 154,056 | $ | 9,945 | $ | 464,753 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
Table of Contents
CRESTWOOD MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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 June 30, 2011 our ownership is as follows:
Ownership Percentage | ||||||||||||
Crestwood | Public | Total | ||||||||||
General partner interest |
1.9 | % | | 1.9 | % | |||||||
Limited partner interest: |
||||||||||||
Common unitholders |
48.8 | % | 33.5 | % | 82.3 | % | ||||||
Class C unitholders |
0.2 | % | 15.6 | % | 15.8 | % | ||||||
Total |
50.9 | % | 49.1 | % | 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 and Granite Wash. 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 condensed consolidated interim financial statements
and related notes present the financial position, results of operations, cash flows and changes in
partners capital of our natural gas gathering and processing assets. In managements opinion, all
necessary adjustments to fairly present our results of operations, financial position and cash
flows for the periods presented have been made and all such adjustments are of a normal and
recurring nature.
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 $1.2
million for the three and six months ended June 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 and long-term debt approximate their carrying amounts as of June 30, 2011.
Revenue Recognition Our primary service offerings are the gathering and processing 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 classify 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. |
10
Table of Contents
Segment Information Our operations include three reportable operating segments. These
operating segments reflect the way we manage our operations and make decisions. Our business
segments reflect the areas in which we operate and consist of the Barnett Shale, the Fayetteville
Shale and the Granite Wash. These 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 per unit calculations for the three and six
months ended June 30, 2011 and 2010. There have not been any units excluded due to being
anti-dilutive.
The weighted-average common units basic and the net income per
limited partner unit basic amounts have been corrected to include
the Class C units in the basic earnings per unit calculation. For the three
months ended June 30, 2011 the net income per limited partner unit basic previously
presented was $0.27 and has been corrected to $0.22. For the six months
ended June 30, 2011 the net income per limited partner unit basic previously
presented was $0.54 and has been corrected to $0.49.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per unit data) | ||||||||||||||||
Limited partners interest in net income |
$ | 8,599 | $ | 9,436 | $ | 17,087 | $ | 15,524 | ||||||||
Impact of interest on subordinated note to Quicksilver
(1) |
| 627 | | 1,213 | ||||||||||||
Income available assuming conversion of convertible debt |
$ | 8,599 | $ | 10,063 | $ | 17,087 | $ | 16,737 | ||||||||
Weighted-average common units basic |
38,558 | 28,502 | 34,893 | 28,502 | ||||||||||||
Effect of unvested phantom units |
136 | 517 | 136 | 517 | ||||||||||||
Effect of subordinated note to Quicksilver (1) |
| 2,939 | | 2,933 | ||||||||||||
Weighted-average common units diluted |
38,694 | 31,958 | 35,029 | 31,952 | ||||||||||||
Basic earnings per unit: |
||||||||||||||||
Net income per limited partner unit basic |
$ | 0.22 | $ | 0.33 | $ | 0.49 | $ | 0.54 | ||||||||
Diluted earnings per unit: |
||||||||||||||||
Net income per limited partner unit diluted |
$ | 0.22 | $ | 0.31 | $ | 0.49 | $ | 0.52 | ||||||||
Conversion price (1) |
N/A | $ | 19.38 | N/A | $ | 19.42 |
(1) | Assumes that convertible debt is converted using the lesser of average closing price per unit or final closing price on June 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. |
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
Effective February 1, 2011, we acquired natural gas gathering pipelines located in the
Morrow/Atoka area and near the emerging Avalon Shale and Bone Spring trends in Southeastern New
Mexico for $5.1 million from a group of independent producers. 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, in the Morrow/Atoka area and 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.
On April 1, 2011, we completed the Frontier Gas Acquisition including assets in the
Fayetteville Shale and the Granite Wash for a purchase price of $338 million, subject to
adjustments, with an additional $15 million to be paid to Frontier if certain operational
objectives are met within six months of the closing date. The Fayetteville Shale is a dry gas
formation in the Arkoma basin located in Northwest Arkansas. The Granite Wash is a liquids-rich
oil and gas producing formation in the Anadarko basin located in the Texas Panhandle.
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Fayetteville Shale System
The Fayetteville Shale System, located in Northwest 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 are 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 of 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.
The final purchase price allocation is pending the finalization of appraisal valuations of
certain tangible and intangible assets acquired, which may result in an adjustment to the
preliminary purchase price allocation. The preliminary purchase price allocation is as follows ($
in thousands):
Purchase
Price: |
||||
Total purchase price |
$ | 348,867 | ||
Preliminary
Purchase Price Allocation: |
||||
Accounts receivable |
335 | |||
Prepaid expenses and other |
750 | |||
Capital lease asset |
8,587 | |||
Property, plant and equipment |
140,683 | |||
Intangible assets |
116,200 | |||
Other assets |
178 | |||
Total assets |
$ | 266,733 | ||
Current portion of capital leases |
2,576 | |||
Other payables |
64 | |||
Capital leases |
6,011 | |||
Asset Retirement Obligations |
383 | |||
Total liabilities |
$ | 9,034 | ||
Goodwill |
$ | 91,168 | ||
The $338 million purchase price, subject to adjustment, 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 $349 million also
includes $8 million in capital spend and $3 million of inventory purchased. Transaction costs for
the three months ended June 30, 2011 were $3.6 million of which $1.1 was recorded in general and
administrative expense and $2.5 million was recorded in interest expense.
The following table is the presentation of income as if we had owned the Fayetteville and Granite Wash Systems
for the three and six months ended June 30, 2010 and for six
months ended June 30, 2011. Subsequent to the issuance of the
financial statements, we determined
the amounts previously presented contained errors. The information reflects corrections to expenses, which as previously presented did not include
depreciation and general and administration expenses for the three and six months ended June
30, 2010 and for the six months ended June 30, 2011.
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Three Months Ended June 30, 2010 | Three Months Ended June 30, 2010 | |||||||||||||||||||||||
As Previously Presented | As Restated | |||||||||||||||||||||||
Crestwood | Crestwood | |||||||||||||||||||||||
Midstream | Fayetteville and | Midstream | Fayetteville and | |||||||||||||||||||||
Partners LP | Granite Wash | Combined | Partners LP | Granite Wash | Combined | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Revenue |
$ | 27,194 | $ | 16,430 | $ | 43,624 | $ | 27,194 | $ | 16,430 | $ | 43,624 | ||||||||||||
Expenses |
(14,063 | ) | (10,762 | ) | (24,825 | ) | (14,063 | ) | (14,489 | ) | (28,552 | ) | ||||||||||||
Operating income |
$ | 13,131 | $ | 5,668 | $ | 18,799 | $ | 13,131 | $ | 1,941 | $ | 15,072 | ||||||||||||
Basic earnings per limited partner unit: |
$ | 0.33 | $ | 0.53 | $ | 0.33 | $ | 0.21 | ||||||||||||||||
Diluted earnings per limited partner unit: |
$ | 0.31 | $ | 0.48 | $ | 0.31 | $ | 0.20 |
Six Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | |||||||||||||||||||||||
As Previously Presented | As Restated | |||||||||||||||||||||||
Crestwood | Crestwood | |||||||||||||||||||||||
Midstream | Fayetteville and | Midstream | Fayetteville and | |||||||||||||||||||||
Partners LP | Granite Wash | Combined | Partners LP | Granite Wash | Combined | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Revenue |
$ | 51,933 | $ | 31,730 | $ | 83,663 | $ | 51,933 | $ | 31,730 | $ | 83,663 | ||||||||||||
Expenses |
(29,882 | ) | (21,170 | ) | (51,052 | ) | (29,882 | ) | (28,344 | ) | (58,226 | ) | ||||||||||||
Operating income |
$ | 22,051 | $ | 10,560 | $ | 32,611 | $ | 22,051 | $ | 3,386 | $ | 25,437 | ||||||||||||
Basic earnings per limited partner unit: |
$ | 0.54 | $ | 0.90 | $ | 0.54 | $ | 0.62 | ||||||||||||||||
Diluted earnings per limited partner unit: |
$ | 0.52 | $ | 0.85 | $ | 0.52 | $ | 0.60 |
Six Months Ended June 30, 2011 | Six Months Ended June 30, 2011 | |||||||||||||||||||||||
As Previously Presented | As Restated | |||||||||||||||||||||||
Crestwood | Crestwood | |||||||||||||||||||||||
Midstream | Fayetteville and | Midstream | Fayetteville and | |||||||||||||||||||||
Partners LP (1) | Granite Wash (2) | Combined | Partners LP (1) | Granite Wash (2) | Combined | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Revenue |
$ | 87,915 | $ | 17,002 | $ | 104,917 | $ | 87,915 | $ | 17,002 | $ | 104,917 | ||||||||||||
Expenses |
(54,936 | ) | (12,420 | ) | (67,356 | ) | (54,936 | ) | (16,014 | ) | (70,950 | ) | ||||||||||||
Operating income |
$ | 32,979 | $ | 4,582 | $ | 37,561 | $ | 32,979 | $ | 988 | $ | 33,967 | ||||||||||||
Basic earnings per limited partner unit: |
$ | 0.49 | $ | 0.63 | $ | 0.49 | $ | 0.37 | ||||||||||||||||
Diluted earnings per limited partner unit: |
$ | 0.49 | $ | 0.62 | $ | 0.49 | $ | 0.37 |
(1) | Includes three months of operating income for Fayetteville and Granite Wash, from April 1, 2011 to June 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
us, 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 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 us issuing an additional 293,948
general partner units, increasing the General Partner interest in us to 2%.
On May 4, 2011, we completed a public offering of 1,800,000 common units, representing limited
partner interests, in us 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 our
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 in us 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:
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Attributable to the | Per Unit | Total Cash | PIK Units to Class | Total IDR | ||||||||||||||||||||
Payment Date | Quarter Ended | Distribution | Distribution | C unitholders | Total | Distribution | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Pending Distributions |
||||||||||||||||||||||||
August 12, 2011 |
June 30, 2011 | $ | 0.46 | $ | 16.8 | $ | 3.1 | $ | 19.9 | $ | 1.5 | |||||||||||||
Completed Distributions |
||||||||||||||||||||||||
2011 |
||||||||||||||||||||||||
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 distribution included amounts paid to common and subordinated unitholders. Beginning
with the distributions starting with 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 limited partner units for the 10 trading days immediately preceding
the date the distribution is declared. For the distribution that was paid May 13, 2011,
attributable to the quarter ended March 31, 2011, we issued 94,093 additional Class C units. For
the distribution that will be paid August 12, 2011, attributable to the quarter ended June 30,
2011, approximately 115,141 additional Class C units will be issued.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Gathering systems |
$ | 269,887 | $ | 158,975 | ||||
Processing plants and compression
facilities |
410,589 | 365,208 | ||||||
Construction in progress gathering |
23,140 | 26,385 | ||||||
Rights-of-way and easements |
47,565 | 32,054 | ||||||
Land |
4,511 | 4,251 | ||||||
Buildings and other |
5,083 | 3,494 | ||||||
760,775 | 590,367 | |||||||
Accumulated depreciation |
(72,377 | ) | (58,996 | ) | ||||
Net property, plant and equipment |
$ | 688,398 | $ | 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 $0.7 million as of June
30, 2011.
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.
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Accumulated | Net Book | |||||||||||
Cost | Amortization | Value | ||||||||||
(In thousands) | ||||||||||||
Intangibles subject to amortization: |
||||||||||||
Gas contracts |
$ | 116,200 | $ | 729 | $ | 115,471 | ||||||
Intangibles not subject to amortization: |
||||||||||||
Goodwill |
91,168 | | 91,168 | |||||||||
$ | 207,368 | $ | 729 | $ | 206,639 | |||||||
The intangible assets have useful lives of 6 to 17 years. Amortization expense recorded for the
three and six months ended June 30, 2011 was approximately $0.7 million. The expected amortization
of the intangible assets is as follows:
Years Ending (in thousands)
2011 (remaining) |
$ | 1,458 | ||
2012 |
4,370 | |||
2013 |
5,870 | |||
2014 |
7,151 | |||
2015 |
8,016 | |||
Thereafter |
88,606 | |||
Total |
$ | 115,471 | ||
7. DEBT
Debt consisted of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Credit Facility |
$ | 237,500 | $ | 283,504 | ||||
Senior Notes |
200,000 | | ||||||
437,500 | 283,504 | |||||||
Current maturities of debt |
| | ||||||
Total |
$ | 437,500 | $ | 283,504 | ||||
Credit Facility At June 30, 2011, we had $237.5 million outstanding under our $500 million
Credit Facility at the weighted-average interest rate of 3.1%. Borrowings under the Credit
Facility bear interest at LIBOR plus an applicable margin or a base rate as defined in the credit
agreement. Under the terms of the Credit Facility, the applicable margin under LIBOR borrowings is
2.75%. 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. As of June 30, 2011, we were in compliance with our financial covenants.
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 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. Interest on the Senior
Notes accrues at a rate of 7.75% per annum, and is 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.
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Our Senior Notes requires 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 June 30, 2011, we were in compliance with this covenant.
8. ACCOUNTS PAYABLE AND OTHER
Accounts payable and other consist of the following:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Accrued operating expenses |
$ | 3,099 | $ | 758 | ||||
Accrued property taxes |
2,728 | | ||||||
Product purchases payable |
4,330 | | ||||||
Compensation and benefits payable |
1,485 | | ||||||
Tax payable |
650 | 280 | ||||||
Legal services |
| 176 | ||||||
Consulting services |
| 802 | ||||||
Interest payable |
4,653 | 726 | ||||||
Other |
476 | 175 | ||||||
$ | 17,421 | $ | 2,917 | |||||
9. CAPITAL LEASES
With the Frontier Gas Acquisition we have leased compressors which are accounted for as
capital leases. The total liability outstanding at June 30, 2011 related to these leases is $7.9
million. Future minimum lease payments of capital leases (in thousands):
Years Ending
2011 (remaining) |
$ | 1,431 | ||
2012 |
2,860 | |||
2013 |
2,860 | |||
2014 |
1,161 | |||
Total payments |
8,312 | |||
Imputed Interest |
(374 | ) | ||
Present value of future payments |
$ | 7,938 | ||
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 |
511 | |||
Accretion expense |
276 | |||
Asset retirement obligations as of June 30, 2011 |
$ | 10,664 | ||
As of June 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 | Weighted | |||||||||||||||
Average Grant | Average Grant | |||||||||||||||
Units | Date Fair Value | Units | Date Fair Value | |||||||||||||
Unvested phantom units January 1, 2011 |
| $ | | 121,526 | $ | 27.11 | ||||||||||
Vested |
| | | | ||||||||||||
Issued |
3,012 | 28.85 | 18,391 | 27.73 | ||||||||||||
Cancelled |
| | (14,820 | ) | 27.11 | |||||||||||
Unvested phantom units June 30, 2011 |
3,012 | $ | 28.85 | 125,097 | $ | 27.20 | ||||||||||
At January 1, 2011, we had total unvested compensation cost of $2.6 million related to phantom
units. We recognized compensation expense of approximately $0.6 million during the six months
ended June 30, 2011. Grants of phantom units during the six months ended June 30, 2011 had an
estimated grant date fair value of $0.6 million. We had unearned compensation expense of $2.6
million at June 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 six months ended June
30, 2011. At June 30, 2011, 636,909 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 income taxes is included in our results of operations as such income
is taxable directly to the partners holding interests in us.
We are subject to Texas Margin tax, 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 At June 30, 2011, 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.
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.
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
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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 June 30, 2010, we had recorded no liabilities for environmental matters.
With the Frontier Gas Acquisition, we agreed to pay to Frontier up to an additional $15
million if certain commercial objectives are met within six months of the closing date.
14. RELATED-PARTY TRANSACTIONS
We routinely conduct business with Quicksilver and its affiliates. For a more complete
description of our agreements with Quicksilver, see Notes 2 and 12 to the consolidated financial
statements in our 2010 Annual Report on Form 10-K.
During the quarter and six months ended June 30, 2011, Quicksilver accounted for 58% and 71%,
respectively of our total revenue. Approximately 10% of our gathered volumes for the six months
ended June 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 $0.3 million of expense related to this agreement during the six months ended June
30, 2011.
15. 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:
Condensed Consolidated Statements of Income
For the Three Months Ended June 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 55,535 | $ | | $ | 55,535 | ||||||||
Operating expenses |
6,070 | 29,090 | | 35,160 | ||||||||||||
Operating income |
(6,070 | ) | 26,445 | | 20,375 | |||||||||||
Interest expense |
9,754 | 65 | | 9,819 | ||||||||||||
Income before income tax |
(15,824 | ) | 26,380 | | 10,556 | |||||||||||
Income tax provision |
| 329 | | 329 | ||||||||||||
Net income before equity in net earnings of subsidiaries |
(15,824 | ) | 26,051 | | 10,227 | |||||||||||
Equity in net earnings of subsidiaries |
26,051 | | (26,051 | ) | | |||||||||||
Net Income |
$ | 10,227 | $ | 26,051 | $ | (26,051 | ) | $ | 10,227 | |||||||
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For the Three Months Ended June 30, 2010 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 27,194 | $ | | $ | 27,194 | ||||||||
Operating expenses |
2,399 | 11,664 | | 14,063 | ||||||||||||
Operating income |
(2,399 | ) | 15,530 | | 13,131 | |||||||||||
Interest expense |
2,945 | | | 2,945 | ||||||||||||
Income before income tax |
(5,344 | ) | 15,530 | | 10,186 | |||||||||||
Income tax provision |
| 73 | | 73 | ||||||||||||
Net income before equity in net earnings of
subsidiaries |
(5,344 | ) | 15,457 | | 10,113 | |||||||||||
Equity in net earnings of subsidiaries |
15,457 | | (15,457 | ) | | |||||||||||
Net Income |
$ | 10,113 | $ | 15,457 | $ | (15,457 | ) | $ | 10,113 | |||||||
For the Six Months Ended June 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 87,915 | $ | | $ | 87,915 | ||||||||
Operating expenses |
12,442 | 42,494 | | 54,936 | ||||||||||||
Operating income |
(12,442 | ) | 45,421 | | 32,979 | |||||||||||
Interest expense |
12,760 | 65 | | 12,825 | ||||||||||||
Income before income tax |
(25,202 | ) | 45,356 | | 20,154 | |||||||||||
Income tax provision |
| 551 | | 551 | ||||||||||||
Net income before equity in net earnings of subsidiaries |
(25,202 | ) | 44,805 | | 19,603 | |||||||||||
Equity in net earnings of subsidiaries |
44,805 | | (44,805 | ) | | |||||||||||
Net Income |
$ | 19,603 | $ | 44,805 | $ | (44,805 | ) | $ | 19,603 | |||||||
19
Table of Contents
For the Six Months Ended June 30, 2010 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue |
$ | | $ | 51,933 | $ | | $ | 51,933 | ||||||||
Operating expenses |
5,460 | 24,422 | | 29,882 | ||||||||||||
Operating income |
(5,460 | ) | 27,511 | | 22,051 | |||||||||||
Interest expense |
5,623 | | | 5,623 | ||||||||||||
Income before income tax |
(11,083 | ) | 27,511 | | 16,428 | |||||||||||
Income tax provision |
| 126 | | 126 | ||||||||||||
Net income before equity in net earnings of subsidiaries |
(11,083 | ) | 27,385 | | 16,302 | |||||||||||
Equity in net earnings of subsidiaries |
27,385 | | (27,385 | ) | | |||||||||||
Net Income |
$ | 16,302 | $ | 27,385 | $ | (27,385 | ) | $ | 16,302 | |||||||
Condensed Consolidated Balance Sheet
June 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
ASSETS |
||||||||||||||||
Current assets |
$ | 344,367 | $ | 43,980 | $ | (350,634 | ) | $ | 37,713 | |||||||
Properties, plant and equipment net |
10,893 | 677,505 | | 688,398 | ||||||||||||
Intangible
assets, net |
| 115,471 | | 115,471 | ||||||||||||
Goodwill |
| 91,168 | | 91,168 | ||||||||||||
Investment in subsidiaries |
560,054 | | (560,054 | ) | | |||||||||||
Other assets |
19,097 | 808 | | 19,905 | ||||||||||||
Total assets |
$ | 934,411 | $ | 928,932 | $ | (910,688 | ) | $ | 952,655 | |||||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||||||||||
Current liabilities |
$ | 32,158 | $ | 352,928 | $ | (350,634 | ) | $ | 34,452 | |||||||
Long-term liabilities |
437,500 | 15,950 | | 453,450 | ||||||||||||
Partners capital |
464,753 | 560,054 | (560,054 | ) | 464,753 | |||||||||||
Total liabilities and partners capital |
$ | 934,411 | $ | 928,932 | $ | (910,688 | ) | $ | 952,655 | |||||||
20
Table of Contents
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 | |||||||
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 2011 | ||||||||||||||||
Crestwood | ||||||||||||||||
Crestwood | Restricted | Midstream | ||||||||||||||
Midstream | Guarantor | Partners LP | ||||||||||||||
Partners LP | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Net cash provided by operating activities |
$ | (33,278 | ) | $ | 71,835 | $ | | $ | 38,557 | |||||||
Capital expenditures |
| (16,888 | ) | | (16,888 | ) | ||||||||||
Acquisitions, net of cash acquired |
(353,966 | ) | (353,966 | ) | ||||||||||||
Net cash provided by investing activities |
| (370,854 | ) | | (370,854 | ) | ||||||||||
Proceeds from Senior Notes |
200,000 | | | 200,000 | ||||||||||||
Proceeds from Credit Facility |
64,200 | | | 64,200 | ||||||||||||
Repayments of Credit Facility |
(110,204 | ) | | | (110,204 | ) | ||||||||||
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 |
(29,130 | ) | | | (29,130 | ) | ||||||||||
Advances to Affiliates |
38,770 | (38,770 | ) | | | |||||||||||
Net cash (used in) provided by financing activities |
371,616 | (38,770 | ) | | 332,846 | |||||||||||
Net cash increase (decrease) |
338,338 | (337,789 | ) | | 549 | |||||||||||
Cash and cash equivalents at beginning of period |
2 | | | 2 | ||||||||||||
Cash or cash equivalents at end of period |
$ | 338,340 | $ | (337,789 | ) | $ | | $ | 551 | |||||||
21
Table of Contents
For the Six Months Ended June 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 |
$ | (6,272 | ) | $ | 33,021 | $ | | $ | 26,749 | |||||||
Capital expenditures |
| (34,845 | ) | | (34,845 | ) | ||||||||||
Distributions to Quicksilver for Alliance Midstream Assets |
| (80,276 | ) | | (80,276 | ) | ||||||||||
Net cash used in investing activities |
| (115,121 | ) | | (115,121 | ) | ||||||||||
Proceeds from Credit Facility |
124,500 | | | 124,500 | ||||||||||||
Repayments of Credit Facility |
(23,100 | ) | | | (23,100 | ) | ||||||||||
Proceeds from issuance of equity |
11,088 | | | 11,088 | ||||||||||||
Equity issuance cost paid |
(34 | ) | | | (34 | ) | ||||||||||
Distributions to unitholders |
(23,128 | ) | | | (23,128 | ) | ||||||||||
Taxes paid for equity-based compensation vesting |
(1,144 | ) | | | (1,144 | ) | ||||||||||
Advances to Affiliates |
135,885 | (135,885 | ) | | ||||||||||||
Net cash (used in) provided by financing activities |
224,067 | (135,885 | ) | | 88,182 | |||||||||||
Net cash increase (decrease) |
217,795 | (217,985 | ) | | (190 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
746 | | 746 | |||||||||||||
Cash or cash equivalents at end of period |
$ | 218,541 | $ | (217,985 | ) | $ | | $ | 556 | |||||||
16. SEGMENT INFORMATION
Our operations include three reportable operating segments. These operating segments reflect
the way we manage our operations and make decisions. We evaluate the performance of our operating
segments based on EBITDA. Our business segments reflect the areas in which we operate and consist
of the Barnett Shale, the Fayetteville Shale and the Granite Wash. These business segments are
engaged in the gathering, compression, processing and treating of natural gas and delivery of NGLs.
The following tables summarize the reportable segment data for the three and six month periods
ending June 30, 2011 and June 30, 2010:
Three Months Ended June 30, 2011 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 3,498 | $ | 7,083 | $ | 12,536 | $ | | $ | 23,117 | ||||||||||
Revenue related party |
32,418 | | | | 32,418 | |||||||||||||||
Total revenues |
$ | 35,916 | $ | 7,083 | $ | 12,536 | $ | | $ | 55,535 | ||||||||||
Operations and maintenance expense |
5,744 | 2,391 | 499 | | 8,634 | |||||||||||||||
Product purchases |
1,072 | 559 | 10,474 | | 12,105 | |||||||||||||||
General and administrative expense |
| | | 6,060 | 6,060 | |||||||||||||||
EBITDA |
29,100 | 4,133 | 1,563 | (6,060 | ) | 28,736 | ||||||||||||||
Depreciation, amortization and
accretion expense |
6,250 | 1,710 | 391 | 10 | 8,361 | |||||||||||||||
Operating income |
$ | 22,850 | $ | 2,423 | $ | 1,172 | $ | (6,070 | ) | $ | 20,375 | |||||||||
Goodwill |
$ | | $ | 73,845 | $ | 17,323 | $ | | $ | 91,168 | ||||||||||
Total assets |
$ | 561,789 | $ | 291,306 | $ | 79,099 | $ | 20,461 | $ | 952,655 | ||||||||||
Capital Expenditures |
$ | 3,843 | $ | 2,328 | $ | 2,741 | $ | | $ | 8,912 |
22
Table of Contents
Three Months Ended June 30, 2010 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 2,015 | $ | | $ | | $ | | $ | 2,015 | ||||||||||
Revenue related party |
25,179 | | | | 25,179 | |||||||||||||||
Total revenues |
$ | 27,194 | $ | | $ | | $ | | $ | 27,194 | ||||||||||
Operations and maintenance expense |
6,022 | | | | 6,022 | |||||||||||||||
Product purchases |
| | | | | |||||||||||||||
General and administrative expense |
| | | 2,399 | 2,399 | |||||||||||||||
EBITDA |
21,172 | | | (2,399 | ) | 18,773 | ||||||||||||||
Depreciation, amortization and
accretion expense |
5,642 | | | | 5,642 | |||||||||||||||
Operating income |
$ | 15,530 | $ | | $ | | $ | (2,399 | ) | $ | 13,131 | |||||||||
Total assets |
$ | 513,690 | $ | | $ | | $ | 2,512 | $ | 516,202 | ||||||||||
Capital Expenditures |
$ | 17,682 | $ | | $ | | $ | | $ | 17,682 |
Six Months Ended June 30, 2011 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 5,890 | $ | 7,083 | $ | 12,536 | $ | | $ | 25,509 | ||||||||||
Revenue related party |
62,406 | | | | 62,406 | |||||||||||||||
Total revenues |
$ | 68,296 | $ | 7,083 | $ | 12,536 | $ | | $ | 87,915 | ||||||||||
Operations and maintenance expense |
12,702 | 2,391 | 499 | | 15,592 | |||||||||||||||
Product purchases |
1,495 | 559 | 10,474 | | 12,528 | |||||||||||||||
General and administrative expense |
| | | 12,430 | 12,430 | |||||||||||||||
EBITDA |
54,099 | 4,133 | 1,563 | (12,430 | ) | 47,365 | ||||||||||||||
Depreciation, amortization and
accretion expense |
12,273 | 1,710 | 391 | 12 | 14,386 | |||||||||||||||
Operating income |
$ | 41,826 | $ | 2,423 | $ | 1,172 | $ | (12,442 | ) | $ | 32,979 | |||||||||
Goodwill |
$ | | $ | 73,845 | $ | 17,323 | $ | | $ | 91,168 | ||||||||||
Total assets |
$ | 561,789 | $ | 291,306 | $ | 79,099 | $ | 20,461 | $ | 952,655 | ||||||||||
Capital Expenditures |
$ | 11,819 | $ | 2,328 | $ | 2,741 | $ | | $ | 16,888 |
23
Table of Contents
Six Months Ended June 30, 2010 | ||||||||||||||||||||
Barnett | Fayetteville | Granite | ||||||||||||||||||
Shale | Shale | Wash | Corporate | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenue |
$ | 3,886 | $ | | $ | | $ | | $ | 3,886 | ||||||||||
Revenue related party |
48,047 | | | | 48,047 | |||||||||||||||
Total revenues |
$ | 51,933 | $ | | $ | | $ | | $ | 51,933 | ||||||||||
Operations and maintenance expense |
13,415 | | | | 13,415 | |||||||||||||||
Product purchases |
| | | | | |||||||||||||||
General and administrative expense |
| | | 5,460 | 5,460 | |||||||||||||||
EBITDA |
38,518 | | | (5,460 | ) | 33,058 | ||||||||||||||
Depreciation, amortization and
accretion expense |
11,007 | | | | 11,007 | |||||||||||||||
Operating income |
$ | 27,511 | $ | | $ | | $ | (5,460 | ) | $ | 22,051 | |||||||||
Total assets |
$ | 513,690 | $ | | $ | | $ | 2,512 | $ | 516,202 | ||||||||||
Capital Expenditures |
$ | 34,845 | $ | | $ | | $ | | $ | 34,845 |
24
Table of Contents
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 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 six months ended June 30, 2011, approximately 74% and 82%,
respectively, of our total gathering volumes were comprised of natural gas owned or controlled by
Quicksilver. Approximately 10% of our gathered volumes 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 and Granite Wash during the quarter and six months ended June 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, 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. |
25
Table of Contents
2011 Recent Developments
Las Animas Acquisition Effective February 1, 2011, we acquired approximately 46 miles of natural
gas gathering pipelines located in the Morrow/Atoka area and near the emerging Avalon Shale and
Bone Spring trends in Southeastern New Mexico for $5.1 million from a group of independent
producers. The pipelines are supported by long-term, fixed-fee contracts which include existing
Morrow/Atoka production and dedications of approximately 57,000 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, the Partnership completed the previously announced
Frontier Gas Acquisition for a purchase price of approximately $338 million, with an additional $15
million to be paid to Frontier if certain operational objectives are met within six months of the
closing date. 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 Northwest 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 us, 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 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 in us 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. Interest on the Senior Notes
accrues at a rate of 7.75% per annum, and is 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 in us, 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 our 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 in us to approximately 1.9%.
26
Table of Contents
RESULTS OF OPERATIONS
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
The following discussion compares the results of operations for the three months ended June
30, 2011 to the three months ended June 30, 2010, which we refer to as the 2011 quarter and the
2010 quarter, respectively.
Three Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Total revenues |
$ | 55,535 | $ | 27,194 | ||||
Operations and maintenance expense |
8,634 | 6,022 | ||||||
Product purchases |
12,105 | | ||||||
General and administrative expense |
6,060 | 2,399 | ||||||
EBITDA |
28,736 | 18,773 | ||||||
Depreciation, amortization and accretion expense |
8,361 | 5,642 | ||||||
Interest expense |
9,819 | 2,945 | ||||||
Income tax provision |
329 | 73 | ||||||
Net income |
$ | 10,227 | $ | 10,113 | ||||
The following table summarizes our volumes:
Gathering | Processing | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(MMcf) | ||||||||||||||||
Barnett Shale |
42,046 | 29,609 | 13,093 | 11,494 | ||||||||||||
Fayetteville Shale System |
7,334 | | | | ||||||||||||
Granite Wash System |
1,538 | | 1,466 | | ||||||||||||
Total |
50,918 | 29,609 | 14,559 | 11,494 | ||||||||||||
The following table summarizes the changes in our revenue:
Gathering | Processing | Product Sales | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue for the three months ended June 30, 2010 |
$ | 19,745 | $ | 7,449 | $ | | $ | 27,194 | ||||||||
Volume changes |
14,210 | 1,987 | | 16,197 | ||||||||||||
Price changes |
(1,015 | ) | (874 | ) | 14,033 | 12,144 | ||||||||||
Revenue for the three months ended June 30, 2011 |
$ | 32,940 | $ | 8,562 | $ | 14,033 | $ | 55,535 | ||||||||
Total Revenue and Volumes Operations related to the Fayetteville Shale System contributed
$7.1 million to gathering revenue. Operations related to Granite Wash System contributed $12.5 million
to revenue primarily related to product sales, which is products sold to third parties.
The increase in revenue related to the Barnett Shale was $8.7 million due to increased volumes on
all the systems.
Operations and Maintenance Expense The increase in operations and maintenance expense of
$2.6 million was from the Frontier Gas Acquisition 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 $12.1 million is due to the Frontier
Gas Acquisition for gas purchased from local producers, related to percent-of-proceeds contracts,
primarily related to the Granite Wash System.
General and Administrative Expense The increase in general and administrative expense 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 and costs related to
professional services. Transaction costs related to the Crestwood Transaction and Frontier Gas
Acquisition amounted to approximately $1.1 million for the 2011 quarter. General and
administrative expense includes $0.2 million and $0.6 million of equity-based compensation expense
for the quarters ended June 30, 2011 and 2010, respectively.
EBITDA EBITDA increased primarily as a result of the increase in revenues described above.
As a percentage of revenue, EBITDA has decreased from 69% of revenues in the 2010 quarter to 52% in
the 2011 quarter. Increases in revenues and expenses include product sales and product purchases
primarily related to the Granite Wash System, which decreases EBITDA as a percent of revenue.
Barnett Shales increased EBITDA from 78% to 81% of revenues is primary due to higher revenues
offset by product purchases. Fayetteville Shale and Granite Washs EBITDA is 58% and 12%,
respectively, of revenue for the 2011 quarter.
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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. The Fayetteville Shale and Granite Wash contributed
$1.7 million and $0.4 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 the expenses related to the commitments of the Bridge Loans. 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 June 30,
2011 and 2010.
Three Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Interest: |
||||||||
Revolving Credit Facility |
$ | 3,195 | $ | 2,308 | ||||
Senior Notes |
4,091 | | ||||||
Bridge Loan |
2,500 | | ||||||
Capital lease interest |
65 | | ||||||
Subordinated note to Quicksilver |
| 637 | ||||||
Total |
9,851 | 2,945 | ||||||
Less interest capitalized |
(32 | ) | | |||||
Interest expense |
$ | 9,819 | $ | 2,945 | ||||
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
The following discussion compares the results of operations for the six months ended June 30,
2011 to the six months ended June 30, 2010, which we refer to as the 2011 period and the 2010
period, respectively.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Total revenues |
$ | 87,915 | $ | 51,933 | ||||
Operations and maintenance expense |
15,592 | 13,415 | ||||||
Product purchases |
12,528 | | ||||||
General and administrative expense |
12,430 | 5,460 | ||||||
EBITDA |
47,365 | 33,058 | ||||||
Depreciation, amortization and accretion expense |
14,386 | 11,007 | ||||||
Interest expense |
12,825 | 5,623 | ||||||
Income tax provision |
551 | 126 | ||||||
Net income |
$ | 19,603 | $ | 16,302 | ||||
The following table summarizes our volumes:
Gathering | Processing | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(MMcf) | ||||||||||||||||
Barnett Shale |
81,447 | 55,406 | 24,053 | 22,738 | ||||||||||||
Fayetteville Shale System |
7,334 | | | | ||||||||||||
Granite Wash System |
1,538 | | 1,466 | | ||||||||||||
Total |
90,319 | 55,406 | 25,519 | 22,738 | ||||||||||||
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The following table summarizes the changes in our revenue:
Gathering | Processing | Product Sales | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Revenue for the six months ended June 30, 2010 |
$ | 37,249 | $ | 14,684 | $ | | $ | 51,933 | ||||||||
Volume changes |
23,472 | 1,796 | | 25,268 | ||||||||||||
Price changes |
(2,954 | ) | (765 | ) | 14,433 | 10,714 | ||||||||||
Revenue for the six months ended June 30, 2011 |
$ | 57,767 | $ | 15,715 | $ | 14,433 | $ | 87,915 | ||||||||
Total Revenue and Volumes Operations related to the Fayetteville Shale System contributed
$7.1 million to gathering revenue. Operations related to Granite Wash System contributed $12.5 million to
revenue primarily related to product sales, which is products sold to third parties. The
increase in revenue related to the Barnett Shale was $16.4 million due to increased volumes on all
the systems.
Operations and Maintenance Expense The increase in operations and maintenance expense of
$2.2 million was from the Frontier Gas Acquisition 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 $12.5 million is due to the Frontier
Gas Acquisition for gas purchased from local producers, related to percent-of-proceeds contracts,
primarily related to the Granite Wash System.
General and Administrative Expense The increase in general and administrative expense 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 $3.0 million for the 2011 period. General and administrative
expense includes $0.4 million and $1.3 million of equity-based compensation expense for the periods
ended June 30, 2011 and 2010, respectively.
EBITDA EBITDA increased primarily as a result of the increase in revenues described above.
As a percentage of revenue, EBITDA has decreased from 64% of revenues in the 2010 period to 54% in
the 2011 period. Increases in revenues and expenses include product sales and product purchases
primarily related to the Granite Wash System, which decreases EBITDA as a percent of revenue.
Barnett Shales increased EBITDA from 74% to 79% of revenues is primary due to higher revenues
offset by product purchases. Fayetteville Shale and Granite Washs EBITDA is 58% and 12%,
respectively, 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. The Fayetteville Shale and Granite Wash contributed
$1.7 million and $0.4 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 the expenses related to the commitments of the Bridge Loans.
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 six months ended June 30,
2011 and 2010.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Interest cost: |
||||||||
Revolving Credit Facility |
$ | 6,237 | $ | 4,390 | ||||
Senior Notes |
4,091 | | ||||||
Bridge Loan |
2,500 | | ||||||
Capital lease interest |
65 | | ||||||
Subordinated note to Quicksilver |
| 1,233 | ||||||
Total cost |
12,893 | 5,623 | ||||||
Less interest capitalized |
(68 | ) | | |||||
Interest expense |
$ | 12,825 | $ | 5,623 | ||||
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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
$0.46 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 Acquisitions
which will result in lower dependency on Quicksilver and our Barnett Shale operations. During the
second quarter of 2011, approximately 74% of our total gathering volumes were comprised of natural
gas owned or controlled by Quicksilver, which has decreased almost 20% from 92% in the first
quarter of 2011.
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.
At this time, a portion of our revenue is derived from our operations in the Barnett Shale.
In addition, more than 70% of our year to date gathering revenues are associated with natural gas
volumes owned or controlled by 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 reduces 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
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net cash provided by operating activities |
$ | 38,557 | $ | 26,749 | ||||
Net cash used in investing activities |
(370,854 | ) | (115,121 | ) | ||||
Net cash provided by financing activities |
332,846 | 88,182 |
Cash Flows Provided by Operating Activities The increase in cash flows from operating
activities resulted from an increase in accrued expenses related to operations, ad valorem tax,
interest expense and incentive compensation, offset by higher receivables from Quicksilver and the
Fayetteville Shale and Granite Wash operations.
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
$354 million, offset by 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 $16.9 million for
gathering assets and processing facilities.
Cash Flows Provided by Financing Activities Changes in cash flows used in financing
activities during the 2011 period resulted primarily from the net borrowings under our Senior Notes
and Credit Facility of $154 million compared with the 2010 period net borrowings of $101.4 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
$6 million more to our unitholders during the 2011 period. We have increased our distributions by
9.5% from the 2010 period to the 2011 period. 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 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 to spend $55 to $65 million for
capital expenditures. This estimate includes a reduction of
approximately $25 million primarily due to the timing of capital projects in the
Granite Wash and Fayetteville Shale. These expenditures were originally
expected to occur in the later part of 2011, are currently estimated to be spent
in first half of 2012. In addition, maintenance capital spending is
expected to be approximately $4 million in 2011. This is a change from our original estimate of $8 million for 2011 and is based on actual
costs being lower than originally expected in 2011.
During the six months ended June 30, 2011, we increased gross property, plant and equipment
by $170.4 million, including $149.3 million for the Frontier Gas Acquisition assets, $5.1 million
for the Las Animas Acquisition, expansion capital expenditures of approximately $15.2 million, $0.7
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 June 30, 2011, we had $237.5 million outstanding under our $500 million
Credit Facility at a weighted-average interest rate of 3.1%. Our average outstanding debt was $263 million for the three months ended June 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 agreement) to our net interest expense of not less than 2.5 to 1.0; and | ||
| a ratio of total indebtedness to consolidated trailing 12-month EBITDA of not more than 5.0 to 1.0 or not more than 5.5 to 1.0 for up to nine months following certain acquisitions. |
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. As of June 30, 2011, we were in compliance with all financial covenants.
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. Interest on the Senior
Notes accrues at a rate of 7.75% per annum, and is 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 requires 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 June 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 June 30, 2011.
Payments Due by Period | ||||||||||||||||||||||||||||
Contractual Obligations | Total | 2011 (remaining) | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Long-term debt (1) |
$ | 437.5 | $ | | $ | | $ | | $ | | $ | 237.5 | $ | 200.0 | ||||||||||||||
Scheduled interest obligations (2) |
152.6 | 11.4 | 22.8 | 22.8 | 22.8 | 21.0 | 51.8 | |||||||||||||||||||||
Contractual obligations (3) |
8.7 | 2.7 | 2.8 | 2.0 | 0.8 | 0.4 | | |||||||||||||||||||||
Capital lease obligations (4) |
7.9 | 1.3 | 2.7 | 2.8 | 1.1 | | | |||||||||||||||||||||
Asset retirement obligations (5) |
10.7 | | | | | | 10.7 | |||||||||||||||||||||
Total contractual obligations |
$ | 617.4 | $ | 15.4 | $ | 28.3 | $ | 27.6 | $ | 24.7 | $ | 258.9 | $ | 262.5 | ||||||||||||||
(1) | As of June 30, 2011, we had $237.5 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 June 30, 2011, we would anticipate interest payments to be approximately $7.4 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 $0.3 million. If the committed amount under our Credit Facility were to be fully utilized by year-end 2011 at interest rates in effect at June 30, 2011, we estimate that annual interest expenses would increase by approximately $8.1 million. If interest rates on our June 30, 2011 variable debt balance of $237.5 million increase or decrease by one percentage point, our annual income will decrease or increase by $2.4 million. | |
(3) | We lease office buildings and other property under operating leases. |
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(4) | We lease compressors which are accounted for as capital leases, see Note 9 to our condensed consolidated interim 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 interim 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 six months ended June 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
Our management, including our Chief Executive Officer and our Chief Financial Officer (the Certifying Officers) evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2011. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management designs controls and procedures to provide reasonable assurance of achieving the desired control objectives. Based on the evaluation of our disclosure controls and procedures as of June 30, 2011, the Certifying Officers concluded that, as of such date, our disclosure controls and procedures were effective.
Subsequently, in the fourth quarter of 2011, management became aware of a deficiency in controls relating to the preparation of pro forma financial information that is required to be disclosed in Note 3 Acquisitions to our condensed consolidated financial statements. We have concluded that such a deficiency represented a material weakness in internal control over financial reporting. This material weakness resulted in the amendment to our Quarterly Report on Form 10-Q/A for the three months and six months ended June 30, 2011, in order to restate the pro forma financial information. As a result of this material weakness, the Certifying Officers have revised their earlier conclusion and have now concluded that our disclosure controls and procedures were not effective as of June 30, 2011.
Remediation of Material Weakness
The Partnership is implementing additional controls related to financial reporting disclosures for acquisitions and additional review procedures by individuals with expertise in U.S. GAAP and SEC financial reporting standards.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 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.
There were no other changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Our operations are subject to a variety of risks and disputes normally incident to our
business. As a result, we may, at any given time, be a defendant in various legal proceedings and
litigation arising in the ordinary course of business. 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.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the risk factor discussed below and the risk 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. |
Failure to maintain effective internal control over financial reporting could have an adverse effect on our operations, financial results or unit price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, we are required to document and test our internal control over financial reporting; our management is required to assess and issue a
report concerning our internal control over financial reporting; and our
independent registered public accounting firm is required to attest to and report on managements
assessment and the effectiveness of internal control over financial reporting.
As
described in Part I Item 4. Controls and Procedures of this report, our Certifying Officers concluded that as of June 30, 2011, there was a material weakness in our internal control over financial reporting and, as a result, as of that date, the Certifying Officers determined that our disclosure controls
and procedures were not effective. As a result of this material weakness, errors
occurred in the Partnerships interim condensed consolidated financial statements
related to presentation of pro forma financial information disclosed in the footnotes
to the condensed consolidated financial statements. These errors ultimately resulted in the
restatement of the Partnerships Form 10-Q for the quarter ended June 30, 2011. Although the
Partnership is implementing additional controls related to financial reporting disclosures for
acquisitions and additional review procedures by individuals with expertise in U.S. GAAP and SEC
financial reporting standards, the Partnership may fail to maintain effective internal control
over financial reporting in the future. Failure to maintain effective internal control over
financial reporting could result in investigations or sanctions by regulatory authorities,
and could have a material adverse effect on investor confidence in our reported financial
information, the market price of our common units could decline, we may be unable to obtain
additional financing to operate and expand our business, and our business and financial
condition could be harmed.
The risk factors should be carefully considered when evaluating our business and the forward-looking
statements in this report.
See Forward-Looking Information on page five of this Quarterly Report on Form 10-Q/A.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits:
The exhibit index is incorporated herein by reference into this quarterly report on Form 10-Q/A.
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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:
December 1, 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 |
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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 | |
3.1
|
Certificate of Limited Partnership of Quicksilver Gas Services LP (filed as Exhibit 3.1 to the Companys Form S-1, File No. 33-140599, filed February 12, 2007 and included herein by reference). | |
3.2
|
Certificate of Amendment to the Certificate of Limited Partnership of Quicksilver Gas Services LP (filed as Exhibit 3.1 to the Companys Form 8-K, filed October 7, 2010 and included herein by reference) | |
3.3
|
Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Crestwood Midstream Partners LP dated as of April 1, 2011 (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed with the Commission on April 5, 2011) | |
3.4
|
First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Quicksilver Gas Services LP (filed as Exhibit 3.2 to the Companys Form 10-Q for the Quarter ended September 30, 2010, filed on November 8, 2010 and included herein by reference) | |
3.5
|
Second Amended and Restated Agreement of Limited Partnership of Quicksilver Gas Services LP, dated February 19, 2008 (filed as Exhibit 3.1 to the Companys Form 8-K filed February 22, 2008 and included herein by reference). | |
3.6
|
Certificate of Formation of Quicksilver Gas Services GP LLC (filed as Exhibit 3.3 to the Companys Form S-1, File No. 333-140599, filed February 12, 2007 and included herein by reference). | |
3.7
|
Certificate of Amendment to the Certificate of Formation of Quicksilver Gas Services GP LLC (filed as Exhibit 3.3 to the Companys Form 10-Q for the Quarter ended September 30, 2010, filed on November 8, 2010 and included herein by reference). | |
3.8
|
First Amended and Restated Limited Liability Company Agreement of Quicksilver Gas Services GP LLC, dated July 24, 2007 (filed as Exhibit 3.4 to the Companys Form S-1/A, File No. 333-140599, filed July 25, 2007 and included herein by reference). | |
3.9
|
First Amendment to the First Amended and Restated Limited Liability Company Agreement of Quicksilver Gas Services GP LLC, dated July 24, 2007 (filed as Exhibit 3.4 to the Companys Form 10-Q for the quarter ended September 30, 2010, filed on November 8, 2010 and included herein by reference) | |
4.1
|
Form of Common Unit Certificate (filed as Exhibit 4.1 to the Companys Form S-3/A, File No. 333-171735, filed April 8, 2011 and included herein by reference). | |
4.2
|
Indenture, dated April 1, 2011, among Crestwood Midstream Partners LP and Crestwood Midstream Finance Corporation, the Guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of the Companys Current Report on Form 8-K filed with the Commission on April 5, 2011). | |
4.3
|
Form of Note representing all 7.75% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K filed with the Commission on April 5, 2011). | |
4.4
|
Registration Rights Agreement, dated April 1, 2011, among Crestwood Midstream Partners LP and Crestwood Midstream Finance Corporation, the Guarantors named therein and UBS Securities LLC, BNP Paribas Securities Corp., RBC Capital Markets, LLC and RBS Securities Inc., as the initial purchasers. (incorporated by reference to Exhibit 4.3 of the Companys Current Report on Form 8-K filed with the Commission on April 5, 2011). | |
4.5
|
Class C Unit Registration Rights Agreement, dated April 1, 2011, by and between Crestwood Midstream Partners LP and the purchasers named therein (incorporated by reference to Exhibit 4.4 of the Companys Current Report on Form 8-K filed with the Commission on April 5, 2011). | |
10.1
|
Joinder Agreement, dated as of April 1, 2011, by and among RBC Capital Markets Corporation, UBS Securities LLC and Bank of America, N.A., and Crestwood Midstream Partners LP and BNP Paribas, as Administrative Agent, Swingline Lender and Issuing Bank (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Commission on April 5, 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 |