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EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Crestwood Midstream Partners LPd269294dex312.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION - Crestwood Midstream Partners LPd269294dex321.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Crestwood Midstream Partners LPd269294dex311.htm

 

 

UNITED STATES

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 March 31, 2011

or

 

¨ 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

717 Texas Avenue, Suite 3150,

Houston, Texas

  77002
(Address of principal executive offices)   (Zip Code)

(832) 519-2200

(Registrant’s telephone number, including area code)

None

(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  ¨

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  ¨    No  ¨

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   ¨    Accelerated filer   þ
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

Indicate the number of shares outstanding of the issuer’s common units and Class C units, as of the latest practicable date:

 

Title of Class

 

Outstanding as of April 29, 2011

Common Units   31,187,696
Class C Units   6,243,000

 

 

 


DEFINITIONS

As used in this report, unless the context otherwise requires:

“Bbl(s)” means barrel or barrels

“Btu” means British Thermal units, a measure of heating value

“EBITDA” means earnings before interest, taxes, depreciation and accretion

“hp” means horsepower

“LIBOR” means London Interbank Offered Rate

“Management” means management of Crestwood Midstream Partners LP’s General Partner

“MMBtu” means million Btu

“MMBtud” means million Btu per day

“Mcf” means thousand cubic feet

“MMcf” means million cubic feet

“MMcfd” means million cubic feet per day

“MMcfe” means MMcf of natural gas equivalents, calculated as one Bbl of oil or NGLs equaling six Mcf of gas

“MMcfed” means MMcfe per day

“NGL(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

“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

“FASB” means the Financial Accounting Standards Board, which promulgates accounting standards

“FASC” means the FASB Accounting Standards Codification

“Fayetteville Shalemeans 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 that were purchased in the Frontier Gas Acquisition on April 1, 2011

“IDR” means Incentive Distribution Rights as defined in the Partnership Agreement

“Joinder Agreement” means the additional commitments received from certain lenders under our Credit Facility, dated April 1, 2011, which expanded total borrowing capacity 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

“NYSE” means the New York Stock Exchange

“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 wholly owned subsidiaries

“SEC” means the U.S. Securities and Exchange Commission

 

2


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 March 31, 2011, filed with the Securities and Exchange Commission on May 10, 2011 (the “Original 10-Q”) to correct an error in the Condensed Consolidated Statement of Cash Flows. This correction relates to the receipt of proceeds received by the Partnership on March 31, 2011 for its Class C units prior to the closing of the Class C unit offering which occurred on April 1, 2011. The Partnership is restating its Condensed Consolidated Statement of Cash Flows in order to reflect the receipt of the proceeds as a financing activity instead of an operating activity as previously presented. This Amendment does not impact the Partnership’s previously reported net increase in cash and cash equivalents in its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2011 and has no impact on our previously reported statements of income, balance sheets, statements of changes in partners’ capital and does not affect our Credit Facility.

This Amendment also amends and restates the exhibit list in Part II “Item 6. Exhibits” 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, as well as Part I “Item 1. Financial Statements” – Note 12 “Condensed Consolidated Financial Information”, Part I “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” – Liquidity and Capital Resources.

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.

 

3


CRESTWOOD MIDSTREAM PARTNERS LP

INDEX TO FORM 10-Q/A

For the Period Ended March 31, 2011

 

PART I. FINANCIAL INFORMATION

     6   

Item 1.

  

Financial Statements (Unaudited)

     6   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     26   

Item 4.

  

Controls and Procedures

     26   

PART II. OTHER INFORMATION

     27   

Item 1.

  

Legal Proceedings

     27   

Item 1A.

  

Risk Factors

     27   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     28   

Item 3.

  

Defaults Upon Senior Securities

     28   

Item 4.

  

(Removed and Reserved)

     28   

Item 5.

  

Other Information

     28   

Item 6.

  

Exhibits

     29   

Signatures

     30   

 

4


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 recent acquisition of midstream assets from Frontier 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


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

 

     Three Months Ended March 31,  
     2011      2010  

Revenue

     

Gathering revenue - related party

   $ 23,351       $ 16,389   

Gathering revenue

     1,476         1,115   

Processing revenue - related party

     6,637         6,479   

Processing revenue

     516         756   

Gas sales

     400         —     
  

 

 

    

 

 

 

Total revenue

     32,380         24,739   
  

 

 

    

 

 

 

Expenses

     

Operations and maintenance

     7,381         7,393   

General and administrative

     6,370         3,061   

Depreciation and accretion

     6,025         5,365   
  

 

 

    

 

 

 

Total expenses

     19,776         15,819   
  

 

 

    

 

 

 

Operating income

     12,604         8,920   

Interest expense

     3,006         2,678   
  

 

 

    

 

 

 

Income before income taxes

     9,598         6,242   

Income tax provision

     222         53   
  

 

 

    

 

 

 

Net income

   $ 9,376       $ 6,189   
  

 

 

    

 

 

 

General partner interest in net income

   $ 888       $ 357   

Common unitholders’ interest in net income

   $ 8,488       $ 5,832   

Basic income (loss) per unit:

     

Net income per limited partner unit - basic

   $ 0.27       $ 0.20   

Diluted income (loss) per unit:

     

Net income per limited partner unit - diluted

   $ 0.27       $ 0.20   

Weighted average number of common units outstanding:

     

Basic

     31,188         28,502   

Diluted

     31,324         29,019   

Distributions declared per unit (attributable to the period ended)

   $ 0.44       $ 0.39   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


CRESTWOOD MIDSTREAM PARTNERS LP

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except for unit data - Unaudited

 

     March 31,
2011
     December 31,
2010
 
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 11,546       $ 2   

Accounts receivable

     1,383         1,679   

Accounts receivable - related party

     29,177         23,003   

Prepaid expenses and other

     601         1,052   
  

 

 

    

 

 

 

Total current assets

     42,707         25,736   

Property, plant and equipment, net

     531,526         531,371   

Other assets

     12,824         13,520   
  

 

 

    

 

 

 

Total assets

   $ 587,057       $ 570,627   
  

 

 

    

 

 

 
LIABILITIES AND PARTNERS’ CAPITAL      

Current liabilities

     

Accounts payable - related party

   $ 4,580       $ 4,267   

Accrued additions to property, plant and equipment

     4,209         11,309   

Accounts payable and other

     21,263         2,917   
  

 

 

    

 

 

 

Total current liabilities

     30,052         18,493   

Long-term debt

     292,800         283,504   

Asset retirement obligations

     10,081         9,877   

Commitments and contingent liabilities (Note 9)

     

Partners’ capital

     

Common unitholders (31,187,696 units issued and outstanding at March 31, 2011 and December 31, 2010)

     253,429         258,069   

General partner

     695         684   
  

 

 

    

 

 

 

Total partners’ capital

     254,124         258,753   
  

 

 

    

 

 

 
   $ 587,057       $ 570,627   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


CRESTWOOD MIDSTREAM PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands – Unaudited

 

     Three Months Ended March 31,  
     2011     2010  
     (as restated
See Note 2)
       

Operating activities:

    

Net income

   $ 9,376      $ 6,189   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation

     5,890        5,250   

Accretion of asset retirement obligations

     135        115   

Deferred income taxes

     —          53   

Equity-based compensation

     283        667   

Non-cash interest expense

     678        1,464   

Changes in assets and liabilities:

    

Accounts receivable

     296        232   

Prepaid expenses and other

     468        (274

Accounts receivable - related party

     (6,174     (16,367

Accounts payable - related party

     313        —     

Accounts payable and other

     6,097        1,214   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     17,362        (1,457
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (13,076     (17,163

Distribution to Quicksilver for Alliance Midstream Assets

     —          (80,276
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,076     (97,439
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from credit facility

     38,400        112,000   

Repayments of credit facility

     (29,104     (11,600

Issuance of common units - net of offering costs

     —          11,050   

Distributions paid to unitholders

     (14,288     (11,564

Proceeds related to Class C units

     12,250        —     

Taxes paid for equity-based compensation vesting

     —          (1,144
  

 

 

   

 

 

 

Net cash provided by financing activities

     7,258        98,742   
  

 

 

   

 

 

 

Net cash increase (decrease)

     11,544        (154

Cash and cash equivalents at beginning of period

     2        746   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 11,546      $ 592   
  

 

 

   

 

 

 

Cash paid for interest

   $ 2,388      $ 1,214   

Non-cash transactions:

    

Working capital related to capital expenditures

     4,209        16,430   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8


CRESTWOOD MIDSTREAM PARTNERS LP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

In thousands – Unaudited

 

     Limited Partners’
Common
    General
Partner
    Total  

Balance at December 31, 2010

   $ 258,069      $ 684      $ 258,753   

Equity-based compensation recognized

     283        —          283   

Distributions paid to partners

     (13,411     (877     (14,288

Net income

     8,488        888        9,376   
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $ 253,429      $ 695      $ 254,124   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9


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 March 31, 2011 our ownership is as follows:

 

     Ownership Percentage  
     Crestwood     Public     Total  

General partner interest

     1.5 %     —          1.5 %

Limited partner interest:

      

Common unitholders

     61.7 %     36.8 %     98.5 %
  

 

 

   

 

 

   

 

 

 

Total interests

     63.2 %     36.8 %     100.0 %
  

 

 

   

 

 

   

 

 

 

Description of Business — We are primarily engaged in the gathering, processing, compression and treating of natural gas and the delivery of NGLs produced from the Barnett Shale formation in the Fort Worth Basin located in North Texas. We provide these midstream services under long-term, fixed fee contracts, whereby we receive fees for performing gathering, processing, compression and treating services. We do not typically take title to the natural gas or associated NGLs thereby avoiding direct commodity price exposure.

We conduct our operations primarily through our Cowtown, Lake Arlington and Alliance systems as described below:

Cowtown System

The Cowtown System, located principally in Hood and Somervell counties in the southern portion of the Fort Worth Basin, includes:

 

   

the Cowtown Pipeline, consisting of a gathering system and related gas compression facilities. This system gathers natural gas produced by our customers and delivers it to the Cowtown and Corvette Plants for processing;

 

   

the Cowtown Plant, consisting of two natural gas processing units with a total capacity of 200 MMcfd that extract NGLs from the natural gas stream and deliver our customers’ residue gas and extracted NGLs to unaffiliated pipelines for sale downstream; and

 

   

the Corvette Plant, consisting of a 125 MMcfd natural gas processing unit that extracts NGLs from the natural gas stream and delivers our customers’ residue gas and extracted NGLs to unaffiliated pipelines for sale downstream.

Lake Arlington System

The Lake Arlington System, located in eastern Tarrant County, consists of a gas gathering system and related gas compression facility with capacity of 230 MMcfd. This system gathers natural gas produced by our customers and delivers it to unaffiliated pipelines for sale downstream.

Alliance System

The Alliance System, located in the Alliance Airport area of Tarrant and Denton Counties, consists of a gathering system and related compression facility with a capacity of 300 MMcfd, an amine treating facility with capacity of 360 MMcfd and a dehydration treating facility with capacity of 300 MMcfd. This system gathers natural gas produced by our customers and delivers it to unaffiliated pipelines for sale downstream.

Acquisitions and Financings — 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, 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.

 

10


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, 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.

Fayetteville Assets

The Fayetteville Shale assets consist 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 assets which interconnect with multiple interstate pipelines are supported by long-term, fixed-fee contracts with producers in the core of the Fayetteville Shale. These contracts have initial terms that extend through 2020 with rights by either party to exercise a five year extension.

 

   

Twin Groves / Prairie Creek / Woolly Hollow Systems. Located in Conway and Faulkner Counties, Arkansas and consists of a gathering system and a related 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 the Boardwalk Gas Transmission, the Ozark Gas Transmission and the Fayetteville Express Pipeline.

 

   

Rose Bud System. Located in White County, Arkansas and consists of a gathering system and a related compression facility with a capacity of 60 MMcfd. This system gathers natural gas produced by BHP / BP and ExxonMobil, and interconnects with the 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 the Ozark Gas Transmission.

Granite Wash System

The Granite Wash assets, located in Roberts County, Texas, consists of a natural gas and NGL pipeline system of approximately 9,400 hp of compression and the Indian Creek cryogenic gas processing plant with capacity of 36 MMcfd which extracts NGL’s from the natural gas stream. This system delivers NGL’s produced by Chesapeake Energy Corporation and others to the Mid-America Pipeline for ultimate delivery to Mt. Belvieu and residue gas is delivered into the ANR Pipeline.

In connection with the Frontier Gas Acquisition, we entered into the following financing transactions:

 

   

the issuance by us of approximately 6.2 million units of new Class C units representing limited partner interests, issued at a price of $24.50 per unit, to certain institutional investors through a private placement transaction, resulting in net proceeds of approximately $153 million; and

 

   

the issuance of the Senior Notes.

The $338 million purchase price paid at closing was financed through a combination of equity and debt as described in Notes 3 and 5 to our condensed consolidated interim financial statements in this Quarterly Report.

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 on Form S-3 at a price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net proceeds of approximately $53 million. The net proceeds from the offering were used to reduce indebtedness under our Credit Facility and for general partnership purposes.

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 management’s 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.

 

11


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 reclassifications have been made to the 2010 financial statements for presentations adopted in 2011. The amount of the reclassification is approximately $0.6 million from operations and maintenance expense to general and administrative expense.

Subsequent to the issuance of the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2011, we determined that proceeds received on March 31, 2011 related to the Class C unit offering, which closed on April 1, 2011, should have been classified as a financing activity instead of an operating activity as previously presented. The Partnership is restating its Condensed Consolidated Statement of Cash Flows to reflect this correction. The following table presents the line items on the Condensed Consolidated Statement of Cash Flows that have been restated:

 

     Three months
ended
March 31, 2011

As previously
presented
    Three months
ended
March 31, 2011

As restated
 

Changes in assets and liabilities:

Accounts payable and other

  

$

18,347

  

 

$

6,097

  

  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

   $ 29,612      $ 17,362   
  

 

 

   

 

 

 

Proceeds related to Class C units

   $ —        $ 12,250   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   ($ 4,992   $ 7,258   
  

 

 

   

 

 

 

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.

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 months ended March 31, 2011 and 2010.

 

     Three Months Ended March 31,  
     2011      2010  
     (In thousands, except per unit data)  

Common unitholders’ interest in net income

   $ 8,488       $ 5,832   

Weighted-average common units - basic

     31,188         28,502   

Effect of unvested phantom units

     136         517   
  

 

 

    

 

 

 

Weighted-average common units - diluted

     31,324         29,019   
  

 

 

    

 

 

 

Basic earnings per unit:

     

Net income per limited partner unit - basic

   $ 0.27       $ 0.20   

Diluted earnings per unit:

     

Net income per limited partner unit - diluted

   $ 0.27       $ 0.20   

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. 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 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 on Form S-3 at a price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net proceeds of approximately $53 million. The net proceeds from the offering were used to reduce indebtedness under our Credit Facility and for general partnership purposes. In connection with the issuance of the common units, our General Partner did not make an additional capital contribution resulting in the General Partner interest in us to reduce to 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.

 

12


The following table presents cash distributions attributable to quarters ended in 2011 and 2010:

 

Payment Date

 

Attributable to the
Quarter Ended

   Per Unit
Distribution
     Total Cash
Distribution
     Total Cash IDR
Distribution
 
                (In millions)      (In millions)  

Pending Distributions

          

May 13, 2011

  March 31, 2011    $ 0.44       $ 14.7       $ 0.759   

Completed Distributions

          

2011

          

February 11, 2011

  December 31, 2010    $ 0.43       $ 14.3       $ 0.665   

2010

          

November 12, 2010

  September 30, 2010    $ 0.42       $ 13.9       $ 0.570   

August 13, 2010

  June 30, 2010    $ 0.42       $ 12.7       $ 0.522   

May 14, 2010

  March 31, 2010    $ 0.39       $ 11.6       $ 0.261   

Cash distribution includes 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. Class C unitholders will not receive a distribution of cash, but instead, will be issued additional Class C units as permitted under the terms of the Second Amendment to our Partnership Agreement.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

     March 31,
2011
    December 31,
2010
 
     (In thousands)  

Gathering systems

   $ 167,362      $ 158,975   

Processing plants and compression facilities

     364,054        365,208   

Construction in progress - gathering

     22,968        26,385   

Rights-of-way and easements

     34,283        32,054   

Land

     4,251        4,251   

Buildings and other

     3,494        3,494   
  

 

 

   

 

 

 
     596,412        590,367   

Accumulated depreciation

     (64,886     (58,996
  

 

 

   

 

 

 

Net property, plant and equipment

   $ 531,526      $ 531,371   
  

 

 

   

 

 

 

5. DEBT

Debt consisted of the following:

 

     March 31,
2011
     December 31,
2010
 
     (In thousands)  

Credit Facility

   $ 292,800       $ 283,504   
  

 

 

    

 

 

 

Total

   $ 292,800       $ 283,504   
  

 

 

    

 

 

 

Credit Facility - At March 31, 2011, we had $292.8 million outstanding under our $400 million Credit Facility. Our Credit Facility permits us to expand our borrowing capacity up to $500 million subject to certain financial ratios being met and lender approval. The weighted-average interest rate as of March 31, 2011 was 3.1% on our Credit Facility. 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. 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.

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 terminated on April 1, 2011 in connection with the closing of the Senior Notes described below. We will recognize approximately $2.5 million of commitment fees in the second quarter of 2011, which will be included in interest expense, related to the bridge loans.

 

13


7.75% Senior Notes due 2019 - 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 accrue at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011, and mature April 2019.

6. 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

     69   

Accretion expense

     135   
  

 

 

 

Asset retirement obligations as of March 31, 2011

   $ 10,081   
  

 

 

 

As of March 31, 2011, no assets are legally restricted for use in settling asset retirement obligations.

7. EQUITY-BASED COMPENSATION

Awards of phantom units have been granted under the Third Amended and Restated 2007 Equity Plan (the “2007 Equity Plan”). The following table summarizes information regarding 2011 phantom unit activity:

 

     Payable in units  
     Units     Weighted
Average Grant
Date Fair Value
 

Unvested phantom units - January 1, 2011

     121,526      $ 27.11   

Vested

     —          —     

Issued

     18,391        27.73   

Cancelled

     (4,353     27.11   
  

 

 

   

Unvested phantom units - March 31, 2011

     135,564      $ 27.19   
  

 

 

   

At January 1, 2011, we had total unvested compensation cost of $2.6 million related to phantom units. We recognized compensation expense of approximately $0.3 million during the three months ended March 31, 2011. Grants of phantom units during the three months ended March 31, 2011 had an estimated grant date fair value of $0.5 million. We had unearned compensation expense of $2.8 million at March 31, 2011. There were not any phantom units that vested during the three months ended March 31, 2011.

On January 3, 2011, we awarded annual equity grants totaling 18,391 phantom units to the non-employee directors. Each phantom unit will settle in CMLP units and had a grant date fair value of $27.73, 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. At March 31, 2011, 626,442 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.

8. 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.

See Note 10 to the consolidated financial statements in our 2010 Annual Report on Form 10-K for more information about our income taxes.

 

14


9. COMMITMENTS AND CONTINGENT LIABILITIES

See Note 9 to the consolidated financial statements in our 2010 Annual Report on Form 10-K for a description of our commitments and contingencies.

10. 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 ended March 31, 2011, Quicksilver accounted for more than 90% of our total revenue. Approximately 11% of our gathered volumes are comprised of natural gas purchased by Quicksilver from Eni SpA and gathered under Quicksilver’s 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 $0.2 million of expense related to this agreement during the three months ended March 31, 2011.

The Crestwood Transaction was funded by Crestwood through an equity contribution from funds managed by First Reserve Corporation, an equity contribution from members of Crestwood management and a $180 million senior secured term loan obtained by Crestwood Holdings payable to multiple financial investors. Crestwood Holdings ownership in us is pledged as collateral and is dependent on distributions from us to service the Crestwood Holdings’ debt obligations which is not included in our financial position.

11. SUBSEQUENT EVENTS

On April 1, 2011, we 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 3 and 5 to our condensed consolidated interim financial statements in this Quarterly Report. The final purchase price is pending the finalization of appraisal valuations of certain tangible and intangible assets acquired and other customary purchase price adjustments that are included in the purchase sale agreement .

In connection with the consummation of the Frontier Gas Acquisition, we entered into the following additional financing transactions:

 

   

the issuance by us of approximately 6.2 million units of new Class C units representing limited partner interests, issued at a price of $24.50 per unit, to certain institutional investors through a private placement transaction, resulting in net proceeds of approximately $153 million; and

 

   

the issuance of the Senior Notes.

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 on Form S-3 at a price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net proceeds of approximately $53 million. The net proceeds from the offering were used to reduce indebtedness under our Credit Facility and for general partnership purposes.

 

15


12. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Condensed consolidated financial information for CMLP is presented below:

Condensed Consolidated Statements of Income

 

     For the Three Months Ended March 31, 2011  
     Crestwood
Midstream
Partners LP
    Restricted
Guarantor
Subsidiaries
     Eliminations     Crestwood
Midstream
Partners LP
Consolidated
 
     (in thousands)  

Revenue

   $ —        $ 32,380       $ —        $ 32,380   

Operating expenses

     6,372        13,404         —          19,776   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     (6,372     18,976         —          12,604   

Interest expense

     3,006        —           —          3,006   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax

     (9,378     18,976         —          9,598   

Income tax provision

     —          222         —          222   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income before equity in net earnings of subsidiaries

     (9,378     18,754         —          9,376   

Equity in net earnings of subsidiaries

     18,754        —           (18,754     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

   $ 9,376      $ 18,754       $ (18,754   $ 9,376   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     For the Three Months Ended March 31, 2010  
     Crestwood
Midstream
Partners LP
    Restricted
Guarantor
Subsidiaries
     Eliminations     Crestwood
Midstream
Partners LP
Consolidated
 
     (in thousands)  

Revenue

   $ —        $ 24,739       $ —        $ 24,739   

Operating expenses

     3,061        12,758         —          15,819   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     (3,061     11,981         —          8,920   

Other income

     —          —           —          —     

Interest expense

     2,678        —           —          2,678   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax

     (5,739     11,981         —          6,242   

Income tax provision

     —          53         —          53   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income before equity in net earnings of subsidiaries

     (5,739     11,928         —          6,189   

Equity in net earnings of subsidiaries

     11,928        —           (11,928     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 6,189      $ 11,928       $ (11,928   $ 6,189   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

16


Condensed Consolidated Balance Sheet

 

     March 31, 2011  
      Crestwood
Midstream
Partners LP
     Restricted
Guarantor
Subsidiaries
     Eliminations     Crestwood
Midstream
Partners LP
Consolidated
 
     (in thousands)  

ASSETS

          

Current assets

   $ 369,482       $ 24,809       $ (351,584   $ 42,707   

Properties, plant and equipment - net

     9,225         522,301         —          531,526   

Investment in subsidiaries

     186,363         —           (186,363     —     

Other assets

     12,203         621         —          12,824   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 577,273       $ 547,731       $ (537,947   $ 587,057   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

          

Current liabilities

   $ 30,348       $ 351,288       $ (351,584   $ 30,052   

Long-term liabilities

     292,800         10,081         —          302,881   

Partners’ capital

     254,125         186,362         (186,363     254,124   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 577,273       $ 547,731       $ (537,947   $ 587,057   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2010  
     Crestwood
Midstream
Partners LP
     Restricted
Guarantor
Subsidiaries
     Eliminations     Crestwood
Midstream
Partners LP
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   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


Condensed Consolidated Statement of Cash Flows

 

     For the Three Months Ended March 31, 2011  
     Crestwood
Midstream
Partners LP(1)
    Restricted
Guarantor
Subsidiaries
    Eliminations      Crestwood
Midstream
Partners LP
Consolidated(1)
 
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (6,010   $ 23,372      $ —         $ 17,362   

Capital expenditures

     —          (13,076     —           (13,076
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (13,076     —           (13,076
  

 

 

   

 

 

   

 

 

    

 

 

 

Proceeds from revolving credit facility borrowings

     38,400        —          —           38,400   

Repayments of credit facility

     (29,104     —          —           (29,104

Distributions to unitholders

     (14,288     —          —           (14,288

Proceeds related to Class C units

     12,250        —          —           12,250   

Advances to Affiliates

     52,376        (52,376     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     59,634        (52,376     —           7,258   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash increase (decrease)

     53,624        (42,080     —           11,544   

Cash and cash equivalents at beginning of period

     2        —          —           2   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash or cash equivalents at end of period

   $ 53,626      $ (42,080   $ —         $ 11,546   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     For the Three Months Ended March 31, 2010  
     Crestwood
Midstream
Partners LP
    Restricted
Guarantor
Subsidiaries
    Eliminations      Crestwood
Midstream
Partners LP
Consolidated
 
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (3,699   $ 2,242      $ —         $ (1,457

Capital expenditures

     —          (17,163     —           (17,163

Distributions to Quicksilver for Alliance Midstream Assets

     —          (80,276     —           (80,276
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     —          (97,439     —           (97,439
  

 

 

   

 

 

   

 

 

    

 

 

 

Proceeds from revolving credit facility borrowings

     112,000        —          —           112,000   

Repayments of credit facility

     (11,600     —          —           (11,600

Proceeds from issuance of equity

     11,088        —          —           11,088   

Equity issuance cost paid

     (38     —          —           (38

Distributions to unitholders

     (11,564     —          —           (11,564

Taxes paid for equity-based compensation vesting

     (1,144     —          —           (1,144

Advances to Affiliates

     138,529        (138,529        —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     237,271        (138,529     —           98,742   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash increase (decrease)

     233,572        (233,727     —           (154

Cash and cash equivalents at beginning of period

     746        —             746   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash or cash equivalents at end of period

   $ 234,318      $ (233,727   $ —         $ 592   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Amounts herein have been restated to reflect the receipt of proceeds on March 31, 2011 of $12.25 million related to the Class C units as a financing activity instead of an operating activity as discussed in Note 2, Summary of Significant Accounting Policies—Changes in Presentation.

 

18


ITEM 2. Management’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2010 Annual Report on Form 10-K.

As discussed in the Explanatory Note and Note 2, we have restated our previously issued condensed consolidated financial statements; accordingly, Management’s Discussion and Analysis of Financial Condition and Results of Operations have been revised for the effects of the restatement.

Overview

We are a growth-oriented publicly traded Delaware master limited partnership engaged in gathering, processing, compression and treating of natural gas and delivery of NGLs produced in North Texas and in Southeastern New Mexico. We began operations in 2004 to provide midstream services primarily to Quicksilver as well as to other natural gas producers in the Fort Worth Basin. Additionally, all our revenues are derived from operations in the Fort Worth Basin and Southeastern New Mexico. During the quarter ended March 31, 2011, more than 90% of our total gathering and processing volumes were comprised of natural gas owned or controlled by Quicksilver. Approximately 11% of our gathered volumes are comprised of natural gas purchased by Quicksilver from Eni SpA and gathered under Quicksilver’s 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 to long term, fixed fee-based contracts. We do not take title to the natural gas or associated NGLs that we gather and process, and therefore, we avoid direct commodity price exposure. However, a prolonged low commodity price environment could result in our customers reducing their production volumes which would cause a decrease in our revenue. Almost all of our natural gas volumes gathered and processed during the quarter ended March 31, 2011 were subject to fee-based contracts.

Operational Measurement

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

Volume — We must continually obtain new supplies of natural gas to maintain or increase throughput volumes on our gathering and processing systems. We 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 company’s 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;

 

19


   

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.

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 LoansIn 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 terminated in connection with the closing of the Senior Notes described below. We will recognize approximately $2.5 million of commitment fees in the second quarter of 2011, which will be 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 3 and 5 to our condensed consolidated interim financial statements in this Quarterly Report.

The Fayetteville Shale assets, located in Arkansas, consist 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 assets which interconnect 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 to Frontier Gas. These contracts have initial terms that extend through 2020 with a five year extension.

The Granite Wash assets, located in the Texas Panhandle, consist of a 28 mile pipeline system and a 36 MMcfd cryogenic processing plant. This area has emerged as a highly economic liquids-rich natural gas play with active drilling programs and the Granite Wash assets are supported by long-term contracts. We are working on a plan to install 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 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 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 accrue at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011, and mature April 2019.

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.

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 on Form S-3 at a price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net proceeds of approximately $53 million. The net proceeds from the offering were used to reduce indebtedness under our Credit Facility and for general partnership purposes. In connection with the issuance of the common units, our General Partner did not make an additional capital contribution resulting in the General Partner interest in us to reduce to 1.9%.

 

20


RESULTS OF OPERATIONS

Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010

The following discussion compares the results of operations for the three months ended March 31, 2011 to the three months ended March 31, 2010, which we refer to as the 2011 quarter and the 2010 quarter, respectively.

 

     Three Months Ended March 31,  
     2011      2010  
     (In thousands)  

Total revenues

   $ 32,380       $ 24,739   

Operations and maintenance expense

     7,381         7,393   

General and administrative expense

     6,370         3,061   
  

 

 

    

 

 

 

EBITDA

     18,629         14,285   

Depreciation and accretion expense

     6,025         5,365   

Interest expense

     3,006         2,678   

Income tax provision

     222         53   
  

 

 

    

 

 

 

Net income

   $ 9,376       $ 6,189   
  

 

 

    

 

 

 

The following table summarizes our volumes:

 

     Gathering      Processing  
     2011      2010      2011      2010  
     (MMcf)  

Cowtown System

     12,184         11,430         10,960         11,244   

Lake Arlington System

     9,549         4,410         —           —     

Alliance System

     17,150         9,957         —           —     

Las Animas System

     518         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     39,401         25,797         10,960         11,244   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the changes in our revenue:

 

     Gathering     Processing     Other      Total  
     (In thousands)  

Revenue for the three months ended March 31, 2010

   $ 17,504      $ 7,235      $ —         $ 24,739   

Volume changes

     9,231        (183     —           9,048   

Price changes

     (1,908     101        400         (1,407
  

 

 

   

 

 

   

 

 

    

 

 

 

Revenue for the three months ended March 31, 2011

   $ 24,827      $ 7,153      $ 400       $ 32,380   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Revenue and Volumes — The increase in revenue was principally due to $4.3 million in higher revenue due to increased volumes on the Alliance System and $2.9 million in higher revenues on the Lake Arlington System. The increased revenue is due to the connection of 48 wells in the 2011 period compared to 21 for the 2010 period with the increase primarily on the Alliance and Lake Arlington Systems.

Operations and Maintenance Expense — The decrease in operations and maintenance expense was mainly due to a decrease in pipeline lease expense of approximately $0.3 million on our Alliance 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 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 amount to approximately $2.0 million for the 2011 period. General and administrative expense includes $0.2 million and $0.7 million of equity-based compensation expense for the quarters ended March 31, 2011 and 2010, respectively.

 

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EBITDA — As a percentage of revenue, EBITDA has stayed consistent at 58% of revenues in the 2010 quarter and 2011 quarter.

Depreciation and Accretion Expense — Depreciation and accretion expense increased primarily as a result of continuing expansion of our asset base, which included the expansion of the Alliance System.

Interest Expense — Interest expense increased primarily due to the increases in the borrowings under our Credit Facility, principally used to fund capital projects, partially offset by the absence of any liability related to subordinated note.

The following table summarizes the details of interest expense for the three months ended March 31, 2011 and 2010.

 

     Three Months Ended March 31,  
     2011     2010  
     (In thousands)  

Interest:

    

Revolving Credit Facility

   $ 3,042      $ 2,082   

Subordinated note

     —          596   
  

 

 

   

 

 

 

Total

     3,042        2,678   

Less interest capitalized

     (36     —     
  

 

 

   

 

 

 

Interest expense

   $ 3,006      $ 2,678   
  

 

 

   

 

 

 

 

22


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 $0.44 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 Quicksilver’s production in the Fort Worth Basin. As Quicksilver and others have developed the Fort Worth Basin, we have expanded our gathering and processing facilities to serve the additional volumes produced by such development. We expect to benefit from the Las Animas and Frontier Gas Acquisitions which will result in lower dependency on Quicksilver and our Fort Worth Basin operations.

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 Fort Worth Basin; 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 in the Fort Worth Basin were to be sustained over a prolonged period of time, we could experience a reduction in volumes through our system and therefore reductions of revenue and cash flows.

At this time, substantially all of our revenue is derived from our operations in the Fort Worth Basin. In addition, more than 90% of our total gathering and processing revenue is 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 fixed-fee contracts for providing gathering and processing and treating services to our customers, but we are still susceptible to volume fluctuations. To reduce the concentration risk associated with our dependency on one producer and one geographic area, we continue to regularly review opportunities for both organic growth projects and acquisitions in other producing basins and with other producers.

We are subject to environmental laws, regulations and permits, including green house 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 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

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Net cash provided by (used in) operating activities

   $ 17,362      $ (1,457

Net cash used in investing activities

     (13,076     (97,439

Net cash provided by financing activities

     7,258        98,742   

Cash Flows Used in Operating Activities — The increase in cash flows from operating activities resulted from an increase in collections from Quicksilver. The March 31, 2010 balance included a receivable from Quicksilver of $10.8 million for the reimbursement of the purchase price adjustment for the Alliance Midstream Assets.

Cash Flows Used in Investing Activities — The decrease in cash flows used in investing activities resulted from the distribution to Quicksilver of $80.3 million related to the purchase of the Alliance Midstream Assets in the prior year. For the 2011 period, we spent $13.1 million for gathering assets and processing facilities, of which $5.1 million relates to the purchase of the Las Animas acquisition.

Cash Flows Used in Financing Activities — Changes in cash flows used in financing activities during the 2011 period resulted primarily from the net borrowings under our Credit Facility of $9.3 million compared with the 2010 period net borrowings of $100.4 million. This change is largely reflective of our funding of the purchase of the Alliance Midstream Assets for $84.4 million in the 2010 period. In addition, we distributed $2.7 million more to our unitholders during the 2011 period. We have increased our quarterly distribution by 12.8% 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. In addition, on March 31, 2011, we received approximately $12.25 million from a purchaser of Class C units prior to the issuance of the Class C units on April 1, 2011. The receipt of the funds is reflected in our cash balance and as a increase in accounts payable and other on March 31, 2011.

Information regarding historical and pending cash distributions is included in Note 3 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report.

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 Fort Worth Basin, Fayetteville, Granite Wash areas and on the Las Animas System. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives and to maintain our distribution levels.

We budgeted approximately $90 million in capital expenditures for 2011, of which approximately $30-$35 million relates to the Fort Worth Basin and approximately $45-$50 million relates to the Frontier capital program. In addition, we have budgeted approximately $8 million as maintenance capital expenditures.

During the three months ended March 31, 2011, we increased gross property, plant and equipment by $6 million, including expansion capital expenditures of approximately $5.5 million, $0.4 million in maintenance capital expenditures and $0.1 million in asset retirement cost.

 

24


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.

Debt

Credit Facility - At March 31, 2011, we had $292.8 million outstanding under our $400 million Credit Facility. Our Credit Facility permits us to expand our borrowing capacity up to $500 million subject to certain financial ratios being met and lender approval. The weighted-average interest rate as of March 31, 2011 was 3.1% on our Credit Facility. 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 to $500 million from $400 million.

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 terminated in connection with the closing of the Senior Notes described below. We will recognize approximately $2.5 million of commitment fees in the second quarter of 2011, which will be included in interest expense, related to the bridge loans.

7.75% Senior Notes due 2019 - 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 accrue at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011, and mature April 2019. For a further discussion of the restrictive covenants, see our Current Report on Form 8-K filed with the SEC on April 5, 2011.

Contractual Obligations and Commercial Commitments

There have been no other significant changes to our contractual obligations and commercial commitments as disclosed in Item 7 in our 2010 Annual Report on Form 10-K.

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

Management’s 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 three months ended March 31, 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.

 

25


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. Quicksilver’s credit ratings are below investment grade, where they may remain for the foreseeable future. Accordingly, this risk could be higher than it might be with a more creditworthy customer or with a more diversified group of customers. Unless and until we significantly diversify our customer base, we expect to continue to be subject to non-diversified risk of nonpayment or late payment of our fees. Additionally, we perform credit analyses of our customers on a regular basis pursuant to our corporate credit policy. We have not had any significant losses due to counter-party failures to perform.

Interest Rate Risk

Although our base interest rates remain low, our leverage ratios directly influence the spreads charged by lenders. The credit markets could also drive the spreads charged by lenders upward. As base rates or spreads increase, our financing costs will increase accordingly. Although this could limit our ability to raise funds in the capital markets, we expect that our competitors would face similar challenges with respect to funding acquisitions and capital projects. We are exposed to variable interest rate risk as a result of borrowings under our Credit Facility.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2011, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

26


PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. However, we are not currently subject to any material lawsuits or other legal proceedings.

Item 1A. Risk Factors

You should review our Annual Report on Form 10-K for the year ended December 31, 2010 which contains a detailed description of risk factors that may materially affect our business, financial condition, results of operations and cash flows. Aside from the additional risk factors set forth below, there were no material changes to the risk factors previously described in Part I, Item 1A. “Risk Factors” included in our Annual Report on our Form 10-K for the year ended December 31, 2010:

We are exposed to the credit risks of Quicksilver, and other third-party customers and any material non-payment or non-performance by these customers could adversely affect our business, results of operations and financial condition and our ability to make cash distributions to our unitholders.

We are dependent on Quicksilver for the volumes that we gather and process, and are consequently subject to the risk of non-payment or non-performance by Quicksilver. Quicksilver’s credit ratings are below investment grade, where we expect them to remain for the foreseeable future. Accordingly, this risk is higher than it would 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 remain subject to non-diversified risk of non-payment or late payment of our fees. Any material non-payment or non-performance by Quicksilver could adversely affect our business, results of operations and financial condition and our ability to make cash distributions to our unitholders. Furthermore, Quicksilver is highly leveraged and subject to its own operating and regulatory risks, which could increase the risk that it may default on its obligations to us.

In addition, on March 31, 2011, Chesapeake announced the completion of the sale of all of its interests in approximately 487,000 net acres of leasehold and producing natural gas properties in the Fayetteville Shale play in central Arkansas to BHP. As a result of the Chesapeake/BHP Transaction and our consummation of the Frontier Gas Acquisition, BHP has become one of our customers. As a result, any material non-payment or non-performance by BHP could adversely affect our business, results of operations and financial condition and our ability to make cash distributions.

Our pipelines may be subject to more stringent safety regulation.

New pipeline safety legislation requiring more stringent spill reporting and disclosure obligations has been introduced in the U.S. Congress and was passed by the U.S. House of Representatives in 2010, but was not voted on in the U.S. Senate. Similar legislation is likely to be considered in the current session of Congress, either independently or in conjunction with the reauthorization of the Pipeline Safety Act. The U.S. Department of Transportation has also recently proposed regulations providing for more stringent oversight of pipelines and increased penalties for violations of safety rules, which is in addition to the Pipeline and Hazardous Materials Safety Administration’s (the “PHMSA”) announced intention to strengthen its rules. Such legislative and regulatory changes could have a material effect on our operations through more stringent and comprehensive safety regulations and higher penalties for the violation of those regulations.

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in our business or our industry and place us at a competitive disadvantage.

As of December 31, 2010, on a pro forma basis after giving effect to the Frontier Gas Acquisition and related financings, the total outstanding principal amount of our senior long-term indebtedness would have been $483.5 million, $283.5 million of which would be secured indebtedness under our Credit Facility.

If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as:

 

   

refinancing or restructuring our debt;

 

27


   

selling assets;

 

   

reducing or delaying scheduled expansions and capital investments; or

 

   

seeking to raise additional capital.

We cannot assure you that we would be able to enter into these alternative financing plans on commercially reasonable terms or at all. However, any alternative financing plans that we undertake, if necessary, may not allow us to meet our debt obligations. Our inability to generate sufficient cash flow to satisfy our debt obligations or to obtain alternative financing could materially and adversely affect our business, results of operations, financial condition and business prospects.

Our debt could have important consequences to our unitholders. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our ability to fund future capital expenditures and working capital, to engage in future acquisitions or development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flow from operations to payments of interest and principal on our debt or to comply with any restrictive terms of our debt;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

result in an event of default if we fail to satisfy our obligations with respect to our indebtedness or fail to comply with the financial and other restrictive covenants contained in agreements governing our indebtedness, which event of default could result in all of our debt becoming immediately due and payable and could permit our lenders to foreclose on any of our assets securing such debt;

 

   

require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

   

increase our cost of borrowing;

 

   

restrict us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

limit our flexibility in planning for, or reacting to, changes in our business or industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore may be able to take advantage of opportunities that our leverage prevents us from exploring;

 

   

impair our ability to obtain additional financing in the future; and

 

   

place us at a competitive disadvantage compared to our competitors that have less debt.

In addition, if we fail to comply with the covenants or other terms of any agreements governing our debt, our lenders may have the right to accelerate the maturity of that debt and foreclose upon the collateral securing that debt. Realization of any of these factors could adversely affect our financial condition.

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.

 

28


Item 6. Exhibits:

 

Exhibit
No.

  

Description

    2.1    Purchase and Sale Agreement by and between Frontier Gas Services, LLC and Crestwood Midstream Partners LP, dated as of February 18, 2011 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2011)
    3.1    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011)
    4.1    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
    4.2    Form of Note representing all 7.75% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
    4.3    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
    4.4    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
  10.1    Class C Unit Purchase Agreement by and among Crestwood Midstream Partners LP and the purchasers named therein, dated as of February 18, 2011 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 22, 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.

 

* Filed herewith

 

29


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 16, 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

 

30


EXHIBIT INDEX

 

Exhibit
No.

  

Description

    2.1    Purchase and Sale Agreement by and between Frontier Gas Services, LLC and Crestwood Midstream Partners LP, dated as of February 18, 2011 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2011)
    3.1    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011)
    4.1    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
    4.2    Form of Note representing all 7.75% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
    4.3    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
    4.4    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 Company’s Current Report on Form 8-K filed with the Commission on April 5, 2011).
  10.1    Class C Unit Purchase Agreement by and among Crestwood Midstream Partners LP and the purchasers named therein, dated as of February 18, 2011 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 22, 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.

 

* Filed herewith