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Executives

Michael Campbell - Senior Vice President and Chief Financial Officer

John Sherman - Chairman and Chief Executive Officer

Brooks Sherman - President, Inergy

William Gautreaux - President, Inergy Services

Ron Happach - Vice President, Commercial Operations, Inergy Midstream

William Moore - Vice President, Corporate Development.

Analysts

Brian Zarahn - Barclays

Gabe Moreen - Bank of America Merrill Lynch

James Jampel - HITE

Ethan Bellamy - R.W. Baird

Inergy, L.P. (NRGY) F1Q13 (Qtr End 12/31/2012) Earnings Call February 5, 2013 11:00 AM ET

Operator

At this time, I would like to welcome everyone to the Inergy and Inergy Midstream first quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Mike Campbell, Senior Vice President and Chief Financial Officer.

Michael Campbell

Good morning, everyone, and welcome to the fiscal 2013 first quarter earnings conference call for Inergy and Inergy Midstream. Thank you for joining us.

With me on the call today are John Sherman, our Chairman and CEO; Brooks Sherman, President of Inergy; Bill Gautreaux, President of Inergy Services; Ron Happach, Senior Vice President of Natural Gas Midstream Operations; and Will Moore, Vice President of Corporate Development.

The format of our call today will be such that, I will read our forward-looking statement and turn the call over to John for his overview of the quarter. I will then walk through the first quarter financial results for NRGM and NRGY that were released earlier this morning. And after that we will open the call up for Q&A.

Let me start with forward-looking statement. In our discussions today, we may communicate certain forward-looking information. Various risk factors, including weather and economic conditions, regulatory proceedings and commodity prices among others, may cause actual results to differ materially from any projections or estimates in our forward-looking statements. We provide a detailed discussion of these risk factors and others in our SEC filing and we encourage you to review these filings.

With that, I'll turn it over to you, John.

John Sherman

Thank you, Mike. Good morning and thank you for your attendance on the call today. We plan to talk to you today about our financial and operating performance for the first fiscal quarter of 2013, and update you on projects and priorities for the partnerships, NRGY and NRGM.

From a financial results perspective, first, at NRGM, $33 million of adjusted EBITDA is generally in line with our budget for the operating businesses, given the December 1 startup date for Marc I. Performance was fairly consistent across the board, including the stub period contribution from the crude logistic segment as a result of the Rangeland/COLT acquisition.

We took some major steps forward during the quarter with a completion and startup of the Marc I pipeline and the acquisition of the COLT Hub in North Dakota. These initiatives add meaningful scale on diversification to NRGM.

With Marc I, we not only add the direct cash flows from the project, but with enhanced connectivity and the expansion of our footprint, we make our entire Northeast storage and transportation platform more valuable. While we've only owned an opportunity to COLT Hub for about two months, we're very excited about its potential.

Current operations are performing as expected and we have agreements underpinning our ramp up to the $58 million EBITDA run rate, we underwrote on this investment. We are currently evaluating an expansion of the facility, based upon the demand we are seeing for these contracted services.

Needless to say, the COLT deal fits our investment criteria, adding to our shale focused infrastructure portfolio in a strategic location with growth potential. The long-term financing for COLT was put in place at closing with NRGM's first bond issuance of $500 million and a $225 million private placement of common units.

As for expansion projects at NRGM and the Finger Lakes LPG project, we believe we're getting close to the final permits from the New York DEC. I know we sound like a broken record on this, but we believe that our persistence will pay off and this will be a fabulous business for the company.

On the Commonwealth pipeline, you probably heard UGI's comments on that project, on their call last week, while initial demand is not meeting our expectations, we continued to believe that the market for short-haul, take away capacity for Marcellus production will develop and we plan to be a participant. We continue to work on this and as market conditions evolve, we will keep you informed.

Moving to NRGY, this quarter marks the first full quarter of operations, since selling our retail propane business to Suburban. Consolidated adjusted EBITDA of $57.4 million is on target for the quarter.

We had a very strong performance from our NGL business, up over 50% from prior year. With the exception of a relatively small investment and transportation assets, this growth is organic. This business is continuing to grow rapidly by the fundamentals of supply and demand around the shales and our expertise in supplying solutions for producers and demand market customers.

Tres Palacios performed flat to last year and was on plan for the quarter. We also received our FERC authority on the connector to Houston Central, and we'll be moving forward on that project shortly.

Bottomline, we see significant opportunity to invest in Midstream infrastructure in current environment. Our goal is to utilize our expertise to leverage our existing portfolio and to execute on the right opportunities for growth from here.

We like the position we're in. We're in good Midstream businesses and good markets that are growing. We're in strong financial position with two strong balance sheets, two valuable equity currencies and good access to capital.

The current M&A environment has good opportunity, if you're selective and disciplined. Our capital structure provides the opportunity for growth in NRGM, the expansion projects, dropdowns, which we expect to execute, and third party acquisitions. We intend to achieve scale and diversification at NRGM, and position NRGY as a GP Holdco, creating value in both securities for investors in the process.

With that, I will turn this back to Mike for a run through the numbers, and I look forward to the Q&A. Thank you.

Michael Campbell

Thanks, John. This is a joint NRGM and NRGY earnings call for the quarter. So I am going to start with the quarterly results for NRGM and follow that with the NRGY results.

At NRGM, total revenues for the first quarter were $50.4 million, an approximate 8% increase over the $46.8 million earned in last year's quarter. The increase in revenue was driven by the acquisition of the COLT Hub and an increase in firm storage and transportation revenues from placing the Marc I in North/South pipelines in service, offset by slightly lesser revenues in salt and hub services.

Our firm transportation revenue is approximately $1.2 million lower than otherwise would be reported in the quarter, due to lesser revenue from a pipeline operator, (Billy), and remitting an incorrect tariff rate to us on pipeline capacity we released to one of our customers. This is a one-time item.

The total NRGM service related cost of $10.9 million, were down slightly from the $11.1 million reported in the same period last year, a slight decrease. The result of lesser cost associated with third-party pipeline transport capacity we held in prior year period, offset by an increase in compression cost related to North/South and Marc I pipelines as well as the COLT acquisition.

At NRGM, our cash operating administrative expenses amounted to $6.5 million than this year's quarter, an increase of $1.3 million versus last year's quarter, driven primarily by placing the Marc I and North/South pipelines into service. Adjusted EBITDA then came in at $33 million in this year's quarter, up from $30.5 million in last year's period. Again, as John pointed out, overall solid performance in the quarter.

To arrive at net income in the quarter, we reported depreciation and amortization of about $15.2 million, $5.5 million of interest expense, $600,000 of loss on disposal of assets, and $2.6 million of long-term incentive and equity comp, and $2.6 million of transactions costs related to the COLT Hub, to arrive at net income of $6.5 million.

Looking down to distributable cash flow, starting with the adjusted EBITDA of $33 million, we subtract cash interest expense of $2.9 million in the quarter, approximately $600,000 of maintenance CapEx to arrive at DCF of $29.5 million, up from the $25.9 million last year. As discussed on previous calls, for comparison purposes, we've adjusted the DCF generated in the first quarter of last year from U.S. salt, as that DCF was not available for distribution by NRGM until May of 2012.

I want to take a moment here to touch on the balance sheet of NRGM. We have approximately $680 million of total debt outstanding at December 31, with the $500 million of 6% senior unsecured notes due 2020 issued in connection with the COLT acquisition and approximately a $180 million drawn under our $600 million revolving credit facility.

Our current balance drawn under the credit facility is approximately $184 million, so not much movement from quarter end. The balance sheet at NRGM continues to be very strong, with debt to EBITDA ratio at 1231 calculated in accordance with our bank credit facility at about 3.5 times.

Now, moving on to the NRGY result review of its quarter. My overview of the results for NRGY will focus on the adjusted EBITDA performance in the quarter and prior year. And with the retail propane operations divestiture, I will be excluding from the prior year approximately $55 million of adjusted EBITDA from the retail propane operations contributed to Suburban.

NRGY reported consolidated adjusted EBITDA of $57.4 million in the quarter ended December 31, 2012, versus approximately $47.7 million in the prior period, once again, excluding the retail propane operations. This represents an increase of about $9.7 million or approximately 20%.

Just as a reminder, in all of our SEC reporting, including the earnings release this morning, NRGM is consolidated with NRGY's results, so to arrive at the NRGY standalone operations, which include our NGL supply logistics business at Tres Palacios. From the $57.4 million of consolidated adjusted EBITDA, we subtract the $33 million reported by NRGM separately in this year's first quarter, to arrive at approximately $24.4 million of adjusted EBITDA in the quarter for the NRGY standalone businesses. This compares to approximately $17.2 million in last year's quarter.

The increase reflect strong performance year-over-year in our NGL supply logistics operation, driven by greater NGL gallons sold and processed, and higher gross profit in our NGL transport business due to increased volumes and acquisitions year-over-year. As John pointed out earlier, Tres Palacios' performance was in line with last year for the quarter.

Before we open up the call to Q&A, let me just take a second to review the balance sheet at NRGY. At December 31, on a standalone basis, the debt outstanding at NRGY was $346.5 million, which includes $332.1 million drawn on our $550 million credit facility, approximately $14.4 million of other debt.

The current balance drawn under the NRGY credit facility is approximately $327 million, again not much movement from core area. So again, the balance sheet at NRGY also remains extremely strong with debt to EBITDA in a ratio of approximately 2 times as measured under our revolving credit facility. That concludes my review of the quarterly results for NRGM and NRGY.

So I think with that operator, you can now open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Zarahn with Barclays.

Brian Zarahn - Barclays

On the Bakken assets, can you give a little more color on the expansion project you're evaluating?

William Gautreaux

What we can tell you there is that the assets performing just as we expected so far. We've also secured the last customer that we needed to be 100% contracted. We have the facility at 120,000 barrels a day. That customer to big balance sheet and it also is somebody that owns acreage in the field, although we love the refiner pull demand of that existing customer base, this will be the first producer that's added to the mix.

As far as the expansion, we have had a number of conversations where we have indications of interest for people to sign up for capacity. And we have engaged a consulting firm to look at options for expansion, potentially the same engineering firm that build the facility.

The other thing I would add is that, I don't think we were able to announce it in the last conference call, but just post-closing of the acquisition, we hired Brian Freed who had been the Development Director of that business for Rangeland. And he is now our Vice President of Crude Logistics, and so we really have maintained some great continuity there. And we've kind of hit the ground running with that acquisition.

Brian Zarahn - Barclays

Is it too early to have a cost estimate for the expansion?

Michael Campbell

It is too early. But it is very, very high priority for us right now, but a little bit early to know exactly when we'll get that back.

Brian Zarahn - Barclays

And then in terms of the opportunity to rail crude to the West Coast, competition is certainly increasing quite quickly. Can you talk a little bit about the competitive landscape and the opportunity to have an unloading facility, to unload crude on the West Coast refining market?

John Sherman

That is something that we are still evaluating with urgency. There have been people announcing that they're looking at projects there as well. Our objective will be to anchor anything that we do with demand that we know we can contract. I would say that relative to our existing expansion at COLT, I mean that's our first order priority, is expansion on the origin side and we are seeing an incremental demand there, some of which is within our existing customer base. But as far as Bakersfield receipt that's something we're still looking at, but I don't have a definitive answer for you there yet.

Brian Zarahn - Barclays

And then a last question from me, more of a housekeeping item. Can you provide expansion CapEx for the quarter?

Michael Campbell

Yes I can. Are you looking at NRGM or NRGY?

Brian Zarahn - Barclays

If you have both the numbers handy, that would be helpful?

John Sherman

So in NRGM, the maintenance CapEx obviously is reported in our press release, you can see that PP&E expansion, which includes that, is about $44 million at NRGM. And then relative to again the maintenance CapEx at NRGY would be reported in our press release and included in the number that I gave you, you got to back out the expansion capital that I just communicated relative to the NRGY from that number and the expansion was very modest at Inergy L.P. at little over $52 million in the quarter.

Operator

Your next question comes from the line of Gabe Moreen with Bank of America Merrill Lynch.

Gabe Moreen - Bank of America Merrill Lynch

Following-up on Brian's questions, in terms of looking at the COLT expansion as well as the facility in Bakersfield, is that something where you potentially try to marry both of those up or are you really trying to work on those two standalone projects?

John Sherman

I think two standalone projects is the answer. I mean, we'll certainly consider the possibility of winking them. But I think what we're seeing today is that the expansion on the origin side, we like the visibility we have there. As far as the expansion on to the receipt side it's not as clear. And so I think what we will be prioritizing, what we know.

Gabe Moreen - Bank of America Merrill Lynch

And then just in terms of getting the final permits for the NGL storage expansion, I mean based on the guidance provided I think for first half of '13, wondering if given the latest developments of the timing slipped there at all or if that changes CapEx guidance at all for the year?

Michael Campbell

I think relative to the CapEx guidance, right now we haven't changed our CapEx guidance for the year and really it would be a timing issue more then anything. We still expect that to have about $20 million of incremental capital. On the timing of that we still await our final DEC approval on that project. I think indications and discussions with the DEC we would expect that to come very soon.

And then the build-out of that facility is really about 90 to 120 day kind of expansion in build-out. So relative to the first half of the year, I think that's kind of our targeted expectation. I think from a contribution standpoint, that's really immaterial to be $180 million in that area of $180 million adjusted EBITDA guidance that we provided for NRGM.

John Sherman

So we'll have the capital spent in fiscal '13 is what our view would be likely, and that the operation startup and the cash flow as we get into the summer.

Operator

Your next question comes from the line of James Jampel with HITE.

James Jampel - HITE

Just a couple of questions. Did you guys take a look at the facility near Portland that Global Partners ended up buying? And if so, why didn't you act on it?

Michael Campbell

We don't discuss or comment upon specific assets or M&A processes as we think about growth.

John Sherman

We're active in the third-party acquisition market obviously, but to discuss those kinds of things on a call like this, we don't do that as a matter of practice.

James Jampel - HITE

Do you think having a West Coast facility is integral to securing a long run competitiveness of COLT?

William Gautreaux

I don't think so. We feel very confident about COLT's position as an origin facility. And we're going to evaluate other opportunities in those markets, but I mean seeing us jump on another origin or receipt facility very quickly while we're still working on the expansion and immigration of this, we're very focused on COLT doing that right. We like our position there and feel very comfortable with its viability for a long time.

John Sherman

I would just add that our customers own the West Coast receipt facility that our barrels are headed to today and those are backed by long-term contract. So having destination of really to take barrels on the West Coast, I think its additive, but the COLT investment is completely independent. I mean the growth there is independent from us being able to offer receipt on the West Coast.

James Jampel - HITE

And do you anticipate that the expansion and the new customer, will they increase the average contract life?

John Sherman

This new customer will slightly expand the term when you average it all out.

James Jampel - HITE

On the Commonwealth, what's your sense of what's causing the weakness on demand for Commonwealth?

Ron Happach

There is a number of factors that are slowing down the development at Commonwealth. Low gas prices, slow economic growth, just a short-term impact on several expansions by legacy pipelines. But we still believe that the project is needed. It's a good project, and just a matter of time before it develops.

James Jampel - HITE

And then last one from me. In the Analyst Day, you had guidance of $180 million at Midstream and $260 million at the parent for adjusted EBITDA. Are those still good?

Michael Campbell

James, our expectation remains in the area of $180 million of adjusted EBITDA for NRGM and $260 million for NRGY on a consolidated basis. We haven't changed those.

Operator

Your next question comes from the line of Ethan Bellamy with R.W. Baird.

Ethan Bellamy - R.W. Baird

I just wondered if yo0u guys could please update us on the timing of the expected dropdowns of the remaining assets at NRGY into NRGM, so that we can get a better feel of the game plan for making NRGY into a pure play GP.

Brooks Sherman

As we've talked about I think after conference and in our last call, I mean, we have talked about the expectations of that perhaps being in 2013 and that continues to be the case that within fiscal 2013 you could see those dropdowns occurring. But we're not in a position to be anymore specific than that.

Ethan Bellamy - R.W. Baird

Can I also ask your comments earlier alluded to the fact of the importance of thing, disciplined and selective in the current M&A environment? Could you please update as the current valuations that you're seeing proposed in the deals that you look at? And if in fact, it's getting harder and harder to remain selective and disciplined with what you see out there?

John Sherman

Yes, just generally, we're seeing a lot of opportunity driven by the Inergy renaissance here that Shell has brought to the United States. And I would say there is a lot of capital looking for home, and so you can see some multiples creep on investment opportunities. But I think that that's just something that we're focused on, making sure we buy the right assets at the right price that are the best fit for our business today. And we're going to be out there looking at all avenues, whether that's organic growth or smaller-scale projects, but also participating in the broader auction processes as well.

Operator

And there are no further questions at this time. I will turn the call back over to Mr. Campbell.

Michael Campbell

Thank you, Brandy and thank you all for joining us this morning on the earnings conference call. We appreciate your attention and look forward to talking again soon. Thank you.

Operator

This concludes today's Inergy and Inergy Midstream first quarter earnings conference call. You may now disconnect.

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