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Executives

John Sherman - Chief Executive Officer

Mike Campbell - Chief Financial Officer

Inergy, L.P. (NRGY) National Association of Publicly Traded Partnerships MLP Investor Conference Call May 22, 2013 11:45 AM ET

Unidentified Analyst

Good morning. Next up we have got Inergy, both from the Inergy LP and Inergy Midstream perspective we have got John Sherman and Mike Campbell that are going to spend a little bit of time talking about it. Obviously, the partnership at the NRGY level has transitioned significantly over the past really few months, but certainly the marketplace and the dynamics around their business have also changed rather dramatically. So, obviously there is a lot going on with Crestwood. There is certainly a lot going on in the Northeast. And over to John, he tells a bit more about the story.

John Sherman - Chief Executive Officer

Thank you, Darren. And we appreciate the opportunity to be here today. I will always enjoy the opportunity to tell our story and particularly with this many investors in one place. We spent most of our time looking forward, but if I could, I just like to look back for just a minute here to talk about the transformation of Inergy over the last 18 months or so. We have executed a series of strategic steps that I think are important in terms of kind of defining where we are today.

In the fall of 2011, propane was our core business and that business was confronting some new challenges. Our leverage was a little bit higher. And then we wanted it to be and we felt like our equity value was not reflecting the high growth midstream business that was embedded in NRGY with our propane operations. And that was before we knew we are entering the warmest winter in 100 years in ‘11 and ‘12. So, what do we do? The first thing we did is we began to separate our businesses, our midstream and our propane businesses. We filed to spin out our Northeast midstream business. We executed that IPO in December of 2011 creating a currency and a balance sheet to fund the growth of the midstream business. In the process in the IPO, we de-levered NRGY by about $400 million. In May, we dropped down US Salt and de-levered NRGY by about another $200 million and then in August we divested our propane – our retail propane operations to suburban shedding $1.2 billion in debt in the process and positioning ourselves as a pure-play midstream MLP. And frankly, we executed that a little bit quicker than I thought we would.

In December, we entered the crude logistics business with the COLT acquisition in the Bakken. That’s been a great deal for us not only is it performing better than underwritten expectations, we have already announced expansion project there and the tender of the contracts there is actually extending. And then the Crestwood transaction, I am going to talk – I am going to spend most of my remarks today really talking about the Crestwood deal, and what I think it means for our investors, but certainly I think that deal creates a significant partnership with the size and scale to compete in the current environment.

If you follow the company, that on May 6 we announced an agreement with Crestwood Holdings and Crestwood Midstream creating a fully integrated midstream partnership with an enterprise value of over $7 billion. We think this deal creates a formidable competitor across the value chain with a diverse platform in the major North American shale plays. It’s a snapshot of the combined partnership. As you can see, a diverse set of assets in major shale plays, natural gas storage and transportation, NGL storage, crude logistics, gathering and processing, and really laid across that a rapidly growing NGL logistics business, which we think enhances our opportunities to increase economic returns in the current environment.

This deal does a lot of us when Bob Philips and I first started talking about this it became clear that we are both trying to accomplish the same thing, size matters, and these are the things that we get from this business. I think Crestwood gets some of the same things, size and scale, diversity both from a geographical perspective and a business segment perspective, while both companies had good backlogs of visible growth, combined we have even more and I think particularly commercial synergies that will lead to more growth. This deal enhances our credit profile and we also get a strong sponsor and major investor in First Reserve.

Couple of things I would take off this slide, as you move across the page you can see the size and scale pro forma for the combination about $5.5 billion of market cap pro forma, about a $7.5 billion enterprise, and about $450 million of 2013 combined EBITDA. The pie chart at the bottom of the page shows that balance of natural gas storage and transportation, NGL crude logistics and gathering and processing. As I mentioned earlier this deal creates a fully integrated service provider offering customers an expanded suite of services. I think this really creates the opportunity to pick up incremental fees across the value chain, which will have the impact of expanding margins and increased economic return on behalf of investors.

Something else that really makes this deal hunt from my perspective is really combining Crestwood’s access to supply it to wellhead with Inergy’s demand side services and relationships. This is really going to enhance opportunities for us in our NGL supply and logistics business. And I think Crestwood’s ability to bring that suite to the producer is going to create opportunities for all of us. The two charts there really just show some of the strategic relationships of the two partnerships today.

A couple of things I would take off this slide. That top pie chart shows a significant diversification in the combined company. We got – really have 10 pretty substantial assets with meaningful cash flow. The bottom chart shows the high percentage of fee-based contracted cash flows, only about 16% of our cash flows are un-contracted and that – most of that is really the growth business that I just described in our NGL services business.

This deal is credit accretive, rating agencies have all come out with positive notes. They like the attributes of size, scale and diversity. This – we are issuing over $2 billion of equity in this transaction and no new debt. Our objective is to attain investment grade status over time with the combined partnership. I mentioned we picked up a strong sponsor in First Reserve many of you are familiar with them, they are 100% energy focused they have a 30 year history. In addition to capital they bring market intelligence and strategic relationships to the partnership. Both companies as I mentioned have meaningful growth potential standalone, this combination opens up more opportunity. We start with about $2 billion of identified growth projects and we expect to deliver at NRGM or the combined operating company a 6% to 10% distribution growth over the foreseeable future.

Before I turn this over to Mike Campbell, our CFO for a run through the numbers I would just say in summary that we are very excited about this deal. I think it creates a lot of opportunity for us, but there is one thing to say it, if you think about Inergy management, Crestwood management and First Reserve, we are rolling over well in excess of $1.5 billion of an investment in this deal, that’s certainly not a guarantee of success, but I think it goes a long way with engaged people with a stake on the table I think that will have a big influence on whether we are successful executing this strategy.

With that, I will turn it over to Mike and I look forward to the Q&A.

Mike Campbell - Chief Financial Officer

Thanks John. I think I get the unenviable position of talking about or transaction – transaction steps and the transaction overview. What started out is a very simple concept when we turned over, the attorneys got a little more involved than the initial ideas. So, I will walk through these the first three steps that you see on the top of this page are expected to close really mid-June timeframe.

I will try to step through these, the fourth step the CMLP and the NRGM merger we expect to close later more August-September timeframe. So, step one of this transaction is really to have NRGY distribute the 56.4 million NRGM units that it owns to the Y shareholders on a pro rata basis that really optimizes the GP. The second step in this transaction process which again first three of these closed mid June is that Crestwood Holdings will acquire the non-economic general partner and control of NRGY. The third step Crestwood Holdings will contribute and really consolidate the NRGM and the CMLP GP and IDRs at NRGY sort of contribute IDRs and GP of CMLP to NRGY in exchange for NRGY units representing at the end of the transaction steps about a 29% interest in NRGY.

In the final step here again, the CMLP and NRGM entities will be merged together. The consideration paid in the CMLP merger is NRGM will issue about 1.07 NRGM units for each Crestwood Midstream unit that’s outstanding. There will also be a one-time $35 million cash payment made to the unaffiliated unit holders of the public unit holders of CMLP, about $25 million of that $35 million is funded by NRGM and then the remaining $10 million is funded by the Crestwood Holdings, First Reserve folks. There is no financing contingencies around this transaction. We have fully committed financing. We have been running very hard over the last week to syndicate those facilities. This NRGM and CMLP merger is conditioned upon a unit hold of vote which we expect to file our proxy and S-4 in the very near future.

Just quickly on the pro forma ownership structure post these transactions, you can see at the NRGY level we’ll have about 185 million units outstanding. The ownership of NRGY at that point will be about 56% owned by the public unit holders and about 44% owned by the combination of the First Reserve, the CMLP and the NRGY management team and then downstairs at NRGM we have about 150 million units outstanding and the ownership of that entity is approximately 75% owned by the public and about 25% owned by the combination of First Reserve, the CMLP and the NRGY management teams.

Moving on here to review really the debt capital structure that I referred to that we have been working very diligently on this past couple of weeks, starting really at the top, at the Crestwood Holdings level, we launched in the process of completing a $365 million term loan that should price today demand has been very strong for that term loan. At the NRGY level, we are amending and the existing NRGY $550 million revolver. We do have committed financing down there. And we chose to really pursue an amendment to our existing revolver rather than syndicate and place new facilities at NRGY.

At the NRGM level, you can see at the bottom of the page, we have – yesterday we launched the syndication of a new $1 billion revolving credit facility that will close condition – close concurrently with the merger of CMLP and NRGM. And then NRGM will assume the existing $350 million of CMLP’s senior notes and our $500 million existing senior notes will remain in place.

You see the leverage stats are at the NRGM level as well as at the NRGY level on a standalone basis. And again as John kind of pointed out here there is a very credit friendly transaction structure. No new debt issued in this transaction and over $2 billion of equity in the consideration. Just kind of moving forward here to look at the historical financials of each company and then on a pro forma basis if you look at the upper left hand corner you can see the CMLP standalone adjusted EBITDA from 2011 to 2012, they grew their adjusted EBITDA about 20%. It’s really driven by their significant expansion in their Marcellus footprint and their interior relationship to a lesser extent their bolt-on acquisition of Devon acquisition in the rich gas Barnett area.

I think one of the things that as a management team we looked at relative to this was the significant diversification that Crestwood has had over the past 24 months away from the dry gas areas that they historically operated in and something that we found a lot of comfort as we did our due diligence and looked at this combination transaction. And it’s something that hats off to Bob and his team to really have a little bit of a transformation of their own similar to us that moving away from propane in the past 15 months.

On the upper right hand corner, you can see the NRGM adjusted EBITDA in the green shaded bars. Again from 2011 to 2012, we grew adjusted EBITDA at about 26% really driven by the combination of enhanced pipeline transportation revenue from our North-South project that we put in service at the end of 2011 and then to a lesser extent some growth in our gas storage business at Seneca Lake.

The NRGY adjusted EBITDA you can see in the red shaded bars on this page, we do consolidate NRGM, so the difference between that green and the red bar there that you see are the operating assets that we hold at NRGY that consist of our NGL supply logistics business and our Tres Palacios gas storage asset down in Texas. On the bottom I will just note here you can see the LTM adjusted EBITDA of the combined pro forma company at about $350 million. We have stated we expect about $450 million from the combined operating assets of the partnerships Y and Crestwood as well as NRGM. I think there is a point here to make. And again it’s the nice diversification that’s added from this transaction that we think a lot of, it’s the size, the scale, it’s the things that John talked about. There is really no asset. No one customer that will represent a significant driver individually to the total adjusted EBITDA of the combined operation.

Just kind of wrapping up here on what I think is important to set the stage for this combination, and that is the pro forma kind of financial policies that we expect to operate NRGM under. And these disciplined guidelines are something that we are going to focus on as we execute our growth objectives. We expect to continue to pursue the stable fee-based cash flow generating assets that we have both CMLP and NRGM and Y pursued in the past. We expect to fund the growth similar to most everybody that’s probably presented this morning on a balance debt and equity funding. And we will expect to maintain our leverage at below four times as we execute on our growth.

As John pointed out, we think we can grow the distributions in this combined entity in that 6% to 10% range year-over-year and targeted coverage ratio of about 1.1 times. I think John said on these, but we couldn’t be more excited about the transaction. We think this is really and I have heard Bob say this several times, this is a two plus two equals five transaction, for all the reasons that you see listed on here the size, the scale, the diversification and really the integrated business model from wellhead to burner tip is something that we are very excited and very focused on closing up as we move through the summer here.

So, with that, I think we can open this up for Q&A.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Mike Campbell

The question there was what entities will remain as the publicly traded securities, is that right? Yeah, from a legal standpoint, NRGY and NRGM will continue to be the publicly traded securities that will survive at the end of these transactions. It gets a little more involved probably from an accounting perspective, but hopefully that answers your question.

Mike Campbell - Chief Financial Officer

Alright. With no further questions, I appreciate your time and appreciate the opportunity to speak to you all today.

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