Inergy's CEO Hosts Investor Conference Call (Transcript)

May. 7.12 | About: Crestwood Midstream (CMLP)

Inergy L.P. (NRGY) Investor Conference Call April 26, 2012 2:00 PM ET

Executives

Brooks Sherman – VP and CFO

John Sherman – President and CEO

Analysts

Brian Zarahn – Barclays

Stephen Maresca – Morgan Stanley

Ronald Londe – Wells Fargo

Jamie Spicer – Wells Fargo

Gabe Moreen – Merrill Lynch

Gary Stromberg – Barclays Capital

Ethan Bellamy – Robert Baird

Noah Lerner – Hartz Capital

Chris Guelph – Shenkman Capital

Byron Wim – Sykes Investment

Mona Yee – Schroder Investment

Andrew Gundlach – First Eagle Investment

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Investor Conference Call. (Operator Instructions) Thank you.

I will now turn the conference over to Mr. Brooks Sherman. Please go ahead, sir.

Brooks Sherman

Thank you, Crystal. Good afternoon, everyone, and welcome to our call today. With me on the line is John Sherman, our President and CEO. The format of our call today is that we’ll talk first about the propane transaction that we’ve announced this morning and during that, as well as during our distribution discussion, we’ll be referencing slides that were posted today within the Investor Relations section of our website. And once we talk about the propane transaction, we’ll spend a few minutes on the NRGY distribution that we declared for the quarter ended March 31, 2012.

So, before I turn this over to John, let me just read our forward-looking information. In our discussion today, we may communicate certain forward-looking information. Various risk factors including weather conditions and regulatory proceedings may cause actual results to differ materially from any projections in these forward-looking statements. We provide a detailed discussion of these risk factors and others in our SEC filings and we encourage you to review these filings.

With that John, I will turn it to you.

John Sherman

Thank you, Brooks, and thank you, everyone, for your attendance on the call today. From my perspective, today’s announcement is another step in a strategic progress that began when we announced we were going to IPO our Northeast natural gas business. That IPO completed in December structurally began the process of separating our two primary businesses.

Our objective as stated at the time was to ultimately create two focused MLPs with their own pools of capital and unique M&A opportunities.

In the process, we started the de-leveraging of NRGY and expect it to unlock the embedded value of our high-growth fee-based midstream business. The transaction we announced today accelerates that process.

We have been proponents of propane industry consolidation for some time. This transaction accomplishes participation in that for us. The combining of operations with Suburban Propane creates scale, geographic diversity and the efficiencies needed to be competitive in the propane industry.

Our investors will retain an investment in that business acquired by Suburban and participate in those synergies and Inergy will focus on growing our midstream business.

I want to take the next few minutes to talk about the propane transaction, what it means for us going forward, and then we will also discuss some detail around the distribution that we announced this morning at NRGY.

I’m going to start referring you to the slides here just for a minute. I’m looking at slide five which says Retail Propane Transaction Overview at the top. Just to kind of describe the transaction as announced. We’re selling our retail propane operations to Suburban Propane for $1.8 billion. The acquisition is financed through a $1.2 billion bond exchange and a combination of Inergy and our investors will receive $600 million worth of SPH units. As I mentioned, our unit holders will have an opportunity to participate in propane industry consolidation via that investment.

The deal is expected to close in the fourth fiscal quarter of 2012. We do have to go through Hart-Scott-Rodino and it’s also contingent on the bond exchange.

Kind of flipping forward to slide six, that’s just a – kind of structurally what we look like in showing the – this transaction. You can see the – we expect that for – in exchange for our $1.2 billion in senior notes, our note holders will receive $1 billion in new Suburban notes and $200 million in cash. Suburban is acquiring the entity Inergy Propane, LLC. Prior to the transaction, we will move our West Coast business and our Inergy Services business, which is our wholesale marketing and NGL supply and logistics business, out of Inergy Propane, LLC before the transfer.

Flipping to the next page, just gives you a quick kind of schematic of what we look like after the transaction. As you can see the – we retain the investment – or our unit holders retain an investment in Suburban. We have significantly reduced our debt. And then the remaining operating businesses, so, at the end of the day, NRGY will own 75% of the limited partnership interest in NRGM, the general partner in the incentive distribution rights in NRGM, and will retain the operating businesses of U.S. Salt, Tres Palacios, our West Coast operation, and Inergy Services, which again is our wholesale NGL supply marketing and logistics business.

Flipping to page eight, I think I’ve made most of these points, but giving effect to this transaction, NRGY becomes a pure play midstream MLP. Again, I think I’ve talked about the – what we own and what we’ll retain. This significantly strengthens the balance sheet of NRGY. We expect this to make us more competitive from a cost of capital standpoint and we do believe that this will have a positive impact on the growth of our midstream business.

I think I covered the final bullet there, the benefits that our shareholders will derive from their retained investment in Suburban.

Page nine just gives you a little snapshot of the combined operations. Again, our investors will participate in a larger, more geographically diversified and we expect to get the efficiencies and synergies again that you need to be competitive in that business. After the transaction, Suburban will be the third largest propane retailer in the United States.

Flipping to page 10, before I turn this over to Brooks for kind of a run through the balance sheet. NRGY, this just gives you a little bit more detail on the operating businesses that we own in the two entities. You can see in that yellow circle there, NRGM, as you know, that is an integrated storage and transportation platform with natural gas storage, natural gas transportation and NGL storage. And then I mentioned the businesses that we retain in NRGY.

I think you look at this NRGM as a rapidly growing midstream business and in NRGY, we become a holder of operating businesses that I think you can expect ultimately will find their way into NRGM and then NRGY evolves as a GP hold co with an interest in the underlying operating partnership and the IDRs.

With that, I’ll turn it over to Brooks for a run through the balance sheet.

Brooks Sherman

Thanks, John. What you see here is pro forma balance sheet. We started with December 31; obviously we haven’t filed our March 31 10-Q yet. We’ll do that next Thursday. So, we started December 31 and on this page really what I’d just point you to I think as we’ve described, the retirement then of our two tranches of bonds, 7% and 6-7/8% bonds.

So you see the $600 million in each of those tranches would then be removed from our capital structure and leaving us with total debt on this pro forma page of about $430 million. And when you think then about us post the transaction, while we’re not giving guidance at this point on any future periods here, this would put us really in the mid-2s from a leverage perspective at NRGY and we’d see the ability to see that go lower in the near term. So, I think as John has alluded to, this transaction provides us looking forward with a strong balance sheet and financial flexibility to benefit the entire structure at NRGY and NRGM.

Yes, the last page here, page 12 on the transaction, the next steps for us. We’ll file for Hart-Scott-Rodino, expecting to do that tomorrow. We’ll prepare for the transition of our retail propane operations to Suburban. We’ll operate those here for the period between sign and close as we normally would and then transition those two Suburban post-close. We would then close the transaction upon that successful completion of the Suburban exchange offer for the bonds and upon receipt then of HSR approval.

So that’s all that we had prepared for the transaction. John, you want to talk on the distribution?

John Sherman

Yeah, thank you, Brooks. Yeah, just quickly I wanted to spend a minute here to talk about the distribution we declared this morning or announced this morning at NRGY. I think we told you a while back that as we looked at our business, we needed a little time to make sure that we were thoughtful in resetting our distribution rate and it would be one that the market could be very confident in, in terms of coverage and future growth potential. So, let me just talk a little bit about kind of the thinking around that.

I would just tell you that the $1.50 annualized rate is basically – if you kind of normalize the business for the next 12 months, that distribution – and this is assuming continued ownership of the propane operations – would result in total unit coverage of 1.2 times. And that was derived from a higher – the way that we derive that is a higher than 1.2 times coverage for the operations of the business and a lower distribution coverage than that for the cash flows coming up from NRGM with the assumption that there’s coverage built in down at NRGM. So the average is based upon 1.2 times of our normalized expectations for the next four quarters.

Now let me just talk a little bit about what should happen when – giving effect to the propane divestiture transaction. You should expect that you would continue to receive approximately $1.50 in distributions if not a little bit more. $0.36 of that coming from your ownership in SPH units, and that’s based upon the $3.41 that they’re currently paying today. As you may know, they announced an increase after this transaction closed to $3.50 and then you would receive approximately $1.15 to $1.20 of annualized distributions per unit from NRGY. And that is derived similarly what I talked about before, based upon the remaining businesses in NRGY providing ample coverage for those operating businesses as well as the cash flows that we receive up from NRGM.

You know I think that’s all I would say about that at this time. I look forward to the Q&A. Brooks, should we open it up for questions?

Brooks Sherman

Sure. Let’s open it up for questions. Crystal?

Question-and-Answer Session

Operator

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

Brian Zarahn – Barclays

Good afternoon.

Brooks Sherman

Hi, Brian.

Brian Zarahn – Barclays

Congratulations on the transaction.

Brooks Sherman

Thank you.

Brian Zarahn – Barclays

Can you walk us through a little bit on this distribution? How much of that $1.50 will be declared at NRGY? Or I was assuming the SPH units would be transferred directly to unit holders.

Brooks Sherman

That’s – when the closing occurs and when those units, we distribute those to our unit holders, that is what happened. And that is what we tried to lay out there on page 14 of the presentation that approximately in that second big bullet in the middle part of that, $0.36 of that $1.50 once those units would be distributed post this transaction, about $0.36 of that would come directly from SPH because that unit would be in an investor’s hand. And the $1.15 to $1.20 then will be paid directly by NRGY via its operating asset cash flow plus its ownership and distributions it receives from NRGM and passing those through. That’s it.

Brian Zarahn – Barclays

So in fiscal 2013, your NRGY’s declared distribution will be closer to $0.30 and then the shareholders – unit holders will get just the remainder from their SPH holdings?

Brooks Sherman

Yeah. That’s right. $0.30 a quarter if you’re assuming $1.20 annually. Correct.

Brian Zarahn – Barclays

Okay. And then, can you talk about what your plans are for the wholesale business?

Brooks Sherman

I mean, the wholesale business stays a part of Inergy LP. That business has grown in and of itself with the relationship with our NGL storage business. So that business stays, and is a good business in its own right. And I think you may have heard – if you heard on the Suburban call today, Mike Dunn talked about having Inergy as a major supplier to Suburban as we look ahead. And we certainly welcome that. That business is obviously well-prepared for that, having been supplying our retail business all these years.

Brian Zarahn – Barclays

Okay, and then last one for me. In your 8-K last week, you mentioned the U.S. Salt dropdown seems to be sooner than later. Can you talk about how this asset sale fits into your dropdown strategy?

Brooks Sherman

Well, I think when we kind of opened the slide with this, this somewhat – it just accelerates the strategy that we talked about of separating propane and midstream. Now the propane is with a third-party entity will maintain an equity ownership, our unit holders have that option.

U.S. Salt, we intend, we’ve said all along, that may be an early candidate and certainly is to be dropped down into NRGM. And so, we would expect that to occur in the near-term. And, the rest of the strategy remains the same, that we would see NRGM as the place to house our midstream assets, and the business that will grow both that way and through acquisitions and projects. So, I think this is a step along the way. John, anything more?

John Sherman

You know, Brian, one thing I might – since you mentioned that 8-K, I wanted to clarify a couple more things because we’ve gotten some questions subsequent to that announcement. We put out, I guess, two 8-Ks. Basically what we did is we amended the credit facility at NRGY. In addition to getting some consents we also downsized that, because we have less financing need up there. We also increased our bank credit facility at NRGM.

But while we were doing that, we got consent for a couple of things. One, for the dropdown of U.S. Salt, which I think we have talked about, and certainly you can expect that transaction. But the other thing that we got consent for, while we were doing this, was for the bank consent to sell, I think it was 5 million units of NRGM owned by NRGY. Let me just clarify that that was to give us flexibility if we needed it to, for any reasons, to deliver NRGY. But, I just want to say that we did not have any current plans to sell the NRGM units owned by NRGY.

Brian Zarahn – Barclays

Appreciate the color.

Brooks Sherman

Okay.

Operator

Your next question comes from the line of Stephen Maresca with Morgan Stanley.

Stephen Maresca – Morgan Stanley

Hi. Good afternoon, everybody.

Brooks Sherman

Hello, Steve.

Stephen Maresca – Morgan Stanley

Two quick questions on the drop downs. So you talked – ultimately over time what would your expectations be for all those going in there? Is it something you think can be done within a two year time or a three year timeframe to get everything into NRGM?

Brooks Sherman

Steve, we don’t have a particular timeframe in mind there that we think U.S. Salt is a pretty quick candidate here. What we did say during the NRGM roadshow and discussion around that originally remains true in that, we want to have the assets that we would drop down into that entity with steady predictable cash flow at the levels that we would expect from the assets and we think U.S. Salt is there. I think the others probably need a little bit more development. I guess when I’m talking about that, I’m talking about Tres perhaps first but – but the others as well, just steady predictable cash flows at the levels we’d expect. So, no real timeframe and I’d hate to put one on it right now.

Stephen Maresca – Morgan Stanley

Okay, fair enough. Second part to that is, you’ve now de-levered significantly assuming this transaction closes at NRGY – once you start monetizing proceeds and drop downs would you still look to pay down – or how would you look to deploy those proceeds? Would it be still to pay down some debt that’s remaining first at NRGY or how else would you deploy them?

Brooks Sherman

Yeah I think that would be – our first focus would be that we would have an entity there that is lowly levered and when you’re down in the twos, you are there but – but we think that ultimately we could see NRGY as owning maybe a couple of those midstream’s assets or via GP holdco, but we would look to maintain that at pretty low leverage. So, yes, the first place proceeds would go, more likely than not would be to pay down debt.

Stephen Maresca – Morgan Stanley

Okay. And then I guess my final one is, just any color around the Inergy Services that’s still at NRGY. So the wholesale, the NGL supply and transportation in terms of what that generates on an EBITDA basis or some sort of color you can provide on that?

Brooks Sherman

That’s not something that we really have talked a lot about. I think I would tell you that when we are prepared to give maybe full guidance on a longer period looking forward, maybe we talk a little bit more about that, but right now kind of given what we are doing here with retail, not really providing guidance, I think we’d rather – we’ll just have to wait on that a little bit.

Stephen Maresca – Morgan Stanley

Okay. Fair enough. Thank you, guys.

Brooks Sherman

Thanks, Steve.

John Sherman

Thanks.

Operator

Your next question comes from the line of Ron Londe with Wells Fargo.

Ronald Londe – Wells Fargo

Thank you. I’m curious going forward after the deal closes, what are your expectations about operating expense for the remaining businesses?

Brooks Sherman

You know, Ron, our retail propane business obviously has the majority of our operating expenses today. So, our corporate overhead will go down with retail not being a part of the picture. Our other operating expenses of the businesses we own and operate today would essentially be unchanged. We’re always trying to be efficient, but it would be essentially unchanged. It’s really the corporate overhead here that would go down. And, now with two publicly traded entities there’s couple of things to work through there. But, it would be really with retail OpEx going away then when you think about corporate OpEx going down, it’s not going to be a material number to the entire business but certainly a big number to corporate just in total. I don’t have a specific number for you and we’re not prepared to forecast any further today.

Ronald Londe – Wells Fargo

What type of maintenance capital expenditures do you expect after the transaction?

Brooks Sherman

Up at NRGY, the bulk of that is retail related. So when you think about the remaining businesses there today, U.S. Salt, Tres, West Coast are the ones that require the maintenance CapEx, that could be about $3 million perhaps between those. So not a lot and I think that would be what I would say is reasonable.

Ronald Londe – Wells Fargo

Are there any tax effects because of this transaction that unit holders would have to absorb?

Brooks Sherman

Well, obviously with the divestiture of this size, Ron, you know the transaction will generate taxable income and MLPs are complex entities when it comes to tax though and any amount will vary really by unit holder. We’re continuing to refine that work and calculations relative to the taxable income from this event. So, at this point I can’t offer any estimates or a range of taxable income. There will be some, but we’ll keep you informed as we move through the year on this, as we move toward close and provide the information as it’s available. I think moreover what I would offer is that we firmly believe the value created for Inergy and its unit holders here by this transaction far surpasses any income tax effect of the deal to our unit holders.

Ronald Londe – Wells Fargo

Do you have an exact number for the exchange rate of the Suburban holder – the Suburban units, 0.1 – it’s probably a long number. Do you have that number?

Brooks Sherman

It is the 0.10 something, Ron. I haven’t – I haven’t done the math.

Ronald Londe – Wells Fargo

Okay. You don’t have the exact number handy?

Brooks Sherman

I do not. We’ve calculated it. I don’t have it handy but it’s – you can calculate it.

Ronald Londe – Wells Fargo

Okay.

John Sherman

It’s in the neighborhood of 0.11 I thought but we can be more precise on that. We’ve got it, it has been approved.

Ronald Londe – Wells Fargo

Also, do you expect any downsizing costs between now and when the deal transpires? Or is that going to be – if there are any of those costs, are they going to be in fiscal first quarter of 2013?

Brooks Sherman

No, I would expect that once we move toward closing on this, it would likely be – assuming we would close it in the 60 to 90 days that we anticipate here, out into the fourth quarter, I guess we’ve said, of fiscal 2012, we’d probably accrue those as of June 30. And I would expect those to be really personnel-related kind of severance packages, those kind of retention bonuses that we would accrue likely as of June 30.

Ronald Londe – Wells Fargo

Is there a number you can give us?

Brooks Sherman

Not today, Ron. We’ll work through that and accrue it. I don’t expect that it’s a – it’s not going to be – I don’t expect it to be a material number but we’re still working through that.

Ronald Londe – Wells Fargo

Okay. Thank you.

Brooks Sherman

Thanks, Ron.

Operator

Your next question comes from the line of James Spicer with Wells Fargo.

Jamie Spicer – Wells Fargo

Hey, guys. Congratulations on the deal and thanks for taking my questions. I just had a question a little bit more on the mechanics of the deal itself. It seems like the bond exchange is a pretty big contingency. Do you see any risks to getting that done? And is there a plan B if the bond holders don’t agree to it?

Brooks Sherman

You know, James, there is a 135 press release out there with respect to that exchange and we are really unable to speak to any aspect of that other than to refer you to the press release.

Jamie Spicer – Wells Fargo

Okay. Okay. Then just on the business itself, I was just curious about the wholesale propane operations that you guys are retaining and whether there’s any impact to that business with the loss of the retail operations, if there were any synergies between the two that you’re not going to realize anymore?

John Sherman

You know it’s – I would say, James, that’s pretty immaterial. When we talk about Inergy Services one of the things they do is provide supply services to our own retail businesses. As Brooks mentioned, we do expect to be a major supplier to Suburban here, as well as a transportation provider, that’s still to be determined the exact details of that. But, a lot of that business, in fact the bulk of what those guys do is really third-party. And that’s a growth business in its own right. And in fact with the development of shale, particularly in the wet areas like Marcellus, pending in the Utica, I mean these guys are growing their businesses substantially kind of ahead of, kind of NGL take-away capacity. So I – the component that relates to serving retail would be immaterial from an earnings perspective.

Jamie Spicer – Wells Fargo

Okay. Got it. Thank you.

John Sherman

Okay.

Operator

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

Gabe Moreen – Merrill Lynch

Hey. Good afternoon, everyone and congratulations on the transaction. Question for you, two quick ones, most of my questions were asked; one is just in terms of the facility at the NRGY level, I know you right-sized that last week with the 8-K, but do you see maintaining that level of facility going forward after the transaction, particularly after some of the drops happened at NRGM?

Brooks Sherman

No, Gabe, I would expect, especially after some of the drops begin, we could see that facility size go down. The need for a facility of that size probably wouldn’t be there. We would certainly carry one that we felt gave us adequate needs plus some for any opportunities that may arise, but it would likely be smaller than what we have today.

Gabe Moreen – Merrill Lynch

Okay. Great. Thanks, Brooks. And then just, bigger picture question in terms of the 1.2 times coverage going forward for the next four quarters of NRGY, given lack of near-term capital and even maybe you guys will grimace along with me on this question, but just where do you see that evolving going forward?

And maybe as a second part to this question, just in terms of the payout ratio that you’re thinking for each of the end line businesses, where in other words is NRGM cash flow that you’re getting just a straight pass-through and you’re thinking about distributing a 100% of that? And maybe some of the rest of the businesses, what you maybe think is the appropriate payout on those?

John Sherman

Yeah, Gabe, this is John. Was your first question about where we said it today and how we thought about that?

Gabe Moreen – Merrill Lynch

Yeah, I think that’s fair. And just also then, as you said it today whether if you’re being you think a little bit conservative with that 1.2 times coverage if you see that changing or possibly evolving going forward?

John Sherman

Yeah, well, I think the – yeah, I think the 1.2 times coverage, as I mentioned, that’s representative of higher coverage than that for operating businesses at NRGY and particularly with the variability of the propane business. And it’s pretty close to a 1.0 kind of philosophy on NRGM, just in that we’re going to build in coverage down below. So, generally our approach would be to cover the operating businesses based upon their potential variability and pass through the NRGM cash flows.

And so you can see there that we’ve kind of landed on kind of a 1.2 times average with that approach for the business as it is today. We’d like a little bit more time to before we kind of clarify what that is for the remaining businesses because we think it’s a little premature until we kind of close this deal. But we certainly want to provide you with that type of transparency once we get this deal done.

Gabe Moreen – Merrill Lynch

Great. Thanks, John, and congrats again.

John Sherman

Thanks.

Operator

Your next question comes from the line of Gary Stromberg with Barclays.

Gary Stromberg – Barclays Capital

Hi, guys.

John Sherman

Hello, Gary.

Gary Stromberg – Barclays Capital

I may have my answer but I’ll try it anyway. Will the exchange energy notes have covenants that align with the Inergy convents or the outstanding Suburban notes? Can you comment on that and whether they have registration rights?

John Sherman

No, Gary, I have to refer you to that Rule 135 press release. That’s all I can do.

Gary Stromberg – Barclays Capital

Okay. Any word from the agencies, the rating agencies, and how this will impact those bonds?

Brooks Sherman

I don’t know – I would just say I don’t know if Suburban talked about that or not, but...

John Sherman

I don’t either. I don’t know if anything has been released publicly on that or not. I think we would just have to refer you to that.

Gary Stromberg – Barclays Capital

Okay. And is there any breakup here, any breakup fee?

John Sherman

No.

Gary Stromberg – Barclays Capital

Okay. All right. That’s all I had. Thank you.

John Sherman

All right.

Brooks Sherman

Thanks, Gary.

Operator

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

Ethan Bellamy – Robert Baird

Hey, guys. Just to follow-up on Ron’s question with respect to the human capital and leadership. Can you talk about where everybody lands and are there any senior folks that are attired in the transaction?

John Sherman

I think you can expect that, if we – if this deal happens. We’re not prepared to talk specifically about that and who, and what we look like structurally. But yeah, I think you would see a restructuring of the senior executive group.

Ethan Bellamy – Robert Baird

And what kind of extra costs should we be modeling in the current quarter related to the transaction?

Brooks Sherman

In this June quarter?

Ethan Bellamy – Robert Baird

Yeah. Banking fees and what not?

Brooks Sherman

Yeah, it’s a little bit difficult to say right now. When I think about the fees in total for the deal on a $1.8 billion deal, we’ve got legal, accounting and other advisory fees. I really would hesitate to lay that out there for you right now, Ethan. I don’t have a good firm number on that, given, I mean, our focus has been getting this deal to this point. And, I hesitate to put a number out there.

John Sherman

Yeah. And I would say, I might say Ethan that I think you would expect it to be kind of normal for a transaction of this size, on the professional fee side of it. And as it relates to – we don’t have a bunch of – well, you’re not going to see a bunch of executives get change of control things or anything like that. So there’s nothing material from that perspective, if you’re trying to kind of think through that.

Brooks Sherman

Yeah, no, it’s normal third-party professional fees, advisory fees.

John Sherman

That’s right.

Ethan Bellamy – Robert Baird

Okay. And I don’t know if you want to talk about this stuff now, but I’d be very interested to hear about potential open season timing, which think we’re looking for in March, and haven’t seen on the commonwealth pipeline. And then, how things went with the re-contracting of storage at Tres, and what the cash flows look like there now?

John Sherman

I think, I would defer that, do you think this fit well, for one thing, Bill’s not here, but he will, we’ll be prepared for him to talk about all those things when we report earnings next week.

Brooks Sherman

Yes, next Thursday.

Ethan Bellamy – Robert Baird

All right, I’ll be patient then. Thank you.

John Sherman

All right, thank you.

Operator

Your next question comes from the line of Noah Lerner with Hartz Capital.

Noah Lerner – Hartz Capital

Good afternoon, everybody.

John Sherman

Hi, Noah.

Noah Lerner – Hartz Capital

Hi. A couple of quick questions, and I might be referred to the same Rule 135 press release but I’m still trying to hunt for, not knowing where to find it. But, I’m just curious, is the bonds swap, continuously, is that, the actual swap an all-or-nothing type of arrangement, where you have to get all bondholders to agree to it or the transaction can be held up?

John Sherman

Yeah, we really can’t just, I’ll answer this one this time since Brooks took the last two. Noah, we really can’t say anything about that bond exchange. But if you want, I think that that 135(c) press release was actually released by Suburban this morning. So you might look on...

Noah Lerner – Hartz Capital

Okay. I’ll look into there, thanks.

John Sherman

Okay.

Noah Lerner – Hartz Capital

And then, I guess the other question, and it’s just, it’s much more longer term is, we used to have the public GP, and we cleaned up the structure, and we merged the LP into the GP and got rid of it all. It seems like we’ve kind of come full circle now, and sometime out in the future we’re going to have that standard GP/LP structure again. Do you foresee that being the long term structure of the organization, or an interim step to once again running without a GP, so that you have the best quote, capital possible?

John Sherman

I think those are all questions we’ll have to evaluate, as we think about the future. Noah, I think right now we’re not really prepared to talk much about it and we want to get this transaction closed and then we’ll kind of get on with that. But I appreciate what you’re saying.

Noah Lerner – Hartz Capital

All right, great. And good luck and congratulations on it.

John Sherman

Thank you, Noah.

Brooks Sherman

Thank you.

Operator

Your next question comes from the line of Chris Guelph with Shenkman Capital.

Chris Guelph – Shenkman Capital

Hey, guys. I had a couple questions actually around the bond treatment as well. One – and hopefully this is something you can answer prior to anything around the exchange, but can you tell me what your RP basket capacity was as of March 31?

John Sherman

Hey, Chris, I really want to refer you to the rule 135 release. I mean, we don’t want to do anything here that could ever come back against. We’ll just, I have to refer you on anything related to the bonds and I’ll apologize to all of you out there for that, but that’s really what we have to do. We’ve worked hard to get to this point and we’ll refer you to that.

Chris Guelph – Shenkman Capital

Okay. All right that was all my questions, then.

John Sherman

Thank you.

Operator

Your next question comes from the line of Byron Wim with Sykes Investment.

Byron Wim – Sykes Investment

Hi guys.

John Sherman

Hi, Byron.

Byron Wim – Sykes Investment

What type of capital gains are you getting from this transaction?

John Sherman

Taxes.

Brooks Sherman

Yeah, on the – as I answered with Ron a little bit ago, there are taxes. There will be taxable income for our unit holders on this. But we have not yet refined that to be able to talk to you in good specific terms. Again, we see the value of this transaction as far surpassing any tax effects of it. But as we get that completed and are able to talk about it so that we can be talking about it on a good average with all unit holders or all classes of unit holders we’ll certainly do that.

Byron Wim – Sykes Investment

Right. So, as just an overall number for the total $1.8 billion sale, you don’t have a – basically a capital gain of how much money you made on the sale?

Brooks Sherman

Well no. I’m looking at that as a tax question and there will be capital gains certainly within that, but otherwise I mean, from a – you’ll see some pro forma financial statements next week but – and you can discern it from GAAP statements there, but to talk about in any other terms right now, I don’t have that.

John Sherman

And I think it’s worth mentioning the – with the structure this is – a great deal of this is tax deferred or tax-free, but we’ll certainly – we want to give you more color on that as soon as we can. Again, it was one of the considerations of our board that we considered the tax effects and the value of this transaction we expect to far exceed any tax effect to our unit holders.

Byron Wim – Sykes Investment

Okay. And in the press release it had a pro forma I think simply $76 million for adjusted EBITDA for the retail business being sold and the price paid is effectively $1.8 billion, which seems to translate to 23 times EBITDA. What could explain, I guess, such a high transaction multiple, is it just they are looking at a warm winter and EBITDA would normally be higher, or is there something else going on?

Brooks Sherman

I think what you’re referring to there, Byron, is the three months of activity...

Byron Wim – Sykes Investment

Oh, okay.

Brooks Sherman

That’s all it is, that was the three months ended March 31.

Byron Wim – Sykes Investment

Okay.

Brooks Sherman

So yes, certainly we have had an abnormally warm winter season here. That showed up in December. It showed up in March. We, I think, disclosed in the press release it was 23% warmer than normal. What I might refer you to is Suburban talked about that, I think in their call today, but we did put our fiscal 2011 numbers in that press release as well and they follow the three months that you referenced. And I think, in that press release that we put out this morning you see the – we disclosed our retail operations. We had adjusted EBITDA of about $197 million in fiscal 2011.

Byron Wim – Sykes Investment

Okay. So it’s around nine times. Okay. Great. Thank you.

Brooks Sherman

Sure.

Operator

Your next question comes from the line of Mona Yee with Schroder Investment.

Mona Yee – Schroder Investment

Question answered. Thank you.

John Sherman

Thank you. Is that it?

Operator

Mona, your line is open.

Mona Yee – Schroder Investment

My questions have been answered.

John Sherman

Oh, she answered.

Mona Yee – Schroder Investment

Thank you.

John Sherman

Thank you.

Operator

Your next question comes from the line of Andrew Gundlach with First Eagle Investment.

Andrew Gundlach – First Eagle Investment

Good afternoon. Congratulations on a deal. Couple of quick questions. When you distribute – a couple technical questions and a couple bigger picture questions. When you distribute the Suburban shares, will your Class B units also receive those distributions commensurate with their percentage ownership?

John Sherman

Yes, they will. They’re treated the same in that regard.

Andrew Gundlach – First Eagle Investment

Okay. And then the second question is, I’m actually looking at the Suburban press release, which you referred to on Noah’s question, in effect it says that you’ll take $1 billion to get it, to clear the transaction and it doesn’t – and my question is does it matter if it comes from – in other words can you get $600 million of the 18s, and $400 million of the 20s, it doesn’t matter. I just want to make sure that I understand that correctly. But let’s imagine all the bonds get tendered, after all they’re getting paid $3.75 if I remember correctly. How do you pro rate it? That’s not clear in there. Could you just explain factually the pro ration if you get it over tendered?

John Sherman

No, Andrew, again I have to refer you to that and really leave it at that. I cannot go into anything further on that just by rule of law.

Andrew Gundlach – First Eagle Investment

Okay. It would be helpful if you could put out something that would explain that though because right now there’s not enough information on that. I would expect everyone will tender their bonds for that very generous premium you’ve offered. The third question is on your 120 run rate ex the Suburban shares, you said that is – if I understood it correctly, you said that, that is the business normalized with an appropriate coverage at NRGM which does not have to be replicated at NRGY. But I assume that that 120 – correct me if this is wrong – that, that 120 assumes that NRGM is not paying any IDRs which are currently at zero. Is that true?

John Sherman

As we look ahead, and we look at the ability for NRGM to grow, we’ve taken that into account a little bit because, as we have the Mark I project come online. We have our new liquid storage facility come online. That will produce distribution increasability we believe at NRGM, which in turn produces IDRs. And so, there’s probably a little bit, yes, taken into account as we look ahead there and we’re confident in that with the contractual cash flows associated with those projects.

Andrew Gundlach – First Eagle Investment

So a little bit is taken into account but obviously not a lot and the potential growth. Is that a fair way of looking at it?

John Sherman

Yeah, I think that’s pretty fair. We’re pretty early in the growth cycle there and the Mark I will not have been online for even for a full year as we look ahead.

Brooks Sherman

Yeah, I think that particularly when you’re going through March 31 of 2013, Andrew, I don’t think there’s a lot in that forecast.

Andrew Gundlach – First Eagle Investment

Okay. That makes sense. And then, the wholesale business, the wholesale propane business that you are retaining, if I remember correctly did around $30 million of gross profit, what is the – what kind of overhead and other stuff has to stay behind such that – what’s the EBITDA associated with that business, number one, if you can share something on that? And the second thing is, why can’t that also be a candidate for drop down one day?

John Sherman

A couple things there, Andrew. We haven’t gotten into the adjusted EBITDA before of NRG services by itself and not really prepared to do that today. We may do that more when we give some guidance down the road. But we do think of that business – to the second part of your question – we do think of that as a business in and of itself. And that business is certainly a candidate down the road to be drop down into NRGM. They have today responsibilities for marketing the liquid storage business that we own at NRGM and that is a great business for us that we are looking to grow. And so their responsibilities and abilities with that will grow too.

Andrew Gundlach – First Eagle Investment

Okay. And last question. Maybe you answered it already on an earlier question. But storage spreads have obviously increased a lot off the bottoms reflective in other prices – NYSEG, et cetera. I have to believe that’s also occurring at Tres. Whether or not it translates into the contract is another story, but certainly on the optimization type of profits and revenues that has to affect the business somewhat. I assume that you’re seeing it. Are you?

Brooks Sherman

Yeah we are, Andrew. We feel like Tres is – we’ve kind of hit the trough here and we’re recovering. So, we feel pretty good about that. And I would just tell you that that – it’s kind of that trough assumption that’s reflected in the – kind of the distribution coverage and the other things that I’ve talked about when we were having the distribution discussion.

Andrew Gundlach – First Eagle Investment

Great. Okay. Thanks for taking the questions. Congratulations on the deal.

John Sherman

Thanks, Andrew.

Brooks Sherman

Thanks, Andrew.

Operator

We’ve reached our allotted time for questions-and-answers. If you have further questions please contact Inergy’s Investor Relations department directly. I will now turn the conference back to Brooks Sherman. Please go ahead.

Brooks Sherman

Thank you, Crystal, and thank you everyone for joining us today. We very much appreciate the support and attention.

John Sherman

We’ll talk to you next week. Thanks.

Operator

This concludes today’s conference call. You may now disconnect.

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