Inergy's CEO Discusses F3Q12 Results - Earnings Call Transcript

Inergy LP (NRGY)

F3Q12 Earnings Call

August 2, 2012 11:00 AM ET

Executives

Brooks Sherman – EVP and CFO

John Sherman – President and CEO

Bill Moler – President and COO, Inergy Midstream

Analysts

Gabe Moreen – Bank of America Merrill Lynch

Brian Zarahn – Barclays Capital

Darren Horowitz – Raymond James

Ron Londe – Wells Fargo

Elvira Scotto – RBC Capital Markets

Ethan Bellamy – Baird

Presentation

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Inergy and Inergy Midstream Third Quarter Conference Call. (Operator Instructions) After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I will now turn the call over to Mr. Brooks Sherman, Chief Financial Officer. You may begin your conference.

Brooks Sherman

Thank you, Melissa, and welcome, everyone. Welcome to the fiscal 2012 third quarter joint earnings call of Inergy LP and Inergy Midstream LP. With me on the call today are John Sherman, our President and CEO, and Bill Moler, our President of Inergy Midstream.

The format of our call today will be such that after I read the forward-looking statement, I’ll turn it over to John for an overview. Bill will follow John with an operations overview as well as an update on our projects. I’ll then go over highlights of the quarter and the year-to-date numbers for both of our MLPs before we open it up for questions.

I would say just one item of significant note is that as you saw in a separate press release this morning, we closed on the sale of our retail propane operations to Suburban Propane. While John will speak in a moment on the strategic benefits of this transaction and how it repositions NRGY, I’ll give you a brief overview of the economics of the deal. The press release had these in it but just to give you a breakdown.

The breakdown consideration for the sale was that we received 14.2 million registered Suburban common units and 1.187 billion of our high yield bonds were exchanged for Suburban high yield bonds and cash that was paid to the note holders by Suburban. Those bonds are now off of our books, leaving only 13 million of these high yield bonds at NRGY.

As for the Suburban units, approximately 14.1 million of those Suburban common units will be distributed to NRGY limited partner unit holders and we expect that to occur over the next 30 to 45 days. And as you saw in the press release, that equates to a ratio of distribution of about 0.1067 Suburban unit per NRGY unit. The completion of this transaction leaves NRGY with a strong balance sheet at less than two times debt to EBITDA leverage, ample liquidity within our revolving bank facility then as we pursue accretive opportunities at both NRGY and NRGM.

To move to our forward-looking statement. In our discussion today, we may communicate certain forward-looking information. Various risk factors, including regulatory proceedings, commodity prices and weather conditions, among others, may cause actual results to differ materially from any projections or estimates 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’ll turn it to you.

John Sherman

Thank you, Brooks. Good morning and thank you for your attendance on the call today. I want to talk to this morning, as Brooks mentioned, about the final structure for our retail propane divestiture, including the pending distribution of the Suburban common units received in that transaction, our financial and operating performance for the quarter and first nine months for NRGM and NRGY, update you on current and future growth plans and discuss our future as a pure-play midstream MLP.

First, today’s announcement of the closing of the divestiture of our retail propane operations to Suburban is a major event for the partnership. It’s another step in the transformation of Inergy that began with the separation of our major business units last year. The IPO of NRGM gave us a competitive cost of capital to finance the growth of our Midstream business and delevered the NRGY balance sheet. The recent dropdown of U.S. Salt continued that and today’s transactions accelerates our conversion into a pure-play midstream business. In the process, we put our propane investment in a good place and cost effectively shed $1.2 billion of debt.

Now for the quarter. At NRGM, $33.4 million of adjusted EBITDA is a solid result and ahead of plan. About $3 million of that number was due to a nonrecurring insurance recovery from a prior period, but net of that, we were right on track as expected. That’s not surprising given the highly fee-based nature of the NRGM cash flows.

We are just beginning to reap the benefits of building out this storage and transportation hub over the last six years. Our storage capacity is fully contracted. Recent recontracting has been consummated at or near historic rates and we have extended our weighted average maturity this year.

Transportation is becoming a bigger part of our business mix, currently about 25% of revenues, and it will be more than a third of revenues when Marc I is up and running. Speaking of Marc I, Bill Moler will provide more color on that in a minute, but the project is progressing well and is expected to be up and running shortly.

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