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Inergy, LP (NRGY)

Inergy Midstream Acquisition of COLT Crude Oil Logistics Hub Call

November 5, 2012 11:30 AM ET


Mike Campbell – SVP and CFO

John Sherman – Chairman and CEO

Brooks Sherman – President

Bill Gautreaux – President, Inergy Services

Will Moore – VP, Corporate Development


Darren Horowitz – Raymond James

Brian Zarahn – Barclays

Brett Reilly – Credit Suisse

Elvira Scotto – RBC Capital Markets

Ethan Bellamy – Baird

Selman Akyol – Stifel, Nicolaus

Noah Lerner – Hartz Capital

James Jampel – HITE Capital



Good morning. My name is Holly, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Inergy Midstream Investor Call. (Operator Instructions)

I’d now like to turn today’s conference over to Mike Campbell. Please go ahead.

Mike Campbell

Thank you, Holly, and good morning, everyone. Welcome to the Inergy Midstream investor conference call to discuss the acquisition of the Crude Oil Logistics Hub.

With me here today is John Sherman, Chairman and CEO; Brooks Sherman, President of Inergy LP; Bill Gautreaux, President of Inergy Services, our NGL supply logistics business; and Will Moore, Vice President of Corporate Development.

I trust that everyone has seen the press release issued this morning and has access to the presentation materials that have been posted to our website. The outline of our call today is such that John Sherman will cover some highlights of the acquisition for the partnership, and then Brooks Sherman, Bill Gautreaux, and I will walk through the transaction in more detail. We will then open up the call for Q&A.

Before we get started, I would like to read a short forward-looking statement disclaimer: in our discussion today, we may communicate certain forward-looking information, various risk factors, including regulatory proceedings, commodity prices, and weather conditions, among others that may cause actual results to differ materially from any projections or estimates in these forward-looking statements. We provide a detailed discussion of these risks factors and others in our SEC filings, and we encourage you to review these filings.

With that I would like to now turn the call over to John Sherman. John?

John Sherman

Thanks, Mike. Good morning. First let me congratulate our counterparty on this transaction. Chris Keene and the Rangeland team and EnCap Flatrock have developed a great asset. The location, the scale, and capabilities of this complex are outstanding. We inherited a solid customer base that we expect to grow, and this asset was designed for cost-effective expansion that we believe will result in high-return bolt-on projects for our investors.

With the recent divestiture of our propane operations, we repositioned the partnership as a pure-play midstream business with a strong financial position. Since then, we have focused on organic growth and expansion projects around our existing assets and growing our NGL logistics business. Concurrently, we’ve been evaluating acquisition opportunities that meet our criteria for investment. We are focused on the rich shale plays, targeting infrastructure that moves fundamental supply to premium demand markets, assets that complement and extend our existing operations, and deals that are immediately accretive and bring expansion opportunities that enhance economic return.

This transaction does a lot for us. First, it’s a franchise asset in the Bakken. It’s immediately accretive and grows to be more so over time. Income is derived from fee-based, contracted cash flows. It diversifies our earnings from both a geographic and product standpoint. It’s in a developing shale play with lots of opportunity. And it complements what we do today.

Bottom line, this is an exciting deal for Inergy, and I expect it will lead to more opportunity.

I’ll now turn it over to Brooks and the rest of the team for a detailed description of the transaction.

Brooks Sherman

Thanks, John. I’m on page 3 of the presentation that was on our website. I’ll do a couple of pages here before I turn it over to Bill to talk about the business.

But on page 3, on the transaction, NRGM has executed a definitive agreement to purchase Rangeland Energy, LLC or the COLT Hub for $425 million subject to certain performance milestone and customary working capital adjustments. What we mean there is that we’ll pay $415 million up-front for the business. Additional $10 million will be paid into escrow pending a signed contract on a small added rail piece.

The COLT Hub is an integrated network of crude oil railcar loading, pipeline, and storage assets strategically located in the Bakken. It provides our customers outbound throughput via rail and pipelines. Inbound throughput comes in via pipe and truck, with 720,000 barrels of storage capacity there. The acquisition of the COLT Hub is really an expansion of our existing refinery services platform and is an early entry for us into another great shale play.

The run rate EBITDA that we see of this business is $58 million. That’s where we’ll be – the run rate we expect to be – at October 1, 2013, so a full-year fiscal 2014, that’s our expectation, about a 7.6 times multiple pay.

You see in the presentation that 90% of the capacity is contracted or committed under long-term take-or-pay contracts. Over the course of the next 11 months, new contracts coming online leading to the full utilization of 120,000 barrels per day of rail capacity and contracted, leading us to that $58 million. The transaction is immediately accretive. We believe creates a long-term strategic and further economic value, and at the $58 million EBITDA run rate, the accretion to NRGM is about 9%.

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