Formation and Initial Acquisition
In March 2012, Crestwood (35% JV interest) and Crestwood Holdings (65% JV interest) through their joint venture, Crestwood Marcellus Midstream (CMM), acquired certain gathering assets from Antero Resources in the Marcellus Shale for $382 million. The acquired assets consist of low pressure gathering pipelines located in Harrison and Doddridge Counties, West Virginia, that deliver Antero’s Marcellus Shale production to various regional pipeline systems including Columbia, Dominion and Equitrans and intermediate systems that connect to MarkWest Energy Partners’ Sherwood Gas Processing Plant. As part of the acquisition, CMM and Antero entered into a 20-year gas gathering and compression agreement, which provides for an Eastern Area of Dedication (Eastern AOD) of approximately 136,000 net acres. In addition, Antero has provided for seven years of annual minimum volume commitments in the Eastern AOD and a right of first offer on future development on adjacent acreage in Doddridge County (Western Area).
The sizable acreage dedication provided by Antero provides CMM with the opportunity to realize substantial future growth as Antero continues to carry out its development plans in the Marcellus Shale. Since the beginning of 2012, volumes in the Eastern AOD have increased from approximately 200 MMcf/d to 400 MMcf/d at year end 2012. Importantly, Antero has committed to approximately 850 MMcf/d of capacity on third-party owned downstream connecting pipelines to support its planned production in the Marcellus region. As production in the Marcellus region continues to increase, Crestwood is well positioned to provide needed gathering and compression services to meet this demand.
Bolt-On Acquisition: Enerven Compression
In December 2012, CMM completed the acquisition of natural gas compression and dehydration assets from Enerven Compression for $95 million expanding the value chain and range of services we provide in the high growth Marcellus Shale. The transaction was funded under CMM’s $200 million revolving credit facility and is expected to contribute approximately $11 million to $12 million of EBITDA to CMM in 2013.
The acquisition included four compressor stations connected to CMM’s low pressure gathering systems and a five-year minimum term compression services agreement with Antero. The acquired compressor stations have current capacity of approximately 300 MMcf/d and are fully utilized by Antero’s existing Marcellus Shale production. As an important benefit of the transaction CMM retained Enerven’s Marcellus operations personnel to support the growing gathering and compression business in the area.
CMM now provides compression services to Antero under the compression services agreements acquired from Enerven, which expire in 2018, as well as the 20-year CMM Antero Gathering and Compression Agreement, which commenced in January 2012. CMM plans to construct at least two additional compressor stations in 2013 for Antero, which will expand total CMM gathering capacity to approximately 500 MMcf/d. Additionally, CMM and Antero are currently discussing additional compression services required in the Western Area, which is currently being developed.
Drop Down Acquisition
In January 2013, CMLP purchased the remaining 65% interest in CMM from Crestwood Holdings for $258 million. The transaction is expected to be 7-8% accretive to CMLP’s 2013 distributable cash flow on a fully diluted basis and was funded with $129 million of cash drawn on Crestwood’s existing revolving credit facility and approximately 6.2 million new Crestwood Class D units (“Class D Units”) issued to Crestwood Holdings.
After the transaction, Crestwood Holdings owns approximately 47% of CMLP’s outstanding limited partner units taking into account the new Class D Units. The Class D Units allow for the payment of quarterly distributions in cash or through the issuance of additional Class D Units at the discretion of CMLP beginning with the first quarter 2013 distribution, payable in the second quarter 2013, and will maintain the pay-in-kind (PIK) option until they convert to common units on a one-for-one basis on March 1, 2014.
The $258 million purchase price reflected an enterprise value of $525 million for 100% of CMM and implied a transaction value of approximately 8.9 times estimated CMM 2013 EBITDA. The transaction was unanimously approved by the Crestwood GP Conflicts Committee, comprised entirely of independent directors. The completion of the drop down acquisition by Crestwood demonstrated the execution of the strategy Crestwood laid out when it acquired Antero’s Marcellus Shale midstream assets in March 2012. The joint venture allowed Crestwood to acquire an interest in an early stage, high-growth Marcellus Shale gathering business without significant stress on Crestwood’s balance sheet. The significant growth in the Marcellus region, as well as the additional fee-based compression business acquired from Enerven in December 2012, supported the rationale to complete the drop down acquisition by Crestwood. By retaining the Class D Units and materially increasing its ownership stake in the Partnership, Crestwood Holdings has shown its continued commitment to support and participate in the long term growth of Crestwood and provides Crestwood Holdings incremental flexibility to continue its support of Crestwood’s growth through incremental future capital investment.
2013 Marcellus Shale Outlook
Located largely in the rich gas window of the southwestern core of the Marcellus Shale play, CMLP’s gas gathering, compression and dehydration business are well positioned for growth. Antero continues to be very active in its development of acreage dedicated to Crestwood and in surrounding areas. At year-end 2012, spot volumes on Crestwood’s Marcellus Shale gathering systems were approximately 400 MMcf/d and are expected to exceed 500 MMcf/d by the end of 2013 with the connection of approximately 60 to 70 new wells.
Based upon Antero’s current 2013 drilling and development plan in the Eastern AOD, Crestwood expects to expand its low pressure gathering systems with an additional 18 miles of pipeline. In addition to the four compressor stations acquired from Enerven, Crestwood also expects to add at least two new compressor stations by year end 2013. CMLP currently expects the 2013 capital expenditures for this development to be in the range of $70 million to $80 million.
Additionally, Crestwood is in early discussions with Antero regarding the accelerated development of midstream infrastructure in the Western AOD including the addition of incremental compressor stations that would materially increase total Marcellus Shale gathering capacity by year end 2013. The potential for continued infrastructure development in the Western AOD illustrates the strength of Crestwood’s relationship with Antero and the long term organic growth potential for Crestwood’s Marcellus Shale position.