CRESTWOOD EQUITY PARTNERS LP Our Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the accompanying footnotes and Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K. This report, including information included or incorporated by reference herein, contains forward-looking statements concerning the financial condition, results of operations, plans, objectives, future performance and business of our company and its subsidiaries. These forward-looking statements include:
• statements that are not historical in nature, including, but not limited
to: (i) our belief that anticipated cash from operations, cash
distributions from entities that we control, and borrowing capacity under
our credit facility will be sufficient to meet our anticipated liquidity
needs for the foreseeable future; (ii) our belief that we do not have
material potential liability in connection with legal proceedings thatwould have a significant financial impact on our consolidated financial
condition, results of operations or cash flows; and (iii) our belief that
our assets will continue to benefit from the development of unconventional
shale plays as significant supply basins; and
• statements preceded by, followed by or that contain forward-looking
terminology including the words "believe," "expect," "may," "will,"
"should," "could," "anticipate," "estimate," "intend" or the negation
thereof, or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
• our ability to successfully implement our business plan for our assets and
operations;
• governmental legislation and regulations;
• industry factors that influence the supply of and demand for crude oil,
natural gas and NGLs;
• industry factors that influence the demand for services in the markets
(particularly unconventional shale plays) in which we provide services;
• weather conditions;
• outbreak of illness, pandemic or any other public health crisis, including
the COVID-19 pandemic;
• the availability of crude oil, natural gas and NGLs, and the price of
those commodities, to consumers relative to the price of alternative and
competing fuels;
• the availability of storage for hydrocarbons;
• the ability of members of the
Countries (OPEC) and other oil-producing countries to agree and maintain
oil price and production controls;
• economic conditions;
• costs or difficulties related to the integration of acquisitions and
success of our joint ventures' operations;
• environmental claims;
• operating hazards and other risks incidental to the provision of midstream
services, including gathering, compressing, treating, processing,
fractionating, transporting and storing energy products (i.e., crude oil,
NGLs and natural gas) and related products (i.e., produced water);
• interest rates;
• the price and availability of debt and equity financing, including our
ability to raise capital through alternatives like joint ventures; and
• the ability to sell or monetize assets, to reduce indebtedness, to
repurchase our equity securities, to make strategic investments, or for
other general partnership purposes.
For additional factors that could cause actual results to be materially
different from those described in the forward-looking statements, see Part I,
Item 1A. Risk Factors of our 2019 Annual Report on Form 10-K and Part II, Item
1A. Risk Factors of this Quarterly Report on Form 10-Q.
Outlook and Trends
Our business objective is to create long-term value for our unitholders. We
expect to create value for our investors by generating stable operating margins
and improving cash flows from our diversified midstream operations by prudently
financing investments in our assets and expansions of our portfolio, maximizing
throughput and optimizing services on our assets, and effectively controlling
our capital expenditures, operating and administrative costs.
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In the first quarter of 2020, during a period of growing global and US oil supplies,OPEC andRussia failed to agree on a plan to cut production of oil and related commodities to balance the global oil markets. Commensurate with this excess global oil supply market condition, the COVID-19 pandemic caused an unprecedented decrease in global oil demand. Subsequently,Saudi Arabia announced plans to increase production and reduce the prices at which they sell oil. WhileOPEC ,Russia ,the United States and other oil and gas producing countries subsequently agreed to collectively decrease production, these events, combined with the impact that the COVID-19 pandemic have contributed to a significant decrease and volatility in prices for oil. The effect of these events was further exacerbated by a shortage in available storage for hydrocarbons in theU.S. , which caused the prices for oil to further decrease dramatically in 2020. The resulting low commodity price environment has adversely impactedU.S. producers and other companies in the energy industry. Despite the recent decline in commodity prices and resulting market conditions, our long-term business strategy has not changed. We have, however, implemented a number of adjustments to our operations and financial strategies in response to these market conditions, including (i) substantially reducing capital expenditures in response to lower development activity by our gathering and processing customers; (ii) realigning our organization to reduce operating and administrative expenses; (iii) engaging with our customers to maintain volumes across our asset portfolio; (iv) optimizing our storage, transportation and marketing assets to take advantage of regional commodity price volatility; and (v) evaluating our debt and equity structure to preserve liquidity and ensure balance sheet strength during this period of uncertainty in the energy and financial markets. Given our efforts over the past few years to improve the partnership's competitive position in the businesses we operate, manage costs and improve margins, create a stronger balance sheet and implement new operating standards consistent with our Environmental, Social and Governance program, we believe the Company is well positioned to execute its business plan and weather current market conditions. In light of these events, we anticipate that the decrease in commodity prices will have a negative impact on certain of our gathering and processing segment's customers. We expect this to result in reduced production volumes in our oil-weighted basins over the next six months and negatively impact our short-term gathering and processing segment results. InJune 2020 , Chesapeake, our major customer in thePowder River Basin , filed for protection under Chapter 11 of theU.S. Bankruptcy Code and inJuly 2020 , Bruin, our major customer in the Bakken, filed for protection under Chapter 11 of theU.S. Bankruptcy Code. Chesapeake and Bruin were current on all amounts due to us as ofJune 30, 2020 and additional cash flow protection is in place with Chesapeake via letters of credit. We are well positioned to maintain full operations to Chesapeake and Bruin throughout their bankruptcy proceedings, and we are closely monitoring our exposure to ensure they continue to promptly pay amounts invoiced to them. We also believe that the natural gas, crude and NGL storage and marketing operations in our storage and transportation and marketing, supply and logistics segments could benefit from the current shortage in available storage for hydrocarbons in theU.S. and the price volatility in the commodity markets caused by the current supply and demand imbalances for crude oil and other commodities. In the current market environment, this could offset some portion of the negative impact of lower commodity prices on our gathering and processing segment, resulting in our expectation that our full year 2020 results of operations will be relatively consistent with our consolidated results of operations in 2019, excluding the impairment of goodwill associated with ourPowder River Basin operations described in further detail below.
Business Highlights
Below is a discussion of events that highlight our core business and financing activities. Through continued execution of our plan, we have materially improved the strategic and financial position of the Company and expect to capitalize on increasing opportunities in an improving but competitive market environment, which will position us to achieve our chief business objective to create long-term value for our unitholders. Bakken. In the Bakken, we completed several capital projects to expand natural gas capacity on the Arrow gas gathering system and upgrade our Arrow produced water gathering system, disposal wells and handling facilities, which should allow us to better serve our customer needs. We believe the expansion of our Arrow facilities, including the placing in service of the Bear Den II processing plant in late 2019, allows us to provide greater flow assurance to our producer customers and reduce the flaring of natural gas experienced by producers on theFort Berthold Indian Reservation . InJuly 2020 , aU.S. District Court ordered the Dakota Access Pipeline (DAPL) to shutdown due to environmental and permitting issues. OnAugust 5, 2020 , theU.S. Court of Appeals for the District of Columbia Circuit ordered that shutdown of DAPL be stayed and set an expedited schedule for briefing by the parties. The Court of Appeals did not stay the lower court's vacating of the DAPL easement, but asked the lower court to clarify whether theU.S. Army Corps of Engineers (theArmy Corps ) intends to allow the continued operation of DAPL.The Army Corps has stated that continued operation of DAPL if the easement is vacated will be subject to review by the federal courts. We are actively engaged with our producer customers on the Arrow system to ensure downstream market access for their crude oil volumes. The Arrow gathering system currently connects 49
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to the DAPL, Hiland and Tesoro pipelines, providing significant downstream delivery capacity for our Arrow customers. Additionally, we can transport Arrow crude volumes to our COLT Hub facility by pipeline or truck, which mitigates the impact to our producers with the ability to access multiple markets out of the basin. In response to several produced water releases on our Arrow system over the past few years, during 2019, we removed approximately 30 miles of water gathering pipeline from service. We plan to continue replacing certain sections of our water gathering system with pipeline composed of higher capacity material that is more suitable for the environment and climate conditions in the Bakken. This capital project will increase water gathering capacity on the Arrow system and further our commitment to sustainability and environmental stewardship on theFort Berthold Indian Reservation .Powder River Basin . In thePowder River Basin , during the first quarter of 2020, we completed the 200 MMcf/d expansion of our processing capacity at our Bucking Horse facility, which increased our processing capacity to 345 MMcf/d. In addition, we placed in-service two compressor stations with 18,750 horsepower and significantly expanded the gas gathering system to connect numerous wells that had been drilled and completed by our producer customers. Delaware Permian. In the Delaware Permian, through our Crestwood Permian joint venture, we are expanding our gas gathering systems and continue to optimize processing volumes at our Orla processing plant. Additionally, in the second quarter of 2020, we completed construction and commenced operations of a produced water gathering and salt water disposal system pursuant to an agreement with a large integrated producer inCulberson andReeves Counties,Texas . The system capacity is 60 MBbls/d as ofJune 30, 2020 with plans to expand up to 120 MBbls/d based on producer activity. Marketing, Supply and Logistics. InApril 2020 , we acquired several NGL storage and rail-to-truck LPG terminals from Plains for approximately$162 million . These assets are complementary to our existing NGL assets, are located in high demand markets across the central and easternUnited States and include 7 MMBbls of NGL storage and seven LPG terminals. As a result of the acquisition, we now have approximately 10 MMBbls of NGL and LPG storage capacity and 13 LPG terminals offering expanded propane and butane services to the market, as well as greater access to a wide range of NGL and LPG supplies from hubs, pipelines, refiners and processors. Regulatory Matters Our regulatory matters are discussed in our 2019 Annual Report on Form 10-K and there have been no material changes in those matters fromDecember 31, 2019 toJune 30, 2020 . Critical Accounting Estimates Our critical accounting estimates are consistent with those described in our 2019 Annual Report on Form 10-K. Below is an update of our critical accounting estimates related to goodwill, long-lived assets and equity method investments.
Our goodwill represents the excess of the amount we paid for a business over the fair value of the net identifiable assets acquired. We evaluate goodwill for impairment annually onDecember 31 , and whenever events indicate that it is more likely than not that the fair value of a reporting unit could be less than its carrying amount. This evaluation requires us to compare the fair value of each of our reporting units to its carrying value (including goodwill). If the fair value exceeds the carrying amount, goodwill of the reporting unit is not considered impaired. We estimate the fair value of our reporting units based on a number of factors, including discount rates, projected cash flows and the potential value we would receive if we sold the reporting unit. Estimating projected cash flows requires us to make certain assumptions as it relates to the future operating performance of each of our reporting units (which includes assumptions, among others, about estimating future operating margins and related future growth in those margins, contracting efforts and the cost and timing of facility expansions) and assumptions related to our customers, such as their future capital and operating plans and their financial condition. When considering operating performance, various factors are considered such as current and changing economic conditions and the commodity price environment, among others. Due to the imprecise nature of these projections and assumptions, actual results can and often do, differ from our estimates. If the assumptions embodied in the projections prove inaccurate, we could incur a future impairment charge. In addition, the use of the income approach to determine the fair value of our reporting units (see further discussion of the use of the income approach below) could result in a different fair value if we had utilized a market approach, or a combination thereof. 50
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The following table summarizes the goodwill of our various reporting units (in
millions):
Impairment
during the
six months ended
December 31, June 30, June 30,
2019 2020 2020
Gathering and Processing
Arrow $ 45.9 $ - $ 45.9
Powder River Basin 80.3 80.3 -
Marketing, Supply and Logistics
NGL Marketing and Logistics 92.7 - 92.7
Total $ 218.9 $ 80.3 $ 138.6
During the first quarter of 2020, current and forward commodity prices
significantly declined from their levels at December 31, 2019 due primarily to
the decreases in energy demand as a result of the outbreak of the COVID-19
pandemic and actions taken by the OPEC , Russia , the United States and other
oil-producing countries relating to the oversupply of oil. We currently
anticipate that the decrease in commodity prices will have a negative impact on
certain of our customers in our gathering and processing segment, which could
adversely impact the financial performance of certain of the reporting units
within those operations.
Upon acquisition, we are required to record the assets, liabilities and goodwill
of a reporting unit at its fair value on the date of acquisition. As a result,
any level of decrease in the forecasted cash flows of these businesses or
increases in the discount rates utilized to value those businesses from their
respective acquisition dates would likely result in the fair value of the
reporting unit falling below the carrying value of the reporting unit, and could
result in an assessment of whether that reporting unit's goodwill is impaired.
We acquired our Powder River Basin reporting unit in 2019 and recorded it at
fair value at that time. Based on the events that occurred during the first
quarter of 2020 described above, we determined that the forecasted cash flows,
and therefore the fair value of our Powder River Basin reporting unit
significantly decreased during the first quarter of 2020, and accordingly
performed a quantitative impairment assessment of the goodwill related to that
reporting unit during that period. Based on our quantitative assessment, which
utilized the income approach, we determined that the goodwill associated with
the Powder River Basin reporting unit should be fully impaired during the first
quarter of 2020, and accordingly recorded an $80.3 million impairment of the
goodwill attributed to that reporting unit during the first quarter of 2020.
We continue to monitor our goodwill associated with our Arrow and NGL Marketing
and Logistics reporting units, and if we receive additional negative information
about market conditions or the intent of our customers to further curtail
production, it could negatively impact the forecasted cash flows or discount
rates utilized to determine the fair value of those businesses. A 40% decrease
in the forecasted cash flows related to our Arrow and NGL Marketing and
Logistics reporting units would not have resulted in an impairment of either of
these reporting units. A 5% increase in the discount rate utilized to determine
the fair value of our Arrow and NGL Marketing and Logistics reporting units at
December 31, 2019 would also not have resulted in an impairment of either of
these reporting units. There were no triggers which required us to evaluate our
goodwill for impairment during the three months ended June 30, 2020 .
Long-Lived Assets
Our long-lived assets consist of property, plant and equipment and intangible
assets that have been obtained through multiple business combinations and
property, plant and equipment that has been constructed in recent years. We
continually monitor our business, the business environment and the performance
of our operations to determine if an event has occurred that indicates that a
long-lived asset may be impaired. If an event occurs, which is a determination
that involves judgment, we may be required to utilize cash flow projections to
assess our ability to recover the carrying value of our assets based on our
long-lived assets' ability to generate future cash flows on an undiscounted
basis.
Projected cash flows of our long-lived assets are generally based on current and
anticipated future market conditions, which require significant judgments to
make projections and assumptions about pricing, demand, competition, operating
costs, construction costs, legal and regulatory issues and other factors that
may extend many years into the future and are often outside of our control. If
those cash flow projections indicate that the long-lived asset's carrying value
is not recoverable, we record an
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impairment charge for the excess of the carrying value of the asset over its fair value. The estimate of fair value considers a number of factors, including the potential value we would receive if we sold the asset, discount rates and projected cash flows. Due to the imprecise nature of these projections and assumptions, actual results can and often do, differ from our estimates. During the first quarter of 2020, current and forward commodity prices significantly declined from their levels atDecember 31, 2019 due primarily to the decreases in energy demand as a result of the outbreak of the COVID-19 pandemic and actions taken by theOPEC ,Russia ,the United States and other oil-producing countries relating to the oversupply of oil. We currently anticipate that the decrease in commodity prices could have a negative impact on certain of our customers in our gathering and processing segment, which could adversely impact the financial performance of certain of the reporting units within those operations. Although we currently anticipate that the decline in commodity prices have not decreased the forecasted financial performance of our operations to where the undiscounted cash flows to be generated by our long-lived asset groups have fallen below the carrying value of those long-lived asset groups, we continue to monitor our long-lived assets, and we could experience impairments of the carrying value of our long-lived assets in the future if we receive additional negative information about market conditions or the intent of our long-lived assets' customers, which could negatively impact the forecasted cash flows utilized to determine the recoverability of those assets. As noted above, during the first quarter of 2020, we recorded an impairment of the goodwill associated with ourPowder River Basin reporting unit. The impairment of goodwill is different than our evaluation of the potential impairment of the long-lived assets of a reporting unit, because when we perform an assessment of the recoverability of goodwill, we utilize fair value estimates that primarily utilize discounted cash flows in the estimation process (as described above), and accordingly a reporting unit that has experienced a goodwill impairment may not experience a similar impairment of the underlying long-lived assets included in that reporting unit. Furthermore, a 40% decrease in the forecasted cash flows of ourPowder River Basin reporting unit would not have resulted in a long-lived asset impairment. As a result, we did not record any material impairments of our property, plant and equipment and intangible assets during the first quarter of 2020. There were no triggers which required us to evaluate our long-lived assets for impairment during the three months endedJune 30, 2020 .
Equity Method Investments
We evaluate our equity method investments for impairment when events or circumstances indicate that the carrying value of the equity method investment may be impaired and that impairment is other than temporary. If an event occurs, we evaluate the recoverability of our carrying value based on the fair value of the investment. If an impairment is indicated, we adjust the carrying values of the asset downward, if necessary, to their estimated fair values. We estimate the fair value of our equity method investments based on a number of factors, including discount rates, projected cash flows, enterprise value and the potential value we would receive if we sold the equity method investment. Estimating projected cash flows requires us to make certain assumptions as it relates to the future operating performance of each of our equity method investments (which includes assumptions, among others, about estimating future operating margins and related future growth in those margins, contracting efforts and the cost and timing of facility expansions) and assumptions related to our equity method investments' customers, such as their future capital and operating plans and their financial condition. When considering operating performance, various factors are considered such as current and changing economic conditions and the commodity price environment, among others. Due to the imprecise nature of these projections and assumptions, actual results can and often do, differ from our estimates. During the first quarter of 2020, current and forward commodity prices significantly declined from their levels atDecember 31, 2019 due primarily to the decreases in energy demand as a result of the outbreak of the COVID-19 pandemic and actions taken by theOPEC ,Russia ,the United States and other oil-producing countries relating to the over supply of oil. We currently anticipate that the decrease in commodity prices could have a negative impact on certain of the customers of our equity-method investments, which could adversely impact the financial performance of certain of those investments. Although we currently anticipate that the decline in commodity prices has not decreased the fair value of our equity investments below their carrying value and any such decline would not be considered other than temporary, we continue to monitor our equity method investments (especially those with gathering and processing operations such as our Crestwood Permian equity method investment). If we receive additional negative information about market conditions or the intent of our equity method investments' customers to curtail production in the future that negatively impacts the forecasted cash flows or discount rates utilized to determine the fair value of those investments, we could experience impairments to the carrying value of these investments. Our equity method investments have long-lived assets, intangible assets, goodwill and equity method investments in their underlying financial statements, and our equity investees apply similar accounting policies and have similar critical accounting estimates in assessing those assets for impairment as we do. During the first quarter of 2020, we recorded a$4.5 million 52
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reduction to the equity earnings from our PRBIC equity method investment as a result of us recording our proportionate share of a long-lived asset impairment recorded by the equity method investment. The carrying value of our PRBIC equity method investment was$3.8 million atJune 30, 2020 . None of our other equity method investments recorded any material impairments during the three and six months endedJune 30, 2020 .
How We Evaluate Our Operations
We evaluate our overall business performance based primarily on EBITDA and Adjusted EBITDA. We do not utilize depreciation, amortization and accretion expense in our key measures because we focus our performance management on cash flow generation and our assets have long useful lives.
EBITDA and Adjusted EBITDA - We believe that EBITDA and Adjusted EBITDA are
widely accepted financial indicators of a company's operational performance and
its ability to incur and service debt, fund capital expenditures and make
distributions. We believe that EBITDA and Adjusted EBITDA are useful to our
investors because it allows them to use the same performance measure analyzed
internally by our management to evaluate the performance of our businesses and
investments without regard to the manner in which they are financed or our
capital structure. EBITDA is defined as income before income taxes, plus
interest and debt expense, net and depreciation, amortization and accretion
expense. Adjusted EBITDA considers the adjusted earnings impact of our
unconsolidated affiliates by adjusting our equity earnings or losses from our
unconsolidated affiliates to reflect our proportionate share (based on the
distribution percentage) of their EBITDA, excluding impairments. Adjusted EBITDA
also considers the impact of certain significant items, such as unit-based
compensation charges, gains or losses on long-lived assets, impairments of
goodwill, third party costs incurred related to potential and completed
acquisitions, certain environmental remediation costs, the change in fair value
of commodity inventory-related derivative contracts, costs associated with the
realignment and restructuring of our operations, and other transactions
identified in a specific reporting period. The change in fair value of commodity
inventory-related derivative contracts is considered in determining Adjusted
EBITDA given that the timing of recognizing gains and losses on these derivative
contracts differs from the recognition of revenue for the related underlying
sale of inventory to which these derivatives relate. Changes in the fair value
of other derivative contracts is not considered in determining Adjusted EBITDA
given the relatively short-term nature of those derivative contracts. EBITDA and
Adjusted EBITDA are not measures calculated in accordance with GAAP, as they do
not include deductions for items such as depreciation, amortization and
accretion, interest and income taxes, which are necessary to maintain our
business. EBITDA and Adjusted EBITDA should not be considered as alternatives to
net income, operating cash flow or any other measure of financial performance
presented in accordance with GAAP. EBITDA and Adjusted EBITDA calculations may
vary among entities, so our computation may not be comparable to measures used
by other companies.
See our reconciliation of net income to EBITDA and Adjusted EBITDA in Results of
Operations below.
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The following tables summarize our results of operations for the three and six
months ended
Crestwood Equity Crestwood Midstream
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2020 2019 2020 2019 2020 2019 2020 2019 Revenues
$ 352.7 $ 683.4 $ 1,080.6 $ 1,518.6 $ 352.7 $ 683.4 $ 1,080.6 $ 1,518.6 Costs of product/services sold 225.7 537.2 760.1 1,232.8 225.7 537.2 760.1 1,232.8 Operations and maintenance expense 31.6 34.7 69.2 63.3 31.6 34.7 69.2 63.3 General and administrative expense 29.5 22.3 44.4 59.5 28.4 20.9 41.9 56.9 Depreciation, amortization and accretion 61.0 49.3 117.1 89.1 64.6 52.7 124.2 96.1 Loss on long-lived assets, net 3.8 - 4.8 2.0 3.8 - 4.8 2.0 Gain on acquisition - 209.4 - 209.4 - 209.4 - 209.4 Goodwill impairment - - 80.3 - - - 80.3 - Operating income (loss) 1.1 249.3 4.7 281.3 (1.4 ) 247.3 0.1 276.9 Earnings from unconsolidated affiliates, net 8.4 3.7 13.9 10.6 8.4 3.7 13.9 10.6 Interest and debt expense, net (34.0 ) (27.8 ) (66.6 ) (52.7 ) (34.0 ) (27.8 ) (66.6 ) (52.7 ) Other income, net 0.1 0.1 0.2 0.2 - - - - (Provision) benefit for income taxes 0.1 (0.3 ) 0.1 (0.3 ) 0.2 (0.3 ) 0.2 (0.3 ) Net income (loss) (24.3 ) 225.0 (47.7 ) 239.1 (26.8 ) 222.9 (52.4 ) 234.5 Add: Interest and debt expense, net 34.0 27.8 66.6 52.7 34.0 27.8 66.6 52.7 Provision (benefit) for income taxes (0.1 ) 0.3 (0.1 ) 0.3 (0.2 ) 0.3 (0.2 ) 0.3 Depreciation, amortization and accretion 61.0 49.3 117.1 89.1 64.6 52.7 124.2 96.1 EBITDA 70.6 302.4 135.9 381.2 71.6 303.7 138.2 383.6 Unit-based compensation charges 13.6 11.3 9.2 28.6 13.6 11.3 9.2 28.6 Loss on long-lived assets, net 3.8 - 4.8 2.0 3.8 - 4.8 2.0 Gain on acquisition - (209.4 ) - (209.4 ) - (209.4 ) - (209.4 ) Goodwill impairment - - 80.3 - - - 80.3 - Earnings from unconsolidated affiliates, net (8.4 ) (3.7 ) (13.9 ) (10.6 ) (8.4 ) (3.7 ) (13.9 ) (10.6 ) Adjusted EBITDA from unconsolidated affiliates, net 17.9 14.0 37.2 33.6 17.9 14.0 37.2 33.6 Change in fair value of commodity inventory-related derivative contracts 21.5 3.7 15.7 4.8 21.5 3.7 15.7 4.8 Significant transaction and environmental related costs and other items 8.8 3.0 10.0 6.4 8.8 3.0 10.0 6.4 Adjusted EBITDA$ 127.8 $ 121.3 $ 279.2 $ 236.6 $ 128.8 $ 122.6 $ 281.5 $ 239.0 54
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Crestwood Equity Crestwood Midstream
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2020 2019 2020 2019 2020 2019 2020 2019
Net cash provided by
operating activities $ 64.2 $ 63.0 $ 183.4 $ 193.9 $ 65.3 $ 64.2 $ 181.1 $ 195.1
Net changes in
operating assets and
liabilities (7.7 ) 17.8 (11.4 ) (35.0 ) (7.7 ) 18.0 (6.5 ) (33.9 )
Amortization of
debt-related deferred
costs (1.6 ) (1.5 ) (3.2 ) (2.9 ) (1.6 ) (1.5 ) (3.2 ) (2.9 )
Interest and debt
expense, net 34.0 27.8 66.6 52.7 34.0 27.8 66.6 52.7
Unit-based compensation
charges (13.6 ) (11.3 ) (9.2 ) (28.6 ) (13.6 ) (11.3 ) (9.2 ) (28.6 )
Loss on long-lived
assets, net (3.8 ) - (4.8 ) (2.0 ) (3.8 ) - (4.8 ) (2.0 )
Gain on acquisition - 209.4 - 209.4 - 209.4 - 209.4
Goodwill impairment - - (80.3 ) - - - (80.3 ) -
Earnings from
unconsolidated
affiliates, net,
adjusted for cash
distributions received (0.9 ) (3.0 ) (5.4 ) (6.3 ) (0.9 ) (3.0 ) (5.4 ) (6.3 )
Deferred income taxes 0.1 (0.1 ) 0.3 (0.3 ) 0.1 (0.2 ) 0.1 (0.2 )
Provision (benefit) for
income taxes (0.1 ) 0.3 (0.1 ) 0.3 (0.2 ) 0.3 (0.2 ) 0.3
EBITDA 70.6 302.4 135.9 381.2 71.6 303.7 138.2 383.6
Unit-based compensation
charges 13.6 11.3 9.2 28.6 13.6 11.3 9.2 28.6
Loss on long-lived
assets, net 3.8 - 4.8 2.0 3.8 - 4.8 2.0
Gain on acquisition - (209.4 ) - (209.4 ) - (209.4 ) - (209.4 )
Goodwill impairment - - 80.3 - - - 80.3 -
Earnings from
unconsolidated
affiliates, net (8.4 ) (3.7 ) (13.9 ) (10.6 ) (8.4 ) (3.7 ) (13.9 ) (10.6 )
Adjusted EBITDA from
unconsolidated
affiliates, net 17.9 14.0 37.2 33.6 17.9 14.0 37.2 33.6
Change in fair value of
commodity
inventory-related
derivative contracts 21.5 3.7 15.7 4.8 21.5 3.7 15.7 4.8
Significant transaction
and environmental
related costs and other
items 8.8 3.0 10.0 6.4 8.8 3.0 10.0 6.4
Adjusted EBITDA $ 127.8 $ 121.3 $ 279.2 $ 236.6 $ 128.8 $ 122.6 $ 281.5 $ 239.0
Segment Results
The following table summarizes the EBITDA of our segments (in millions):
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019
Gathering and Storage and Marketing, Supply and Gathering and Storage and Marketing, Supply and
Processing Transportation Logistics Processing Transportation Logistics
Revenues $ 114.5 $ 3.1 $ 235.1 $ 199.7 $ 4.9 $ 478.8
Intersegment revenues 14.3 2.4 (16.7 ) 25.4 3.2 (28.6 )
Costs of
product/services sold 21.3 0.1 204.3 108.9 - 428.3
Operations and
maintenance expenses 19.3 0.7 11.6 24.6 0.9 9.2
Loss on long-lived
assets, net (3.6 ) - (0.2 ) (0.2 ) - -
Gain on acquisition - - - 209.4 - -
Earnings (loss) from
unconsolidated
affiliates, net (1.0 ) 9.4 - (2.8 ) 6.5 -
EBITDA $ 83.6 $ 14.1 $ 2.3 $ 298.0 $ 13.7 $ 12.7
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Six Months Ended Six Months Ended
June 30, 2020 June 30, 2019
Gathering and Storage and Marketing, Supply and Gathering and Storage and Marketing, Supply
Processing Transportation Logistics Processing Transportation and Logistics
Revenues $ 329.4 $ 6.6 $ 744.6 $ 382.0 $ 12.7 $ 1,123.9
Intersegment revenues 54.3 5.0 (59.3 ) 78.2 6.8 (85.0 ) Costs of product/services sold 129.6 0.3 630.2 246.9 -
985.9
Operations and maintenance expenses 46.3 2.1 20.8 42.7 1.9
18.7
Loss on long-lived assets, net (4.6 ) - (0.2 ) (2.0 ) - (0.2 ) Goodwill impairment (80.3 ) - - - - - Gain on acquisition - -
- 209.4 - -
Earnings (loss) from
unconsolidated
affiliates, net (0.2 ) 14.1 - (3.0 ) 13.6 -
EBITDA $ 122.7 $ 23.3 $ 34.1 $ 375.0 $ 31.2 $ 34.1
Below is a discussion of the factors that impacted EBITDA by segment for the
three and six months ended
Gathering and Processing
EBITDA for our gathering and processing segment decreased by approximately$214.4 million and$252.3 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019. The comparability of our gathering and processing segment's EBITDA during the six months endedJune 30, 2020 was impacted by an$80.3 million goodwill impairment related to our Jackalope operations. In addition, our gathering and processing segment's EBITDA for the three and six months endedJune 30, 2019 was impacted by a$209.4 million gain related to the acquisition of the remaining 50% equity interest in Jackalope. For a further discussion of these transactions, see "Critical Accounting Estimates" above and Item 1. Financial Statements, Notes 2 and 3. Our gathering and processing segment's revenues decreased by approximately$96.3 million and$76.5 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, while our costs of product/services sold decreased by approximately$87.6 million and$117.3 million during those same periods. These decreases were primarily due to declines in commodity prices experienced during 2020 compared to 2019, which impacted the average prices that our gathering and processing segment realized on its agreements under which it purchases and sells crude oil and natural gas during the three and six months endedJune 30, 2020 compared to the same periods in 2019. During the three months endedJune 30, 2020 , our revenues decreased more than our costs of product/services sold as a result of the producer customers in the oil-weighted basins in which we operate deciding to electively shut-in production due to recent declines in commodity prices and resulting market conditions. During the three months endedJune 30, 2020 , natural gas, crude oil and water volumes gathered by our Arrow system decreased by 24%, 33%, and 18%, respectively, compared to the three months endedMarch 31, 2020 . In addition, during the three months endedJune 30, 2020 , natural gas volumes gathered and processed by our Jackalope system decreased by 41% and 38% compared to the three months endedMarch 31, 2020 . We anticipate that many of our gathering and processing segment's producer customers will bring a portion of the shut-in production back online during the third quarter of 2020, and certain customers began the process of bringing shut-in production back online in late second quarter of 2020. During the six months endedJune 30, 2020 , our costs of product/services sold decreased faster than our revenues primarily as a result of Arrow placing in service a 120 MMcf/d cryogenic plant inAugust 2019 , which resulted in a 196%, 36%, 19% and 36% increase in natural gas processing volumes and natural gas, crude oil and water gathering volumes during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . In addition, inApril 2019 , Crestwood Niobrara acquired the remaining 50% equity interest in Jackalope from Williams and we began consolidating Jackalope's results, which partially offset the decrease in revenues experienced related to the decline in commodity prices and producer shut-ins described above.
Our gathering and processing segment's operations and maintenance expenses
decreased by approximately
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months endedJune 30, 2020 , our gathering and processing segment's operations and maintenance expenses increased by approximately$3.6 million compared to the same period in 2019, primarily due to the acquisition of the remaining 50% equity interest in Jackalope inApril 2019 as well as placing into service the Bear Den and Bucking Horse processing plants into service during 2019 and early 2020. Our gathering and processing segment's EBITDA for the three and six months endedJune 30, 2020 was also impacted by a loss on long-lived assets of approximately$3.6 million and$4.6 million , primarily related to the retirement of certain water gathering lines on our Arrow system. During the six months endedJune 30, 2019 , we recorded a loss on long-lived assets of approximately$2.0 million , primarily related to the retirement and disposal of our Granite Wash gathering and processing assets. Our gathering and processing segment's EBITDA was also impacted by an increase in earnings from unconsolidated affiliates of approximately$1.8 million and$2.8 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019. During the three and six months endedJune 30, 2020 , we recorded an equity loss of approximately$1.0 million and$0.2 million related to our Crestwood Permian equity investment. During the three months endedJune 30, 2020 , Crestwood Permian's revenues and costs of products sold decreased compared to the three months endedMarch 31, 2020 as its gathering and processing volumes from its Orla andWillow Lake gathering and processing systems decreased by 35% and 26%, respectively, as a result of its producer customers shutting in production in response to the recent decline in commodity prices. Crestwood Permian's major customer in the Delaware Permian began bringing shut-in production back online in lateJune 2020 . During the three and six months endedJune 30, 2019 , we recorded an equity loss of approximately$3.3 million and$6.7 million related to our Crestwood Permian equity investment. During the first half of 2019, Crestwood Permian experienced lower average margin on certain of its gathering contracts due to higher transportation and fractionation fees resulting in lower revenues. In addition, Crestwood Permian recorded a loss on the retirement of certain of its gathering and processing assets during the three and six months endedJune 30, 2019 . Equity earnings from our Jackalope equity investment decreased by approximately$0.5 million and$3.7 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, due to the acquisition of the remaining 50% equity interest in Jackalope from Williams inApril 2019 .
EBITDA for our storage and transportation segment increased by$0.4 million during the three months endedJune 30, 2020 compared to the same period in 2019, while we experienced a decrease in EBITDA of approximately$7.9 million during the six months endedJune 30, 2020 compared to the same period in 2019. Revenues from our COLT Hub operations decreased by approximately$2.6 million and$7.9 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019. The decrease in revenues from our COLT Hub operations during the three and six months endedJune 30, 2020 compared to the same periods in 2019 was primarily due to the decline in demand for rail loading services which resulted in a decrease of 33% and 15%, respectively, in rail loading volumes during those periods. During the six months endedJune 30, 2019 , we recognized approximately$4.9 million of revenues under a take-or-pay contract with one of our rail loading customers which expired in 2019. In addition, in late 2019 and early 2020, we renewed several rail loading and storage contracts at lower rates resulting in lower revenues during the six months endedJune 30, 2020 compared to the same period in 2019.
Our storage and transportation segment's costs of product/services sold and
operations and maintenance expenses were relatively flat during the three and
six months ended
Our storage and transportation segment's EBITDA was also impacted by a net increase in earnings from unconsolidated affiliates during the three and six months endedJune 30, 2020 compared to the same periods in 2019. Earnings from ourStagecoach Gas equity investment increased by approximately$2.8 million and$5.0 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, primarily due to our share of its equity earnings increasing from 40% to 50% effectiveJuly 1, 2019 . Aside from this change in earnings percentage, our earnings from ourStagecoach Gas equity investment were relatively flat. This was due to demand for the natural gas storage and transportation services provided byStagecoach Gas being relatively flat given that the Northeast market for natural gas in whichStagecoach Gas operates is experiencing declining natural gas prices and basis differentials, offset by an increase in producer activity and lack of new infrastructure being built, which is keeping the demand forStagecoach Gas's storage and transportation services relatively stable. Earnings from our PRBIC equity investment decreased by approximately$4.3 million during the six months endedJune 30, 2020 compared to the same period in 2019. During the first quarter of 2020, we recorded a$4.5 million reduction in equity earnings from PRBIC to reflect our proportionate share of a long-lived asset impairment recorded by our PRBIC equity investment. 57
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Marketing, Supply and Logistics
EBITDA for our marketing, supply and logistics segment decreased by approximately$10.4 million during the three months endedJune 30, 2020 compared to the same period in 2019, while our EBITBA for the six months endedJune 30, 2020 was flat compared to the same period in 2019. Our marketing supply and logistics segment's revenues decreased by approximately$231.8 million and$353.6 million during the three and six months endedJune 30, 2020 , while our costs of product/services sold decreased by approximately$224.0 million and$355.7 million during those same periods. Our crude and natural gas marketing operations experienced a decrease in its revenues of approximately$190.1 million and$229.1 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, and a decrease in its products costs of approximately$188.9 million and$225.5 million during those same periods. These decreases were driven by lower average sales prices to our customers due to lower commodity prices, partially offset by higher crude marketing volumes due to increased marketing activity surrounding our crude-related operations as a result of greater volatility in crude prices experienced during the three and six months endedJune 30, 2020 . Our NGL marketing and logistics operations experienced a reduction in revenues of approximately$41.7 million and$124.5 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, and a decrease in its costs of product/services sold of approximately$35.1 million and$130.2 million during those same periods. These decreases were primarily driven by declining NGL prices. During the first half of 2020, NGL prices decreased due to a combination of decreases in overall commodity prices, high NGL production and constrained NGL infrastructure. Our NGL marketing and logistics operations' costs of product/services sold decreased more than its revenues during the six months endedJune 30, 2020 due to an increase in our NGL marketing activity, as we continued to take advantage of market disruptions and low NGL prices to create strong margin for delivery into forward markets, and the constrained NGL infrastructure increased demand for our storage, terminalling and transportation assets. Included in our costs of product/services sold was a gain of$6.8 million and$28.8 million during the three and six months endedJune 30, 2020 , and a gain of$9.9 million and$7.0 million during the three and six months endedJune 30, 2019 related to our price risk management activities. Our marketing, supply and logistics operations and maintenance expenses increased by approximately$2.4 million and$2.1 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, primarily due to the acquisition of several NGL storage and rail-to-truck LPG terminals from Plains inApril 2020 . Other EBITDA Results General and Administrative Expenses. During the three months endedJune 30, 2020 , our general and administrative expenses increased by approximately$7 million compared to the same period in 2019, primarily due to costs related to restructuring our operations in response to the recent decline in commodity prices. During the six months endedJune 30, 2020 , our general and administrative expenses decreased by approximately$15 million compared to the same period in 2019. During the six months endedJune 30, 2020 , we were allocated less unit-based compensation charges fromCrestwood Holdings as a result of the impact of the decrease in the market price forCrestwood Equity's common units.
Items not affecting EBITDA include the following:
Depreciation, Amortization and Accretion Expense. During the three and six months endedJune 30, 2020 , our depreciation, amortization and accretion expensed increased by approximately$12 million and$28 million compared to the same periods in 2019, primarily due to the acquisition of the remaining 50% equity interest in Jackalope inApril 2019 and the acquisition of NGL storage and terminalling assets from Plains inApril 2020 . In addition, we placed in-service the expansion of our processing capacity at our Bucking Horse processing facility in the first quarter of 2020 and placed into service the Bear Den II processing plant on our Arrow system in late 2019. Interest and Debt Expense, Net. Interest and debt expense, net increased by approximately$6.2 million and$13.9 million during the three and six months endedJune 30, 2020 compared to the same periods in 2019, primarily due to the issuance of$600 million unsecured senior notes due 2027 inApril 2019 . In addition, our capitalized interest was higher during the three and six months endedJune 30, 2019 , compared to the same periods in 2020 due to the timing of growth capital projects primarily in the Bakken andPowder River Basin . 58
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The following table provides a summary of interest and debt expense (in
millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Credit facility $ 6.1 $ 5.7 $ 12.5 $ 13.6
Senior notes 26.5 25.2 53.1 43.3
Other debt-related costs 1.8 1.6 3.6 3.2
Gross interest and debt expense 34.4 32.5 69.2 60.1
Less: capitalized interest 0.4 4.7 2.6
7.4
Interest and debt expense, net$ 34.0 $ 27.8 $ 66.6
Liquidity and Sources of Capital
Crestwood Equity is a holding company that derives all of its operating cash flow from its operating subsidiaries. Our principal sources of liquidity include cash generated by operating activities from our subsidiaries, distributions from our joint ventures, borrowings under theCrestwood Midstream credit facility, and sales of equity and debt securities. Our equity investments use cash from their respective operations to fund their operating activities, maintenance and growth capital expenditures, and service their outstanding indebtedness. The COVID-19 pandemic's impact on global crude oil demand and corresponding supply and demand imbalances have created significant near-term challenges for the energy industry including record low commodity prices, production declines and temporary shut-ins for producers in every major basin acrossNorth America . We are aggressively responding to these extraordinary market events by canceling or delaying capital projects, substantially reducing operating and administrative costs, optimizing our storage assets and working closely with our customers to maintain volumes across our diversified asset portfolio. Through these steps, combined with the steps we have taken over the past few years, we believe our liquidity sources and operating cash flows are sufficient to address our future operating, debt service and capital requirements. We make quarterly cash distributions to our common unitholders within approximately 45 days after the end of each fiscal quarter in an aggregate amount equal to our available cash for such quarter. We also pay quarterly cash distributions of approximately$15 million to our preferred unitholders and quarterly cash distributions of approximately$9 million to Crestwood Niobrara's non-controlling partner. We believe our operating cash flows will exceed cash distributions to our partners, preferred unitholders and non-controlling partner, and as a result, we will have adequate operating cash flows as a source of liquidity for our growth capital expenditures. OnJuly 16, 2020 , we declared a quarterly cash distribution of$0.625 per unit to our common unitholders, which will be paid onAugust 14, 2020 and was consistent with the distribution paid inMay 2020 . Based on the impact that the recent decline in commodity prices has had and could continue to have on our customers and our financial performance in future quarters, our Board of Directors will be evaluating the level of distributions to our common and preferred unitholders. The Board of Directors will consider a wide range of strategic, commercial, operational and financial factors, including current and projected operating cash flows and liquidity needs and the potential adverse impact of future distribution reductions on our common unitholders, including our general partner. The evaluation will also include a review of the potential for an event of default of the debt ofCrestwood Holdings , which could result in a change in control atCrestwood Holdings and, accordingly, in us, which is further described in Part II, Item 1A. Risk Factors. As ofJune 30, 2020 , we had$424.9 million of available capacity under theCrestwood Midstream credit facility considering the most restrictive debt covenants in the credit agreement. As ofJune 30, 2020 , we were in compliance with all of our debt covenants applicable to the credit facility and senior notes. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 59
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The following table provides a summary of
Six Months Ended
June 30,
2020 2019
Net cash provided by operating activities
Operating Activities
Our operating cash flows decreased by approximately$10.5 million during the six months endedJune 30, 2020 compared to the same period in 2019. During the six months endedJune 30, 2020 , our operating revenues decreased by approximately$438.0 million , while our costs of product services/sold decreased by approximately$472.7 million compared to the same period in 2019. These decreases were primarily driven by our marketing, supply and logistics segment's and gathering and processing segment's operations as discussed in Results of Operations above. We also experienced an increase in our operations and maintenance expenses of approximately$5.9 million during the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to the acquisition of the remaining 50% equity interest in Jackalope inApril 2019 and the acquisition of NGL assets from Plains inApril 2020 . Our interest and debt expense, net increased by approximately$13.9 million during the six months endedJune 30, 2020 compared to the same period in 2019 primarily due to the issuance of$600 million of senior notes inApril 2019 . In addition, the decrease in net operating cash flows was also impacted by a$23.6 million reduction in net cash inflow from working capital requirements, primarily from our marketing, supply and logistics operations.
Investing Activities
Capital Expenditures. The energy midstream business is capital intensive, requiring significant investments for the acquisition or development of new facilities. We categorize our capital expenditures as either:
• growth capital expenditures, which are made to construct additional assets,
expand and upgrade existing systems, or acquire additional assets; or
• maintenance capital expenditures, which are made to replace partially or
fully depreciated assets, to maintain the existing operating capacity of
our assets, extend their useful lives or comply with regulatory
requirements.
As a part of our strategic plan to address the current downturn in commodity
prices, we have reduced our projection of growth capital expenditures to
approximately $140 million to $160 million for 2020, and our projection of
maintenance capital expenditures to approximately $10 million to $15 million and
reimbursable capital expenditures to $15 million and $25 million , respectively
for 2020. Our growth capital expenditures for the remainder of the year will be
primarily focused on completing in-progress water and gas gathering and
processing projects and well connections. We expect to finance our capital
expenditures with a combination of cash generated by our operating subsidiaries,
distributions received from our equity investments and borrowings under our
credit facility. The following table summarizes our capital expenditures for the
six months ended June 30, 2020 (in millions):
Growth capital $ 127.2
Maintenance capital 6.4
Other (1) 9.6
Purchases of property, plant and equipment
(1) Represents purchases of property, plant and equipment that are reimbursable by third parties.
Acquisitions. InApril 2020 , we acquired several NGL storage and rail-to-truck LPG terminals from Plains for approximately$162 million . InApril 2019 , Crestwood Niobrara acquired the remaining 50% equity interest in Jackalope from Williams for approximately$462 million , net of cash acquired. For a further discussion of these acquisitions, see Item 1. Financial Statements, Note 3. 60
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Investments in Unconsolidated Affiliates. During the six months endedJune 30, 2020 and 2019, we contributed approximately$6.0 million and$6.5 million to ourTres Palacios and PRBIC equity investments for their operating purposes. During the six months endedJune 30, 2019 , we contributed approximately$10.0 million to our Crestwood Permian equity investment primarily to fund its expansion projects and also contributed$24.4 million to our Jackalope equity investment prior to our acquisition of the remaining 50% equity interest in Jackalope from Williams, and this contribution was primarily utilized by us after Jackalope's consolidation to fund its growth capital expenditures.
Financing Activities
The following equity and debt transactions impacted our financing activities
during the six months ended
Equity and Debt Transactions
• During the six months ended
increased by
due to the increase in our distribution per limited partner unit from
$0.60 per limited partner unit to $0.625 per limited partner unit;
• During the six months ended
paid cash distributions of
non-controlling partner. In addition, during the six months ended
2020, Crestwood Niobrara received contributions of
non-controlling partner;
• During the six months ended
million in new Series A-3 Preferred Units to Jackalope Holdings in
conjunction with Crestwood Niobrara's acquisition of the remaining 50%
equity interest in Jackalope from Williams. For a further discussion of
this transaction, see Item 1. Financial Statements, Note 10;
• During the six months ended
compensation vesting increased by
in 2019, primarily due to higher vesting of unit-based compensation
awards; and
• During the six months ended
resulted in net proceeds of approximately $244.3 million compared to net
proceeds of $375.5 million during the six months ended June 30, 2019 .
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