As we all know by now, it’s the midstream sector of the natural gas industry that is driving forward much of the activity in America’s energy sector, fed by the tax advantages offered through master limited partnerships. They come in all sizes, shapes and mixtures of businesses, which can often change on a moment’s notice or at an executive’s whim.
Today one of the most active midstream players is Inergy Midstream, LLC, a subsidiary of Inergy L.P. headquartered in Kansas City, MO. Inergy boasts of having the largest independent natural gas and LPG storage operations in the Northeast and also owns a unique solution mining and evaporative salt production company. Those efforts are strategically located atop the growing Marcellus Shale play in upstate New York. Inergy is among the nation’s fastest growing MLPs.
Another key component of Inergy’s business portfolio is propane. As the fourth-largest retail propane distribution company, it serves 800,000 customers from more than 300 customer service centers in 32 states.
William R. Moler is senior vice president of natural gas midstream operations for Inergy Midstream. He joined Inergy in 2004 as director of midstream operations and was promoted to senior vice president in 2007. Prior to joining Inergy, Bill held senior level positions with Westport Resources Corporation and Kinder Morgan. He received a B.S. in Mechanical Engineering from Texas Tech University. In an interview, he discussed the company’s growth and its energy strategies.
P&GJ: When was Inergy formed and how has it grown since its start-up?
Moler: Inergy was formed in 1996 by John Sherman, president and CEO of Inergy, and other members of its management team. Inergy, L.P. went public in July 2001 and has significantly expanded its operations to an enterprise value of over $3.5 billion today. Inergy has grown through the acquisition of 80 retail propane companies and six midstream businesses as well as through organic expansion projects in its midstream businesses.
P&GJ: How did Inergy get into the propane business and is this a profitable market today?
Moler: John Sherman and several other founding executives are propane industry veterans and in 1996, they set out to create one of the most profitable retail propane companies in the U.S. The retail propane market is highly fragmented, with less than 40% of the U.S. market share in the hands of the top 10 propane retailers. Inergy has been able to generate stable, recurring cash flows in a variety of operating environments and its financial and operational metrics lead the propane industry peer group.
P&GJ: What is Inergy’s strategy for its midstream assets? Is Inergy a classic example of a midstream energy company developing its own unique array of assets that its managers have found to be profitable?
Moler: Inergy’s strategy of diversifying its operations into the midstream energy sector has been very successful and has generated a second platform from which Inergy can grow its business. Inergy’s natural gas storage and transportation assets are uniquely situated within 200 miles of New York City and are or will be connected to the four major pipelines that deliver energy into the Northeast which is the largest and arguably the best demand market in the country.
Inergy has grown its operations through the acquisition and expansion of its asset base in an effort to develop an integrated gas storage and transportation hub in the Northeast, which serves to ensure the efficient and cost-effective supply of natural gas to customers in the northeast markets. Inergy’s storage capacity is 100% contracted under long-term agreements with its customers and its expansion projects have repeatedly met with overwhelmingly strong demand for services.
P&GJ: As the largest independent gas and LPG storage operator in the Northeast, what brought Inergy into that region, and what does the future look like, especially in the Marcellus Shale?
Moler: Inergy entered the Northeast market with the acquisition of the Stagecoach natural gas storage facility in 2005 as a way to grow and further diversify its cash flows in the midstream sector. Inergy has been successful in growing its storage capacity by over 200% since that initial acquisition. The development of the Marcellus Shale has steadily increased the interest and value in its storage and transportation assets in a region that critically needs energy infrastructure to efficiently allow the Marcellus to proliferate. Due to its existing footprint in the region, Inergy has a first-mover advantage in facilitating the build out of this necessary infrastructure and the outlook for these opportunities are very attractive.
P&GJ: What are some challenges involved in developing the Marcellus Shale? What is your view of the future for energy development in upstate New York which has been economically depressed for many years?
Moler: The major challenge to developing the Marcellus Shale is the state of the regulatory and political environment in the U.S., and in particular, the state of New York. Regulators in New York have been slow to approve energy infrastructure projects and embrace the economic opportunities this development will bring to the state. Inergy has proposals in the hands of state regulatory officials in New York that will not only create construction jobs in the near term, but also long-term employment opportunities in upstate New York, which is a region starving for economic stimulus. The development of the Marcellus Shale would provide both jobs in the region and an opportunity to bridge state and local budget deficits without additional crippling tax levies.
P&GJ: What are some of the recent, ongoing and future projects that Inergy has been involved with and how does that follow overall energy strategy?
Moler: Inergy is investing substantial capital in its midstream storage and transportation projects in the Northeast. In November 2009, Inergy placed the 7 Bcf Thomas Corners natural gas storage facility in service. In January, it announced the acquisition of Seneca Lake Gas Storage which will provide an additional 2 Bcf of gas storage to Inergy’s portfolio of assets. Inergy also has the ability – through development of existing cavern space at its US Salt facility in Watkins Glen, NY – for an additional 10 Bcf of storage, bringing the total capacity to 52 Bcf.
In addition to the storage expansions, the North-South project and the 43 mile, 30-inch Marc I Hub Line project that Inergy has proposed will connect all 52 Bcf of storage capacity to the four major natural gas transportation pipelines into the Northeast: Transco, Tennessee Gas Pipeline, Millennium, and Dominion. This platform will have access to the major supply basins in North America such as Gulf Coast gas, Canadian gas, Rockies gas and indigenous Marcellus gas supply. The supply through Inergy’s asset base will be connected to storage with the flexible and redundant delivery to any of the four major pipes into the demand centers in the Northeast.
P&GJ: How did Inergy develop its expertise in the salt business, and does this include uses besides natural gas and LPG storage? What is the market for LPG today?
Moler: Inergy first contacted US Salt in an effort to partner with the company to dispose of brine at its Bath, NY LPG storage facility and to potentially develop existing caverns at US Salt for energy storage capacity. With a deeper review of the US Salt operations, the discussions evolved into a more exciting opportunity for Inergy and the US Salt team. Inergy’s US Salt operations solution-mine and produces over 300,000 tons of salt each year and the salt operation has been a great investment.
The Salt business not only adds to Inergy’s business diversification, but more importantly, it adds a string of future energy storage development opportunities that expand its growth potential. Inergy is developing up to 5 million barrels of LPG storage on its property at US Salt. This project will help facilitate the liquids production and take-away issues that are developing in the Marcellus Shale.
P&GJ: Does Inergy plan to continue growing its propane and storage businesses as separate entities, and what other types of businesses might the company look into acquiring?
Moler: Inergy intends to invest capital and grow both the propane and midstream businesses. The focus has been to invest capital at attractive financial returns in businesses characterized by long-lived and stable cash flowing assets. Inergy intends to continue seeking out businesses that meet these criteria and will look at businesses where it has a competitive advantage, whether that is in propane or in midstream businesses that meet our objectives.
P&GJ: How did you get into the energy industry, and what has been the career path that led you to your current position?
Moler: My father worked for Oklahoma Gas & Electric for more than 35 years and in college I interned as a field engineer with Natural Gas Pipeline Company of America, so I’ve been around the industry from a very young age. I have had the opportunity to work in a diverse array of positions that have included engineering, marketing, transportation, regulatory, gathering, processing, production and now storage. There are very few industries other than natural gas that offer so much career diversity within the broader energy framework.