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Acquisitions
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Dec. 31, 2014
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| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions | Acquisitions Costar Acquisition On October 14, 2014, the Partnership acquired 100% of the membership interests of Costar Midstream, L.L.C. ("Costar") from Energy Spectrum Partners VI LP and Costar Midstream Energy, LLC, in exchange for $265.4 million in cash and 6.9 million of the Partnership's limited partner common units ("Costar Acquisition"). Costar Midstream is an onshore gathering and processing company with its primary gathering, processing, fractionation, and off-spec condensate treating and stabilization assets in East Texas and the Permian basin, with a significant crude oil gathering system project underway in the Bakken oil play. The Costar Acquisition was accounted for using the acquisition method of accounting and as a result, the aggregate purchase price was allocated to the assets acquired, liabilities assumed and a noncontrolling interest in a Costar subsidiary based on their respective fair values as of the acquisition date. The excess of the aggregate purchase price of the fair values of the assets acquired, liabilities assumed and the noncontrolling interest was classified as goodwill, which is attributable to future prospective customer agreements from the acquisition. Costar has been included in the Partnership’s Gathering and Processing Segment from the acquisition date. The following table summarizes the fair value of consideration transferred to acquire Costar and the preliminary allocation of that amount to the assets acquired, liabilities assumed and the noncontrolling interest based upon their respective fair values as of the acquisition date. Such allocation will be finalized once the Partnership negotiates a final settlement of working capital amounts with the sellers with any resulting adjustment being recorded to goodwill.
The fair value of the limited partner common units of $147.3 million differs from the amount determined using the market price of such units on the date of the acquisition as a result of restrictions which require the sellers to hold the units for specified periods of time. The fair value of limited partner units issued in the transaction was determined using an option pricing model and the following key assumptions: i) the closing unit market price on the day of the acquisition, ii) the contractual holding periods, iii) historical unit price volatility for the Partnership and its peers, and iv) a risk-free rate of return. The fair value of property, plant and equipment was determined using both the cost and market approaches which required significant Level 3 inputs. Key assumptions included i) estimated replacement costs for individual assets or asset groups, ii) estimated remaining useful lives for the acquired assets, and iii) recent market transactions for similar assets. The fair value of intangible assets was determined using the income approach which also required significant Level 3 inputs. Key assumptions included i) estimated throughput volumes, ii) forward market prices for natural gas and NGLS as of the acquisition date, iii) estimated future operating and development cash flows, and iv) discount rates ranging from 11.0% to 16.0%. The intangible assets acquired relate to existing customer relationships which Costar had at the time of the acquisition, as well as agreements with two producers under which Costar agreed to construct and operate gathering and processing facilities in exchange for the producers’ agreements to dedicate certain acreage and related production to those facilities. Working capital includes $11.2 million of accounts receivable, all of which were subsequently collected. Costar contributed revenue of $19.9 million and operating income of $0.3 million for the period October 14, 2014 through December 31, 2014, attributable to the Partnership's Gathering and Processing segment. Additionally, the Partnership incurred $0.5 million of transaction costs related to the acquisition which are included in Selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2014. The following unaudited pro forma summary presents consolidated financial information for the Partnership as if the Costar acquisition had occurred on January 1, 2013 (in thousands):
These pro forma amounts have been calculated after applying the Partnership’s accounting policies to Costar’s historical results and making adjustments to reflect additional interest expense that would have been incurred and additional depreciation and amortization expense that would have been recognized had the acquisition occurred as of January 1, 2013. The unaudited pro forma adjustments are based on available information and certain assumptions we believe are reasonable. Lavaca Acquisition On January 31, 2014, the Partnership acquired approximately 120 miles of high- and low-pressure pipelines and associated facilities located in the Eagle Ford shale in Gonzales and Lavaca Counties, Texas from Penn Virginia Corporation (NYSE: PVA) ("PVA") for $104.4 million in cash (the "Lavaca Acquisition"). The Lavaca Acquisition was financed with proceeds from the Partnership's January 2014 equity offering and from the issuance of Series B Units to our General Partner. The Lavaca Acquisition was accounted for using the acquisitions method of accounting and, as a result, the purchase price was allocated to the assets acquired upon their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the assets acquired was classified as goodwill. The following table summarizes the preliminary allocation of the purchase price to the assets acquired based upon their respective fair values as of the acquisition date. Such allocation will be finalized once the Partnership negotiates a final settlement of property, plant and equipment expenditures with the sellers, with any resulting adjustment being recorded to goodwill (in thousands):
During the fourth quarter of 2014, errors were identified in the spreadsheets used to determine the preliminary purchase price allocation for the Lavaca Acquisition, which resulted in a $23.6 million overstatement of the previously reported amount allocated to intangible assets with an offsetting understatement of goodwill. These errors also resulted in a $0.5 million overstatement of amortization expense for the first nine months of 2014. The preliminary purchase price allocation as summarized above has been revised to correct these errors. Additionally, an adjustment was recorded during the fourth quarter of 2014 to correct the overstatement of amortization expense which occurred during the first nine months of the year. The fair value of property, plant and equipment was determined using the cost approach which required significant Level 3 inputs. Key assumptions included i) estimated replacement costs for individual assets or asset groups and ii) estimated remaining useful lives for the acquired assets. The fair value of intangible assets was determined using the income approach which also required significant Level 3 inputs. Key assumptions included i) estimated throughput volumes, ii) future operating and development cash flows, and iii) a discount rate of 10.5%. The intangible assets acquired relate to a 25-year gas gathering agreement under which PVA will dedicate certain acreage and related production to the acquired facilities. Lavaca contributed revenue of $16.8 million and net income of $7.6 million for the period from January 31, 2014 through December 31, 2014, attributable to the Partnership's Gathering and Processing segment. The Partnership incurred $0.1 million of transaction costs related to the acquisition, which are included in Selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2014. Pro forma financial results are not presented as it is impractical to obtain the necessary information. The seller did not operate the acquired assets as a standalone business and, therefore, historical financial information that is consistent with the operations under the current agreement is not available. Other Acquisitions Investment in Unconsolidated Affiliate On August 11, 2014, the Partnership acquired a 66.7% non-operated interest in MPOG, an offshore oil gathering system, for a net purchase price of $12.0 million, which was financed with borrowings from the Partnership's credit facility. Although the Partnership owns a majority interest in MPOG, the ownership structure requires unanimous approval of all owners on decisions impacting the operation of the assets and any changes in ownership structure. Therefore, the Partnership's voting rights are not proportional to its obligation to absorb losses or receive returns. The Partnership accounts for its 66.7% interest using the equity method. The Partnership recorded $0.3 million in earnings from unconsolidated affiliate, and received cash distributions of $2.0 million for the year ended December 31, 2014. The excess of the cash distributions received over the earnings recorded from MPOG is classified as a return of capital within the investing section of our consolidated statement of cash flows. Williams Pipeline Acquisition In the first quarter of 2014, the Partnership acquired natural gas pipeline facilities that are contiguous to and connect with our High Point System in offshore Louisiana from Transcontinental Gas Pipe Line Company, LLC ("Transco"), a subsidiary of Williams Partners, LP for $6.5 million in cash (the "Williams Pipeline Acquisition"). The acquisition was subject to FERC approval of the seller's application to abandon by sale to us the pipeline facilities and to permit the facilities to serve a gathering function, exempt from FERC's jurisdiction. The FERC granted approval of the application during the first quarter of 2014, and the purchase and sale agreement closed on March 14, 2014. The purchase price was allocated to pipelines using the income approach which required certain Level 3 inputs. Blackwater Terminals Acquisition On December 17, 2013, the Partnership acquired Blackwater Midstream Holdings LLC ("Blackwater"), a Delaware limited liability company and other related subsidiaries from an affiliate of HPIP. Blackwater operated 1.3 million barrels of storage capacity across four marine terminal sites located in Westwego, Louisiana; Brunswick, Georgia; Harvey, Louisiana; and Salisbury, Maryland. The Partnership distributed consideration of $63.9 million, of which $27.7 million was accounted for as a cash distribution to the General Partner. The consideration also included 125,500 limited partner units which were accounted for as a non-cash distribution to the General Partner at a fair value of $3.1 million. The fair value of the units issued was determined using level one inputs based upon the Partnership's closing unit price on December 17, 2013. The remaining consideration was utilized to settle all of the Blackwater's outstanding debt at December 17, 2013. The acquisition of Blackwater represents a transaction between entities under common control and a change in reporting entity. Transfers of net assets or exchanges of shares between entities under common control are accounted for as if the transfer occurred at the beginning of the period or date of common control. Therefore, net assets received were recorded at their historical book value of $22.7 million as of the date common control was established, which is April 15, 2013. For the period from April 15, 2013 to December 31, 2013, our Terminals segment contributed $9.8 million of revenue and $0.8 million of net loss attributable to the Partnership's Terminals segment, which are included in the consolidated statement of operations. High Point System Effective April 15, 2013, our General Partner contributed the High Point System, consisting of 100% of the limited liability company interests in High Point Gas Transmission, LLC, and High Point Gas Gathering, LLC. The High Point System consists of approximately 700 miles of natural gas and liquids pipeline assets located in southeast Louisiana, in the Plaquemines and St. Bernard parishes, and the shallow water and deep shelf Gulf of Mexico, including the Mississippi Canyon, Viosca Knoll, West Delta, Main Pass, South Pass and Breton Sound zones. Natural gas is collected at more than 75 receipt points that connect hundreds of wells with an emphasis on oil and liquids-rich reservoirs. The High Point System, along with $15.0 million in cash, was contributed to us by HPIP in exchange for 5,142,857 Series A Units. Of the cash consideration paid by HPIP, approximately $2.5 million was used to pay certain transaction expenses of HPIP, and the remaining approximately $12.5 million was used to repay borrowings outstanding under the Partnership's former credit facility. The contribution of the High Point System occurred concurrently with HPIP's acquisition of 90% of our General Partner and all of our subordinated units, which resulted in HPIP gaining control of our General Partner and a majority of our outstanding limited partner interests. The fair value of the Series A Units on April 15, 2013, was $17.50 per unit, or a total of $90.0 million, and was issued by the Partnership in exchange for net cash of approximately $12.5 million and net assets of $61.9 million contributed to the Partnership by our General Partner. The contribution of net assets of the High Point System was accounted for as a transaction between entities under common control whereby the High Point System was recorded at historical book value. As such, the value of the Series A Units in excess of the net assets contributed by our General Partner amounted to $15.6 million and was allocated pro-rata to our General Partner and existing limited partners' interest based on their ownership interests. The fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimate was based on i) present value of estimated future contracted distributions, ii) an assumed discount rate of 18.0%, and iii) an assumed distribution growth rate of 1.0% in 2014 and thereafter. The fair value of the additional Series A Units in an amount equal to the cash portion of the distribution was $19.67 per unit, or a total distribution of $13.2 million for the year ended December 31, 2014. Primarily using the market and income approach, the fair value estimate was based on i) present value of estimated future contracted distributions, ii) an option value of $3.32 per unit using a Black-Scholes model, iii) an assumed discount rate of 10.0%, and iv) an assumed distribution growth rate of 1.0% in 2014 and thereafter. The contribution was treated as a transaction between entities under common control, under which the net assets received are recorded at their historical book value as of date of transfer. The following table presents the carrying value of the identified assets received and liabilities assumed at the acquisition date (in thousands):
Subsequent to the contribution, for the year ended December 31, 2013, the High Point System contributed $30.4 million of revenue and $7.2 million of net income attributable to the Partnership's Transmission segment, which are included in the consolidated statement of operations. Chatom Gathering, Processing and Fractionation Plant Effective July 1, 2012, we acquired an 87.4% undivided interest in the Chatom system from affiliates of Quantum Resources Management, LLC. The acquisition fair value consideration of $51.4 million includes a credit associated with the cash flow the Chatom system generated between January 1, 2012, and the effective date of July 1, 2012. The consideration paid by the Partnership consisted of cash, which was funded under borrowings under our revolving credit facility. The Chatom system is located in Washington County, Alabama, approximately 15 miles from our Bazor Ridge processing plant in Wayne County, Mississippi, and consists of a 25 MMcf/d cryogenic processing plant, a 1,900 Bbl/d fractionation unit, a 160 long-ton per day sulfur recovery unit, and a 24 mile gas gathering system. We believe the fractionating services provide flexibility to the Partnership's product and service offerings. The following table presents the fair value of consideration transferred to acquire the Chatom system and the amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the 12.6% noncontrolling interest in the Chatom system at the acquisition date (in thousands):
The fair value of the property, plant and equipment and noncontrolling interests were estimated by applying a combination of the market and income approaches. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimates are based on i) an assumed cost of capital of 9.25%, ii) an assumed terminal value based on the present value of estimated EBITDA, iii) an inflationary cost increase of 2.5%, iv) forward market prices as of July 2012 for natural gas and crude oil, v) a Federal tax rate of 35% and a state tax rate of 6.5%, and vi) an increase in processed and fractionated volumes in 2013, declining thereafter. Working capital was estimated using net realizable value. Accrued revenue was deemed to be fully collectible at July 1, 2012. During the fourth quarter of 2013 we offered to purchase the noncontrolling interest in Chatom from all holders of the noncontrolling interest. As of December 31, 2013, 38% of the noncontrolling interest was purchased by us (a 4.8% overall interest), increasing our total ownership to 92.2% and reducing the noncontrolling interest to 7.8%. Subsequent to the initial 87.4% acquisition, our undivided interest in the Chatom system contributed $25.4 million of revenue and $1.8 million of net income attributable to the Partnership, which are included in the consolidated statement of operations for the year ended December 31, 2012. Madison Divestiture On March 31, 2014, the Partnership completed the sale of certain gathering and processing assets in Madison County, Texas. We received $6.1 million in cash proceeds related to the sale. The Partnership recognized a $3.0 million impairment charge related to these assets for the year ended December 31, 2013, which wrote down the assets to a carrying value of $6.1 million as of December 31, 2013. |
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