UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Or
oo
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35257
AMERICAN MIDSTREAM PARTNERS, LP
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1400 16th Street, Suite 310
Denver, CO
(Address of principal executive offices)
27-0855785
(I.R.S. Employer
Identification No.)
80202
(Zip code)
(720) 457-6060
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Units Representing Limited Partnership Interests
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x
No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained in, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one): Yes o
No x
The aggregate market value of common units held by non-affiliates of the registrant on June 30, 2015, was $354,233,679 . The aggregate market value was
computed by reference to the closing price of the registrant's common units on the New York Stock Exchange on June 30, 2015.
There were 30,889,659 common units and 9,499,370 Series A Units of American Midstream Partners, LP outstanding as of March 4, 2016 . Our common units
trade on the New York Stock Exchange under the ticker symbol "AMID."
Documents Incorporated by Reference
None.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
TABLE OF CONTENTS
PART I
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1
1A
1B
2
3
4
5
6
7
7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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9
9A
9B
10
11
12
13
14
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER
MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
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23
50
50
50
51
52
53
56
79
80
80
80
81
83
88
103
106
108
109
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Our reports, filings and other public announcements may from time to time contain statements that do not directly or exclusively relate to historical facts. Such
statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-
looking statements by the use of words, such as "may," "could," "project," "believe," "anticipate," "expect," "estimate," "potential," "plan," "forecast" and other
similar words.
All statements that are not statements of historical facts, including statements regarding our future financial position, business strategy, budgets, projected costs and
plans and objectives of management for future operations, are forward-looking statements.
These forward-looking statements reflect our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and
other factors, many of which are outside our control. Important factors that could cause actual results to differ materially from the expectations expressed or
implied in the forward-looking statements include known and unknown risks. These risks and uncertainties, many of which are beyond our control, include, but are
not limited to, the risks set forth in "Item 1A. Risk Factors" in this Annual Report on Form 10-K (the "Annual Report") as well as the following risks and
uncertainties:
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our ability to generate sufficient cash from operations to pay distributions to unitholders;
our ability to maintain compliance with financial covenants and ratios in our credit facility;
the timing and extent of changes in natural gas, crude oil, NGLs and other commodity prices, interest rates and demand for our services;
the level and success of natural gas and crude oil drilling around our assets and our success in connecting natural gas and crude oil supplies to our gathering
and processing systems;
our ability to access capital to fund growth including access to the debt and equity markets, which will depend on general market conditions;
our dependence on a relatively small number of customers for a significant portion of our gross margin;
the level of creditworthiness of counterparties to transactions;
changes in laws and regulations, particularly with regard to taxes, safety, regulation of over-the-counter derivatives market and entities, and protection of
the environment;
our ability to successfully balance our purchases and sales of natural gas;
the demand for NGL products by the petrochemical, refining or other industries;
severe weather and other natural phenomena, including their potential impact on demand for the commodities we sell and the operation of company-owned
and third party-owned infrastructure;
the adequacy of insurance to cover our losses;
our ability to grow through contributions from affiliates, acquisitions or internal growth projects;
our management's history and experience with certain aspects of our business and our ability to hire as well as retain qualified personnel to execute our
business strategy;
our ability to remediate any material weakness in internal control over financial reporting;
volatility in the price of our common units;
security threats such as military campaigns, terrorist attacks, and cybersecurity breaches, against, or otherwise impacting, our facilities and systems;
our ability to timely and successfully integrate our current and future acquisitions, including the realization of all anticipated benefits of any such
transaction, which otherwise could negatively impact our future financial performance;
general economic, market and business conditions, including industry changes and the impact of consolidations and changes in competition;
the amount of collateral required to be posted from time to time in our transactions; and
our success in risk management activities, including the use of derivative financial instruments to hedge commodity and interest rate risks.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore,
we cannot assure you that the forward-looking statements included in this Annual Report will prove to be accurate. Some of these and other risks and uncertainties
that could cause actual results to differ materially from such forward-looking statements are more fully described in "Item 1A. Risk Factors" in this Annual Report.
Statements in this Annual Report speak as of the date of this report. Except as may be required by applicable securities laws, we undertake no obligation to
publicly update or advise investors of any change in any forward-looking statement, whether as a result of new information, future events or otherwise.
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As generally used in the energy industry and in this Annual Report, the identified terms have the following meanings:
Bbl Barrels: 42 U.S. gallons measured at 60 degrees Fahrenheit.
GLOSSARY OF TERMS
Bbl/d Barrels per day.
Bcf Billion cubic feet.
Btu
British thermal unit; the approximate amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Condensate
Liquid hydrocarbons present in casinghead gas that condense within the gathering system and are removed prior to delivery to the natural gas
plant. This product is generally sold on terms more closely tied to crude oil pricing.
/d Per day.
FERC Federal Energy Regulatory Commission.
Fractionation Process by which natural gas liquids are separated into individual components.
GAAP Generally Accepted Accounting Principles in the United States of America
Gal Gallons.
Mgal/d Million gallons per day.
MBbl Thousand barrels.
MMBbl Million barrels.
MMBbl/d Million barrels per day.
MMBtu Million British thermal units.
Mcf Thousand cubic feet.
MMcf Million cubic feet.
MMcf/d Million cubic feet per day.
NGL or NGLs
Natural gas liquid(s): The combination of ethane, propane, normal butane, isobutane and natural gasoline that, when removed from natural gas,
become liquid under various levels of higher pressure and lower temperature.
Tcf
Trillion cubic feet.
Throughput
The volume of natural gas transported or passing through a pipeline, plant, terminal or other facility during a particular period.
As used in this Annual Report, unless the context otherwise requires, "we," "us," "our," the "Partnership" and similar terms refer to American Midstream Partners
LP, together with its consolidated subsidiaries. References in this Annual Report to our "General Partner" refer to American Midstream GP, LLC.
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Item 1. Business
Overview
PART I
American Midstream Partners, LP (along with its consolidated subsidiaries, "we," "us," "our," or the "Partnership") is a growth-oriented Delaware limited
partnership that was formed in August 2009 to own, operate, develop and acquire a diversified portfolio of midstream energy assets. We are engaged in the
business of gathering, treating, processing, and transporting natural gas; gathering, transporting, storing, treating and fractionating NGLs; gathering, storing and
transporting crude oil and condensates; and storing specialty chemical products, all through our ownership and operation of twelve gathering systems, five
processing facilities, three fractionation facilities, three marine terminal sites, three interstate pipelines, five intrastate pipelines and one crude oil pipeline. We also
own a 66.7% non-operated interest in Main Pass Oil Gathering Company ("MPOG"), a crude oil gathering and processing system; a 50% undivided, non-operated
interest in the Burns Point Plant, a natural gas processing plant; a 46% non-operated interest in Mesquite, an off-spec condensate fractionation project; and a 12.9%
non-operated indirect interest in Delta House, a floating production system platform and related pipeline infrastructure. Our primary assets, which are strategically
located in Alabama, Georgia, Louisiana, Mississippi, North Dakota, Tennessee, Texas, and the Gulf of Mexico, provide critical infrastructure that links producers
of natural gas, crude oil, NGLs, condensate and specialty chemicals to numerous intermediate and end-use markets. We currently operate more than 3,000 miles of
pipelines that gather and transport over 1 Bcf/d of natural gas and operate approximately 1.8 million barrels of storage capacity across three marine terminal sites.
Our operations are organized into three segments: i) Gathering and Processing, ii) Transmission and iii) Terminals. In our Gathering and Processing segment, we
receive fee-based and fixed-margin compensation for gathering, processing, transporting and treating natural gas and crude oil. Where we provide processing
services at the plants that we own or share an interest, or obtain processing services for our own account under our elective processing arrangements, we typically
retain and sell a percentage of the residue natural gas and/or resulting NGLs under percent-of-proceeds ("POP") arrangements.
In our Transmission segment, the majority of our segment gross margin is generated by firm capacity reservation charges and interruptible transportation services
from throughput volumes on our interstate and intrastate pipelines.
In our Terminals segment, we generally receive fee-based compensation under guaranteed firm storage contracts, throughput fees charged to our customers when
their products are either received or disbursed, and other operational charges associated with ancillary services provided to our customers, such as excess
throughput, steam heating, truck weighing, etc.
Recent Developments
Delta House Investment
On September 18, 2015, the Partnership acquired a 26.3% non-operated interest in Pinto Offshore Holdings, LLC ("Pinto") (the "Delta House Investment"), an
entity that owns a non-operated interest in (i) approximately 49% of the limited liability company interests of Delta House FPS LLC and (ii) approximately 49% of
the limited liability company interests of Delta House Oil and Gas Lateral LLC, which respectively own the Delta House floating production system and related
pipeline infrastructure ("Delta House"). We acquired our interest in Pinto in exchange for $162.0 million in cash. The Partnership funded the purchase price with
the net proceeds of its public offering of 7.5 million common units which closed on September 15, 2015, and with borrowings under the Partnership's Amended
and Restated Credit Agreement, as amended by the First Amendment and Incremental Commitment Agreement, dated as of September 14, 2014 (as amended, the
"Credit Agreement").
Delta House is a floating production platform system with associated crude oil and natural gas export pipelines, located in the Mississippi Canyon region of the
deepwater Gulf of Mexico with nameplate processing capacity of 80,000 barrels of crude oil per day (Bbl/d) and 200 million cubic feet of natural gas per day
(MMcf/d), and peak processing capacity of 100,000 Bbl/d of crude oil and 240 MMcf/d of gas. Cash flows for Delta House are supported by a 100% fee-based
tiered tariff structure with ship-or-pay components. Delta House was developed by ArcLight Capital Partners, LLC ("ArcLight") and LLOG Exploration Offshore,
LLC ("LLOG Exploration"), a leading private deepwater exploration company in the Gulf of Mexico, as well as a consortium of exploration companies, and
commenced operations in April 2015. LLOG Exploration operates Delta House.
Series A-2 Convertible Preferred Units
On March 30, 2015 and June 30, 2015, we entered into two Unit Purchase Agreements with Magnolia Infrastructure Partners, LLC ("Magnolia"), which is an
affiliate of High Point Infrastructure Partners, LLC ("HPIP") pursuant to which the Partnership issued, in separate private placements, Series A-2 Convertible
Preferred Units ("Series A-2 Units") for approximately $45.0 million
3
in gross proceeds. The Series A-2 Units will participate in distributions of the Partnership along with common units in a manner identical to the existing Series A
Convertible Preferred Units (such previously existing Series A Units are referred to as the "Series A-1 Units" and, together with the Series A-2 Units, the "Series A
Units"), with such distributions being made in cash or with paid-in-kind Series A Units at the election of the Board of Directors of our General Partner. The Board
of Directors of our General Partner has, to date, elected to pay distributions on Series A Units using paid-in-kind Series A Units, which began with the distribution
for the three months ended June 30, 2014 and will continue through the distribution for the quarter ended March 31, 2016.
Partnership Agreement Amendment
On July 27, 2015, we entered into the Fifth Amendment (the “Fifth Amendment”) to the Fourth Amended and Restated Agreement of Limited Partnership ("the
Partnership Agreement"). The Fifth Amendment grants us the right (the “Call Right”) to require the holders of the Series A-2 Units (the “Series A-2 Holders”) to
sell, assign and transfer all or a portion of the then outstanding Series A-2 Units to us for a purchase price of $17.50 per Series A-2 Unit (subject to appropriate
adjustments). We may exercise the Call Right at any time, in connection with our acquisition of assets or equity from ArcLight Energy Partners Fund V, L.P., or
one of its affiliates, for a purchase price in excess of $100 million . We may not exercise the Call Right with respect to any Series A-2 Units that a Series A-2
Holder has elected to convert into common units on or prior to the date we have provided notice of our intent to exercise the Call Right, and may not exercise the
Call Right if doing so would result in a default under any of our financing agreements or obligations.
Market
Conditions
Average daily prices for NYMEX West Texas Intermediate crude oil ranged from a high of $61.43 per barrel to a low of $26.21 per barrel from January 1, 2015
through March 1, 2016. Average daily prices for NYMEX Henry Hub natural gas ranged from a high of $3.23 per MMBtu to a low of $1.71 per MMBtu from
January 1, 2015 through March 1, 2016. We are unable to predict future movements in the market price for natural gas, crude oil and NGLs and thus, cannot
predict the ultimate impact of prices on our operations. For the year ended December 31, 2015 , net loss attributable to the Partnership was $127.5 million ,
primarily as a result of impairments of goodwill of $118.6 million , compared to net loss attributable to the Partnership of $98.0 million , primarily as a result of
impairments of property, plant and equipment, for the year ended December 31, 2014. If commodity prices remain depressed or continue to trend lower as they did
in 2015 and early 2016, this could lead to reduced profitability and may impact our liquidity and compliance with the financial covenants in our Credit Agreement.
Reduced profitability may result in future potential non-cash impairments of long-lived assets, goodwill, or intangible assets, as well as the reduction or elimination
of distributions to our unitholders.
Business Strategies
Our principal business objective is to strategically grow the Partnership in order to maintain or increase the quarterly cash distributions that we pay to our
unitholders while ensuring the long-term stability of our business. We strive to achieve this objective by executing the following strategies:
Continue Our Commitment to Safe and Environmentally Sound Operations. The safety of our employees and the communities in which we operate is our
highest priority. We believe it is critical to safely handle natural gas, crude oil and NGLs for our customers, while striving to minimize the environmental impact of
our operations. We have implemented a safety performance program, including an integrity management program, and planned maintenance programs to increase
the safety, reliability and efficiency of our operations.
Pursue Strategic and Accretive Acquisitions, Including Acquisitions from ArcLight and Its Affiliates in Drop Down Transactions. We plan to pursue accretive
acquisitions of energy infrastructure assets, including in drop-down transactions from ArcLight who control our General Partner, and its affiliates, that are
complementary to our existing asset base or that provide attractive returns in new operating regions or business lines. We plan to pursue acquisitions in our areas of
operation that we believe will allow us to realize operational efficiencies by capitalizing on our existing infrastructure, personnel and customer relationships. We
also plan to seek acquisitions in new geographic areas or new but related business lines to the extent that we believe we can utilize our operational expertise to
enhance our business with these acquisitions.
Develop Strategic and Accretive New Asset Platforms. We plan to selectively pursue the development of new complementary midstream asset platforms in our
current operating regions and in new midstream asset regions that we believe provide attractive returns. As our customers move to produce in new areas or develop
new end-use markets, we seek to provide solutions for their midstream needs. We intend to develop assets in our current lines of business, but may pursue
opportunities in new but related business lines as well.
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Capitalize on Organic Growth Opportunities Associated with Our Existing Assets. We continually seek to identify and evaluate economically attractive organic
expansion and asset enhancement opportunities that leverage our existing asset footprint and strategic relationships with our customers. We expect to have
opportunities to expand our systems into new markets and sources of supply, which we believe will make our services more attractive to our customers. We intend
to focus on projects that can be completed at a relatively low cost and that have potential for attractive returns.
Attract Additional Volumes to Our Systems. We intend to attract new volumes of natural gas, crude oil and specialty chemicals to our systems and terminals from
existing and new customers by continuing to provide superior customer service and through aggressively marketing our services to additional customers in our
areas of operation. We have available capacity on the majority of our systems; as a result, we can accommodate additional volumes at a minimal incremental cost.
Manage Exposure to Commodity Price Risk. We work to manage our commodity price exposure by targeting a contract portfolio that is weighted toward firm
transportation, as well as fee-based and fixed-margin contracts, while often seeking to mitigate direct commodity price exposure by using hedging activities. For
the years ended December 31, 2015 , 2014 , and 2013 , $105.8 million , $76.6 million , and $48.7 million , or 85.8% , 74.4% , and 65.1% respectively, of our gross
margin was generated from fee-based, fixed-margin, firm and interruptible transportation contracts and firm storage contracts, which have little or no direct
commodity price exposure. The GAAP measure most comparable to gross margin is net income (loss) attributable to the Partnership. Those contracts, together
with our percent-of-proceeds contracts, generated relatively stable cash flows. Due to declining commodity prices, we had not entered into commodity hedge
contracts to hedge production in 2016 and beyond as of December 31, 2015.
Pursue and Maintain Financial Flexibility and Conservative Leverage. We plan to pursue a disciplined financial policy and seek to maintain a conservative
capital structure that we believe will allow us to develop of new asset platforms and attractive organic growth projects and acquisitions.
Competitive Strengths
We believe that we will be able to successfully execute our business strategies because of the following competitive strengths:
Relationship with ArcLight. ArcLight controls HPIP, the majority owner of our General Partner, and has a proven track record of investments across the energy
industry. ArcLight bases its investments on fundamental asset values and defined growth strategies with a focus on investing in cash flow generating assets and
service companies with conservative capital structures. We believe our growth strategy may benefit from this relationship.
Diversified Asset Base. Our assets are diversified geographically and by business line, which contributes to the stability of our cash flows and creates a number of
potential growth avenues for our business. We primarily operate in seven states and the Gulf of Mexico, have access to multiple sources of natural gas supply, and
service various interstate and intrastate pipelines, as well as utility, industrial and other commercial customers. We believe this diversification provides us with a
variety of growth opportunities and mitigates our exposure to reduced activity in any one area.
Strategically Located Assets. Our assets are located in areas where we believe there will be opportunities to access new natural gas, crude oil and specialty
chemical supplies and to capture new customers who are underserved by our competitors. Upon the stabilization of the commodities market, we expect drilling
activity to recommence or continue on and around the majority of our assets, and we believe that our assets are strategically positioned to capitalize on this drilling
activity, increased demand for midstream services and growing commodity consumption in the shale plays of the Bakken, Eagle Ford and Permian as well as East
Texas, Gulf Coast and Southeast U.S. regions. This belief is based on:
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the proximity of our gathering and transmission systems to newly producing wells and the relatively lower cost to connect to our systems compared to
those farther away;
the available capacity of our systems, coupled with an ability to economically add capacity to our systems; and
the availability of multiple downstream interconnects that many of our systems have provides our customers with multiple market delivery options, which
often causes our systems to be more attractive than those of our competitors.
Well Positioned to Pursue Opportunities Overlooked by Larger Competitors. Our size and flexibility, in conjunction with our geographically diverse asset base,
positions us to pursue economically attractive growth projects and acquisitions that may not be attractive to our competitors. Given the size of our business, these
opportunities may have a larger financial impact on us than they would on our competitors and may provide us with material growth opportunities. The benefits of
our size and flexibility apply not only to the opportunities around our current assets but also to opportunities to develop new asset platforms as well, which allows
us to pursue the development of new systems that may positively impact our company.
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Focus on Delivering Excellent Customer Service. We view our strong customer relationships as one of our key assets and believe it is critical to maintain
operational excellence and ensure best-in-class customer service and reliability. Furthermore, we believe our entrepreneurial culture and smaller size relative to our
peers enables us to offer more customized and creative solutions for our customers and to be more responsive to their needs.
Experienced Management and Operating Teams. Our executive management team has an average of approximately 25 years of experience in the midstream
energy industry. The team possesses a comprehensive skill set to support our business and enhance unitholder value through asset optimization, accretive
development projects and acquisitions. In addition, our field supervisory team has operated our assets for an average of more than 25 years. We believe that our
field employees' knowledge of the assets will further contribute to our ability to execute our business strategies. Furthermore, the interests of our executive
management and operating teams are strongly aligned with those of common unitholders, including through their ownership of common units and participation in
our Second Amended and Restated Long-Term Incentive Plan or Third Amended and Restated Long-Term Incentive Plan (as applicable, the "Long-Term
Incentive Plan" or "LTIP").
Our Assets
We own and operate twelve gathering systems, five processing facilities, three fractionation facilities, three marine terminal sites, three interstate pipelines, five
intrastate pipelines and one crude oil pipeline. We also own a 66.7% non-operated interest in MPOG, a crude oil gathering and processing system; a 50%
undivided, non-operated interest in the Burns Point Plant, a natural gas processing plant; a 46% non-operated interest in Mesquite, an off-spec condensate
fractionation project; and a 12.9% non-operated indirect interest in Delta House, a floating production system platform and related pipeline infrastructure. Our
primary assets are strategically located in Alabama, Georgia, Louisiana, Mississippi, North Dakota, Tennessee, Texas and the offshore Gulf of Mexico. We
organize our operations into three business segments: i) Gathering and Processing; ii) Transmission; and iii) Terminals.
Gathering and Processing Segment
General
Our Gathering and Processing segment consists of midstream natural gas systems that provide the following services to our customers:
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gathering;
compression;
treating;
processing;
fractionating;
transportation; and
sales of natural gas, crude oil, NGLs and condensate.
Our Gathering and Processing assets are located in Alabama, Louisiana, Mississippi, North Dakota and Texas and in shallow state and federal waters in the Gulf of
Mexico off the coast of Louisiana and are positioned in areas with opportunities for organic growth. We continually seek new sources of raw natural gas and crude
oil supply to maintain and increase the throughput volume on our gathering systems and through our processing plants.
We generally derive revenue in our Gathering and Processing segment from fee-based, fixed-margin and POP arrangements, for our producer and supplier
customers and our own account. We have no keep-whole arrangements with our customers. For the year ended December 31, 2015 , our fee-based and fixed-
margin arrangements and our POP arrangements accounted for approximately 77.3% and 22.7% , respectively, of our segment gross margin for the Gathering and
Processing segment. For the year ended December 31, 2014 , our fee-based and fixed-margin arrangements and our POP arrangements accounted for
approximately 48.3% and 51.7% , respectively, of our segment gross margin for the Gathering and Processing segment.
The following table provides information regarding our Gathering and Processing segment assets as of December 31, 2015 , and for the years ended December 31,
2015 and 2014 .
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Approximate Gas
Gathering System
(Miles)
Approximate
Design
Capacity
(MMcf/d)
Compression
(Horsepower)
Number of Plants and
Fractionators
Gathering and Processing
Lavaca (a)
Magnolia
Longview (b)
Chapel Hill (b)
Yellow Rose (b)
Bakken (c)
Chatom (d)
Bazor Ridge
Other (e)
Total
203
116
620
90
47
43
24
169
267
1,579
218
120
50
20
40
40
25
22
556
1,091
32,000
3,328
23,880
2,540
3,256
—
3,456
8,615
13,962
91,037
—
—
3
2
1
—
2
1
1
10
Approximate
Average
Throughput (MMcf/d)
Years Ended
December 31,
2015
119.1
27.1
17.2
14.6
4.2
—
5.9
7.6
142.5
338.2
2014
65.0
21.7
4.7
4.1
1.3
—
6.4
9.6
162.0
274.8
(a) The Lavaca System was acquired effective January 31, 2014.
(b) The gathering and processing assets of Costar Midstream were acquired effective October 1, 2014.
(c) This includes the crude oil gathering system in the Williston Basin with capacity of 40,000 bbl/d which commenced operation in October 2015. From
October 2015 through December 2015, the Bakken system had average throughput volumes of 8,639 Bbl/d.
(d) We have included approximate average throughput at 100% for the Chatom System. As of December 31, 2015, we owned 92.2% undivided interest in the
Chatom System.
(e) Other includes our Gloria and Lafitte, Quivira and Burns Point, and Offshore Texas systems.
Lavaca System
The Lavaca System consists of 203 miles of high- and low-pressure pipelines ranging from four to eight inches in diameter with 32,000 horsepower of leased
compression, and associated facilities located in the Eagle Ford shale in Gonzales and Lavaca Counties, Texas. The Lavaca System currently has a design capacity
of approximately 218 MMcf/d. Natural gas production gathered by the system is compressed and delivered to a third-party for processing or redelivered to
producers for gas lift.
Magnolia System
The Magnolia gathering system is a Section 311 intrastate pipeline that gathers coal-bed methane in Tuscaloosa, Greene, Bibb, Chilton and Hale counties of
Alabama and delivers this natural gas to an interconnect with the Transcontinental Gas Pipe Line Co. pipeline system ("Transco Pipeline System"), an interstate
pipeline owned by The Williams Companies, Inc. The Magnolia System consists of approximately 116 miles of pipeline with small-diameter gathering lines and
trunk lines ranging from six to 24 inches in diameter and one compressor station with 3,328 horsepower.
Longview System
The Longview gathering and processing system consists of approximately 620 miles of high- and low-pressure gathering lines with diameters ranging from two to
twenty inches with a combined compression capacity of 23,880 horsepower. Our Longview System also contains two cryogenic processing plants with a design
capacity of approximately 50 MMcf/d, one fractionation unit with 8,500 Bbls/d of capacity, product storage tanks, and truck racks to receive off-spec condensate.
The Longview System is located near Longview in Gregg County, Texas. Located adjacent to the Longview System is a rail facility, which is currently under
construction, that will transport off-spec condensate. This facility commenced operations in the first quarter of 2016.
Chapel Hill System
The Chapel Hill gathering and processing system consists of approximately 90 miles of gathering lines with a combined compression capacity of 2,540
horsepower. Our Chapel Hill System also contains a cryogenic processing plant with a design capacity of approximately 20 MMcf/d, one fractionation unit with
1,250 Bbls/d of capacity, product storage tanks, and truck racks to deliver propane. The Chapel Hill System is located near Tyler in Smith County, Texas.
7
Yellow Rose System
The Yellow Rose gathering and processing system consists of approximately 47 miles of low-pressure, rich-gas gathering system and 40 MMcf/d cryogenic
processing plant that commenced operations in October, 2014. The Yellow Rose System is located in Martin County, Texas.
Bakken System
The Bakken crude oil gathering pipeline system consists of a 43 mile pipeline with capacity to transport up to approximately 40,000 Bbls/d of crude oil for delivery
to the Tesoro Logistics pipeline located Northeast of Watford City, North Dakota and a planned interconnect with the Energy Transfer Dakota Access Pipeline.
The system, which commenced operations in October 2015, provides producers in the area with access to refinery, rail and pipeline markets. The system also has
the capability to receive volumes through its truck rack, which also commenced operations in November 2015. From October 2015 through December 2015, the
Bakken system had average throughput volumes of 8,639 Bbl/d.
Chatom System
The Chatom System 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 and compression capacity of 3,456 horsepower. The system is located in Washington County, Alabama, approximately 15 miles from
our Bazor Ridge processing plant in Wayne County, Mississippi. The Chatom System gathers natural gas from onshore crude oil and natural gas wells in the
Norphlet and Smackover formations in Alabama and Mississippi. Chatom also has a truck rack and the capability to provide condensate stabilization services.
Bazor Ridge System
The Bazor Ridge gathering and processing system consists of approximately 169 miles of pipeline, with diameters ranging from three to eight inches, and three
compressor stations with a combined compression capacity of 1,069 horsepower. Our Bazor Ridge System is located in Jasper, Clarke, Wayne and Greene counties
of Mississippi. The Bazor Ridge System also contains a sour natural gas treating and cryogenic processing plant located in Wayne County, Mississippi, with a
design capacity of approximately 22 MMcf/d as well as four inlet and one discharge compressor with approximately 5,218 of combined horsepower. The natural
gas supply for our Bazor Ridge System is derived primarily from rich natural gas produced from crude oil wells targeting the mature Upper Smackover formation.
Other Gathering and Processing Systems
Gloria
and
Lafitte
systems.
The Gloria gathering system provides gathering and compression services through our assets, as well as processing services through our
elective processing arrangements. The Gloria System is located in Lafourche, Jefferson, Plaquemines, St. Charles and St. Bernard parishes of Louisiana and
consists of approximately 138 miles of pipeline, with diameters ranging from three to 16 inches, and four compressors with a combined size of 2,962 horsepower.
The Gloria System may experience excess volumes from our Lafitte system. The Lafitte gathering system consists of approximately 40 miles of gathering pipeline,
with diameters ranging from four to 12 inches and a design capacity of approximately 71 MMcf/d. The Lafitte System originates onshore in southern Louisiana
and terminates in Plaquemines Parish, Louisiana, at the Alliance Refinery owned by Phillips 66. We are the sole supplier of natural gas to the Alliance Refinery
through our Lafitte and Gloria systems. We supply natural gas to the Alliance Refinery pursuant to a long-term contract that expires in 2023. Any natural gas not
used by Phillips 66 at the Alliance Refinery is delivered to our Gloria System.
Quivira
and
Burns
Point
Systems.
The Quivira gathering system consists of approximately 34 miles of pipeline, with a 12-inch diameter mainline and several
laterals ranging in diameter from six to eight inches. The system originates offshore of Iberia and St. Mary parishes of Louisiana in Eugene Island Block 24 and
terminates onshore in St. Mary Parish, Louisiana, at a connection with the Burns Point Plant, a cryogenic processing plant with a design capacity of 165 MMcf/d
that is jointly owned by us and the plant operator, Enterprise Gas Processing, LLC ("Enterprise"). We hold a 50% undivided, non-operated interest in the Burns
Point Plant. We acquired an interest in the asset group and not in a legal entity. We and Enterprise are proportionately liable for the liabilities. Outside of the rights
and responsibilities of the operator, we and Enterprise have equal rights and obligations to the assets. Significant non-capital and maintenance capital expenditures,
plant expansions and significant plant dispositions require the approval of both owners.
Offshore
Texas
System.
The Offshore Texas System consists of the GIGS and Brazos systems, two parallel gathering systems that share common geography and
operating characteristics and have approximately 56 miles of pipeline with diameters ranging from
8
six to 16 inches and a design capacity of approximately 100 MMcf/d. The Offshore Texas System is in a position to provide gathering and dehydration services to
natural gas producers in the shallow waters of the Gulf of Mexico offshore Texas.
Customers and Contracts
With respect to our Gathering and Processing segment, substantially all of the natural gas produced on our Lavaca System is delivered to Penn Virginia
Corporation for processing. On our Gloria and Lafitte systems, we have a buy/sell agreement whereby most of the natural gas is sold to ConocoPhillips for use at
the Alliance Refinery in Plaquemines Parish, Louisiana, under a contract that expires in 2023. For the year ended December 31, 2015 , our Gathering and
Processing segment derived 12% of its revenue from both ConocoPhillips and Penn Virginia, respectively. For the year ended December 31, 2014 , our Gathering
and Processing segment derived 33% and 12% of its revenue from ConocoPhillips and Shell, respectively.
Transmission Segment
General
Our Transmission segment is comprised of interstate and intrastate pipelines that transport natural gas from interconnection points on other large pipelines or
production points to customers, such as local distribution companies ("LDCs"), electric utilities, direct-served industrial complexes, or to interconnects on other
pipelines. Certain of our pipelines are subject to regulation by FERC and by state regulators. In this segment, we often enter into firm transportation contracts with
our shipper customers to transport natural gas sourced from large interstate or intrastate pipelines. Our Transmission segment assets are located in multiple parishes
in Louisiana, including onshore and offshore producing regions around southeast Louisiana, and multiple counties in Mississippi, Alabama and Tennessee.
The following table provides information regarding our Transmission segment assets as of December 31, 2015 , and for the years ended December 31, 2015 and
2014 .
Approximate
Transmission System
(Miles)
Jurisdiction
Compression
(Horsepower)
Transmission
High Point
Midla/MLGT (a)
AlaTenn/Bamagas/TriGas
Chalmette
Total
574
432
383
39
1,428
(a)
Includes the SIGCO system.
High Point System
Intrastate
Interstate/Intrastate
Interstate/Intrastate
Intrastate
—
3,600
3,665
—
7,265
Approximate
Design
Capacity
(MMcf/d)
1,120
518
710
125
2,473
Approximate
Average
Throughput (MMcf/d)
Years Ended
December 31,
2015
371.6
139.7
182.7
14.6
708.6
2014
427.3
183.8
160.3
7.5
778.9
The High Point System consists of approximately 574 miles of natural gas and liquids pipeline assets located in southeast Louisiana and the shallow water and
deep shelf Gulf of Mexico. The High Point System gathers natural gas from both onshore and offshore producing regions around southeast Louisiana. The onshore
footprint is Plaquemines and St. Bernard Parish, Louisiana. The offshore footprint consists of the following federal Gulf of Mexico zones: Mississippi Canyon,
Viosca Knoll, West Delta, Main Pass, South Pass and Breton Sound. Natural gas is collected at more than 63 receipt points that connect to hundreds of wells
targeting various geological zones in water depths up to 1,000 feet, with an emphasis on crude oil and liquids-rich reservoirs. The High Point System is comprised
of FERC-regulated transmission assets and non-jurisdictional gathering assets, both of which accept natural gas from well production and interconnected pipeline
systems. The High Point System delivers the natural gas to the Toca Gas Processing Plant, which is operated by Enterprise, where the products are processed and
the residue gas is sent to an unaffiliated interstate system owned by Kinder Morgan Energy Partners.
Midla and MLGT Systems
9
Our Midla System is an interstate natural gas pipeline with approximately 370 miles of pipeline linking the Monroe Natural Gas Field in northern Louisiana and
interconnections with the Transco Pipeline System and Gulf South Pipeline System to customers near Baton Rouge, Louisiana.
The northern portion of the system, including the T-32 lateral, consists of approximately four miles of high-pressure, 12-inch-diameter pipeline. Natural gas on the
northern end of the Midla System is delivered to two power plants operated by Entergy by way of the T-32 lateral and the CLECO Sterlington plant by way of the
Sterlington lateral.
The mainline has a design capacity of approximately 198 MMcf/d and consists of approximately 170 miles of low-pressure, 22-inch-diameter pipeline with laterals
ranging in diameter from two to 16 inches. This section of the Midla System primarily serves small LDCs under firm transportation contracts that automatically
renew on a year-to-year basis. Substantially all of these contracts are at the maximum rates allowed under Midla's FERC tariff.
The southern portion of the system, including interconnections with the MLGT System and other associated laterals, consists of approximately two miles of high-
and low-pressure, 12-inch-diameter pipeline. This section of the system primarily serves industrial and LDC customers in the Baton Rouge market through
contracts with several large marketing companies.
The MLGT System is an intrastate transmission system that sources natural gas from interconnects with the FGT Pipeline system, the Tetco Pipeline system, the
Transco Pipeline system and our Midla System to a Baton Rouge, Louisiana refinery owned and operated by ExxonMobil Corporation and several other industrial
customers. Our MLGT System has a design capacity of approximately 170 MMcf/d and is comprised of approximately 54 miles of pipeline with diameters ranging
from three to 14 inches. The MLGT System is connected to five receipt and 19 delivery points.
On April 16, 2015, the FERC approved the Midla Agreement between Midla and its customers allowing Midla to retire the existing 1920s vintage pipeline and
replace the existing natural gas service with a new pipeline from Winnsboro, Louisiana to Natchez, Mississippi (the “Midla-Natchez Line”) to serve existing
residential, commercial, and industrial customers. Under the Midla Agreement, customers not served by the new Midla-Natchez Line will be connected to other
interstate or intrastate pipelines, other gas distribution systems, or offered conversion to propane service. On June 29, 2015, the Partnership filed for authorization
to construct the Midla-Natchez pipeline with the FERC, which was approved on December 17, 2015. Construction is expected to commence in the first half of
2016 with service beginning in late 2016. Under the Midla Agreement, Midla plans to execute long-term agreements seeking to recover its investment in the
Midla-Natchez Line.
We also own a number of miscellaneous interconnects and small laterals that are collectively referred to as the SIGCO assets.
AlaTenn/Bamagas/Trigas
AlaTenn
System.
The AlaTenn System is a FERC-regulated interstate natural gas pipeline that interconnects with TGP and travels west to east delivering natural
gas to industrial customers in northwestern Alabama, as well as the city gates of Decatur and Huntsville, Alabama. Our AlaTenn System has a design capacity of
approximately 200 MMcf/d and is comprised of approximately 294 miles of pipeline with diameters ranging from three to 16 inches and includes two compressor
stations with combined capacity of 3,665 horsepower. The AlaTenn System is connected to 19 active delivery and four receipt points, including the Tetco Pipeline
system, an interstate pipeline owned by Spectra Energy Transmission, LLC, and the Columbia Gulf Pipeline system, an interstate pipeline owned by NiSource Gas
Transmission and Storage.
Bamagas
System.
Our Bamagas System is a Hinshaw intrastate natural gas pipeline that travels west to east from an interconnection point with TGP in Colbert
County, Alabama, to two power plants in Morgan County, Alabama. The Bamagas System consists of 52 miles of high-pressure, 30-inch pipeline with a design
capacity of approximately 450 MMcf/d. Currently, 100% of the throughput on this system is contracted under long-term firm transportation agreements.
Trigas
System.
Our Trigas System is located in three counties in northwestern Alabama and has approximate design capacity of 60 MMcf/d.
Chalmette System
The Chalmette System is located in St. Bernard Parish, Louisiana. The approximate design capacity for the Chalmette System is 125 MMcf/d.
Customers
10
In our Transmission segment, we contract with LDCs, electric utilities, or direct-served industrial complexes, or to interconnections on other large pipelines, to
provide firm and interruptible transportation services.
For our Midla and AlaTenn systems, and a portion of our High Point systems, which are interstate natural gas pipelines, the maximum and minimum rates for
services are governed by each individual system's FERC-approved tariff. In some cases, with FERC approval, we can have rates or certain other terms that are
different from those generally provided for in the FERC tariff. For our Bamagas and MLGT systems, which are intrastate pipelines providing interstate services
under the Hinshaw exemption of the Natural Gas Act ("NGA"), we negotiate service rates with each of our shipper customers.
For our High Point systems, we have interruptible transportation contracts in place with various customers operating in both onshore and offshore producing
regions around southeast Louisiana. During 2015, we converted a fixed-margin arrangement on our MLGT System to an interruptible transportation contract,
which has reduced the amount of natural gas that we transport.
Within the Transmission segment, the weighted-average remaining life of our firm and interruptible transportation contracts is approximately five years and less
than one year, respectively. Superior Natural Gas Corporation and Enbridge Marketing (US) L.P. are the two largest purchasers of natural gas and transmission
capacity in our Transmission segment and accounted for approximately 19% and 16% , respectively, of our segment revenue for the year ended December 31,
2015 . For the year ended December 31, 2014 , ExxonMobil and Enbridge Marketing (US) L.P. accounted for approximately 43% and 16% , respectively, of our
segment revenue.
Terminals Segment
General
Our Terminals segment consists of approximately 1.8 million barrels of storage capacity across three marine terminal sites located in Westwego, Louisiana;
Brunswick, Georgia; and Harvey, Louisiana. Our Terminals segment provides above-ground storage services at our marine terminals that support various
commercial customers, including commodity brokers, refiners, and chemical manufacturers, to store a range of products, including petroleum products, distillates,
chemicals and agricultural products.
The following table provides information regarding our Terminals segment assets as of December 31, 2015 , and for the years ended December 31, 2015 and 2014
.
Terminals
Westwego
Brunswick
Harvey (a)
Total
Storage Utilization (%)
As of December 31,
Number of Tanks
Approximate
Contracted Capacity
(Bbls)
Approximate Design
Capacity (Bbls)
48
5
21
74
981,400
221,000
390,000
1,592,400
1,044,600
221,000
535,200
1,800,800
2015
93.9%
100.0
72.9
88.4%
2014
100.0%
100.0
16.4
86.8%
(a) The Harvey terminal commenced operations in July of 2014.
Westwego Terminal Operations
The Westwego Terminal site consists of 48 above-ground storage tanks with a combined capacity of 1,044,600 barrels. Our operations support many different
commercial customers, including commodity brokers, refiners and chemical manufacturers. Our location within the Port of New Orleans, the warehousing and
international distribution attributes this location provides, along with our broad customer base, contributes to the potential diversity of the products customers may
want stored in our terminal. The products will generally fall into two broad categories: chemical and agricultural.
Our income from the Westwego Terminal is derived from storage capacity contracts, throughput charges for receipt and delivery of our customers' products; and
other services requested by our customers, such as blending services. The terms of our storage capacity contracts range from month-to-month to multiple years,
with renewal options.
11
At the Westwego Terminal, we generally receive our customers' liquid product by river vessel at our Mississippi River dock and by railcar. The product is
transferred from the river vessels and railcars to the specified storage tank via the terminal's internal pipeline system. The customer's product is removed from
storage at our terminal by truck, railcar and/or water vessel. The length of time that the customer's product is held in storage without transfer varies depending upon
the customer's needs.
Brunswick Terminal Operations
The Brunswick Terminal site consists of one 60,000-barrel above-ground storage tank, two 80,000-barrel above-ground storage tanks and two 500-barrel above-
ground storage tanks with a combined capacity of 221,000 barrels. The Brunswick Terminal is currently leasing land from the Georgia Ports Authority pursuant to
a lease that is scheduled to terminate on September 4, 2016, which we plan to renew.
This terminal is ideally suited to serve petroleum, chemical and agricultural customers who need deep-water access and distribution in the southeastern United
States. Income from the Brunswick Terminal is derived from storage capacity contracts, throughput charges for receipt and delivery of our customers' products and
other services requested by our customers, such as blending services. The terms of our storage capacity contracts will range from month-to-month to multiple
years, with renewal options.
At the Brunswick Terminal, we offer product transfer via river vessel, railcar and bulk-liquid carrying truck. At the Brunswick Terminal, the customer's liquid
product is received by barge or ship at the dock. The product is transferred from barges or ships to the storage tank via the terminal's internal pipeline system. The
customer's product is removed from storage at our terminal by truck, railcar and/or barge or ship. The length of time that the customer's product is to be held in
storage without transfer will vary depending on the customer's needs.
Harvey Terminal Operations
The Harvey Terminal is located on 56 acres on the west bank of the Mississippi River in the Port of New Orleans and equipped to handle a wide variety of
petroleum and chemical products. Terminal storage operations at the Harvey Terminal commenced in July 2014 and currently consists of 21 above-ground storage
tanks with a combined capacity of approximately 535,200 barrels. The Harvey Terminal is a full-service storage site, including 3,000 feet of rail track that can
accommodate up to 50 cars, a two bay semi-automated truck loading facility, and a deepwater shipdock allowing for product transfers via ship, barge, railcar,
and/or tank truck. The Partnership recently executed an agreement with a major refinery customer to lease 650,000 barrels of storage capacity at the Harvey
Terminal, of which 550,000 will be newly constructed, increasing the site's total storage capacity to approximately 1.1 million barrels by the end of 2016. When
fully developed, the Harvey Terminal has the potential to provide more than 2 million barrels of storage capacity.
Customers
In our Terminals segment, we generally receive fee-based compensation on guaranteed firm storage contracts and throughput fees charged to our customers when
their products are either received or disbursed along with other operational charges associated with ancillary services provided to our customers, such as excess
throughput, truck weighing, etc. The terms of our firm storage contracts are multiple years, with renewal options.
Among all of our customers in this segment, the weighted-average remaining life of our guaranteed firm storage contracts are approximately 2.2 years. Occidental
Chemical Corporation and Monsanto Company are the two largest customers in our Terminals segment and accounted for approximately 21% and 13%,
respectively, of our segment revenue for the year ended December 31, 2015. Shell Trading (US) Company and Shrieve Chemical Products, Inc accounted for
approximately 20% and 19%, respectively, of our segment revenue for the year ended December 31, 2014.
Investment in Unconsolidated Affiliates
Delta
House
We own a 12.9% non-operated indirect interest in Delta House, a semi-submersible floating production system (“FPS”) with associated crude oil and natural gas
export pipelines located in the Mississippi Canyon region of the deepwater Gulf of Mexico. The FPS receives raw production from deepwater wells, which
includes a mixture of crude oil, natural gas, and produced water, and separates the production into its components. The separated crude oil and natural gas
pressures are increased, creating pipeline quality crude oil and natural gas that flows into the respective crude oil and natural gas export pipelines. Delta House is
operated by LLOG Exploration and has nameplate processing capacity of 80,000 Bbl/d and 200 MMcf/d and peak processing capacity of 100,000 Bbl/d and 240
MMcf/d.
12
Main
Pass
Oil
Gathering
System
We own a 66.7% non-operated interested in MPOG, a crude oil gathering system located offshore the Southeast coast of Louisiana in the Gulf of Mexico. The
approximately 100 mile system has a total design capacity of approximately 160,000 Bbl/d and is currently operated by Panther Operating Companies, LLC, a
subsidiary of the minority interest owner, Panther Companies.
Mesquite
We own a 46% non-operated interest in Mesquite, a joint venture with EnLink Midstream located near Midland, Texas. The Mesquite facility includes a rail
terminal, 5,000 Bbl/d condensate stabilization facility and 5,000 Bbl/d fractionation unit that facilitates the receipt, treatment and sale of off-spec condensate and
NGLs via pipeline, truck and rail.
Competition
The natural gas gathering, compression, treating and transportation business is very competitive. Our competitors in our Gathering and Processing segment include
other midstream companies, producers, intrastate and interstate pipelines. Competition for natural gas volumes is primarily based on reputation, commercial terms,
reliability, service levels, location, available capacity, capital expenditures and fuel efficiencies. Our major competitors in this segment include DCP Midstream
LLC; Enbridge Energy Partners; LP; Energy Transfer Partners, L.P; EnLink NGL Marketing, L.P.; Kinder Morgan Energy Partners; Midcoast Energy Partners,
and Southcross Energy Partners, L.P.
Competition is often the greatest in geographic areas experiencing robust drilling by producers and during periods of high commodity prices for natural gas, crude
oil and/or NGLs. Competition is also increased in those geographic areas where our commercial contracts with our customers are shorter term and therefore must
be renegotiated on a more frequent basis.
In our Transmission segment, we compete with other pipelines that serve regional markets, specifically in our Baton Rouge market. An increase in competition
could result from new pipeline installations or expansions of existing pipelines. Competitive factors include the commercial terms, available capacity, fuel
efficiencies, the interconnected pipelines and natural gas quality issues. Our major competitors for this segment are Columbia Gulf Transmission Company;
EnLink NGL Marketing, L.P.; Enterprise Gas Processing, LLC; Gulf South Pipeline Company, LP; Southern Natural Gas Company; Tennessee Gas Pipeline
Company, LLC, and Texas Eastern Pipeline.
In our Terminals segment, we compete with a number of existing storage facilities within the New Orleans to Baton Rouge, Louisiana refining and manufacturing
corridor, the southeast USA, Florida and Georgia area and the Delmarva, Maryland Peninsula area. Our major competitors for this segment are International-Matex
Tank Terminals; Kinder Morgan Energy Partners; LBC Tank Terminals; Royal Vopak; Stolt-Nielsen Limited, and Westway Terminals Company LLC.
Other Segment Information
For additional information on our segments, including revenues from customers, profit or loss and total assets, please see Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 15. "Exhibits and Financial Statement Schedules."
Safety and Maintenance
We are subject to regulation by the Pipeline and Hazardous Materials Safety Administration ("PHMSA") pursuant to the Natural Gas Pipeline Safety Act of 1968
("NGPSA"), and by the Pipeline Safety Improvement Act of 2002 ("PSIA"), which was recently reauthorized and amended by the Pipeline Inspection, Protection,
Enforcement and Safety Act of 2006. The NGPSA regulates safety requirements in the design, construction, operation and maintenance of gas pipeline facilities,
while the PSIA establishes mandatory inspections for all U.S. crude oil and natural gas transportation pipelines and some gathering lines in high-consequence
areas. The PHMSA has developed regulations implementing the PSIA that require transportation pipeline operators to implement integrity management programs,
including more frequent inspections and other measures to ensure pipeline safety in "high-consequence areas," such as high population areas. The Pipeline Safety,
Regulatory Certainty, and Job Creation Act of 2011, which became law in January 2012, increases the penalties for safety violations, establishes additional safety
requirements for newly constructed pipelines and requires studies of safety issues that could result in the adoption of new regulatory requirements for existing
pipelines. The PHMSA issued a final rule applying safety regulations to certain rural low-stress hazardous liquid pipelines that were not covered previously by
some of its safety regulations. We believe that this rule does not apply to any of our pipelines. In April 2015, PHMSA proposed rulemaking that would require leak
detection for all hazardous liquid pipelines and require
13
periodic assessment of hazardous liquid pipelines not already covered by the integrity management requirements. A final rule has not been issued. To date,
PHMSA has not proposed rules expanding the integrity management requirements for natural gas pipelines. While we cannot predict the outcome of these
legislative or regulatory initiatives, such legislative and regulatory changes could have a material effect on our operations, particularly by extending more stringent
and comprehensive safety regulations (such as integrity management requirements) to pipelines not previously subject to such requirements. While we expect any
legislative or regulatory changes to allow us time to become compliant with new requirements, costs associated with compliance may have a material effect on our
operations. We cannot predict with any certainty at this time the terms of any new laws or rules or the costs of compliance associated with such requirements.
We regularly inspect our pipelines, and third parties assist us in interpreting the results of the inspections.
States are largely preempted by federal law from regulating pipeline safety for interstate lines, but most states are certified by the U.S. Department of
Transportation ("DOT") to assume responsibility for enforcing federal intrastate pipeline regulations and inspection of intrastate pipelines. In practice, because
states can adopt stricter standards for intrastate pipelines than those imposed by the federal government for interstate lines, states vary considerably in their
authority and capacity to address pipeline safety. These state crude oil and gas standards may include requirements for facility design and management in addition
to requirements for pipelines. We do not anticipate any significant difficulty in complying with applicable state laws and regulations. Our natural gas pipelines
have continuous inspection and compliance programs designed to keep the facilities in compliance with pipeline safety and pollution control requirements.
In addition, we are subject to a number of federal and state laws and regulations, including the federal Occupational Safety and Health Act ("OSHA"), and
comparable state statutes, the purposes of which are to protect the health and safety of workers, both generally and within the pipeline industry. In addition, the
OSHA hazard communication standard, the Environmental Protection Agency ("EPA"), community right-to-know regulations under Title III of the federal
Superfund Amendment and Reauthorization Act (Superfund") and comparable state statutes require that information be maintained concerning hazardous materials
used or produced in our operations and that such information be provided to employees, state and local government authorities, and citizens. We and the entities in
which we own an interest are also subject to OSHA Process Safety Management ("PSM") regulations, which are designed to prevent or minimize the consequences
of catastrophic releases of toxic, reactive, flammable or explosive chemicals. We have an internal program of inspection designed to monitor and enforce
compliance with worker safety requirements. We believe that we are in material compliance with all applicable laws and regulations relating to worker health and
safety, Superfund and PSM.
We and the entities in which we own an interest are subject to:
•
•
EPA Chemical Accident Prevention Provisions, also known as the Risk Management Plan requirements, which are designed to prevent the accidental
release of toxic, reactive, flammable or explosive materials; and
Department of Homeland Security Chemical Facility Anti-Terrorism Standards, which are designed to regulate the security of high-risk chemical facilities.
Regulation of Operations
Regulation of pipeline gathering and transportation services, natural gas sales and transportation of NGLs may affect certain aspects of our business and the market
for our products and services.
Regulation of our terminals require us to maintain and currently hold approvals and permits from federal, state and local regulatory agencies for air quality and
water discharge, as well as standard local occupational licenses.
Interstate Natural Gas Pipeline Regulation
Our interstate natural gas transportation systems are subject to the jurisdiction of FERC pursuant to the NGA. Under the NGA, FERC has authority to regulate
natural gas companies that provide natural gas pipeline transportation services in interstate commerce. Federal regulation of our interstate pipelines extends to such
matters as:
•
•
•
•
•
•
rates, services, and terms and conditions of service;
the types of services offered to customers;
the certification and construction of new facilities;
the acquisition, extension, disposition or abandonment of facilities;
the maintenance of accounts and records;
relationships between affiliated companies involved in certain aspects of the natural gas business;
14
the initiation and discontinuation of services;
•
• market manipulation in connection with interstate sales, purchases or transportation of natural gas and NGLs; and
•
participation by interstate pipelines in cash management arrangements.
Under the NGA, the rates for service on these interstate facilities must be just and reasonable and not unduly discriminatory.
The rates and terms and conditions for our interstate pipeline services are set forth in FERC-approved tariffs. Pursuant to FERC's jurisdiction over rates, existing
rates may be challenged by complaint and proposed rate increases may be challenged by protest. Any successful complaint or protest against our rates could have
an adverse impact on our revenue associated with providing transportation service.
In 2008, FERC issued Order No. 717, a final rule that implements standards of conduct that include three primary rules: (1) the "independent functioning rule,"
which requires transmission function and marketing function employees to operate independently of each other; (2) the "no-conduit rule," which prohibits passing
transmission function information to marketing function employees; and (3) the "transparency rule," which imposes posting requirements to help detect any
instances of undue preference. The FERC has since issued four rehearing orders that generally reaffirmed the determinations in Order No. 717 and also clarified
certain provisions of the Standards of Conduct.
In 2005, the FERC issued a policy statement permitting the inclusion of an income tax allowance in the cost of service-based rates of a pipeline organized as a tax
pass through partnership entity to reflect actual or potential income tax liability on public utility income, if the pipeline proves that the ultimate owner of its
interests has an actual or potential income tax liability on such income. The policy statement provided that whether a pipeline's owners have such actual or
potential income tax liability will be reviewed by the FERC on a case-by-case basis. In August 2005, FERC dismissed requests for rehearing of its new policy
statement. In December 2005, the FERC issued its first significant case-specific review of the income tax allowance issue in another pipeline partnership's rate
case. The FERC reaffirmed its income tax allowance policy and directed the subject pipeline to provide certain evidence necessary for the pipeline to determine its
income tax allowance. The tax allowance policy and the December 2005 order were appealed to the United States Court of Appeals for the District of Columbia
Circuit, or D.C. Circuit. The D.C. Circuit denied these appeals in May 2007 in ExxonMobil
Oil
Corporation
v.
FERC
and fully upheld the FERC's tax allowance
policy and the application of that policy in the December 2005 order. In 2007, the D.C. Circuit denied rehearing of its ExxonMobil
decision. The ExxonMobil
decision, its applicability, other orders issued by the FERC upholding the FERC's income tax allowance policy and the issue of the inclusion of an income tax
allowance have been the subject of extensive litigation before the FERC. The FERC's most recent order upholding the policy was issued in September 2012.
Several parties have appealed this FERC order. Whether a pipeline's owners have actual or potential income tax liability continues to be reviewed by FERC on a
case-by-case basis. How the FERC applies the income tax allowance policy to pipelines owned by publicly traded partnerships could impose limits on a pipeline's
ability to include a full income tax allowance in its cost of service.
In April 2008, the FERC issued a Policy Statement regarding the composition of proxy groups for determining the appropriate return on equity for natural gas and
crude oil pipelines using FERC's Discounted Cash Flow ("DCF") model for setting cost-of-service or recourse rates. The FERC denied rehearing and no petitions
for review of the Policy Statement were filed. In the policy statement, FERC concluded, among other matters that MLPs should be included in the proxy group
used to determine return on equity for both natural gas and crude oil pipelines, but the long-term growth component of the DCF model should be limited to fifty
percent of long-term gross domestic product. The adjustment to the long-term growth component, and all other things being equal, results in lower returns on
equity than would be calculated without the adjustment. However, the actual return on equity for our interstate pipelines will depend on the specific companies
included in the proxy group and the specific conditions at the time of the future rate case proceeding. FERC's policy determinations applicable to MLPs are subject
to further modification.
Section 311 Pipelines
Intrastate transportation of natural gas is largely regulated by the state in which such transportation takes place. To the extent that our intrastate natural gas
transportation systems transport natural gas in interstate commerce without an exemption under the NGA, the rates, terms and conditions of such services are
subject to FERC jurisdiction under Section 311 of the Natural Gas Policy Act, or NGPA, and Part 284 of the FERC's regulations. Pipelines providing
transportation service under Section 311 are required to provide services on an open and nondiscriminatory basis. The NGPA regulates, among other things, the
provision of transportation services by an intrastate natural gas pipeline on behalf of a local distribution company or an interstate natural gas pipeline. The rates,
terms and conditions of some transportation services provided on our Section 311 pipeline systems are subject to FERC regulation pursuant to Section 311 of the
NGPA. Under Section 311, rates charged for intrastate transportation must be fair and equitable, and amounts collected in excess of fair and equitable rates are
subject to refund with interest. The terms and conditions of service set forth in the intrastate facility's statement of operating conditions are also subject to FERC's
review and approval. Should the FERC determine not to authorize rates equal to or greater than our currently approved Section 311 rates, our business
15
may be adversely affected. Failure to observe the service limitations applicable to transportation and storage services under Section 311, failure to comply with the
rates approved by the FERC for Section 311 service, and failure to comply with the terms and conditions of service established in the pipeline's FERC-approved
statement of operating conditions could result in alteration of jurisdictional status, and/or the imposition of administrative, civil and criminal remedies.
Hinshaw Pipelines
Intrastate natural gas pipelines are defined as pipelines that operate entirely within a single state, and generally are not subject to FERC's jurisdiction under the
NGA. Hinshaw pipelines, by definition, also operate within a single state, but can receive gas from outside their state without becoming subject to FERC's NGA
jurisdiction. Specifically, Section 1(c) of the NGA exempts from the FERC's NGA jurisdiction those pipelines that transport gas in interstate commerce if (1) they
receive natural gas at or within the boundary of a state, (2) all the gas is consumed within that state and (3) the pipeline is regulated by a state commission.
Following the enactment of the NGPA, the FERC issued Order No. 63 authorizing Hinshaw pipelines to apply for authorization to transport natural gas in interstate
commerce in the same manner as intrastate pipelines operating pursuant to Section 311 of the NGPA. Hinshaw pipelines frequently operate pursuant to blanket
certificates to provide transportation and sales service under the FERC's regulations.
Historically, FERC did not require intrastate and Hinshaw pipelines to meet the same rigorous transactional reporting guidelines as interstate pipelines. However,
as discussed below, in 2010 the FERC issued a new rule, Order No. 735, which increases FERC regulation of certain intrastate and Hinshaw pipelines. See "Market
Behavior Rules; Posting and Reporting Requirements."
Gathering Pipeline Regulation
Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of FERC. However, some of our natural gas gathering activity is subject to
Internet posting requirements imposed by FERC as a result of FERC's market transparency initiatives. We believe that our natural gas pipelines meet the traditional
tests that FERC has used to determine that a pipeline is a gathering pipeline and is, therefore, not subject to FERC jurisdiction. The distinction between FERC-
regulated transmission services and federally unregulated gathering services, however, is the subject of substantial, on-going litigation, so the classification and
regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress. State regulation of gathering facilities
generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. In recent
years, FERC's efforts to promote open access, transparency, and the unbundling of interstate pipeline services has prompted a number of interstate pipelines to
transfer their non-jurisdictional gathering facilities to unregulated affiliates. As a result of these activities, natural gas gathering may begin to receive greater
regulatory scrutiny at both the state and federal levels. Our natural gas gathering operations could be adversely affected should they be subject to more stringent
application of state or federal regulation of rates and services. Our natural gas gathering operations also may be or become subject to additional safety and
operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. Additional rules
and legislation pertaining to these matters are considered or adopted from time to time. We cannot predict what effect, if any, such changes might have on our
operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.
Our natural gas gathering operations are subject to ratable take and common purchaser statutes in most of the states in which we operate. These statutes generally
require our gathering pipelines to take natural gas without undue discrimination as to source of supply or producer. These statutes are designed to prohibit
discrimination in favor of one producer over another producer or one source of supply over another source of supply. The regulations under these statutes can have
the effect of imposing some restrictions on our ability as an owner of gathering facilities to decide with whom we contract to gather natural gas. The states in which
we operate have adopted a complaint-based regulation of natural gas gathering activities, which allows natural gas producers and shippers to file complaints with
state regulators in an effort to resolve grievances relating to gathering access and rate discrimination. We cannot predict whether such a complaint will be filed
against us in the future. Failure to comply with state regulations can result in the imposition of administrative, civil and criminal remedies. To date, there has been
no adverse effect to our system due to these regulations.
Market Behavior Rules; Posting and Reporting Requirements
On August 8, 2005, Congress enacted the Energy Policy Act of 2005, ("EP Act 2005"). Among other matters, the EP Act 2005 amended the NGA to add an anti-
manipulation provision that makes it unlawful for any entity to engage in prohibited behavior in contravention of rules and regulations to be prescribed by FERC
and, furthermore, provides FERC with additional civil penalty authority. On January 19, 2006, FERC issued Order No. 670, a rule implementing the anti-
manipulation provision of the EP Act 2005, and subsequently denied rehearing. The rules make it unlawful for any entity, directly or indirectly in connection with
the
16
purchase or sale of natural gas subject to the jurisdiction of FERC or the purchase or sale of transportation services subject to the jurisdiction of FERC to (1) use or
employ any device, scheme or artifice to defraud; (2) to make any untrue statement of material fact or omit to make any such statement necessary to make the
statements made not misleading; or (3) to engage in any act or practice that operates as a fraud or deceit upon any person. The new anti-manipulation rules apply to
interstate gas pipelines and storage companies and intrastate gas pipelines and storage companies that provide interstate services, such as Section 311 service, as
well as otherwise non-jurisdictional entities to the extent the activities are conducted "in connection with" gas sales, purchases or transportation subject to FERC
jurisdiction. The new anti-manipulation rules do not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but only to the
extent such transactions do not have a "nexus" to jurisdictional transactions. The EP Act 2005 also amends the NGA and the NGPA to give FERC authority to
impose civil penalties for violations of these statutes, up to $1,000,000 per day per violation for violations occurring after August 8, 2005. In connection with this
enhanced civil penalty authority, FERC issued a policy statement on enforcement to provide guidance regarding the enforcement of the statutes, orders, rules and
regulations it administers, including factors to be considered in determining the appropriate enforcement action to be taken. Should we fail to comply with all
applicable FERC-administered statutes, rule, regulations and orders, we could be subject to substantial penalties and fines.
The EP Act of 2005 also added a section 23 to the NGA authorizing the FERC to facilitate price transparency in markets for the sale or transportation of physical
natural gas in interstate commerce. In 2007, FERC took steps to enhance its market oversight and monitoring of the natural gas industry by issuing several
rulemaking orders designed to promote gas price transparency and to prevent market manipulation. In December 2007, FERC issued a final rule on the annual
natural gas transaction reporting requirements, as amended by subsequent orders on rehearing, or Order No. 704. Order No. 704 requires buyers and sellers of
annual quantities of natural gas of 2,200,000 MMBtu or more, including entities not otherwise subject to FERC jurisdiction, to submit on May 1 of each year an
annual report to FERC describing their aggregate volumes of natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions
utilize, contribute to or may contribute to the formation of price indices. Order No. 704 also requires market participants to indicate whether they report prices to
any index publishers and, if so, whether their reporting complies with FERC's policy statement on price reporting. In June 2010, the FERC issued the last of its
three orders on rehearing further clarifying its requirements.
In May 2010, the FERC issued Order No. 735, which requires intrastate pipelines providing transportation services under Section 311 of the NGPA and Hinshaw
pipelines operating under Section 1(c) of the NGA to report on a quarterly basis more detailed transportation and storage transaction information, including: rates
charged by the pipeline under each contract; receipt and delivery points and zones or segments covered by each contract; the quantity of natural gas the shipper is
entitled to transport, store, or deliver; the duration of the contract; and whether there is an affiliate relationship between the pipeline and the shipper. Order No. 735
further requires that such information must be supplied through a new electronic reporting system and will be posted on FERC's website, and that such quarterly
reports may not contain information redacted as privileged. The FERC promulgated this rule after determining that such transactional information would help
shippers make more informed purchasing decisions and would improve the ability of both shippers and the FERC to monitor actual transactions for evidence of
market power or undue discrimination. Order No. 735 also extends the Commission's periodic review of the rates charged by the subject pipelines from three years
to five years. Order No. 735 became effective on April 1, 2011. In December 2010, the Commission issued Order No. 735-A. In Order No. 735-A, the Commission
generally reaffirmed Order No. 735 requiring section 311 and "Hinshaw" pipelines to report on a quarterly basis storage and transportation transactions containing
specific information for each transaction, aggregated by contract.
In July 2010, for the first time the FERC issued an order finding that the prohibition against buy/sell arrangements applies to interstate open access services
provided by Section 311 and Hinshaw pipelines. The FERC denied the numerous requests for rehearing of the July order. However, in October 2010, the FERC
issued a Notice of Inquiry seeking public comment on the issue of whether and how parties that hold firm capacity on some intrastate pipelines can allow others to
use their capacity, including to what extent buy/sell transactions should permitted and whether the FERC should consider requiring such pipelines to offer capacity
release programs. In the Notice of Inquiry, the FERC granted a blanket waiver regarding such transactions while the FERC is considering these policy issues. The
comment period has ended but the FERC has not issued an order.
Offshore Natural Gas Pipelines
Our offshore natural gas gathering pipelines are subject to federal regulation under the Outer Continental Shelf Lands Act, which requires that all pipelines
operating on or across the outer continental shelf provide open and nondiscriminatory access to shippers. From 1982 until 2012, the Minerals Management Service
("MMS"), of the U.S. Department of the Interior ("DOI"), was the federal agency that managed the nation's crude oil, natural gas, and other mineral resources on
the outer continental shelf, which is all submerged lands lying seaward of state coastal waters which are under U.S. jurisdiction, and collected, accounted for, and
disbursed revenues from federal offshore mineral leases. On June 18, 2010, the Minerals Management Service was renamed the Bureau of Ocean Energy
Management, Regulation and Enforcement ("BOEMRE"). In October 2011, the BOEMRE was reorganized into
17
and replaced by two separate agencies, the Bureau of Ocean Energy Management ("BOEM") and the Bureau of Safety and Environmental Enforcement ("BSEE").
The BOEM manages the exploration and development of the nation's offshore resources. BOEM seeks to appropriately balance economic development, energy
independence, and environmental protection through crude oil and gas leases, renewable energy development and environmental reviews and studies. BSEE works
to promote safety, protect the environment, and conserve resources offshore through vigorous regulatory oversight and enforcement.
Sales of Natural Gas and NGLs
The price at which we sell natural gas is not currently subject to federal rate regulation and, for the most part, is not subject to state regulation. However, with
regard to our physical sales of these energy commodities, we are required to observe anti-market manipulation laws and related regulations enforced by the FERC
and/or the Commodity Futures Trading Commission ("CFTC"), and the Federal Trade Commission ("FTC"). Should we violate the anti-market manipulation laws
and regulations, we could also be subject to related third-party damage claims by, among others, sellers, royalty owners and taxing authorities.
Sales of NGLs are not currently regulated and are made at negotiated prices. Nevertheless, Congress could enact price controls in the future.
As discussed above, the price and terms of access to pipeline transportation are subject to extensive federal and state regulation. The FERC is continually
proposing and implementing new rules and regulations affecting interstate natural gas pipelines and those initiatives may also affect the intrastate transportation of
natural gas both directly and indirectly.
Environmental Matters
General
Our operation of pipelines, plants, terminals and other facilities for the gathering, compressing, treating and transporting of natural gas and other products is subject
to stringent and complex federal, state and local laws and regulations relating to the protection of the environment. As an owner or operator of these facilities, we
must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many
ways, such as:
•
•
•
•
•
requiring the installation of pollution-control equipment or otherwise restricting the way we operate;
limiting or prohibiting construction activities in sensitive areas, such as wetlands, coastal regions or areas inhabited by endangered or threatened species;
delaying system modification or upgrades during permit reviews;
requiring investigatory and remedial actions to mitigate pollution conditions caused by our operations or attributable to former operations; and
enjoining the operations of facilities deemed to be in non-compliance with permits issued pursuant to such environmental laws and regulations.
Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of
monetary penalties. Certain environmental statutes impose strict joint and several liability for costs required to clean up and restore sites where substances,
hydrocarbons or wastes have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment.
The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus, there can be no assurance
as to the amount or timing of future expenditures for environmental compliance or remediation and actual future expenditures may be different from the amounts
we currently anticipate. We try to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing
environmental laws and regulations and to minimize the costs of such compliance. We also actively participate in industry groups that help formulate
recommendations for addressing existing or future regulations.
We do not believe that compliance with federal, state or local environmental laws and regulations will have a material adverse effect on our business, financial
position or results of operations or cash flows. In addition, we believe that the various environmental activities in which we are presently engaged are not expected
to materially interrupt or diminish our operational ability to gather, compress, treat and transport natural gas. We cannot assure, however, that future events, such
as changes in existing laws or enforcement policies, the promulgation of new laws or regulations or the development or discovery of new facts or conditions will
not cause us to incur significant costs. Below is a discussion of the material environmental laws and regulations that relate to our business. We believe that we are
in substantial compliance with all of these environmental laws and regulations.
18
Hazardous Substances and Waste
Our operations are subject to environmental laws and regulations relating to the management and release of hazardous substances, solid and hazardous wastes and
petroleum hydrocarbons. These laws generally regulate the generation, storage, treatment, transportation and disposal of solid and hazardous waste and may
impose strict joint and several liability for the investigation and remediation of affected areas where hazardous substances may have been released or disposed. For
instance, the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), and comparable state laws impose liability, without regard
to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a hazardous substance into the environment. We may
handle hazardous substances within the meaning of CERCLA, or similar state statutes, in the course of our ordinary operations and, as a result, may be jointly and
severally liable under CERCLA for all or part of the costs required to clean up sites at which these hazardous substances have been released into the environment.
We also generate industrial wastes that are subject to the requirements of the Resource Conservation and Recovery Act ("RCRA"), and comparable state statutes.
While RCRA regulates both solid and hazardous wastes, it imposes strict requirements on the generation, storage, treatment, transportation and disposal of
hazardous wastes. We generate little hazardous waste; however, it is possible that these wastes, which could include wastes currently generated during our
operations, will in the future be designated as "hazardous wastes" and, therefore, be subject to more rigorous and costly disposal requirements. Any such changes
in the laws and regulations could have a material adverse effect on our maintenance capital expenditures and operating expenses.
We currently own or lease properties where hydrocarbons are being or have been handled for many years. Although previous operators have utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties
owned or leased by us or on or under the other locations where these hydrocarbons and wastes have been transported for treatment or disposal. These properties
and the wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under these laws, we could be required to remove or remediate
previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated soil
and groundwater) or to perform remedial operations to prevent future contamination. We are not currently aware of any facts, events or conditions relating to such
requirements that could materially impact our operations or financial condition.
Air Quality and Climate Change
Our operations are subject to the federal Clean Air Act and comparable state and local laws and regulations. These laws and regulations regulate emissions of air
pollutants from various industrial sources, including our compressor stations and processing plants, and also impose various monitoring and reporting
requirements. Such laws and regulations may require that we obtain pre-approval for the construction or modification of certain projects or facilities expected to
produce or significantly increase air emissions, obtain and strictly comply with air permits containing various emissions and operational limitations and utilize
specific emission control technologies to limit emissions. Failure to comply with applicable air statutes or regulations may lead to the assessment of administrative,
civil or criminal penalties and may result in the limitation or cessation of construction or operation of certain air emission sources. Although we can give no
assurances, we believe such requirements will not have a material adverse effect on our financial condition or operating results, and the requirements are not
expected to be more burdensome to us than to any similarly situated company. As the EPA issues new, lower National Ambient Air Quality Standards
("NAAQS"), we may be required to incur certain capital expenditures for air pollution control equipment in connection with obtaining and maintaining operating
permits and approvals for air emissions. For example, in June 2010, the EPA issued a new NAAQS for sulfur dioxide, or SO 2, and replaced the 24-hour and
annual standards with a more stringent hourly standard. In October 2015, the agency finalized a reduction of the national ambient air quality standard for ozone
standard from 75 parts per billion to 70 parts per billion; both nitrogen oxides and VOCs are ozone precursors. This reduction is expected to increase the number of
ozone nonattainment areas. In September 2015, the EPA also proposed Control Technology Guidelines for emissions of VOCs from crude oil and natural gas
industry sources to be relied upon by states when implementing the ozone standard in ozone nonattainment areas. We believe that our operations will not be
materially adversely affected by such requirements, and the requirements are not expected to be any more burdensome to us than to any other similarly situated
companies.
On April 17, 2012, the EPA approved final rules under the Clean Air Act that establish new air emission controls for crude oil and natural gas production, pipelines
and processing operations. These rules became effective on October 15, 2012. The established specific new requirements regarding emissions from wet seal and
reciprocating compressors at production facilities, gathering systems, boosting facilities and onshore natural gas processing plants, effective October 15, 2012, and
from pneumatic controllers and storage vessels at production facilities, gathering systems, boosting facilities and onshore natural gas processing plants, effective
October 15, 2013. In addition, the rules revise existing requirements for volatile organic compound emissions from equipment leaks at onshore natural gas
processing plants by lowering the leak definition for valves from 10,000 parts per million to 500 parts
19
per million and requiring the monitoring of connectors, pumps, pressure relief devices and open-ended lines, effective October 15, 2012. Initial compliance and
ongoing compliance with the new subset of rules required capital expenditures and ongoing compliance expenses. Following the publication of the final rule, the
EPA received petitions for reconsideration of certain aspects of the standards. On April 12, 2013, the EPA published proposed updates to the NSPS Section OOOO
storage tank requirements. On September 23, 2013, the EPA published final revisions to the NSPS Section OOOO storage tank requirements, including a phase-in
of installation of VOC controls and alternate limits for tanks where emissions have declined. The EPA issued revised definitions related to the stages of well
completions and amended storage tank requirements under NSPS Section OOOO in December 2014 and further revised the storage tank requirements in March
2015. The EPA continues to reconsider other portions of Section OOOO. The rule is also the subject of Petitions for Review before the U.S. Court of Appeals for
the District of Columbia Circuit.
A number of states have adopted or considered programs to reduce “greenhouse gases,” or GHGs and the EPA has declared that GHGs “endanger” public health
and welfare, and is regulating GHG emissions from mobile sources such as cars and trucks. According to the EPA, this final action on the GHG vehicle emission
rule triggered regulation of carbon dioxide and other GHG emissions from stationary sources under certain Clean Air Act programs at both the federal and state
levels, particularly the Prevention of Significant Deterioration program and Title V permitting. These requirements for stationary sources took effect on January 2,
2011; however, in June 2014 the U.S. Supreme Court reversed a D.C. Circuit Court of Appeals decision upholding these rules and struck down the EPA’s
greenhouse gas permitting rules to the extent they impose a requirement to obtain a federal air permit based solely on emissions of greenhouse gases. Large sources
of other air pollutants, such as volatile organic compounds or nitrogen oxides, could still be required to implement process or technology controls and obtain
permits regarding emissions of greenhouse gases. The EPA has also published various rules relating to the mandatory reporting of GHG emissions, including
mandatory reporting requirements of GHGs from petroleum and natural gas systems. In December 2014, the EPA proposed to amend and expand greenhouse gas
reporting requirements to all segments of the oil and gas sector, with a final regulation expected to be effective by January 1, 2016 with initial reporting submitted
by March 31, 2017 for all affected sources.
In September of 2015 the EPA released proposed rules to set emission standards for methane and volatile organic compounds, or VOCs, for certain new, modified
and reconstructed emission sources across the oil and gas sector. The proposed rules affect sources that had VOC requirements under the 2012 NSPS rule but now
this is to include methane for these sources. For sources not affected by the 2012 rule the proposed rule will implement VOC and methane standards for those
sources. The proposed rules apply to facilities constructed, modified or reconstructed after September 1, 2015 and would include 2012 rules as well as new
provisions within the 2015 proposed rules. In particular the rules affect centrifugal and reciprocating compressors, pneumatic pumps, fugitive emissions from well
sites and compressor stations and equipment leaks at natural gas processing plants. Additionally, in January 2016, the Bureau of Land Management proposed
additional rules designed to reduce methane venting and flaring from production wells, pneumatic controllers and storage tanks on federal and tribal lands, which
are expected to be finalized in 2016.
The permitting, regulatory compliance and reporting programs taken as a whole increase the costs and complexity of operating oil and gas operations in
compliance with these legal requirements, with resulting potential to adversely affect our cost of doing business, demand for the oil and gas we transport and may
require us to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining operating permits and
approvals for air emissions.
Water Discharges
The Federal Water Pollution Control Act ("Clean Water Act"), and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants
into state waters as well as waters of the U.S. and to conduct construction activities in waters and wetlands. In May 2015, the EPA and the U.S. Army Corps of
Engineers issued a final rule to clarify which waters and wetlands are subject to Clean Water Act regulation. The implementation of this rule was stayed
nationwide in October 2015. Certain state regulations and the general permits issued under the Federal National Pollutant Discharge Elimination System program
prohibit the discharge of pollutants and chemicals. Spill Prevention Control and Countermeasure ("SPCC") requirements of federal laws require appropriate
containment berms and similar structures to help prevent the contamination of regulated waters in the event of a hydrocarbon tank spill, rupture or leak. In addition,
the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types
of facilities. These permits may require us to monitor and sample the storm water runoff from certain of our facilities. Some states also maintain groundwater
protection programs that require permits for discharges or operations that may impact groundwater conditions. Federal and state regulatory agencies can impose
administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and
regulations. We believe that compliance with existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on
our financial condition, results of operations or cash flow.
Safe Drinking Water Act
20
The underground injection of crude oil and natural gas wastes are regulated by the Underground Injection Control program authorized by the Safe Drinking Water
Act. The primary objective of injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migration of
fluids from the injection zone into underground sources of drinking water. We own and operate an acid gas disposal well in Wayne County, Mississippi, as part of
our Bazor Ridge gas treating facilities. This well takes a combination of hydrogen sulfide and carbon dioxide recovered from the raw field natural gas feeding the
Bazor Ridge Gas plant and injects it into an underground formation permitted for this purpose. The well received an Underground Injection Control ("UIC")
Class 2 permit through the Mississippi state oil and gas board in 1999. As part of our permit requirements, we perform regular inspection, maintenance and
reporting to the state on the condition and operations of this well which is adjacent to our processing plant. We believe that our facilities will not be materially
adversely affected by such requirements.
Endangered Species
The Endangered Species Act ("ESA") restricts activities that may affect endangered or threatened species or their habitats. While some of our pipelines may be
located in areas that are designated as habitats for endangered or threatened species, we believe that we are in substantial compliance with the ESA. However, the
designation of previously unidentified endangered or threatened species could cause us to incur additional costs or become subject to operating restrictions or bans
in the affected states.
National Environmental Policy Act
The National Environmental Policy Act ("NEPA") establishes a national environmental policy and goals for the protection, maintenance, and enhancement of the
environment and provides a process for implementing these goals within federal agencies. A major federal agency action having the potential to significantly
impact the environment requires review under NEPA and, as a result, many activities requiring FERC approval must undergo NEPA review. Many of our activities
are covered under categorical exclusions that result in a shorter NEPA review process. The Council on Environmental Quality has issued final guidance to
reinvigorate NEPA reviews that, while intended to streamline the process, may result in longer review processes that could lead to delays and increased costs that
could materially adversely affect our revenues and results of operations.
Anti-terrorism Measures
The federal Department of Homeland Security regulates the security of chemical and industrial facilities pursuant to regulations known as the Chemical Facility
Anti-Terrorism Standards. These regulations apply to oil and gas facilities, among others, that are deemed to present “high levels of security risk.” Pursuant to
these regulations, certain of our facilities are required to comply with certain regulatory provisions, including requirements regarding inspections, audits,
recordkeeping, and protection of chemical-terrorism vulnerability information.
Title to Properties and Rights-of-Way
Our real property falls into two categories: i) parcels that we own in fee and ii) parcels in which our interest derives from leases, easements, rights-of-way, permits
or licenses from landowners or governmental authorities, permitting the use of such land for our operations. Portions of the land on which our plants and other
major facilities are located are owned by us in fee title, and we believe that we have satisfactory title to these lands. The remaining land on which our plant sites
and major facilities are located, are held by us pursuant to surface leases between us, as lessee, and the fee owner of the lands, as lessors. Our predecessors leased
or owned these lands for many years without any material challenge known to us relating to the title to the land upon which the assets are located, and we believe
that we have satisfactory leasehold estates or fee ownership in such lands. We have no knowledge of any challenge to the underlying fee title of any material lease,
easement, right-of-way, permit or license held by us or to our title to any material lease, easement, right-of-way, permit or lease, and we believe that we have
satisfactory title to all of our material leases, easements, rights-of-way, permits and licenses.
Employees
We do not have any employees. The officers of our General Partner manage our operations and activities. As of December 31, 2015, our General Partner employed
approximately 300 people who provide direct, full-time support to our operations. All of the employees required to conduct and support our operations are
employed by our General Partner. None of these employees are covered by collective bargaining agreements, and our General Partner considers its employee
relations to be positive.
General
21
We make certain filings, and amendments thereto, with the Securities and Exchange Commission (the "SEC"), including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports. All of these filings are available as soon as reasonably practicable after the
electronic filing with the SEC free of charge on our website, www.americanmidstream.com. The filings are also available at the SEC's Public Reference Room at
100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. Additionally, the filings are available on the Internet at www.sec.gov. The
information contained on our website is not part of, nor is it incorporated by reference into, this Annual Report on Form 10-K.
22
Item 1A. Risk Factors
Limited
partner
units
are
inherently
different
from
capital
stock
of
a
corporation,
although
many
of
the
business
risks
to
which
we
are
subject
are
similar
to
those
that
would
be
faced
by
a
corporation
engaged
in
similar
businesses.
We
urge
you
to
carefully
consider
the
following
risk
factors
together
with
all
of
the
other
information
included
in
this
Annual
Report
in
evaluating
an
investment
in
our
common
units.
If
any
of
the
following
risks
were
to
occur,
our
business,
financial
condition,
results
of
operations
or
cash
flows
could
be
materially
adversely
affected.
In
that
case,
we
might
not
be
able
to
pay
the
minimum
quarterly
distribution
on
our
common
units,
the
trading
price
of
our
common
units
could
decline
and
you
could
lose
all
or
part
of
your
investment
in
us.
Risks Related to our Business
Our Credit Agreement includes financial covenants and ratios. We may have difficulty maintaining compliance with such financial covenants and ratios,
which include a consolidated total leverage ratio on a quarterly basis, which could adversely affect our operations and our ability to pay distributions to our
unitholders.
We depend on our credit facility for working capital and future expansion capital needs and, as necessary, to fund a portion of cash distributions to unitholders. We
are required to comply with certain financial covenants and ratios in our Credit Agreement, including a consolidated interest coverage ratio, consolidated total
leverage ratio and consolidated secured leverage ratio. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by
the levels of cash flow from our operations and events or circumstances beyond our control, including events and circumstances that may stem from the condition
of financial markets and commodity price levels. Our failure to comply with any of the covenants under our Credit Agreement could result in a default, which
could cause all of our existing indebtedness to become immediately due and payable.
Our ability to pay distributions to holders of our common and Series A Units is partially dependent upon general economic conditions in the energy industry,
which continue to deteriorate.
The actual amount of cash that is available to be distributed each quarter depends, in part, upon general economic conditions in the energy industry, which are
beyond our control and the control of our General Partner. As conditions in the energy industry have continued to deteriorate many master limited partnerships
have decreased the amount of, or suspended the payment of, distributions to holders of common units. If the current state of the energy industry continues for a
prolonged period of time, or the condition worsens, we may be forced to reduce or suspend distributions to holders of our common and Series A Units.
We may not have sufficient cash from operations following the preferred distribution on our Series A Units, the establishment of cash reserves and payment of
fees and expenses, including cost reimbursements to our General Partner, to enable us to pay distributions to holders of our common units.
We may not have sufficient available cash from operations each quarter to enable us to pay the minimum quarterly distribution of $0.4125 per common unit or at
all. These distributions may only be made from cash available for distribution after the preferred quarterly distribution to which our Series A Units are entitled, the
establishment of cash reserves, and payment of our fees and expenses. The amount of cash we can distribute on our units principally depends upon the amount of
cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
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the volume of natural gas we gather, process and transport;
the level of production of crude oil and natural gas and the resultant market prices of crude oil and natural gas and NGLs;
realized pricing impacts on our revenue and expenses that are directly subject to commodity price exposure;
changes in the fees we charge for our services;
the market prices of natural gas and NGLs relative to one another, which affects our processing margins;
the effect of seasonal variations in temperature on the amount of natural gas and crude oil that we transport and the amount of natural gas that we store,
process and treat;
capacity charges and volumetric fees associated with our transportation services;
storage capacity utilization associated with our terminals segment;
the level of competition from other midstream energy companies in our geographic markets;
the creditworthiness of our customers;
the level of our operating, maintenance and selling, general and administrative costs;
regulatory action affecting the supply of, or demand for, natural gas, the transportation rates we can charge on our regulated pipelines, how we contract
for services, our existing contracts, our operating costs and our operating flexibility; and
acts of God.
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In addition, the actual amount of cash we will have available for distribution will depend on other factors, including:
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the level and timing of capital expenditures we make;
the cost of acquisitions, and the resulting costs of integrations, if any;
our debt service payments and requirements and other liabilities;
fluctuations in our working capital needs;
our ability to borrow funds and access capital markets;
restrictions contained in our Credit Agreement;
the amount of cash reserves established by our General Partner; and
other business risks affecting our cash levels.
There is no guarantee that unitholders will receive quarterly distributions from us. Our distributions are determined each quarter by the Board of Directors of our
General Partner based on the board’s consideration of the foregoing factors, our financial position, earnings, cash flow, current and future business needs and other
relevant factors at that time. We may reduce or eliminate distributions at any time we have insufficient cash available for distributions. This may be due to
insufficient cash reserves, requirements to fund current or anticipated future operations, capital expenditures, acquisitions, growth or expansion projects, debt
repayment or other business needs.
Because of the natural decline in production from existing wells in our areas of operation, our success depends on our ability to obtain new sources of natural
gas, NGLs and crude oil, which is dependent on factors beyond our control. Any decrease in the volumes of natural gas that we gather, process or transport
could adversely affect our business and operating results.
The commodity volumes that support our business are dependent on the level of production from natural gas and crude oil wells connected to our systems,
including volumes from significant customers, the production of which will naturally decline over time. As a result, our cash flows associated with these wells will
also decline over time. In order to maintain or increase throughput levels on our systems, we must obtain new sources of natural gas and crude oil. The primary
factors affecting our ability to obtain non-dedicated sources of natural gas and crude oil include i) the level of successful drilling activity in our areas of operation
and ii) our ability to compete for volumes from successful new wells.
We have no control over the level of drilling activity in our areas of operation, the amount of reserves associated with wells connected to our systems or the rate at
which production from a well declines. In addition, we have no control over producers or their drilling or production decisions, which are affected by, among other
things:
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prevailing and projected natural gas, crude oil and NGL prices;
the availability and cost of capital;
demand for natural gas, crude oil and NGLs;
levels of reserves;
geological considerations;
environmental or other governmental regulations, including the availability of drilling permits; and
the availability of drilling rigs and other production and development costs.
Fluctuations in energy prices, like the ongoing declines in commodity prices of crude oil, natural gas and NGLs, can also greatly affect the development of new
reserves. Further declines in crude oil, natural gas and NGLs prices could have a negative impact on exploration, development and production activity, and, if
sustained, are likely to lead to further decreases in such activity. Sustained reductions in exploration or production activity in our areas of operation would lead to
reduced utilization of our assets. We are unable to predict future potential movements in the market price for natural gas, crude oil and NGLs and thus, cannot
predict the ultimate impact of prices on our operations. If commodity prices continue to remain low or trend lower as they have since the latter part of 2014, this
could lead to reduced profitability and may impact our liquidity and compliance with financial covenants in our Credit Agreement. Reduced profitability may also
result in future non-cash impairments of long-lived assets, goodwill, or intangible assets.
Because of these and other factors, even if new natural gas, NGL and crude oil reserves are known to exist in areas served by our assets, producers may choose not
to develop those reserves. If reductions in drilling activity result in our inability to maintain the current levels of throughput on our systems, it could reduce our
revenue and cash flow and adversely affect our ability to make cash distributions to our unitholders.
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Natural gas, crude oil, NGL and other commodity prices are volatile, and a reduction in these prices in absolute terms, or an adverse change in the prices of
natural gas and NGLs relative to one another, could adversely affect our gross margin and cash flow and our ability to make distributions to our unitholders.
We are subject to risks due to frequent and often substantial fluctuations in commodity prices. In the past, the prices of natural gas and crude oil have been
extremely volatile, and we expect this volatility to continue. Natural gas prices have been under downward pressure in recent years and were highly volatile in
2014. The NYMEX daily settlement price for natural gas for the forward month contract in 2015 ranged from a high of $3.23 per MMBtu to a low of $1.76 per
MMBtu. NGL prices are generally positively correlated to the price of WTI crude oil, which has also exhibited frequent and substantial fluctuations. Oil prices
declined dramatically in late 2014 and remained low in 2015 and early 2016. The NYMEX daily settlement price for WTI crude oil for the forward month contract
in 2015 ranged from a high of $61.43 per Bbl to a low of $34.73 per Bbl.
The markets for and prices of natural gas, crude oil, NGLs and other hydrocarbon commodities depend on factors that are beyond our control. These factors
include the supply of and demand for these commodities, which fluctuate with changes in market and economic conditions and other factors, including:
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worldwide economic conditions;
worldwide political events, including actions taken by foreign oil and gas producing nations;
worldwide weather events and conditions, including natural disasters and seasonal changes;
the levels of world-wide and domestic production and consumer demand;
the availability of imported, or market for exported, liquefied natural gas, or LNG;
the market for exported crude oil;
the availability of transportation systems with adequate capacity;
the volatility and uncertainty of regional pricing differentials;
the price and availability of alternative fuels;
the effect of energy conservation measures;
the nature and extent of governmental regulation and taxation; and
the current and anticipated future prices of natural gas, crude oil, NGLs and other commodities.
In our Gathering and Processing segment, we have exposure to direct commodity price risk under percent-of-proceeds processing contracts as well as under our
elective processing arrangements. Under percent-of-proceeds arrangements, we generally purchase natural gas from producers and retain an agreed percentage of
the proceeds (in cash or in-kind) from the sale at market prices of pipeline-quality natural gas and NGLs resulting from our processing activities. We also purchase
natural gas at various receipt points, process the gas at a third-party owned natural gas processing facility and sell our portion of the residue gas and NGLs. Under
percent-of-proceeds arrangements, our revenue and our cash flows increase or decrease as the prices of natural gas, NGLs and crude oil fluctuate. When we
process natural gas that we purchase for our own account, the relationship between natural gas prices and NGL prices also affects our profitability. When natural
gas prices are low relative to NGL prices, it is more profitable for us to process the natural gas that we purchase and process for our own account. When natural gas
prices are high relative to NGL prices, it is less profitable for us and our customers to process natural gas both because of the higher value of natural gas and
because of the increased cost (principally that of natural gas shrink that occurs during processing and use of natural gas as a fuel) of separating the mixed NGLs
from the natural gas. As a result, we may experience periods in which higher natural gas prices relative to NGL prices reduce our processing margins or reduce the
volume of natural gas processed pursuant to our elective processing arrangements. For the years ended December 31, 2015 and 2014 , percent-of-proceeds
arrangements accounted for approximately 14.1% and 25.6% , respectively, of our gross margin, or 22.7% and 51.7% , respectively, of the segment gross margin
in our Gathering and Processing segment.
If the current decline in commodity prices continues, it could result in a further decrease in exploration and development activities in the fields served by our
gathering and pipeline transmission systems and our natural gas processing plants, which could lead to further reduced utilization of these assets. During periods of
natural gas, crude oil, or NGL declines, the level of drilling activity generally decrease. When combined with a reduction of cash flow resulting from lower
commodity prices, a reduction in our producers' borrowing base under reserve-based credit facilities and lack of availability of debt or equity financing for our
producers may result in a significant reduction in our producers' spending for drilling activity, which could result in lower volumes being transported on our
gathering and transmission systems.
Our growth strategy, and ability to fund expansion capital projects, requires access to new capital. Tightened capital markets or other factors that increase our
cost of capital, or limit our access to capital, could impair our ability to grow.
We continuously consider potential acquisitions and opportunities for expansion capital projects. Acquisition opportunities arise quickly and unexpectedly, may
occur at any time and may be significant in size relative to our existing assets and operations. Our
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ability to fund our capital projects and make acquisitions depends on whether we can access the necessary financing to fund these activities. Any limitations on
our access to capital or increase in the cost of that capital could significantly impair our growth strategy. Our ability to maintain our targeted credit profile,
including our target debt-to-equity ratio, could affect our cost of capital as well as our ability to execute our growth strategy. In addition, a variety of factors
beyond our control could impact the availability or cost of capital, including domestic or international economic conditions, increases in key benchmark interest
rates and/or credit spreads, the adoption of new or amended banking or capital market laws or regulations, the re-pricing of market risks and volatility in capital
and financial markets.
Due to these factors, we cannot be certain that funding for our capital needs will be available from bank credit arrangements, our Credit Agreement or capital
markets on acceptable terms. If funding is not available when needed, or is available only on unfavorable terms, we may be unable to implement our development
plans, enhance our existing business, complete acquisitions and construction projects, take advantage of business opportunities or respond to competitive pressures,
any of which could have a material adverse effect on our revenues and results of operations.
Our hedging activities may not be effective in reducing our direct exposure to commodity price risk and may, in certain circumstances, increase the variability
of our cash flows.
From time to time, we have entered into derivative transactions related to only a portion of the equity volumes of commodities to which we take title. As a result,
we will continue to have direct commodity price risk to the unhedged portion of our commodity equity volumes. We do not currently have any commodity hedges
in place and whether we place additional commodity hedges depends on the cost of such hedges, our projected volumes and price expectations. Our actual future
volumes may be significantly higher or lower than we estimated at the time we entered into the derivative transactions for that period. If the actual amount is
higher than we estimated, we will have greater commodity price risk than we intended. If the actual amount is lower than the amount that is subject to our
derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale of the
underlying physical commodity, resulting in a reduction of our liquidity. The derivative instruments we utilize for these hedges are based on posted market prices,
which may be lower than the actual commodity prices that we realize in our operations. In addition, when there is not a hedging instrument available for a
commodity to which we take title, we are forced to use an alternative hedge that may not adequately reduce price risk. As a result of these factors, our hedging
activities may not be as effective as we intend in reducing the variability of our cash flows, and, in certain circumstances, may actually increase the variability of
our cash flows. To the extent we hedge our commodity price risk, we may forego the benefits we would otherwise experience if commodity prices were to change
in our favor. Further, there may be times where we terminate or enter into offsetting positions depending on our view of future market prices. We do not enter into
derivative transactions with respect to the volumes of natural gas or condensate that we purchase and sell.
We may not successfully balance our purchases and sales of natural gas, which would increase our exposure to commodity price risks.
We purchase from producers and other suppliers a substantial amount of the natural gas that flows through our pipelines and processing facilities for sale to third
parties, including natural gas marketers and other purchasers. We are exposed to fluctuations in the price of natural gas through volumes sold pursuant to percent-
of-proceeds arrangements as well as through volumes sold pursuant to our fixed-margin contracts.
In order to mitigate our direct commodity price exposure, we do not enter into natural gas hedge contracts, but rather attempt to balance our natural gas sales with
our natural gas purchases on an aggregate basis across all of our systems. We may not be successful in balancing our purchases and sales, and as such may become
exposed to fluctuations in the price of natural gas. For example, we are currently net purchasers of natural gas on certain of our systems and net sellers of natural
gas on certain of our other systems. Our overall net position with respect to natural gas can change over time and our exposure to fluctuations in natural gas prices
could materially increase, which in turn could result in increased volatility in our revenue, gross margin and cash flows.
Although we enter into back-to-back purchases and sales of natural gas in our fixed-margin contracts in which we purchase natural gas from producers or suppliers
at receipt points on our systems and simultaneously sell an identical volume of natural gas at delivery points on our systems, we may still be exposed to commodity
price risks. For example, the volumes or timing of our purchases and sales may not correspond. In addition, a producer or supplier could fail to deliver contracted
volumes or deliver in excess of contracted volumes, or a purchaser could purchase less than contracted volumes. Any of these actions could cause our purchases
and sales to become unbalanced. If our purchases and sales are unbalanced, we will face increased exposure to commodity price risks, which in turn could result in
increased volatility in our revenue, gross margin and cash flows.
We have no control over the entities that own and operate Delta House.
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We recently acquired a 26.3% non-operated interest in Pinto Offshore Holdings, LLC ("Pinto"), an entity that owns a non-operated interest in (i) approximately
49% of the limited liability company interests of Delta House FPS LLC and (ii) approximately 49% of the limited liability company interests of Delta House Oil
and Gas Lateral LLC, which respectively own the Delta House floating production system and related pipeline infrastructure ("Delta House"). As a result, we own
a minority interest in Pinto, which in turn causes us to own a 12.9% indirect interest in Delta House. Pursuant to the limited liability company agreement of Pinto,
we have no management control or authority over the day-to-day operations, capital calls, expenditures, expansions or any other decision with regard to Delta
House and its related infrastructure. We may be required to make significant capital contributions to Delta House, or risk dilution of our indirect investment. In the
event Delta House does not perform to expectations, we do not have any ability to make changes in its operations.
Severe weather in the U.S. Gulf of Mexico, including windstorms, could cause significant damage and disruption to our business interests located in that
region.
The U.S. Gulf of Mexico experiences hurricanes and other extreme weather conditions on a frequent basis, the frequency of which may increase with climate
change. Our High Point system, our Offshore Texas system, our non-operated interests in MPOG and Delta House and any future systems that we acquire in the
U.S. Gulf of Mexico, are susceptible to adverse weather conditions in the U.S. Gulf of Mexico, including hurricanes and other extreme weather conditions. Our
insurance may not cover all associated loss. High winds, storm surge, and turbulent seas can cause significant damage and curtail these operations for extended
periods during and after such weather conditions, which may result in decreased revenues from our interests in these operations. In addition, these adverse weather
conditions in the U.S. Gulf of Mexico can affect producers connected to our facilities even if our facilities are not damaged, which may result in decreased
revenues from our interests in these operations.
A decrease in demand for natural gas, NGLs or condensate by the petrochemical, refining or heating industries, could adversely affect the profitability of our
midstream business.
Various factors impact the demand for natural gas, NGLs and condensate, including general economic conditions, extended periods of ethane rejection, increased
competition from petroleum-based products due to pricing differences, adverse weather conditions, availability of natural gas processing and transportation
capacity and government regulations affecting prices and production levels of natural gas, NGLs and condensate. A decrease in demand for natural gas, NGLs or
condensate by the petrochemical, refining or heating industries, could adversely affect the profitability of our midstream business.
We are a relatively small enterprise, and our management has limited history and experience with certain aspects of our business and certain assets. As a
result, operational, financial and other events in the ordinary course of business could disproportionately affect us, and our ability to grow our business could
be significantly limited.
We may be smaller than many of the other companies in our industry for the foreseeable future, not only in terms of market capitalization but also in terms of
managerial, operational and financial resources. Consequently, an operational incident, customer loss, volume reduction or other event that might not significantly
impact the business and operations of the larger companies in our industry may have a material adverse impact on our business and results of operations. In
addition, our executive management team is relatively small with limited experience in managing certain aspects of our business and certain assets. As a result, we
may not be able to anticipate or respond to material changes or other events in our business as effectively as if our executive management team had extensive
experience and had managed our business and assets for many years. Furthermore, acquisitions and other growth projects may place a significant strain on our
management resources. As a result, our ability to execute our growth strategy and to integrate acquisitions and expansion projects successfully into our existing
operations could be significantly limited
We have identified a material weakness in our internal control over financial reporting, and our business and unit price may be adversely affected if we do not
adequately address the weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.
We identified a material weakness in our internal control over financial reporting as of December 31, 2014 related to the failure to design and maintain effective
internal controls over the completeness and accuracy of spreadsheets. Our guidelines were not precise enough in describing the level of review to be performed
regarding the inputs, assumptions and formulas used in spreadsheets. The existence of this or other material weaknesses or significant deficiencies could result in
errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. Although the material weakness
identified above had been remediated as of December 31, 2015, if we cannot produce reliable financial reports, investors could lose confidence in our reported
financial information, the market price of our common units could decline significantly, we may be unable to obtain additional financing to operate and expand our
business and our business and financial condition could be harmed.
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We continue to evaluate the adequacy of our accounting personnel staffing level and other matters related to our internal control over financial reporting, and we
cannot predict the outcome of this evaluation of the effectiveness of our internal control over financial reporting.
Given the difficulties inherent in the design and operation of internal control over financial reporting, we can provide no assurance as to our, or our independent
registered public accounting firm's future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply
with Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to implement and maintain effective internal control over financial reporting will subject us to
regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and a negative effect on the
trading price of our common units.
We depend on a relatively small number of customers for a significant portion of our gross margin. The loss of any one of these customers could adversely
affect our ability to make distributions.
A significant percentage of the gross margin in each of our segments is attributable to a relatively small number of customers. Additionally, a number of customers
upon which our business depends are small companies that may have limited access to capital or that may, as a result of operational incidents or other events, be
disproportionately affected as compared to larger, better capitalized companies. For information regarding our concentration of customers and associated credit risk
by segment, please refer to "Part I, Item 1. Business" in this Annual Report. Although we have gathering, processing and transmission contracts with significant
customers of varying duration and commercial terms, if one or more of these customers were to default on their contract or if we were unable to renew our contract
with one or more of these customers on favorable terms, we may not be able to replace these customers in a timely fashion, on favorable terms or at all. In any of
these situations, our gross margin and cash flows and our ability to make cash distributions to our unitholders may be adversely affected. We expect our exposure
to concentrated risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively small number of customers for a
substantial portion of our gross margin.
Our reliance on our key customers exposes us to their credit risks, and any material nonpayment or nonperformance by our key customers or purchasers could
have a material adverse effect on our revenue, gross margin and cash flows.
We are subject to risks of loss resulting from nonpayment or nonperformance by our customers to which we provide services and sell commodities. For the year
ended December 31, 2015, our Gathering and Processing segment derived 12% of its revenue from both ConocoPhilips Company and Penn Virginia Oil & Gas,
LP. For the year ended December 31, 2014, our Gathering and Processing segment derived 33% and 12% of its revenue from ConocoPhillips Company and Shell
Trading (US) Company, respectively. For the year ended December 31, 2015, our Transmission segment derived 19% and 16% of its revenue from Superior
Natural Gas Corporation and Enbridge Marketing (US) L.P., respectively, who were the two largest purchasers of natural gas and transmission capacity. For the
year ended December 31, 2014, ExxonMobil and Enbridge Marketing (US) L.P. accounted for approximately 43% and 16%, respectively, of our Transmission
segment revenue. Occidental Chemical Corporation and Monsanto Company accounted for 21% and 13%, respectively, of our Terminal segment revenue for the
year ended December 31, 2015. Shell Trading (US) Company and Shrieve Chemical Products, Inc. accounted for 20% and 19%, respectively, of our Terminal
segment revenue for the year ended December 31, 2014.
Some of our customers and purchasers may be highly leveraged or under-capitalized and subject to their own operating and regulatory risks, which could increase
the risk that they may default on their obligations to us. Any material nonpayment or nonperformance by any of our key customers or purchasers could have a
material adverse effect on our revenue, gross margin and cash flows and our ability to make cash distributions to our unitholders.
If third-party pipelines or other midstream facilities interconnected to our gathering or transportation systems become partially or fully unavailable, or if the
volumes we gather or transport do not meet the natural gas quality requirements of such pipelines or facilities, our revenue and cash available for distribution
could be adversely affected.
Our natural gas gathering and processing and transportation systems connect to other pipelines or facilities, the majority of which, such as the Southern Natural
Gas Company, or Sonat, pipeline, the Toca plant, crude oil gathering lines on Quivira and the Burns Point processing plant, as well as the Destin, Tennessee Gas
and Transco pipelines, are owned and operated by third parties. For example, our elective processing arrangements are entirely dependent on the Toca plant for
processing services and the Sonat pipeline for natural gas takeaway capacity and are substantially dependent on Kinetica for natural gas supply volumes. The
continuing operation of such third-party pipelines and other midstream facilities is not within our control. These pipelines and other midstream facilities may
become unavailable because of testing, turnarounds, line repair, reduced operating pressure, lack of operating capacity, regulatory requirements, curtailments of
receipt or deliveries due to insufficient capacity or because of
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damage from hurricanes or other operational hazards. If any of these pipelines or other midstream facilities becomes unable to receive or transport natural gas, or if
the volumes we gather or transport do not meet the natural gas quality requirements of such pipelines or facilities, our revenue and cash available for distribution
could be adversely affected.
Our gathering, processing, transportation and terminal contracts subject us to renewal risks.
We gather, purchase, process, transport and sell most of the commodities on our systems under contracts with terms of various durations. We provide above-
ground storage services at our marine terminals that support various commercial customers. As these contracts expire, we may have to negotiate extensions or
renewals with existing suppliers and customers or enter into new contracts with other suppliers and customers. We may be unable to obtain new contracts on
favorable commercial terms, if at all. We also may be unable to maintain the economic structure of a particular contract with an existing customer or the overall
mix of our contract portfolio. For example, depending on prevailing market conditions at the time of a contract renewal, gathering and processing customers with
percent-of-proceeds contracts may choose to switch to fee-based gathering and transportation contracts, or a producer with whom we have a natural gas purchase
contract may choose to enter into a transportation contract with us and retain title to its natural gas. To the extent we are unable to renew our existing contracts on
terms that are favorable to us or successfully manage our overall contract mix over time, our revenue, gross margin and cash flows could decline and our ability to
make distributions to our unitholders could be materially and adversely affected.
Environmental, health and safety costs and liabilities, and changing environmental, health and safety regulation, could have a material adverse effect on our
financial position, results of operations and cash flows.
Our operations are subject to various environmental, health and safety requirements and potential liabilities under extensive federal, state and local laws and
regulations. Further, we cannot ensure that existing environmental, health and safety regulations will not be revised or that new regulations will not be adopted or
become applicable to us. Governmental authorities have the power to enforce compliance with applicable regulations and permits and to subject violators to civil
and criminal penalties, including substantial fines, injunctions or both. Certain environmental laws, including CERCLA and analogous state laws and regulations,
may impose strict, joint and several liability for costs required to clean-up and restore sites where hazardous substances or hydrocarbons have been disposed or
otherwise released. Moreover, third parties, including neighboring landowners, may also have the right to pursue legal actions to enforce compliance or to recover
for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment.
Failure to comply with these requirements may expose us to fines, penalties and/or interruptions in our operations that could have a material adverse effect on our
financial position, results of operations and cash flows.
In addition, future environmental, health and safety law developments, such as stricter laws, regulations, permits or enforcement policies, could significantly
increase some costs of our operations. Areas of potential future environmental, health and safety law development include the following items:
Greenhouse Gases/Climate Change. The U.S. Congress has considered legislation to reduce emissions of greenhouse gases. In addition, some states, including
states in which our facilities or operations are located, have individually or in regional cooperation, imposed restrictions on greenhouse gas emissions under various
policies and approaches, including establishing a cap on emissions, requiring efficiency measures, or providing incentives for pollution reduction, use of renewable
energy sources, or use of replacement fuels with lower carbon content.
The EPA initiated the regulation of greenhouse gases under its Clean Air Act authority in 2009, as set forth in the discussion of new rules below. Federal agencies
also have begun directly regulating emissions of methane (a greenhouse gas) from crude oil and natural gas operations. In September 2015, the EPA announced
proposed new source performance standards for methane from new and modified crude oil and natural gas industry sources, which are expected to be finalized in
2016. These regulations will expand upon the 2012 EPA new source performance standard rulemaking for equipment-specific emissions control requirements, and
will, for example, require additional controls for pneumatic controllers and pumps, and compressors, and impose leak detection and repair requirements for natural
gas compressor and booster stations. In January 2016, the Bureau of Land Management proposed additional rules designed to reduce methane venting and flaring
from production wells, pneumatic controllers and storage tanks on federal and tribal lands, which also are expected to be finalized in 2016.
The adoption and implementation of any federal, state or local regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, our
equipment and operations could require us to incur significant costs to reduce emissions of greenhouse gases associated with our operations or could adversely
affect demand for the commodities that we buy and/or sell, transport, store or otherwise handle in connection with our midstream services. In addition, the adoption
and implementation of any federal, state or local regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, the equipment and
operations of our producer customers could affect their ability to produce the commodities that we buy and/or sell, transport, store or otherwise
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handle in connection with our midstream services. The potential increase in our operating costs could include among other things costs to operate and maintain our
facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay taxes related to our greenhouse gas
emissions, and administer and manage a greenhouse gas emissions program. We may not be able to recover such increased costs through customer prices or rates.
In addition, changes in regulatory policies that result in a reduction in the demand for hydrocarbon products that are deemed to contribute to greenhouse gases, or
restrictions on their use, may reduce volumes available to us for processing, transportation, marketing and storage. These developments could have a material
adverse effect on our financial position, results of operations and cash flows.
Hydraulic Fracturing. Certain of our customers employ hydraulic fracturing techniques to stimulate natural gas and crude oil production from unconventional
geological formations (including shale formations), which entails the injection of pressurized fracturing fluids (consisting of water, sand and certain chemicals)
into a well bore. The U.S. federal government, and some states and localities, have adopted, and others are considering adopting, regulations or ordinances that
could restrict hydraulic fracturing in certain circumstances, or that would impose higher taxes, fees or royalties on natural gas production, or otherwise limit the use
of the technique. Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to crude oil and natural gas drilling
activities using hydraulic fracturing techniques, including increased litigation. Additional legislation or regulation could also lead to operational delays and/or
increased operating costs in the production of crude oil and natural gas incurred by our customers or could make it more difficult for them to perform hydraulic
fracturing. If these legislative and regulatory initiatives cause a material decrease in the drilling or production of new wells and related servicing activities, it may
affect the volume of hydrocarbon projects available to our midstream business and have a material adverse effect on our financial position, results of operations
and cash flows.
The value of our interests in operations located in the U.S. Gulf of Mexico could be adversely impacted by increased regulation and continuing regulatory
uncertainty.
Operations in the U.S. Gulf of Mexico have been subject to an increasingly stringent regulatory environment including government regulations focused on offshore
operating requirements, spill cleanup, and enforcement matters. These regulations also implement additional safety and certification requirements applicable to
offshore activities in the U.S. Gulf of Mexico. Certain operating assets such as our High Point system and our Offshore Texas system, and certain non-operated
interests in operations located in the U.S. Gulf of Mexico that we currently hold or may hold in the future, are subject to such increased regulations, including our
non-operated interests in MPOG and Delta House. In addition, the Bureau of Safety and Environmental Enforcement and the Bureau of Ocean Energy
Management has increased regulatory activity including shortening the time period a line may be inactive before it must be removed or abandoned and requiring
additional supplemental bonding for offshore facilities. These new regulations have increased our operating costs, and the operating costs of our producer
customers. As a result, the value of our interests in these operations may be adversely affected by these regulations. Future regulatory requirements could delay
activities from these operations and reduce our revenues, resulting in reduced cash flows and profitability.
Our industry is highly competitive and increased competitive pressure could adversely affect our business and operating results.
We compete with other midstream companies in our areas of operation. In addition, some of our competitors are large companies that have greater financial,
managerial and other resources than we do. Our competitors may expand or construct gathering, compression, treating, processing, transportation or terminaling
systems that would create additional competition for the services we provide to our customers. In addition, our customers may develop their own gathering,
compression, treating, processing or transportation systems in lieu of using ours. Our ability to renew or replace existing contracts with our customers at rates
sufficient to maintain current revenue and cash flow could be adversely affected by the activities of our competitors and our customers. All of these competitive
pressures could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.
Significant portions of our pipeline systems have been in service for several decades and we have a limited ownership history with respect to all of our assets.
There could be unknown events or conditions or increased maintenance or repair expenses and downtime associated with our pipelines that could have a
material adverse effect on our business and results of operations.
Significant portions of the pipeline systems that we have purchased had been in service for many decades prior to our purchase. Consequently, our executive
management team has a limited history of operating such assets. There may be historical occurrences or latent issues regarding our pipeline systems that our
executive management may be unaware of and that may have a material adverse effect on our business and results of operations. The age and condition of our
pipeline systems could also result in increased maintenance or repair expenditures, and any downtime associated with increased maintenance and repair activities
could materially reduce our revenue. Any significant increase in maintenance and repair expenditures or loss of revenue due to the age or condition of our pipeline
systems could adversely affect our business and results of operations and our ability to make cash distributions to our unitholders.
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We may incur significant costs and liabilities as a result of safety regulation, including pipeline integrity management program testing and related repairs.
Pursuant to the PSIA, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006, the DOT has adopted regulations
requiring pipeline operators to develop integrity management programs for transmission pipelines located where a leak or rupture could harm "high consequence
areas," including high population areas, unless the operator effectively demonstrates by risk assessment that the pipeline could not affect the area. The regulations
require operators, including us, to:
perform ongoing assessments of pipeline integrity;
identify and characterize applicable threats to pipeline segments that could impact a high consequence area;
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repair and remediate pipelines as necessary; and
implement preventive and mitigating actions.
In addition, many states have adopted regulations similar to existing DOT regulations for intrastate gathering and transmission lines. Although many of our natural
gas facilities fall within a class that is not subject to these requirements, we may incur significant costs and liabilities associated with repair, remediation,
preventative or mitigation measures associated with our non-exempt pipelines, particularly our AlaTenn and Midla pipelines. We currently estimate that we will
incur future costs of approximately $0.6 million during 2016 to complete the testing required by existing DOT regulations. This estimate does not include the costs,
if any, for repair, remediation, preventative or mitigating actions that may be determined to be necessary as a result of the testing program, which could be
substantial. Such costs and liabilities might relate to repair, remediation, preventative or mitigating actions that may be determined to be necessary as a result of the
testing program, as well as lost cash flows resulting from shutting down our pipelines during the pendency of such repairs. Additionally, should we fail to comply
with DOT regulations, we could be subject to penalties and fines.
The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, which became law in January 2012, increases the penalties for safety violations,
establishes additional safety requirements for newly constructed pipelines and requires studies of safety issues that could result in the adoption of new regulatory
requirements for existing pipelines. In April 2015, PHMSA proposed rulemaking that would require leak detection for all hazardous liquid pipelines and require
periodic assessment of hazardous liquid pipelines not already covered by the integrity management requirements. A final rule has not been issued. To date,
PHMSA has not proposed rules expanding the integrity management requirements for natural gas pipelines. Such legislative and regulatory changes could have a
material effect on our operations and costs of transportation services.
Recent spills and their aftermath could lead to additional governmental regulation of the offshore exploration and production industry, which may result in
substantial cost increases or delays in our offshore natural gas gathering activities.
In April 2010, a deep-water exploration well located in the Gulf of Mexico, owned and operated by companies unrelated to us, sustained a blowout and subsequent
explosion leading to the leaking of hydrocarbons. In response to this event, certain federal agencies and governmental officials ordered additional inspections of
deep-water operations in the Gulf of Mexico. This spill and its aftermath has led to additional governmental regulation of the offshore exploration and production
industry and delays in the issuance of drilling permits, which may result in volume impacts, cost increases or delays in our offshore natural gas gathering activities,
which could materially impact our offshore operations, and our business, financial condition and results of operations. We cannot predict with any certainty what
form any additional regulation or limitations will take.
We intend to grow our business in part by seeking strategic acquisition opportunities. If we are unable to make acquisitions on economically acceptable terms
from third parties, our future growth may be limited, and the acquisitions we do make may reduce, rather than increase, our cash generated from operations
on a per unit basis.
Our ability to grow depends, in part, on our ability to make acquisitions that increase our cash generated from operations on a per unit basis. The acquisition
component of our strategy is based, in large part, on our expectation of ongoing divestitures of midstream energy assets by industry participants. A material
decrease in such divestitures would limit our opportunities for future acquisitions and could adversely affect our ability to grow our operations and increase our
distributions to our unitholders.
If we are unable to make accretive acquisitions from third parties, whether because we are: i) unable to identify attractive acquisition candidates or negotiate
acceptable purchase contracts, ii) unable to obtain financing for these acquisitions on economically acceptable or attractive terms or iii) outbid by competitors or
for any other reason, then our future growth and ability to increase distributions will be limited. Furthermore, even if we do make acquisitions that we believe will
be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations on a per unit basis.
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Any acquisition involves potential risks, including, among other things:
• mistaken assumptions about volumes, revenue, decline rates, drilling activity and cost savings, including synergies;
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an inability to secure adequate customer commitments to use the acquired systems or facilities;
an inability to integrate successfully the assets or businesses we acquire, particularly given the relatively small size of our management team and its limited
history with certain assets;
the assumption of unknown liabilities;
limitations on rights to indemnity from the seller;
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the diversion of management's and employees' attention from other business concerns;
the entry of competitors in the markets where the acquired business competes;
unforeseen difficulties operating in new geographic areas and business lines; and
customer or key employee losses at the acquired businesses.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and our unitholders will not have the opportunity
to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.
If we are unable to timely and successfully integrate our acquisitions, our future financial performance may suffer, and we may fail to realize all of the
anticipated benefits of the transaction.
Our future growth may depend in part on our ability to integrate our acquisitions. We cannot guarantee that we will successfully integrate any acquisitions into our
existing operations, or that we will achieve the desired profitability and anticipated results from such acquisitions. Failure to achieve such planned results could
adversely affect our operations and cash flows available for distribution to our unitholders.
The integration of acquisitions with our existing business involves numerous risks, including:
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operating a significantly larger combined organization and integrating additional midstream operations into our existing operations;
difficulties in the assimilation of the assets and operations of the acquired businesses, especially if the assets acquired are in a new business segment or
geographical area;
the loss of customers or key employees from the acquired businesses;
the diversion of management's attention from other existing business concerns;
the failure to realize expected synergies and cost savings;
coordinating geographically disparate organizations, systems and facilities;
integrating personnel from diverse business backgrounds and organizational cultures; and
consolidating corporate and administrative functions.
Further, unexpected costs and challenges may arise whenever businesses with different operations or managements are combined, and we may experience
unanticipated delays in realizing the benefits of an acquisition. Following an acquisition, we may discover previously unknown liabilities, including those under the
same environmental laws and regulations relating to the release of pollutants into the environment and environmental protection that are applicable to our existing
plants, pipelines and facilities. If so, our operation of these new assets could cause us to incur increased costs to address these liabilities or to attain or maintain
compliance with such requirements. If we consummate any future acquisition, our capitalization and results of operation may change significantly, and unitholders
will not have the opportunity to evaluate the economic, financial and other relevant information that we may consider in determining the application of these funds
and other resources.
Our construction of new assets may not result in increased revenue and will be subject to regulatory, environmental, political, legal and economic risks, which
could adversely affect our results of operations and financial condition.
One of the ways we intend to grow our business is through organic growth projects. The construction of additions or modifications to our existing systems and the
construction of new midstream assets involve numerous regulatory, environmental, political, legal and economic uncertainties that are beyond our control. Such
expansion projects may also require the expenditure of significant amounts of capital, and financing may not be available on economically acceptable terms or at
all. If we undertake these projects, they may not be completed on schedule, at the budgeted cost, or at all. Cost overruns on construction projects may cause
unexpected changes in project economics. Moreover, our revenue may not increase immediately upon the expenditure of funds on a particular project.
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For instance, if we expand a pipeline, the construction may occur over an extended period of time, yet we will not receive any material increases in revenue until
the project is completed and placed into service. Moreover, we could construct facilities to capture anticipated future growth in production in a region in which
such growth does not materialize or only materializes over a period materially longer than expected. Since we are not engaged in the exploration for, and
development of, natural gas and crude oil reserves, we often do not have access to third-party estimates of potential reserves in an area prior to constructing
facilities in that area. To the extent we rely on estimates of future production in our decision to construct additions to our systems, such estimates may prove to be
inaccurate as a result of the numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not attract enough
throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition.
In addition, the construction of additions to our existing gathering and transportation assets, or the construction of new gathering and transportation assets, may
require us to obtain new rights-of-way. We may be unable to obtain such rights-of-way and may, therefore, be unable to connect new natural gas volumes to our
systems or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to renew
existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases materially, our cash flows could be adversely affected.
In connection with our expansion capital programs, we have agreed, and may in the future agree, to construct oil and gas gathering pipelines to service
existing and future oil and gas properties, which involves potential risk s.
In connection with our expansion capital programs, we have agreed, and may in the future agree, at our cost and expense, to design, acquire right-of-way for,
obtain all permits from governmental authorities for, procure materials for, construct, operate, and maintain additional gathering pipelines for connection to certain
current and future producing crude oil and natural gas properties. There are risks involved with such obligations, including:
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general construction cost overruns and delays resulting from numerous factors, many of which may be out of our control;
the inability to obtain required permits for the pipelines;
the inability to obtain rights-of-way for the gathering pipelines, which may result in pipelines being re-routed, which itself could result in cost overruns
and delays;
the risk associated with producer's exploration and production activities and the associated potential failure of the gathering pipelines to generate
attractive cash flows given our obligation to construct and operate them; and
title issues or environmental or regulatory compliance matters or liabilities or accidents associated with the construction or operation of the pipelines.
We currently expect to fund these costs with borrowings under our Credit Agreement or by accessing the capital markets. If we are unable to finance the expansion
costs with existing liquidity, we could be required to seek alternative sources of liquidity, which could be costly or may not be available. In the event expansion
and extension of the crude oil and natural gas properties is significantly more expensive than we expect or we are unable to obtain financing for such construction,
it could have a material adverse effect on our financial condition, including our results of operations and cash flows.
We do not intend to obtain independent evaluations of natural gas reserves connected to our gathering and transportation systems on a regular or ongoing
basis; therefore, in the future, volumes of natural gas on our systems could be less than we anticipate.
We do not intend to obtain independent evaluations of natural gas reserves connected to our systems on a regular or ongoing basis. Accordingly, we may not have
independent estimates of total reserves dedicated to some or all of our systems or the anticipated life of such reserves. If the total reserves or estimated life of the
reserves connected to our gathering and transportation systems are less than we anticipate and we are unable to secure additional sources of natural gas, it could
have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.
Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for
which we are not adequately insured, our operations and financial results could be adversely affected.
Our operations are subject to all of the risks and hazards inherent in the gathering, compressing, treating, processing and transportation of natural gas, including:
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damage to pipelines and plants, related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and
acts of terrorism;
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inadvertent damage from construction, vehicles, farm and utility equipment;
leaks of natural gas and other hydrocarbons or losses of natural gas as a result of the malfunction of equipment or facilities;
ruptures, fires and explosions; and
other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.
These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or
other environmental damage. These risks may also result in curtailment or suspension of our operations. A natural disaster or other hazard affecting the areas in
which we operate could have a material adverse effect on our operations. We are not fully insured against all risks inherent in our business. For example, we do not
have any casualty insurance on our underground pipeline systems that would cover damage to the pipelines. Additionally, we do not have business interruption/loss
of income insurance that would provide coverage in the event of damage to any of our underground facilities. In addition, although we are insured for
environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, we may not be insured against all environmental
accidents that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which we are not fully insured, it could
adversely affect our operations and financial condition. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at
reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances,
certain insurance could become unavailable or available only for reduced amounts of coverage. Additionally, we may be unable to recover from prior owners of
our assets, pursuant to our indemnification rights, for potential environmental liabilities.
Our interstate natural gas pipelines are subject to regulation by the FERC, which could adversely affect our ability to make distributions to our unitholders.
Our AlaTenn and Midla interstate natural gas transportation systems are subject to regulation by the FERC, under the NGA. Under the NGA, the rates for and
terms of conditions of service on these interstate facilities must be just and reasonable and not unduly discriminatory. The rates and terms and conditions for our
interstate pipeline services are set forth in tariffs that must be filed with and approved by the FERC. Pursuant to the FERC's jurisdiction over rates, existing rates
may be challenged by complaint and proposed rate increases may be challenged by protest. Any successful complaint or protest against our rates could have an
adverse impact on our revenue associated with providing transportation service.
Under the NGA, the FERC has the authority to regulate companies that provide natural gas pipeline transportation services in interstate commerce. The FERC's
authority over such companies includes such matters as:
rates, terms and conditions of service;
the types of services interstate pipelines may offer to their customers;
the certification and construction of new facilities;
the acquisition, extension, disposition or abandonment of facilities;
the maintenance of accounts and records;
relationships between affiliated companies involved in certain aspects of the natural gas business;
the initiation and discontinuation of services;
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• market manipulation in connection with interstate sales, purchases or transportation of natural gas and NGLs; and
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participation by interstate pipelines in cash management arrangements.
The EP Act 2005 amended the NGA to add an anti-manipulation provision. Pursuant to the amended NGA, the FERC established rules prohibiting energy market
manipulation. Also, the FERC's rules require interstate pipelines and their affiliates to adhere to Standards of Conduct that, among other things, require that
transportation employees function independently of marketing employees. We are subject to audit by the FERC of our compliance in general, including adherence
to all its rules and regulations. A violation of these rules, or any other rules, regulations or orders issued or administered by the FERC, may subject us to civil
penalties, disgorgement of certain profits, or appropriate non-monetary remedies imposed by the FERC. In addition, the EP Act 2005 amended the NGA and the
NGPA, to increase civil and criminal penalties for any violation of the NGA, NGPA and any rules, regulations or orders of the FERC up to $1.0 million per day
per violation.
Additionally, existing rates may not reflect our current costs of operations, which may have risen since the last time our rates were approved by the FERC.
The application of certain FERC policy statements could affect the rate of return on our equity that we are allowed to recover through rates and the amount of
any allowance our interstate systems can include for income taxes in establishing their rates for service, which would in turn impact our revenue and/or equity
earnings.
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In setting authorized rates of return for interstate natural gas pipelines, the FERC uses a discounted cash flow model that incorporates the use of proxy groups to
develop a range of reasonable returns earned on equity interests in companies with corresponding risks. The FERC then assigns a rate of return on equity within
that range to reflect specific risks of that pipeline when compared to the proxy group companies. The FERC allows Master Limited Partnerships ("MLPs"), to be
included in the proxy group to determine return on equity. However, as to such MLPs, the FERC will generally adjust the long-term growth rate used to calculate
the equity cost of capital. The FERC stated that the long-term growth projection for natural gas pipeline MLPs will be equal to fifty percent of gross domestic
product ("GDP"), as compared to the unadjusted GDP used for corporations. Therefore, to the extent that MLPs are included in a proxy group, the FERC's policy
lowers the return on equity that might otherwise be allowed if there were no adjustment to the MLP growth projection used for the discounted cash flow model.
This could lower the return on equity that we would otherwise be able to obtain.
The FERC currently allows partnerships, including MLPs, to include in their cost-of-service an income tax allowance if the partnership's owners have actual or
potential income tax liability, a matter that will be reviewed by the FERC on a case-by-case basis. Any changes to the FERC's treatment of income tax allowances
in cost-of-service rates or an adverse determination with respect to the inclusion of an income tax allowance in our interstate pipelines' rates could result in an
adjustment in a future rate case of our interstate pipelines' respective equity rates of return that underlie their recourse rates and may cause their recourse rates to be
set at a level that is different, and in some instances lower, than the level otherwise in effect.
A change in the jurisdictional characterization or regulation of our assets by federal, state or local regulatory agencies or a change in policy by those agencies
could result in increased regulation of our assets which could materially and adversely affect our financial condition, results of operations and cash flows.
Intrastate transportation facilities that do not provide interstate transmission services are exempt from the jurisdiction of the FERC under the NGA. Although the
FERC has not made any formal determinations with respect to any of our facilities, we believe that our intrastate natural gas pipelines and related facilities that are
not engaged in providing interstate transmission services are engaged in exempt gathering and intrastate transportation and, therefore, are not subject to FERC
jurisdiction. We believe that our natural gas gathering pipelines meet the traditional tests that the FERC has used to determine if a pipeline is a gathering pipeline
and is therefore not subject to the FERC's jurisdiction. The distinction between FERC-regulated transmission services and federally unregulated gathering services
is the subject of substantial ongoing litigation and, over time, the FERC's policy for determining which facilities it regulates has changed. In addition, the
distinction between FERC-regulated transmission facilities, on the one hand, and intrastate transportation and gathering facilities, on the other, is a fact-based
determination made by the FERC on a case-by-case basis. If the FERC were to consider the status of an individual facility and determine that the facility and/or
services provided by it are not exempt from FERC regulation under the NGA, the rates for, and terms and conditions of, services provided by such facility would
be subject to regulation by the FERC under the NGA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in
question, could adversely affect our results of operations and cash flows. In addition, if any of our facilities were found to have provided services or otherwise
operated in violation of the NGA or NGPA, this could result in the imposition of civil penalties as well as a requirement to disgorge charges collected for such
service in excess of the cost-based rate established by the FERC.
Moreover, FERC regulation affects our gathering, transportation and compression business generally. The FERC's policies and practices across the range of its
natural gas regulatory activities, including, for example, its policies on open access transportation, market manipulation, ratemaking, capacity release and market
transparency and market center promotion, directly and indirectly affect our gathering business. In addition, the classification and regulation of our gathering and
intrastate transportation facilities also are subject to change based on future determinations by the FERC, the courts or Congress.
State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and
complaint-based rate regulation. In recent years, FERC's efforts to promote open access, transparency, and the unbundling of interstate pipeline services has
prompted a number of interstate pipelines to transfer their non-jurisdictional gathering facilities to unregulated affiliates. As a result of these activities, natural gas
gathering may begin to receive greater regulatory scrutiny at both the state and federal levels. Such additional scrutiny could result in increased expenses to us and
a resulting materially adverse change in our finances.
We are subject to stringent environmental laws and regulations that may expose us to significant costs and liabilities.
Our natural gas gathering, compression, treating and transportation operations are subject to stringent and complex federal, state and local environmental laws and
regulations that govern the discharge of materials into the environment or otherwise relate to environmental protection. Examples of these laws include:
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the federal Clean Air Act and analogous state laws that impose obligations related to air emissions;
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the federal CERCLA and analogous state laws that regulate the cleanup of hazardous substances that may be or have been released at properties currently
or previously owned or operated by us or at locations to which our wastes are or have been transported for disposal;
the federal Clean Water Act and analogous state laws that regulate discharges from our facilities into state and federal waters, including wetlands;
the federal OPA and analogous state laws that establish strict liability for releases of oil into waters of the United States;
the federal RCRA and analogous state laws that impose requirements for the storage, treatment and disposal of solid and hazardous waste from our
facilities;
the ESA; and
the Toxic Substances Control Act ("TSCA"), and analogous state laws that impose requirements on the use, storage and disposal of various chemicals and
chemical substances at our facilities.
These laws and regulations may impose numerous obligations that are applicable to our operations, including the acquisition of permits to conduct regulated
activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our pipelines and facilities, and the imposition of
substantial liabilities and remedial obligations for pollution resulting from our operations. Numerous governmental authorities, such as the EPA, and analogous
state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly
corrective actions. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the
imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of our operations.
In addition, we may experience a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt
our operations and limit our growth and revenue. Please read "Business - Environmental Matters - Air Quality and Climate Control" for more information about
these matters.
There is a risk that we may incur significant environmental costs and liabilities in connection with our operations due to historical industry operations and waste
disposal practices, our handling of hydrocarbon wastes and potential emissions and discharges related to our operations. Joint and several strict liability may be
incurred, without regard to fault, under certain of these environmental laws and regulations in connection with discharges or releases of hydrocarbon wastes on,
under or from our properties and facilities, many of which have been used for midstream activities for a number of years, oftentimes by third parties not under our
control. Private parties, including the owners of the properties through which our gathering or transportation systems pass and facilities where our wastes are taken
for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance, as well as to seek damages for non-compliance with
environmental laws and regulations or for personal injury or property damage. For example, an accidental release from one of our pipelines could subject us to
substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury
and property damage and fines or penalties for related violations of environmental laws or regulations. We may not be able to recover all or any of these costs from
insurance. In addition, changes in environmental laws occur frequently, and any such changes that result in more stringent and costly waste handling, storage,
transport, disposal or remediation requirements could have a material adverse effect on our operations or financial position. Please read "Business - Environmental
Matters" for more information.
We may be unable to obtain or renew permits necessary for our operations or the operations we may acquire in future acquisitions.
Our facilities operate under a number of required federal and state permits, licenses and approvals with terms and conditions containing a significant number of
prescriptive limits and performance standards in order to operate. All of these permits, licenses, approvals, limits and standards require a significant amount of
monitoring, record keeping and reporting in order to demonstrate compliance with the underlying permit, license, approval, limit or standard. Noncompliance or
incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to
deny or delay issuing a new or renewed material permit, license or approval, or to revoke or substantially modify an existing permit, license or approval, could
have a material adverse effect on our financial condition, including our results of operations and cash flows.
Our operations may impact the environment or cause environmental contamination, which could result in material liabilities to us.
Our operations use hazardous materials, generate limited quantities of hazardous wastes and may affect runoff or drainage water. In the event of environmental
contamination or a release of hazardous materials, we could become subject to claims for toxic torts, natural resource damages and other damages and for the
investigation and cleanup of soil, surface water, groundwater, and other
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media. Such claims may arise out of conditions at sites that we currently own or operate, as well as at sites that we previously owned or operated, or may acquire.
Our liability for such claims may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even
for the entire share. These and other impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated
with our operations, could result in costs and liabilities that could have a material adverse effect on us. Please read "Business - Environmental Matters" for more
information.
The EPA could develop new rules and current rules may be modified.
Independent of Congress, the EPA is beginning to adopt regulations controlling GHG emissions under its existing Clean Air Act authority. For example, on
December 15, 2009, the EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health
and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth's atmosphere and other climatic changes.
These findings by the EPA allow the agency to proceed with the adoption and implementation of regulations that would restrict emissions of greenhouse gases
under existing provisions of the federal Clean Air Act. In 2009, the EPA adopted rules regarding regulation of GHG emissions from motor vehicles. The EPA
argued that these motor vehicle regulations triggered the regulation of carbon dioxide and other GHG emissions from stationary sources under certain Clean Air
Act programs at both the federal and state levels, particularly the Prevention of Significant Deterioration program and Title V permitting. In June 2014, the U.S.
Supreme Court reversed a D.C. Circuit Court of Appeals decision upholding these rules and struck down the EPA’s greenhouse gas permitting rules to the extent
they impose a requirement to obtain a federal air permit based solely on emissions of greenhouse gases. Large sources of other air pollutants which are otherwise
required to go through permitting, still could be required to implement process or technology controls designed to reduce emissions of greenhouse gases in order to
obtain a permit.
In addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission
sources in the U.S. beginning in 2011 for emissions occurring in 2010. Our Bazor Ridge facility is currently required to report under this rule. On November 30,
2010, the EPA published a final rule expanding its existing GHG emissions reporting rule for petroleum and natural gas facilities, including natural gas
transmission compression facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year. The rule, which went into effect on December 30,
2010, requires reporting of greenhouse gas emissions by regulated facilities to the EPA annually. In October 2015, the EPA amended and expanded greenhouse gas
reporting requirements to all segments of the crude oil and natural gas industry, including gathering and boosting facilities and blowdowns of natural gas
transmission pipelines, starting with the 2016 reporting year, and in January 2016, the EPA proposed additional revisions to leak detection methodology to align
the reporting rule with the new source performance standards. We have filed annual emission reports for our Bazor Ridge and Chatom systems since March 2012.
As discussed in the climate change section above, EPA also has initiated regulation of methane from crude oil and natural gas facilities. Final rules are expected in
2016. It is likely that we will be required to control methane emissions from new or modified facilities under this rulemaking.
On August 16, 2012, the EPA published final rules that establish new air emission controls for natural gas processing operations. Specifically, the EPA's rule
package includes New Source Performance Standards ("NSPS") to address emissions of sulfur dioxide and volatile organic compounds ("VOCs"), and a separate
set of emission standards to address hazardous air pollutants frequently associated with natural gas processing activities. The rules establish specific requirements
regarding emissions from compressors, dehydrators, storage tanks and other production equipment. In addition, the rules establish new leak detection requirements
for natural gas processing plants. Under these rules we are required to modify some of our operations, though we do not expect these modifications to have a
material effect on our operations. Following the publication of the final rule, the EPA received petitions for reconsideration of certain aspects of the standards. On
April 12, 2013, the EPA published proposed updates to the NSPS Section OOOO storage tank requirements. On September 23, 2013, the EPA published final
revisions to the NSPS Section OOOO storage tank requirements, including a phase-in of installation of VOC controls and alternate limits for tanks where
emissions have declined. The EPA issued revised definitions related to the stages of well completions and amended storage tank requirements under NSPS Section
OOOO in December 2014 and further revised the storage tank requirements in March 2015. EPA continues to reconsider other portions of Section OOOO. The
rule is also the subject of Petitions for Review before the U.S. Circuit Court of Appeals for the District of Columbia.
In October 2015, the EPA finalized a reduction of the national ambient air quality standard for ozone standard from 75 parts per billion to 70 parts per billion; both
nitrogen oxides and VOCs are ozone precursors. This reduction is expected to increase the number of ozone nonattainment areas. The EPA also proposed in
September 2015 Control Technology Guidelines for emissions of VOCs from crude oil and natural gas industry sources to be relied upon by states when
implementing the ozone standard in ozone nonattainment areas.
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Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our
business, any future federal laws or implementing regulations that may be adopted to address greenhouse gas emissions could require us to incur increased
operating costs and could adversely affect demand for the natural gas we gather, treat or otherwise handle in connection with our services. The potential increase in
the costs of our operations resulting from any legislation or regulation to restrict emissions of greenhouse gases could include new or increased costs to operate and
maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our
greenhouse gas emissions and administer and manage a greenhouse gas emissions program. While we may be able to include some or all of such increased costs in
the rates charged by our pipelines or other facilities, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy sources
could reduce demand for natural gas, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities
may affect our operations.
Our pipelines may become subject to more stringent safety regulation.
The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, which became law in January 2012, increases the penalties for safety violations,
establishes additional safety requirements for newly constructed pipelines and requires studies of safety issues that could result in the adoption of new regulatory
requirements for existing pipelines. The DOT has also recently proposed legislation providing for more stringent oversight of pipelines and increased penalties for
violations of safety rules, which is in addition to the Pipeline and Hazardous Materials Safety Administration's announced intention to strengthen its rules. The
PHMSA, which is part of DOT, recently issued a final rule, effective October 1, 2011, applying safety regulations to certain rural low-stress hazardous liquid
pipelines that were not covered previously by some of its safety regulations. While we believe that this rule does not apply to any of our pipelines, in April 2015,
PHMSA proposed rulemaking that would require leak detection for all hazardous liquid pipelines and require periodic assessment of hazardous liquid pipelines not
already covered by the integrity management requirements. A final rule has not been issued. To date, PHMSA has not proposed rules expanding the integrity
management requirements for natural gas pipelines. We cannot predict the outcome of other proposed legislative or regulatory initiatives. Such legislative and
regulatory changes could have a material effect on our operations particularly by extending more stringent and comprehensive safety regulations (such as integrity
management requirements) to pipelines not previously subject to such requirements. Additionally, legislative and regulatory changes may also result in higher
penalties for the violation of federal pipeline safety regulations and the costs associated with compliance may have a material effect on our operations. We cannot
predict with any certainty at this time the terms of any new laws or rules or the costs of compliance associated with such requirements.
We do not own all of the land on which our pipelines and facilities are located, which could result in disruptions to our operations.
We do not own all of the land on which our pipelines and facilities have been constructed, and we are, therefore, subject to the possibility of more onerous terms
and/or increased costs to retain necessary land use if we do not have valid rights-of-way or if such rights-of-way lapse or terminate, or we may not be able to renew
our contract leases on commercially reasonable terms or at all. We obtain the rights to construct and operate our pipelines on land owned by third parties and
governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a
material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.
Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.
Our future level of debt could have important consequences to us, including the following:
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our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such
financing may not be available on favorable terms;
our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to
make interest payments on our debt;
we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and
our flexibility in responding to changing business and economic conditions may be limited.
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to
service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions,
investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to affect any of these actions on satisfactory terms or at
all.
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We currently have a small management team, who does not devote 100% of their time to us. Our ability to operate our business effectively could be impaired if
we fail to attract and retain key management personnel.
We currently have a small management team, and our ability to operate our business and implement our strategies depends on the continued contributions of
certain executive officers and key employees of our General Partner. Our General Partner has a smaller managerial, operational and financial staff than many
similar companies in our industry. Given the small size of our management team, the loss of any one member of our management team could have a material
adverse effect on our business. In addition, certain of our field operating managers are approaching retirement age. Our management team devotes a portion of its
efforts to projects owned and operated by our General Partner or its affiliates, which means they do not devote 100% of their time to the Partnership. We believe
that our future success will depend on our continued ability to attract and retain highly skilled management personnel with midstream natural gas and crude oil
industry experience and hiring for such persons in the midstream natural gas industry is competitive. Given our small size, we may be at a disadvantage, relative to
our larger competitors, in the competition for these personnel. We may not be able to continue to employ our senior executives and key personnel or attract and
retain qualified personnel in the future, and our failure to retain or attract our senior executives and key personnel could have a material adverse effect on our
ability to effectively operate our business.
A shortage of skilled labor in the midstream industry could reduce labor productivity and increase costs, which could have a material adverse effect on our
business and results of operations.
The gathering, treating, processing and transporting of natural gas and crude oil requires skilled laborers in multiple disciplines such as equipment operators,
mechanics and engineers, among others. We have from time to time encountered shortages for these types of skilled labor. If we experience shortages of skilled
labor in the future, our labor and overall productivity or costs could be materially and adversely affected. If our labor prices increase or if we experience materially
increased health and benefit costs with respect to our General Partner's employees, our results of operations could be materially and adversely affected.
Our work force could become unionized in the future, which could adversely affect the stability of our production and materially reduce our profitability.
All of our systems are operated by non-union employees. Our employees have the right at any time under the National Labor Relations Act to form or affiliate with
a union. If our employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly different from our
current compensation and job assignment arrangements with our employees, these arrangements could adversely affect the stability of our operations and
materially reduce our profitability.
A failure in our operational systems or cyber security attacks on any of our facilities, or those of third parties, may adversely affect our financial results.
Our business is dependent upon our operational systems to process a large amount of data and complex transactions. If any of our financial, operational, or other
data processing systems fail or have other significant shortcomings or downtime, our financial results could be adversely affected. Our financial results could also
be adversely affected if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating
our operational systems. In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee tampering or
manipulation of those systems will result in losses that are difficult to detect.
Due to increased technology advances, we have become more reliant on technology to help increase efficiency in our business. We use computer programs to help
run our financial and operational departments, and these systems may subject our business to increased risks. Any future cyber security attacks that affect our
facilities, our customers and any financial data could have a material adverse effect on our business. In addition, cyber-attacks on our customer and employee data
may result in financial loss and may negatively impact our reputation. Third-party systems on which we rely could also suffer operational system failure. Any of
these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our financial results.
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Our assets and operations can be affected by weather, weather related conditions and other natural phenomena.
Our assets and operations can be adversely affected by hurricanes, floods, tornadoes, wind, lightning, cold weather and other natural phenomena, which could
impact our results of operations and make it more difficult for us to realize historic rates of return. Although we carry insurance on the vast majority of our assets,
insurance may be inadequate to cover our loss and in some instances, we have been unable to obtain insurance on some of our assets on commercially reasonable
terms, or at all. If we incur a significant disruption in our operations or a significant liability for which we were not fully insured, our financial condition, results of
operations and ability to make distributions to our unitholders could be materially adversely affected.
Terrorist attacks, the threat of terrorist attacks, and sustained military campaigns may adversely impact our results of operations.
Increased security measures taken by us as a precaution against possible terrorist attacks have resulted in increased costs to our business. Uncertainty surrounding
continued hostilities in the Middle East and North Africa or other sustained military conflicts may affect our operations in unpredictable ways, including
disruptions of crude oil supplies or storage facilities, and markets for refined products, and the possibility that infrastructure facilities could be direct targets of, or
indirect casualties of, an act of terror.
Global economic conditions may have adverse impacts on our business and financial condition.
Changes in economic conditions could adversely affect our financial condition and results of operations. A number of economic factors, including, but not limited
to, gross domestic product, consumer interest rates, reduced government spending, strength of U.S. currency versus other international currencies, consumer
confidence and debt levels, retail trends, inflation and foreign currency exchange rates, may generally affect our business. Recessionary economic cycles, higher
unemployment rates, higher fuel and other energy costs and higher tax rates may adversely affect demand for natural gas and NGLs. Also, any tightening of the
capital markets could adversely impact our ability to execute our long-term organic growth projects and meet our obligations to our producer customers and limit
our ability to raise capital and, therefore, have an adverse impact on our ability to otherwise take advantage of business opportunities or react to changing economic
and business conditions. These factors could have a material adverse effect on our revenues, income from operations, cash flows and our quarterly distribution on
our common units.
Risks Related to Our Units, Partnership Structure and Ownership
We have a holding company structure in which our subsidiaries conduct our operations and own our operating assets.
The Partnership is a holding company, and our subsidiaries conduct all of our operations and own all of our operating assets. We do not have significant assets
other than equity in our subsidiaries and equity investees. As a result, our ability to make distributions depends on the performance of our subsidiaries and their
ability to distribute funds to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, our Credit Agreement,
applicable state business organization laws and other laws and regulations.
The amount of cash we have available for distribution to holders of our common and Series A Units depends primarily on our cash flow rather than on our
profitability, which may prevent us from making distributions, even during periods in which we record net income.
The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash
items. As a result, we may make cash distributions during periods when we record net losses for financial reporting purposes and may not make cash distributions
during periods when we record net income for financial reporting purposes.
The amount of cash we have available for distribution to holders of our common and Series A Units is subject to the broad discretion of our General Partner to
set aside reserves for our conduct of business and for the payment of future distributions.
The amount of cash we have available for distribution is subject to our General Partner’s determination to set aside reserves for (i) conducting business, including
anticipated capital expenditures, during the next quarter, (ii) compliance with any law or agreement and (iii) distributions for the next four quarters. As a result, we
may make cash distributions during periods when we record net losses for financial reporting purposes and may not make cash distributions during periods when
we record net income for financial reporting purposes.
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As our common units are yield-oriented securities, increases in interest rates could adversely impact our unit price, our ability to issue equity or incur debt for
acquisitions or other purposes and our ability to make cash distributions at our intended levels.
Interest rates may increase in the future. As a result, interest rates on future credit facilities and debt offerings could be higher than current levels, causing our
financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by our level of our cash distributions and implied
distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes.
Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate
environment could have an adverse impact on our unit price, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash
distributions at our intended levels.
HPIP, an affiliate of ArcLight Capital Partners, and AIM Midstream Holdings, LLC ("AIM Midstream Holdings") directly own our General Partner, which
has sole responsibility for conducting our business and managing our operations. HPIP elects all of the members of the board of our General Partner. HPIP,
AIM Midstream Holdings and our General Partner have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the
detriment of us and our unitholders.
HPIP and AIM Midstream Holdings own our General Partner. HPIP has the power to appoint all of the officers and directors of our General Partner, some of
whom are also officers of HPIP. The directors and officers of our General Partner have a fiduciary duty to manage our General Partner in a manner that is
beneficial to it, and have no duty to us or our common unitholders. Conflicts of interest may arise between HPIP and AIM Midstream Holdings and our General
Partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our General Partner may favor its own interests and
the interests of HPIP and AIM Midstream Holdings over our interests and the interests of our unitholders. These conflicts include the following situations, among
others:
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neither our Partnership Agreement nor any other agreement requires HPIP or AIM Midstream Holdings to pursue a business strategy that favors us;
our Partnership Agreement limits the liability of and reduces the fiduciary duties owed by our General Partner, and also restricts the remedies available to
our unitholders for actions that, without the limitations, might constitute breaches of such fiduciary duty;
except in limited circumstances, our General Partner has the power and authority to conduct our business without unitholder approval;
our General Partner determines the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the
creation, reduction or increase of reserves, each of which can affect the amount of cash that is distributed to our unitholders;
our General Partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital
expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect
the amount of cash that is distributed to our unitholders and to our General Partner and the ability of the Series A Units to convert to common units;
our General Partner determines which costs incurred by it are reimbursable by us;
our General Partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to
make a distribution on the Series A Units, to make incentive distributions or to accelerate the expiration of a subordination period;
our Partnership Agreement permits us to classify up to $11.5 million as operating surplus, even if it is generated from asset sales, non-working capital
borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our Series A Units or to our
General Partner in respect of the General Partner interest or the incentive distribution rights;
our Partnership Agreement does not restrict our General Partner from causing us to pay it or its affiliates for any services rendered to us or entering into
additional contractual arrangements with any of these entities on our behalf;
our General Partner intends to limit its liability regarding our contractual and other obligations;
our General Partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if they own more than 80% of the
common units;
our General Partner controls the enforcement of the obligations that it and its affiliates owe to us;
our General Partner decides whether to retain separate counsel, accountants or others to perform services for us; and
our General Partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our General
Partner's incentive distribution rights without the approval of the Conflicts Committee of the Board of Directors of our General Partner ("Conflicts
Committee") or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.
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Our President and Chief Executive Officer received a grant of phantom units, with distribution equivalent rights based on Series A distributions, in connection
with his appointment.
In December 2015, Lynn L. Bourdon, our President and Chief Executive Officer received a grant of 200,000 phantom units with distribution equivalent rights. The
distribution equivalent rights receive cash distributions based on the extent to which the Series A Units receive cash distributions. Holders of Series A Units have
different incentives than holders of our common units and therefore Mr. Bourdon’s incentives may not always align with those of our common unit holders.
HPIP and AIM Midstream Holdings are not limited in their ability to compete with us and are not obligated to offer us the opportunity to acquire additional
assets or businesses, which could limit our ability to grow and could adversely affect our results of operations and cash available for distribution to our
unitholders.
HPIP and AIM Midstream Holdings are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, in the
future, HPIP and AIM Midstream Holdings may acquire, construct or dispose of additional midstream or other assets and may be presented with new business
opportunities, without any obligation to offer us the opportunity to purchase or construct such assets or to engage in such business opportunities. Moreover, while
HPIP and AIM Midstream Holdings may offer us the opportunity to buy additional assets from them, they are under no contractual obligation to do so and we are
unable to predict whether or when such acquisitions might be completed.
The New York Stock Exchange ("NYSE") does not require a publicly traded partnership like us to comply with certain of its corporate governance
requirements.
Our common units are listed on the NYSE. Because we are a publicly traded partnership, the NYSE does not require us to have a majority of independent directors
on our General Partner's board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any
future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE's shareholder approval rules. Accordingly,
unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.
If you are not an eligible holder, you may not receive distributions or allocations of income or loss on your common units and your common units will be
subject to redemption.
We have adopted certain requirements regarding those investors who may own our units. Eligible holders are U.S. individuals or entities subject to U.S. federal
income taxation on the income generated by us or entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity's
owners are U.S. individuals or entities subject to such taxation. If you are not an eligible holder, our General Partner may elect not to make distributions or allocate
net income or loss on your units, and you run the risk of having your units redeemed by us at the lower of your purchase price for the units and the then-current
market price. The redemption price may be paid in cash or by delivery of a promissory note, as determined by our General Partner.
C ommon units held by persons who are non-taxpaying assignees will be subject to the possibility of redemption.
Our Partnership Agreement gives our General Partner the power to amend the agreement to avoid any adverse effect on the maximum applicable rates chargeable
to customers by us under FERC regulations or to reverse an adverse determination that has occurred regarding such maximum rate. If our General Partner
determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with
the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum
applicable rates chargeable to customers by us, then our General Partner may adopt such amendments to our Partnership Agreement as it determines are necessary
or advisable to obtain proof of the U.S. federal income tax status of our limited partners (and their owners, to the extent relevant) and permit us to redeem the units
held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the
procedures instituted by our General Partner to obtain proof of the U.S. federal income tax status.
Our General Partner intends to limit its liability regarding our obligations.
Our General Partner intends to continue limiting its liability under contractual arrangements so that the counterparties to such arrangements have recourse only
against our assets, and not against our General Partner or its assets. Our General Partner may therefore cause us to incur indebtedness or other obligations that are
nonrecourse to our General Partner. Our Partnership Agreement provides that any action taken by our General Partner to limit its liability is not a breach of our
General Partner's fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to
reimburse
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or indemnify our General Partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the
amount of cash otherwise available for distribution to our unitholders.
Our Partnership Agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.
We distribute all of our available cash to our unitholders and rely primarily upon external financing sources, including borrowings under our Credit Facility and the
issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth
externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we distribute all of our available cash, we may not grow as
quickly as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or
expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per-
unit distribution level. There are no limitations in our Partnership Agreement, and in our Credit Agreement, on our ability to issue additional units, including units
ranking senior to the common units. The incurrence of additional borrowings under our Credit Agreement or other debt to finance our growth strategy would result
in increased interest expense, which, in turn, may impact the available cash that we have to distribute to our unitholders.
Our Partnership Agreement limits our General Partner's fiduciary duties to us and the holders of our common units.
Our Partnership Agreement contains provisions that modify and reduce the fiduciary duties to which our General Partner would otherwise be held by state
fiduciary duty law. For example, our Partnership Agreement permits our General Partner to make a number of decisions in its individual capacity, as opposed to in
its capacity as our General Partner or otherwise, free of fiduciary duties to us and our unitholders. This entitles our General Partner to consider only the interests
and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited
partners. Examples of decisions that our General Partner may make in its individual capacity include:
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how to allocate corporate opportunities among us and its affiliates;
whether to exercise its limited call right;
how to exercise its voting rights with respect to the units it owns;
whether to elect to reset target distribution levels; and
whether or not to consent to any merger or consolidation of the partnership or amendment to the Partnership Agreement.
By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the Partnership Agreement, including the provisions discussed
above.
Our Partnership Agreement restricts the remedies available to holders of our common units for actions taken by our General Partner that might otherwise
constitute breaches of fiduciary duty.
Our Partnership Agreement contains provisions that restrict the remedies available to unitholders for actions taken by our General Partner that might otherwise
constitute breaches of fiduciary duty under state fiduciary duty law. For example, our Partnership Agreement:
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provides that whenever our General Partner makes a determination or takes, or declines to take, any other action in its capacity as our General Partner, our
General Partner is required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any other or
different standard imposed by our Partnership Agreement, Delaware law, or any other law, rule or regulation, or at equity;
provides that our General Partner will not have any liability to us or our unitholders for decisions made in its capacity as a General Partner so long as such
decisions are made in good faith, meaning that it believed that the decision was in, or not opposed to, the best interest of our partnership;
provides that our General Partner and its officers and directors will not be liable for monetary damages to us, our limited partners or their assignees
resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that
our General Partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal
matter, acted with knowledge that the conduct was criminal; and
provides that our General Partner will not be in breach of its obligations under the Partnership Agreement or its fiduciary duties to us or our unitholders if a
transaction with an affiliate or the resolution of a conflict of interest is:
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approved by the Conflicts Committee of the Board of Directors of our General Partner, although our General Partner is not obligated to seek such
approval;
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approved by the vote of a majority of the outstanding common units, excluding any common units owned by our General Partner and its affiliates;
on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our General Partner must be made in good
faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the Conflicts Committee, and the Board of
Directors of our General Partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either
of the standards set forth in subclauses (c) and (d) above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any
proceeding brought by or on behalf of any limited partner or the Partnership, the person bringing or prosecuting such proceeding will have the burden of
overcoming such presumption.
Our General Partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our General
Partner's incentive distribution rights without the approval of the Conflicts Committee of our General Partner's board or our unitholders. This election may
result in lower distributions to our common unitholders in certain situations.
Our General Partner has the right, at any time it has received incentive distributions exceeding the target distribution described in our Partnership Agreement for
each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distribution at the time of the
exercise of the reset election. Following a reset election by our General Partner, the minimum quarterly distribution will be reset to an amount equal to the average
cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the "reset minimum quarterly
distribution"), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly
distribution.
We anticipate that our General Partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently
accretive to cash distributions per common unit without such conversion; however, it is possible that our General Partner could exercise this reset election at a time
when we are experiencing declines in our aggregate cash distributions or at a time when our General Partner expects that we will experience declines in our
aggregate cash distributions in the foreseeable future. In such situations, our General Partner may be experiencing, or may expect to experience, declines in the
cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued common units, which are entitled to specified priorities
with respect to our distributions and which therefore may be more advantageous for the General Partner to own in lieu of the right to receive incentive distribution
payments based on target distribution levels that are less certain to be achieved in the then current business environment. As a result, a reset election may cause our
common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued common units to our
General Partner in connection with resetting the target distribution levels related to our General Partner's incentive distribution rights.
Holders of our common units have limited voting rights and are not entitled to elect our General Partner or its directors.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to
influence management's decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our General Partner or its board of
directors. The Board of Directors of our General Partner will be chosen by HPIP. Furthermore, if the unitholders are dissatisfied with the performance of our
General Partner, they will have little ability to remove our General Partner. As a result of these limitations, the price at which the common units will trade could be
diminished because of the absence or reduction of a takeover premium in the trading price. Our Partnership Agreement also contains provisions limiting the ability
of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders' ability to influence the manner or
direction of management.
Even if holders of our common units are dissatisfied, they cannot currently remove our General Partner without its consent.
Our unitholders are unable to remove our General Partner without its consent because our General Partner and its affiliates own sufficient units to be able to
prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding limited partner units voting together as a single class is required to remove our
General Partner. As of March 4, 2016 , HPIP owned 6,650,214 Series A Units and controlled our General Partner which held 1,349,609 common units. If the
Series A Units were converted, HPIP's holdings would represent 22.6% of our then-outstanding common units. As of March 4, 2016, Magnolia Infrastructure
Partners,
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LLC ("Magnolia"), an affiliate of HPIP, owned 2,849,156 Series A Units and Busbar, LLC ("Busbar"), an affiliate of HPIP, owned 1,629,450 of our common units.
Our Partnership Agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Unitholders' voting rights are further restricted by a provision of our Partnership Agreement providing that any units held by a person that owns 20% or more of
any class of units then outstanding, other than our General Partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the
Board of Directors of our General Partner, cannot vote on any matter.
Our General Partner interest or the control of our General Partner may be transferred to a third party without unitholder consent.
Our General Partner may transfer its General Partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the
unitholders. Furthermore, our Partnership Agreement does not restrict the ability of HPIP to transfer all or a portion of their ownership interest in our General
Partner to a third party. The new owner of our General Partner would then be in a position to replace the board of directors and officers of our General Partner with
its own designees and thereby exert significant control over the decisions made by the board of directors and officers.
We may issue additional units without your approval, which would dilute your existing ownership interests.
Our Partnership Agreement does not limit the number of additional limited partner interests that we may issue at any time without the approval of our unitholders.
The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:
•
•
•
•
•
•
our existing unitholders' proportionate ownership interest in us will decrease;
the amount of cash available for distribution on each unit may decrease;
because of the Series A Units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will
increase;
the ratio of taxable income to distributions may increase;
the relative voting strength of each previously outstanding unit may be diminished; and
the market price of the common units may decline.
HPIP may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.
As of March 4, 2016 , HPIP held 6,650,214 Series A Units. The Series A Units are convertible into common units at the election of HPIP at any time. In addition,
as of March 4, 2016, HPIP and AIM Midstream Holdings controlled our General Partner, which held 1,349,609 common units. As of March 4, 2016, Magnolia
owned 2,849,156 Series A Units and 618,921 of our outstanding common units and Busbar owned 1,629,450 of our outstanding common units. The sale of these
units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.
Our General Partner has a limited call right that may require you to sell your units at an undesirable time or price.
If at any time our General Partner and its affiliates own more than 80% of our common units, our General Partner will have the right, which it may assign to any of
its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their
then-current market price, as calculated pursuant to the terms of our Partnership Agreement. As a result, you may be required to sell your common units at an
undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. As of March 4, 2016,
HPIP owned 6,650,214 Series A Units and controlled our General Partner which held 1,349,609 common units. If the Series A Units were converted, HPIP's
holdings would represent 22.6% of our then-outstanding common units. As of March 4, 2016, Magnolia owned 618,921 our outstanding common units and Busbar
owned 1,629,450 of our outstanding common units.
Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
A General Partner of a partnership generally has unlimited liability for the obligations of the Partnership, except for those contractual obligations of the Partnership
that are expressly made without recourse to the General Partner. Our partnership is organized under Delaware law, and we conduct business in a number of other
states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of
the other states in which we do
45
business. You could be liable for any and all of our obligations as if you were a General Partner if a court or government agency were to determine that:
•
•
we were conducting business in a state but had not complied with that particular state's partnership statute; or
your right to act with other unitholders to remove or replace our General Partner, to approve some amendments to our Partnership Agreement or to take
other actions under our Partnership Agreement constitute "control" of our business.
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised
Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.
Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew
at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are
liable both for the obligations of the assignor to make contributions to the Partnership that were known to the substituted limited partner at the time it became a
limited partner and for those obligations that were unknown if the liabilities could have been determined from the Partnership Agreement. Neither liabilities to
partners on account of their partnership interest nor liabilities that are non-recourse to the Partnership are counted for purposes of determining whether a
distribution is permitted.
If we are deemed an "investment company" under the Investment Company Act of 1940, it would adversely affect the price of our common units and could
have a material adverse effect on our business.
Our assets include a 26.3% non-operated interest in Pinto, which may be deemed to be an "investment security" within the meaning of the Investment Company
Act of 1940, as amended (the “Investment Company Act”). In the future, we may acquire additional minority owned interests that could be deemed "investment
securities." If a sufficient amount of our assets are deemed to be "investment securities" within the meaning of the Investment Company Act, we would either have
to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our
contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our
ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to
borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates. The
occurrence of some or all of these events may have a material adverse effect on our business. Moreover, treatment of us as an investment company would prevent
our qualification as a partnership for federal income tax purposes in which case we would be treated as a corporation for federal income tax purposes, and be
subject to federal income tax at the corporate tax rate, significantly reducing the cash available for distributions. Additionally, distributions to our unitholders
would be taxed again as corporate distributions and none of our income, gains, losses or deductions would flow through to our unitholders.
Additionally, as a result of our desire to avoid having to register as an investment company under the Investment Company Act, we may have to forego potential
future acquisitions of interests in companies that may be deemed to be investment securities within the meaning of the Investment Company Act or dispose of our
current interests in any of our assets that are deemed to be "investment securities."
Tax Risks to Common Unitholders
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our being subject to minimal entity-level taxation by
individual states. If the Internal Revenue Service ("IRS") were to treat us as a corporation for federal income tax purposes, or we become subject to a material
amount of entity-level taxation for state tax purposes, then our cash available for distribution to the unitholders would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax
purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a
corporation for federal income tax purposes. Although we do not believe based upon our current operations that we will be treated as a corporation, the IRS could
disagree with the positions we take or a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax
purposes or otherwise subject us to taxation as an entity.
46
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is
currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to a unitholder would generally be taxed again as corporate
dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to the
unitholder. Because a tax would be imposed upon us as a corporation, our cash available for distribution to unitholders would be substantially reduced. Therefore,
treatment of us as a corporation for federal tax purposes would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our common units.
Our Partnership Agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or
otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution
amounts may be adjusted to reflect the impact of that law on us.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative
changes and differing interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative,
legislative or judicial interpretation at any time. Any modification to the federal income tax laws and interpretations thereof may or may not be applied
retroactively. Moreover, any such modification could make it more difficult or impossible for us to meet the exception that allows publicly traded partnerships that
generate qualifying income to be treated as partnerships (rather than corporations) for federal income tax purposes, affect or cause us to change our business
activities, or affect the tax consequences of an investment in our common units. For example, members of the U.S. Congress and the President's Administration
have recently considered substantive changes to the existing federal income tax laws that would affect the tax treatment of certain publicly traded partnerships.
Further, on May 5, 2015, the U.S. Treasury Department (“Treasury”) and the IRS issued proposed regulations interpreting the scope of activities that generate
qualifying income under Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”). We believe that the income we currently treat as qualifying
income satisfies the requirements for qualifying income under the proposed regulations. The proposed regulations, however, could be changed before they are
finalized and could modify the amount of our gross income that we are able to treat as qualifying income for the purposes of the qualifying income requirement.
We are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such change could negatively impact the value of an
investment in our common units.
Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the
imposition of state income, franchise and other forms of taxation. For example, we are required to pay the State of Texas a margin tax that is assessed at 0.75% of
taxable margin apportioned to Texas. Imposition of such a tax on us by other states would reduce the cash available for distribution to unitholders. The Partnership
Agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects
us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels will be
adjusted to reflect the impact of that law on us.
Changes in tax laws could adversely affect our performance.
We are subject to extensive tax laws and regulations, including federal, state, local and foreign income taxes and transactional taxes such as excise, sales/use,
payroll, franchise and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could
result in increased tax expenditures or impact our utilization of net operating losses. Many of these tax liabilities are subject to audits by the respective taxing
authority. These audits may result in additional taxes as well as interest and penalties. The costs of these audits are borne indirectly by the unitholders and our
general partner because such costs reduce our cash available for distribution.
If the IRS contests the federal tax positions we take, the market for our common units may be adversely impacted, and the cost of any IRS contest will reduce
our cash available for distribution to the unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. We received a Notice of Beginning of
Administrative Proceeding from the IRS in October 2014 relating to our 2012 tax year, however, the audit was concluded in June 2015 with no proposed
adjustments. The IRS may adopt positions that differ from the conclusions of our counsel or from the positions we take, and the IRS’s positions may ultimately be
sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court
may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS, and the outcome of any such contest, may increase a
unitholder’s tax liability and result in adjustment to items unrelated to us and could materially and adversely impact the market for our common units and the price
at which they trade. The rights of a unitholder owning less than
47
a 1% profits interest in us to participate in the federal income tax audit process are very limited. In addition, our costs of any contest with the IRS will be borne
indirectly by the unitholders and our General Partner because such costs will reduce our cash available for distribution.
If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it may assess us for any taxes (including any
applicable penalties and interest) resulting from such audit adjustment and collect such taxes directly from us, in which case our cash available for distribution
to our unitholders might be substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, if the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it
may assess us for any taxes (including any applicable penalties and interest) resulting from such audit adjustment and collect such taxes directly from us. We
expect to have the ability to shift any such tax liability to our General Partner and our unitholders in accordance with their interests in us during the year under
audit, but there can be no assurance that we will be able to do so under all circumstances. If we are required to make payments of taxes, penalties and interest
resulting from audit adjustments, our cash available for distribution to our unitholders might be substantially reduced. These rules are not applicable to us for tax
years beginning on or prior to December 31, 2017.
The unitholders' share of our income will be taxable to them for U.S. federal income tax purposes even if the unitholders do not receive any cash distributions
from us.
Because a unitholder will be treated as a partner to whom we will allocate taxable income, which could be different in amount than the cash we distribute, a
unitholder's allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local
income taxes on its share of our taxable income even if it receives no cash distributions from us. The unitholders may not receive cash distributions from us equal
to their share of our taxable income or even equal to the tax liability that results from that income.
Certain actions that we may take, such as issuing additional units, may increase the federal income tax liability of unitholders.
In the event we issue additional units or engage in certain other transactions in the future, the allocable share of nonrecourse liabilities allocated to the unitholders
will be recalculated to take into account our issuance of any additional units. Any reduction in a unitholder's share of our nonrecourse liabilities will be treated as a
distribution of cash to that unitholder and will result in a corresponding tax basis reduction in a unitholder's units. A deemed cash distribution may, under certain
circumstances, result in the recognition of taxable gain by a unitholder, to the extent that the deemed cash distribution exceeds such unitholder's tax basis in its
units.
In addition, the federal income tax liability of a unitholder could be increased if we dispose of assets or make a future offering of units and use the proceeds in a
manner that does not produce substantial additional deductions, such as to repay indebtedness currently outstanding or to acquire property that is not eligible for
depreciation or amortization for federal income tax purposes or that is depreciable or amortizable at a rate significantly slower than the rate currently applicable to
the our assets.
There are limits on the deductibility of losses that may adversely affect unitholders.
In the case of taxpayers subject to the passive loss rules (generally, individuals, closely-held corporations and regulated investment companies), any losses
generated by us will only be available to offset our future income and cannot be used to offset income from other activities, including other passive activities or
investments. Unused losses may be deducted when the unitholder disposes of the unitholder’s entire investment in us in a fully taxable transaction with an
unrelated party. A unitholder’s share of our net passive income may be offset by unused losses from us carried over from prior years, but not by losses from other
passive activities, including losses from other publicly traded partnerships.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If a unitholder sells its common units, the unitholder will recognize a gain or loss equal to the difference between the amount realized and the unitholder's tax basis
in those common units. Because distributions to a unitholder in excess of the total net taxable income allocated to the unitholder decrease the unitholder's tax basis
in the unitholder's common units, the amount, if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income to the
unitholder if the unitholder sell the common units at a price greater than the unitholder's tax basis in those common units, even if the price received by the
unitholder is less than the original cost. Furthermore, a substantial portion of the amount realized on any sale of a unitholder's common units, whether or not
representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized
includes a unitholder's share of our nonrecourse liabilities, if the
48
unitholder sells its common units, the unitholder may incur a tax liability in excess of the amount of cash the unitholder receives from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as individual retirement accounts, or IRAs, other retirement plans and non-U.S. persons raises issues
unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement
plans, will be unrelated business taxable income, which may be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the
highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their share of our taxable income. If you
are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.
We treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge
this treatment, which could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units and because of other reasons, we have adopted depreciation and amortization positions that
may not conform to all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits
available to the unitholders. Our counsel is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the
amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to the unitholders'
tax returns.
W e prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month
based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may
challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among the unitholders.
We prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based
upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. Treasury recently adopted final
regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among
transferor and transferee unitholders to ours. We are currently evaluating these regulations, which apply to certain publicly-traded partnerships, including us, for
taxable years beginning on or after August 3, 2015. However, these regulations do not specifically authorize the use of the proration method we have previously
used. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge our proration method, we may be required to
change the allocation of items of income, gain, loss and deduction among the unitholders.
A unitholder whose common units are loaned to a "short seller" to cover a short sale of common units may be considered as having disposed of those common
units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may
recognize gain or loss from the disposition.
Because a unitholder whose common units are loaned to a "short seller" to cover a short sale of common units may be considered as having disposed of the loaned
common units, the unitholder may no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan to the short
seller and such unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain,
loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those
common units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are
loaned to a short seller to cover a short sale of common units. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a
loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing and lending their common units.
We have adopted certain valuation methodologies for tax purposes that may result in a shift of income, gain, loss and deduction between our General Partner
and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
When we issue additional units or engage in certain other transactions, we determine the fair market value of our assets and allocate any unrealized gain or loss
attributable to our assets to the capital accounts of our unitholders and the General Partner. Our methodology may be viewed as understating the value of our
assets. In that case, there may be a shift of income, gain, loss and
49
deduction between certain unitholders and our General Partner, which may be unfavorable to such unitholders. Moreover, subsequent purchasers of common units
may have a greater portion of the Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS
may challenge our valuation methods, or our allocation of the Code Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of
income, gain, loss and deduction between our General Partner and certain of the unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to the unitholders. It also
could affect the amount of gain from the unitholders' sale of common units and could have a negative impact on the value of the common units or result in audit
adjustments to the unitholders' tax returns without the benefit of additional deductions.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for
federal income tax purposes.
We will be considered to have terminated as a partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our
capital and profits within a twelve-month period. Our termination, among other things, would result in the closing of our taxable year for all unitholders, which
would result in us filing two tax returns (and our unitholders could receive two Schedule K-1's if relief from the IRS was not granted, as described below) for one
calendar year. Our termination could also result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder
reporting on a taxable year other than a calendar year, the closing of our taxable year may result in more than twelve months of our taxable income or loss being
includable in his taxable income for the year of termination. Under current law, such a termination would not affect our classification as a partnership for federal
income tax purposes, but instead, after our termination, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make
new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a relief procedure for publicly
traded partnerships that terminate in this manner, whereby, if a publicly traded partnership that has terminated requests and the IRS grants special relief, among
other things, the Partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years resulting from the
termination.
Unitholders may be subject to state and local taxes and return filing requirements in states and jurisdictions where they do not reside as a result of investing in
our units.
In addition to federal income taxes, unitholders may be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate,
inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property, even if the unitholders do not live in any of
those jurisdictions. Unitholders may be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these
jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we
may own assets or do business in additional states that impose a personal income tax or an entity level tax. It is each unitholder's responsibility to file all
U.S. federal, foreign, state, local and non-U.S. tax returns. Our outside tax counsel has not rendered an opinion on the state or local tax consequences of an
investment in our common units.
Some of the states in which we do business or own property may require us to, or we may elect to, withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the state. Withholding, the amount of which may be greater or less than a particular unitholder's income tax liability to the
state, generally does not relieve the nonresident unitholder from the obligation to file an income tax return. Amounts withheld may be treated as if distributed to
unitholders for purposes of determining the amounts distributed by us.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
A description of our properties is contained in "Item 1. Business" of this Annual Report and is incorporated into this Item 2. by reference.
Our principal executive offices are located at 1400 16 th Street, Suite 310, Denver, Colorado 80202 and our telephone number is 720-457-6060.
Item 3. Legal Proceedings
50
We are not currently party to any pending litigation or governmental proceedings, other than ordinary routine litigation incidental to our business. While the
ultimate impact of any proceedings cannot be predicted with certainly, our management believes that the resolution of any of our pending proceeds will not have a
material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
51
Item 5. Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
Our common units have been listed on the New York Stock Exchange ("NYSE") since July 27, 2011, under the symbol "AMID." The following table sets forth the
high and low sales prices of our common units, as reported by the NYSE for each quarter during 2015 and 2014 , together with distributions paid subsequent to
such quarter for that quarter through December 31, 2015 :
Period Ended
2015
High Price
Low Price
Distribution per common unit
2014
High Price
Low Price
Distribution per common unit
Fourth Quarter
Third Quarter
Second Quarter
First
Quarter
$
$
$
$
$
$
12.70 $
3.80 $
0.4725 $
29.65 $
18.22 $
0.4725 $
16.71 $
9.01 $
0.4725 $
32.01 $
27.86 $
0.4725 $
19.42 $
15.75 $
0.4725 $
30.52 $
25.39 $
0.4625 $
21.17
15.71
0.4725
28.95
22.62
0.4625
As of March 4, 2016 , there were 77 unitholders of record of our common units. This number does not include unitholders whose units are held in trust by other
entities. The actual number of unitholders is greater than the number of holders of record. We have also issued approximately 9,499,370 Series A Units, and
542,002 General Partner units, for which there is no established trading market. Our General Partner and its affiliates receive quarterly distributions on the General
Partner units only after the requisite distributions have been paid on the common units and Series A Units.
Our Distribution Policy
Our Partnership Agreement requires us to distribute all of our available cash quarterly. Our cash distribution policy reflects our belief that our unitholders will be
better served if we distribute rather than retain our available cash. Generally, our available cash is the sum of our i) cash on hand at the end of a quarter after the
payment of our expenses and the establishment of cash reserves and ii) cash on hand resulting from working capital borrowings made after the end of the quarter.
We pay the cash dividend in one payment to those unitholders of record on the applicable record date, as determined by the General Partner.
The following table sets forth the number of units at December 31, 2015 and 2014 (in thousands):
Series A convertible preferred units
Series B convertible units (a)
Limited partner common units
December 31,
2015
2014
9,210
1,350
30,427
5,745
1,255
22,670
General Partner units
(a) Our General Partner held 1,349,609 Series B convertible units ("Series B Units"), which converted into common units on a one-for-one basis on February 1,
2016.
536
392
Our General Partner's initial 2.0% interest in distributions has been reduced to 1.3% due to the issuance of additional units and the General Partner has not
contributed a proportionate amount of capital to us to maintain its initial 2.0% General Partner notional interest.
Our cash distribution policy, as expressed in our Partnership Agreement, may not be modified or repealed without amending our Partnership Agreement. The
actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of
reserves our General Partner establishes in accordance with our Partnership Agreement as described above. We will pay our distributions on or about the 15th of
each February, May, August and November
52
to holders of record on or about the 5th of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business
day immediately preceding the indicated distribution date.
Series A Distribution Amendment
The Partnership executed an amendment (the "Third Amendment") to the Partnership Agreement related to the outstanding Series A Units which became effective
July 24, 2014. As a result of the Third Amendment, distributions on Series A Units can be made with paid-in-kind Series A Units, cash or a combination thereof, at
the discretion of the Board of Directors, which began with the distribution for the three months ended June 30, 2014 and will continue through the distribution for
the quarter ended March 31, 2016. At December 31, 2015 , we had accrued $4.4 million of distributions for the paid-in-kind Series A Units.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information about our equity compensation plans as of December 31, 2015:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by unitholders (a)
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
200,000 $
—
200,000
7.50
—
7.50
15,484
6,000,000
6,015,484
(a) On November 19, 2015, subject to unitholder approval, the Board of Directors of our General Partner approved the Third Amended and Restated Long-Term
Incentive Plan, which, subject to unitholder approval, would increase the number of common units authorized for issuance under the Plan by 6,000,000. On
February 11, 2016, the unitholders approved the Third Amended and Restated Long-Term Incentive Plan to increase the number of available awards by 6,000,000
common units. For more information on our Long-Term Incentive Plan, please refer to Item 11. “Executive Compensation,” and Item 12. “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters - Securities Authorized for Issuance Under Equity Compensation Plans.”
Item 6. Selected Historical Financial and Operating Data
The following table presents selected historical consolidated financial and operating data for the periods and as of the dates indicated. We derived this information
from our historical consolidated financial statements and accompanying notes. This information should be read together with, and is qualified in its entirety, by
reference to those consolidated financial statements and notes, which for the years 2015 , 2014 , and 2013 begin on F-1 to this Annual Report.
For a detailed discussion of the following table, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Statements of Operations Data:
Revenue
Realized loss in early termination of commodity
derivatives
Gain (loss) on commodity derivatives, net
Total revenue
Operating expenses:
Years ended December 31,
2015 (a)
2014 (a)
2013 (a)
2012
2011
(in thousands, except per unit and operating data)
$
235,034 $
307,309 $
294,051 $
204,868 $
247,043
—
1,324
—
1,091
—
28
—
3,400
(2,998)
(2,452)
236,358
308,400
294,079
208,268
241,593
53
Purchases of natural gas, NGLs and condensate
105,883
197,952
215,053
154,472
200,776
Direct operating expenses
Selling, general and administrative expenses
Equity compensation expense (b)
Depreciation, amortization and accretion expense
Total operating expenses
Gain (loss) on acquisition of assets
Gain (loss) on involuntary conversion of property,
plant and equipment
Gain (loss) on sale of assets, net
Loss on impairment of property, plant and
equipment
Loss of impairment of goodwill
Operating income (loss)
Other income (expense):
Interest expense
Other income (expense)
Earnings in unconsolidated affiliates
Net income (loss) before income tax (expense)
benefit
Income tax (expense) benefit
Net income (loss) from continuing operations
Discontinued operations:
Income (loss) from discontinued operations,
net of tax
Net income (loss)
Net income (loss) attributable to non-controlling
interests
Net income (loss) attributable to the Partnership
General Partner's Interest in net income (loss)
Limited Partners' Interest in net income (loss)
Limited Partners' net income (loss) per common unit:
Basic and diluted:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Weighted average number of common units
outstanding:
Basic and diluted (c)
Statement of Cash Flow Data:
Net cash provided by (used in):
$
$
$
$
$
59,549
27,232
3,774
38,014
45,702
23,103
1,536
28,832
32,236
19,079
2,094
30,002
17,183
14,309
1,783
21,287
11,745
13,576
3,357
20,454
234,452
297,125
298,464
209,034
249,908
—
—
(3,011)
—
—
(122)
—
343
—
—
(99,892)
(18,155)
—
—
—
(1,021)
123
—
—
565
—
399
—
—
(88,739)
(22,197)
(1,664)
(7,351)
(9,291)
(4,570)
(4,508)
(118,592)
(119,697)
(14,745)
—
8,201
(126,241)
(1,134)
(127,375)
(7,577)
(670)
348
(96,638)
(557)
(97,195)
—
—
(31,488)
495
(30,993)
—
—
(6,234)
—
(6,234)
(18)
(6,252)
256
(6,508) $
(129) $
(6,379) $
—
—
(11,859)
—
(11,859)
161
(11,698)
—
(11,698)
(233)
(11,465)
(80)
(127,455)
(611)
(97,806)
(2,413)
(33,406)
25
214
633
(127,480) $
(98,020) $
(34,039) $
(1,645) $
(1,279) $
(1,405) $
(125,835) $
(96,741) $
(32,634) $
(6.00) $
—
(6.00) $
(8.54) $
(0.04)
(8.58) $
(7.15) $
(0.27)
(7.42) $
(0.70) $
—
(0.70) $
(1.66)
0.02
(1.64)
24,983
13,472
7,525
9,113
6,997
54
Operating activities
Investing activities
Financing activities
Other Financial Data:
Adjusted EBITDA (d)
Gross margin (e)
Cash distribution declared per common unit
Segment gross margin:
Gathering and Processing
Transmission
Terminals
Balance Sheet Data (at period end):
$
40,937
$
21,478
$
17,223
$
18,348 $
(171,108)
129,672
(471,870)
450,490
(28,214)
10,816
(62,427)
43,784
$
66,311
$
45,551
$
31,907
$
18,850 $
123,281
1.89
76,865
35,301
11,115
102,807
1.85
50,817
42,828
9,162
74,821
1.75
36,985
32,408
5,428
49,431
1.73
36,118
13,313
—
Cash and cash equivalents
$
— $
499
$
393
$
576 $
Accounts receivable and unbilled revenue
Property, plant and equipment, net
Total assets
Current portion of long-term debt
Long-term debt
Operating Data:
Gathering and processing segment:
Average throughput (MMcf/d)
Average plant inlet volume (MMcf/d) (e)
Average gross NGL production (Mgal/d)(e)
Average gross condensate production (Mgal/d)
(f)
Transmission segment:
Average throughput (MMcf/d)
Average firm transportation - capacity
reservation (MMcf/d)
Average interruptible transportation -
throughput (MMcf/d)
Terminals segment:
Storage utilization
18,740
648,013
891,296
2,338
525,100
338.2
120.9
231.1
99.8
708.6
653.7
410.3
29,543
582,182
913,558
2,908
372,950
274.8
89.1
64.2
75.2
778.9
577.9
468.9
29,823
312,701
382,075
2,048
130,735
277.2
117.3
52.0
46.2
644.7
640.7
389.2
23,470
223,819
256,696
—
128,285
291.2
116.1
49.9
22.6
398.5
703.6
86.6
88.1%
91.4%
95.6%
—
10,432
(41,744)
32,120
20,785
44,356
0.70
30,619
13,737
—
871
20,963
170,231
199,551
—
66,270
250.9
36.7
54.5
22.6
381.1
702.2
69.0
—
(a) During these years, we had the following transactions that affect comparability: i) in September 2015, we acquired a non-operated 12.9% indirect interest in
Delta House, which we account for as an equity method investment; ii) in October 2014 and January 2014, we acquired the Costar and Lavaca systems,
respectively, both of which are included in our Gathering and Processing segment; iii) in December 2013, we acquired Blackwater, which is included in our
Terminals segment; and iv) in April 2013, we acquired the High point System, which is included in Transmission segment.
(b) Represents cash and non-cash costs related to our Long-Term Incentive Plans. Of these amounts, $1.6 million were cash expenses for the year ended
(c)
December 31, 2011.
Includes unvested phantom units with distribution equivalent rights ("DERs), which are considered participating securities, of 200,000 at December 31,
2015.
(d) For a definition of Adjusted EBITDA and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with
GAAP and a discussion of how we use Adjusted EBITDA to evaluate our operating performance, please read "Item 7. Management's Discussion and
Analysis — How We Evaluate Our Operations."
(e) For a definition of gross margin and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP
and a discussion of how we use gross margin to evaluate our operating performance, please read "Item 7. Management's Discussion and Analysis — How
We Evaluate Our Operations."
55
(f) Excludes volumes and gross production under our elective processing arrangements. For a description of our elective processing arrangements, please read
"Item 7. Management's Discussion and Analysis — Our Operations - Gathering and Processing Segment"
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The
following
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
should
be
read
in
conjunction
with
the
audited
consolidated
financial
statements
and
the
related
notes
thereto
included
elsewhere
in
this
Annual
Report.
Our
actual
results
may
differ
materially
from
those
anticipated
in
these
forward-looking
statements
or
as
a
result
of
certain
factors
such
as
those
set
forth
below
under
the
caption
"Cautionary
Statement
About
Forward-Looking
Statements."
Overview
We are a growth-oriented Delaware limited partnership that was formed in August 2009 to own, operate, develop and acquire a diversified portfolio of midstream
energy assets. We are engaged in the business of gathering, treating, processing, and transporting natural gas; gathering, transporting, storing, treating and
fractionating NGLs; gathering, storing and transporting crude oil and condensates; and storing specialty chemical products, all through our ownership and
operation of twelve gathering systems, five processing facilities, three fractionation facilities, three marine terminal sites, three interstate pipelines, five intrastate
pipelines and one crude oil pipeline. We also own a 66.7% non-operated interest in Main Pass Oil Gathering Company ("MPOG"), a crude oil gathering and
processing system; a 50% undivided, non-operated interest in the Burns Point Plant, a natural gas processing plant; a 46% non-operated interest in Mesquite, an
off-spec condensate fractionation project; and, a 12.9% non-operated indirect interest in Delta House, a floating production system platform and related pipeline
infrastructure. Our primary assets, which are strategically located in Alabama, Georgia, Louisiana, Mississippi, North Dakota, Tennessee, Texas, and the Gulf of
Mexico, provide critical infrastructure that links producers of natural gas, crude oil, NGLs, condensate and specialty chemicals to numerous intermediate and end-
use markets. We currently operate approximately 3,000 miles of pipelines that gather and transport over 1 Bcf/d of natural gas and operate approximately 1.8
million barrels of storage capacity across three marine terminal sites.
Significant financial highlights during the year ended December 31, 2015 , include the following:
•
•
Gross margin increased to $123.3 million , or an increase of 19.9% , as compared to the same period in 2014 primarily due to the Costar and Lavaca
acquisitions in October 2014 and January 2014, respectively;
Adjusted EBITDA increased to $66.3 million , or an increase of 45.4% , as compared to the same period in 2014 primarily due to the Costar and Lavaca
acquisitions, as well as distributions from Delta House;
• We distributed $46.6 million to our Limited Partner common unitholders, or $1.89 per unit;
•
•
•
On September 15, 2015, we issued 7,500,000 common units at a price of $11.31 per common unit and received $81.0 million in net proceeds which were
used to fund a portion of our investment in Delta House;
On September 18, 2015, we entered into the First Amendment and Incremental Commitment Agreement to our Amended and Restated Credit Agreement
dated as of September 5, 2014 (as amended, the Credit Agreement), which increased our borrowing capacity from $500.0 million to $750.0 million , with
the ability to further increase the borrowing capacity subject to lender approval; and
On September 18, 2015, an affiliate of our General Partner contributed a 12.9% indirect interest in Delta House to the Partnership in exchange for
consideration of $162.0 million .
Significant operational highlights during the year ended December 31, 2015 , include the following:
•
•
•
The percentage of gross margin generated from fee-based, fixed-margin, firm and interruptible transportation contracts and firm storage contracts
increased to 85.8% compared to 74.4% for 2014;
Average gross NGL production totaled 231.1 Mgal/d, representing a 166.9 Mgal/d or 260.0% increase compared to 2014;
Average gross condensate production totaled 99.8 Mgal/d, representing a 24.6 Mgal/d or 32.7% increase compared to 2014;
56
•
•
Throughput volumes attributable to the Partnership totaled 1,046.8 MMcf/d, which is consistent with 2014; and
Contracted capacity for our Terminals segment averaged 1,487,542 barrels, representing a 19.3% increase compared to 2014.
Our Operations
We manage our business and analyze and report our results of operations through three business segments:
•
•
•
Gathering and Processing . Our Gathering and Processing segment provides "wellhead-to-market" services to producers of natural gas and
crude oil, which include transporting raw natural gas and crude oil from various receipt points through gathering systems, treating the raw
natural gas, processing raw natural gas to separate the NGLs from the natural gas, fractionating NGLs, and selling or delivering pipeline-quality
natural gas, crude oil, and NGLs to various markets and pipeline systems.
Transmission . Our Transmission segment transports and delivers natural gas from producing wells, receipt points or pipeline interconnects for
shippers and other customers, which include local distribution companies ("LDCs"), utilities and industrial, commercial and power generation
customers.
Terminals. Our Terminals segment provides above-ground leasable storage operations at our marine terminals that support various commercial
customers, including commodity brokers, refiners and chemical manufacturers to store a range of products.
Gathering and Processing Segment
Our results of operations from our Gathering and Processing segment are determined primarily by the volumes of natural gas and crude oil we gather, process and
fractionate, the commercial terms in our current contract portfolio and natural gas, crude oil, NGL, and condensate prices. We gather and process natural gas and
crude oil primarily pursuant to the following arrangements:
•
•
•
Fee-Based Arrangements. Under these arrangements, we generally are paid a fixed fee for gathering, processing and transporting natural gas
and crude oil.
Fixed-Margin Arrangements. Under these arrangements, we purchase natural gas and off-spec condensate from producers or suppliers at
receipt points on our systems at an index price less a fixed transportation fee and simultaneously sell an identical volume of natural gas or off-
spec condensate at delivery points on our systems at the same, undiscounted index price. By entering into back-to-back purchases and sales of
natural gas or off-spec condensate, we are able to lock in a fixed margin on these transactions. We view the segment gross margin earned under
our fixed-margin arrangements to be economically equivalent to the fee earned in our fee-based arrangements.
Percent-of-Proceeds Arrangements ("POP"). Under these arrangements, we generally gather raw natural gas from producers at the wellhead or
other supply points, transport it through our gathering system, process it and sell the residue natural gas, NGLs and condensate at market prices.
Where we provide processing services at the processing plants that we own, or obtain processing services for our own account in connection
with our elective processing arrangements, we generally retain and sell a percentage of the residue natural gas and resulting NGLs. However, we
also have contracts under which we retain a percentage of the resulting NGLs and do not retain a percentage of residue natural gas. Our POP
arrangements also often contain a fee-based component.
Gross margin earned under fee-based and fixed-margin arrangements is directly related to the volume of natural gas and crude oil that flows through our systems
and is not directly dependent on commodity prices. However, a sustained decline in commodity prices could result in a decline in throughput volumes from
producers and, thus, a decrease in our fee-based and fixed-margin gross margin. These arrangements provide stable cash flows but minimal, if any, upside in higher
commodity-price environments. Under our typical POP arrangement, our gross margin is directly impacted by the commodity prices we realize on our share of
natural gas and NGLs received as compensation for processing raw natural gas. However, our POP arrangements also often contain a fee-based component, which
helps to mitigate the degree of commodity-price volatility we could experience under these arrangements. We further seek to mitigate our exposure to commodity
price risk through our hedging program. Please read "Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Commodity Price Risk."
Transmission Segment
57
Results of operations from our Transmission segment are determined by capacity reservation fees from firm transportation contracts and the volumes of natural gas
transported on the interstate and intrastate pipelines we own pursuant to interruptible transportation or fixed-margin contracts. Our transportation arrangements are
further described below:
•
•
•
Firm Transportation Arrangements. Our obligation to provide firm transportation service means that we are obligated to transport natural gas
nominated by the shipper up to the maximum daily quantity specified in the contract. In exchange for that obligation on our part, the shipper
pays a specified reservation charge, whether or not the shipper utilizes the capacity. In most cases, the shipper also pays a variable-use charge
with respect to quantities actually transported by us.
Interruptible Transportation Arrangements. Our obligation to provide interruptible transportation service means that we are only obligated to
transport natural gas nominated by the shipper to the extent that we have available capacity. For this service, the shipper pays no reservation
charge but pays a variable-use charge for quantities actually shipped.
Fixed-Margin Arrangements. Under these arrangements, we purchase natural gas from producers or suppliers at receipt points on our systems
at an index price less a fixed transportation fee and simultaneously sell an identical volume of natural gas at delivery points on our systems at the
same undiscounted index price. We view fixed-margin arrangements to be economically equivalent to our interruptible transportation
arrangements.
Terminals Segment
Our Terminals segment provides above-ground leasable storage services at our marine terminals that support various commercial customers, including commodity
brokers, refiners and chemical manufacturers to store a range of products, including petroleum products, distillates, chemicals and agricultural products. We
generally receive fee-based compensation on guaranteed firm storage contracts, throughput fees charged to our customers when their products are either received
or disbursed and other fee-based charges associated with ancillary services provided to our customers, such as excess throughput, truck weighing, etc. Our firm
storage contracts are typically multi-year contracts with renewal options.
Contract Mix
For the years ended December 31, 2015 , 2014 , and 2013 , $105.8 million , $76.6 million , and $48.7 million , or 85.8% , 74.4% , and 65.1% , respectively, of our
gross margin was generated from fee-based, fixed-margin, firm and interruptible transportation contracts and firm storage contracts. Set forth below is a table
summarizing our average contract mix relative to segment gross margin for the years ended December 31, 2015 , 2014 , and 2013 (in thousands):
Gathering and Processing
Fee-based
Fixed margin
Percent-of-proceeds
Total
Transmission
Firm transportation
Interruptible transportation
Fixed margin
Total
Terminals
Firm storage
Total
For the Year Ended
December 31, 2015
For the Year Ended
December 31, 2014
For the Year Ended
December 31, 2013
Segment
Gross
Margin
Percent of
Segment
Gross Margin
Segment
Gross
Margin
Percent of
Segment
Gross Margin
Segment
Gross
Margin
Percent of
Segment
Gross Margin
$
$
$
$
$
$
40,278
19,139
17,448
76,865
10,767
24,534
—
35,301
11,115
11,115
52.4% $
24.9%
22.7%
100.0% $
30.5% $
69.5%
—%
21,394
3,151
26,272
50,817
11,092
31,736
—
42.1% $
6.2%
51.7%
100.0% $
25.9% $
74.1%
—%
8,876
1,997
26,112
36,985
10,597
21,714
97
100.0% $
42,828
100.0% $
32,408
100.0% $
100.0% $
9,162
9,162
100.0% $
100.0% $
5,428
5,428
24.0%
5.4%
70.6%
100.0%
32.7%
67.0%
0.3%
100.0%
100.0%
100.0%
58
Cash distributions derived from our unconsolidated affiliates amounted to $20.6 million and $2.0 million for the years ended December 31, 2015 and 2014 ,
respectively, and are primarily generated from fee-based gathering and processing arrangements.
How We Evaluate Our Operations
Our management uses a variety of financial and operational metrics to analyze our performance. We view these metrics as important factors in evaluating our
profitability and review these measurements on at least a monthly basis for consistency and trend analysis. These metrics include throughput volumes, gross
margin and direct operating expenses on a segment basis, and Adjusted EBITDA on a company-wide basis.
Throughput Volumes
In our Gathering and Processing segment, we must continually obtain new supplies of natural gas, crude oil, NGLs and condensate to maintain or increase
throughput volumes on our systems. Our ability to maintain or increase existing volumes and obtain new supplies of natural gas, crude oil, NGLs and condensate is
impacted by i) the level of work-overs or recompletions of existing connected wells and successful drilling activity of our significant producers in areas currently
dedicated to or near our gathering systems, ii) our ability to compete for volumes from successful new wells in the areas in which we operate, iii) our ability to
obtain natural gas, crude oil, NGLs and condensate that has been released from other commitments and iv) the volume of crude oil, natural gas, NGLs and
condensate that we purchase from connected systems. We actively monitor producer activity in the areas served by our gathering and processing systems to
maintain current throughput volumes or pursue new supply opportunities.
In our Transmission segment, the majority of our segment gross margin is generated by firm capacity reservation charges and interruptible transportation services
from throughput volumes on our interstate and intrastate pipelines. Substantially all of our Transmission segment gross margin is generated under contracts with
shippers, including producers, industrial companies, LDCs and marketers, for firm and interruptible natural gas transportation on our pipelines. We routinely
monitor natural gas market activities in the areas served by our transmission systems to maintain current throughput volumes or pursue new shipper opportunities.
In our Terminals segment, we generally receive fee-based compensation on guaranteed firm storage contracts, throughput fees charged to our customers when their
products are either received or disbursed, and other operational charges associated with ancillary services provided to our customers, such as excess throughput,
steam heating, truck weighing, etc.
Storage Utilization
Storage utilization is a metric that we use to evaluate the performance of our Terminals segment. We define storage utilization as the percentage of the contracted
capacity in barrels compared to the design capacity of the tank.
Segment Gross Margin and Gross Margin
Segment gross margin and gross margin are metrics that we use to evaluate our performance. We define segment gross margin in our Gathering and Processing
segment as revenue generated from gathering and processing operations and realized gains or (losses) on commodity derivatives, less the cost of natural gas, crude
oil, NGLs and condensate purchased and revenue from construction, operating and maintenance agreements ("COMA"). Revenue includes revenue generated from
fixed fees associated with the gathering and treatment of natural gas and crude oil and from the sale of natural gas, crude oil, NGLs and condensate resulting from
gathering and processing activities under fixed-margin and percent-of-proceeds arrangements. The cost of natural gas, NGLs and condensate includes volumes of
natural gas, NGLs and condensate remitted back to producers pursuant to percent-of-proceeds arrangements and the cost of natural gas purchased for our own
account, including pursuant to fixed-margin arrangements.
We define segment gross margin in our Transmission segment as revenue generated from firm and interruptible transportation agreements and fixed-margin
arrangements, plus other related fees, less the cost of natural gas purchased in connection with fixed-margin arrangements. Substantially all of our gross margin in
this segment is fee-based or fixed-margin, with little to no direct commodity price risk.
We define segment gross margin in our Terminals segment as revenue generated from fee-based compensation on guaranteed firm storage contracts and
throughput fees charged to our customers less direct operating expense which includes direct labor, general materials and supplies and direct overhead.
We define gross margin as the sum of our segment gross margin for our Gathering and Processing, Transmission and Terminals segments. The GAAP measure
most directly comparable to gross margin is net income (loss) attributable to the Partnership.
59
Direct Operating Expenses
Our management seeks to maximize the profitability of our operations in part by minimizing direct operating expenses without sacrificing safety or the
environment. Direct labor costs, insurance costs, ad valorem and property taxes, repair and non-capitalized maintenance costs, integrity management costs,
utilities, lost and unaccounted for gas, and contract services comprise the most significant portion of our operating expenses. These expenses are relatively stable
and largely independent of throughput volumes through our systems but may fluctuate depending on the activities performed during a specific period.
Adjusted EBITDA
Adjusted EBITDA is a measure used by our management and by external users of our financial statements, such as investors, commercial banks, research analysts
and others, to assess:
•
•
•
•
the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
the ability of our assets to generate cash flow from operations to make cash distributions to our unit holders and General Partner and its affiliates;
our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing
or capital structure; and
the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.
We define Adjusted EBITDA as net income (loss) attributable to the Partnership, plus interest expense, income tax expense, depreciation, amortization and
accretion expense, certain non-cash charges such as non-cash equity compensation expense, unrealized losses on commodity derivative contracts, debt issuance
costs, return of capital from unconsolidated affiliates, transaction expenses and selected charges that are unusual or nonrecurring, less interest income, income tax
benefit, unrealized gains on commodity derivative contracts, and selected gains that are unusual or nonrecurring. The GAAP measure most directly comparable to
Adjusted EBITDA is net income (loss) attributable to the Partnership.
Note About Non-GAAP Financial Measures
Gross margin, segment gross margin and Adjusted EBITDA are performance measures that are considered non-GAAP financial measures. Each has important
limitations as an analytical tool because it excludes some, but not all, items that affect the most directly comparable GAAP financial measures. Management
compensates for the limitations of these non-GAAP measures as analytical tools by reviewing the comparable GAAP measures, understanding the differences
between the measures and incorporating these data points into management's decision-making process.
You should not consider gross margin, segment gross margin or Adjusted EBITDA in isolation or as a substitute for, or more meaningful than analysis of, our
results as reported under GAAP. Gross margin and Adjusted EBITDA may be defined differently by other companies in our industry. Our definitions of these non-
GAAP financial measures may not be comparable to similarly titled measures of other companies in our industry.
The following tables reconcile the non-GAAP financial measures of gross margin and Adjusted EBITDA used by management to Net income (loss) attributable to
the Partnership, their most directly comparable GAAP measure, for each of the three years ended December 31, 2015 , 2014 and 2013 (in thousands):
60
Years Ended December 31,
2015 (a)
2014 (a)
2013 (a)
Reconciliation of Gross Margin to Net income (loss) attributable to
the Partnership
Gathering and processing segment gross margin
$
76,865 $
50,817 $
Transmission segment gross margin
Terminals segment gross margin (b)
Total gross margin
Plus:
Gain (loss) on commodity derivatives, net
Earnings in unconsolidated affiliates
Less:
Direct operating expenses (b)
Selling, general and administrative expenses
Equity compensation expense
Depreciation, amortization and accretion expense
(Gain) loss on involuntary conversion of property, plant and
equipment
(Gain) loss on sale of assets, net
Loss on impairment of property, plant and equipment
Loss on impairment of goodwill
Interest expense
Other (income) expense
Other, net (c)
Income tax expense (benefit)
Income (loss) from discontinued operations, net of tax
Net income (loss) attributable to noncontrolling interest
35,301
11,115
42,828
9,162
123,281
102,807
1,324
8,201
52,909
27,232
3,774
38,014
—
3,011
—
118,592
14,745
—
770
1,134
80
25
1,091
348
39,360
23,103
1,536
28,832
—
122
99,892
—
7,577
670
(208)
557
611
214
36,985
32,408
5,428
74,821
28
—
27,833
19,079
2,094
30,002
(343)
—
18,155
—
9,291
—
226
(495)
2,413
633
Net income (loss) attributable to the Partnership
$
(127,480) $
(98,020) $
(34,039)
(a) During these years, we had the following transactions that affect comparability: i) in September 2015, we acquired a non-operated 12.9% indirect interest in
Delta House, which we account for as an equity method investment; ii) in October 2014 and January 2014, we acquired the Costar and Lavaca systems,
respectively, both of which are included in our Gathering and Processing segment; iii) in December 2013, we acquired Blackwater, which is included in our
Terminals segment; and iv) in April 2013, we acquired the High Point System, which is included in our Transmission segment.
(b) Direct operating expenses includes Gathering and Processing segment direct operating expenses of $39.2 million , $23.8 million , and $14.6 million and
Transmission segment direct operating expenses of $13.7 million , $15.6 million , and $13.3 million for each of the three years ended December 31, 2015 ,
2014 and 2013 , respectively. Direct operating expenses related to our Terminals segment of $6.6 million , $6.3 million , and $4.4 million are included within
the calculation of Terminals segment gross margin for each of the three years ended December 31, 2015 , 2014 and 2013 , respectively.
(c) Other, net includes realized gain on commodity derivatives of $1.6 million , $0.7 million and $1.1 million and COMA income of $0.8 million , $0.9 million
and $0.8 million for each of the years ended December 31, 2015 , 2014 and 2013 , respectively.
61
Reconciliation of Adjusted EBITDA to Net income (loss) attributable to the
Partnership
Net income (loss) attributable to the Partnership
$
(127,480) $
(98,020) $
(34,039)
Years Ended December 31,
2015
2014
2013
Add:
Depreciation, amortization and accretion expense
Interest expense
Debt issuance costs
Unrealized (gain) loss on derivatives, net
Non-cash equity compensation expense
Transaction expenses
Income tax expense (benefit)
Impairment on property, plant and equipment
Loss on impairment of noncurrent assets held for sale
Loss on impairment of goodwill
Proceeds from equity method investment, return of capital
General Partner contribution for cost reimbursement
Deduct:
COMA income
Straight-line amortization of put costs
OPEB plan net periodic benefit
Gain (loss) on involuntary conversion of property, plant and equipment
Gain (loss) on sale of assets, net
Adjusted EBITDA
$
Items Affecting the Comparability of Our Financial Results
38,014
13,631
2,238
71
3,863
1,426
953
—
—
118,592
12,367
330
841
—
14
—
(3,161)
66,311 $
28,832
6,433
3,841
(595)
1,626
1,794
224
99,892
673
—
1,632
—
943
—
45
—
(207)
30,002
7,850
2,113
1,495
2,094
3,987
(847)
18,155
2,400
—
—
—
843
119
73
343
(75)
45,551 $
31,907
Our historical results of operations for the periods presented may not be comparable, either to each other or to our future results of operations, for the reasons
described below:
•
•
•
•
•
•
•
On September 18, 2015, we acquired a 12.9% non-operated indirect interest in Delta House, which is a floating production system platform with
associated crude oil and natural gas export pipelines, for a net purchase price of $162.0 million . The investment was financed by proceeds of a public
offering of 7.5 million of the Partnership's common units and through borrowings under the Partnership's Credit Agreement. The interest is accounted
for as an equity method investment under ASC 323, Investments-Equity
Method
and
Joint
Ventures.
On October 14, 2014, we acquired Costar from Energy Spectrum Partners VI LP and Costar Midstream Energy, LLC for approximately $405.3
million .
On August 11, 2014, we acquired a 66.7% non-operated interest in MPOG, which is an offshore crude oil gathering system, for a net purchase price
of $12.0 million . The acquisition was financed through borrowings under the Partnership's Credit Agreement. The interest is accounted for as an
equity method investment under ASC 323, Investments-Equity
Method
and
Joint
Ventures.
On January 31, 2014, we acquired our Lavaca System, which is an onshore gas gathering system for approximately $104.4 million.
On April 15, 2013, our General Partner contributed the High Point System.
On December 17, 2013, we completed the acquisition of Blackwater from our General Partner. The net assets received were recorded at their
historical book value of $22.7 million as of the date common control was established, which was April 15, 2013; and
During the fourth quarter of 2013, we acquired an additional 4.8% undivided interest in the Chatom System, increasing our ownership to 92.2%.
General Trends and Outlook
62
During 2016, our business objectives will continue to focus on maintaining stable cash flows from our existing assets and executing on growth opportunities to
increase our long-term cash flows. We believe the key elements to stable cash flows are the diversity of our asset portfolio and our fee-based business which
represents a significant portion of our estimated margins, the objective of which is to protect against downside risk in our cash flows.
We incur capital expenditures for our consolidated entities and our unconsolidated affiliates. We anticipate maintenance capital expenditures of between $5.5
million and $6.5 million, and approved expenditures for expansion capital of between $45.0 million and $55.0 million, for the year ending December 31, 2016.
Forecasted growth capital expenditures include construction of midstream infrastructure for the Permian Off-spec treating facility, expansion of the Harvey
terminal, continued build-out of Lavaca System, completion of the Longview Rail and Yellow Rose facilities, and other organic growth projects.
We expect to continue to pursue a multi-faceted growth strategy, which includes maximizing drop down opportunities provided by our relationship with ArcLight,
capitalizing on organic expansion and pursuing strategic third-party acquisitions in order to grow our cash flows. However, in light of the sharp decline in energy
commodity prices that began in fourth quarter of 2014 and continued throughout 2015, we expect producer and supplier activities to be impacted, which may
reduce the growth rate of our Gathering and Processing and Transmission segments.
We expect our business to continue to be affected by the key trends discussed below. Our expectations are based on assumptions made by us and information
currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may
vary materially from our expected results.
Gathering and Processing Segment. Except for our fee-based contracts, which may be impacted by throughput volumes, the profitability of our gathering and
processing segment is dependent upon commodity prices, natural gas and crude oil supply, and demand for natural gas, crude oil, NGLs and condensate.
Commodity prices, which are impacted by the balance between supply and demand, have historically been volatile and saw a significant decline in the latter part of
2014 and continued throughout 2015. Throughput volumes could decline, particularly in areas with lower NGL content, should commodity prices and drilling
levels continue to experience weakness.
Transmission Segment. Profitability of our transmission segment is dependent upon the demand to transport natural gas pursuant to our firm and interruptible
transportation contracts. Throughput volumes could continue to decline should natural gas prices and drilling levels continue to experience weakness as a result of
volatile commodity prices.
Terminals Segment. Profitability of our terminals segment is dependent upon the demand from our customers to store their products, which is generally not tied to
the crude oil and natural gas commodity markets. Currently, we have not experienced deterioration of terminal gross margin in connection with the volatility of the
natural gas, crude oil, NGL or condensate markets. Further, the terms of our firm storage contracts are multiple years, with renewal options.
Average daily prices for NYMEX West Texas Intermediate crude oil ranged from a high of $61.43 per barrel to a low of $26.21 per barrel from January 1, 2015
through March 1, 2016. Average daily prices for NYMEX Henry Hub natural gas ranged from a high of $3.23 per MMBtu to a low of $1.71 per MMBtu from
January 1, 2015 through March 1, 2016. We are unable to predict future potential movements in the market price for natural gas, crude oil and NGLs and thus,
cannot predict the ultimate impact of prices on our operations. If commodity prices continue to trend lower as they did in the latter part of 2014 and through early
2016, this could lead to reduced profitability and may impact our liquidity, compliance with financial covenants in our Credit Agreement, and our ability to
maintain our current distribution levels. Our long-term view is that as economic conditions improve, commodity prices should reach levels that will support
continued natural gas and crude oil production in the United States. Reduced profitability may result in future potential non-cash impairments of long-lived assets,
goodwill, or intangible assets.
On January 25, 2016, we announced that the Board of Directors of our General Partner voted to maintain our quarterly cash distribution of $0.4725 per unit for the
fourth quarter ended December 31, 2015, or $1.89 per unit on an annualized basis. The cash distribution was paid on February 12, 2016, to unitholders of record as
of the close of business on February 3, 2016. The amount of our cash distributions on our units principally depends upon the amount of cash we generate from our
operations, which could be adversely impacted by market conditions and factors outside of our control. The Partnership Agreement allows us to reduce or
eliminate quarterly distributions, if required to maintain ongoing operations.
Capital Markets. Volatility in the capital markets may impact our operations in multiple ways, including limiting our producers' ability to finance their drilling and
workover programs and limiting our ability to fund drop downs, organic growth projects and acquisitions.
63
Impact of Inflation on Direct Operating Expenses. Inflation has been relatively low in the United States in recent years. However, the inflation rates impacting
our operations fluctuate throughout the broad economic and energy business cycles. Consequently, our costs for chemicals, utilities, materials and supplies, labor
and major equipment purchases may increase during periods of general business inflation or periods of relatively high-energy commodity prices.
Results of Operations — Combined Overview
Gross margin increased by $20.5 million , or 19.9% , for the year ended to December 31, 2015 to $123.3 million as compared to the same period in 2014 . For the
year ended December 31, 2015 , the increase in gross margin was largely a result of incremental segment gross margin of $24.2 million associated with the
gathering and processing systems obtained through the Costar acquisition in October 2014 and higher gross margin of $4.8 million was attributable to the Lavaca
System acquisition in January 2014; which was partially offset by lower gross margin in our Transmission segment of $7.5 million as a result of a decrease in
average throughput volumes and changes in pipeline imbalances.
For the year ended December 31, 2015 , Adjusted EBITDA increased $20.7 million, or 45.4% , compared to the same period in 2014 . The increase is primarily
related to incremental segment gross margin in the Gathering and Processing segment from the Costar acquisition, higher gross margin related to the Lavaca
System acquisition, and higher cash distributions derived from our unconsolidated affiliates of $18.6 million due to the September 2015 investment in Delta House.
These increases were partially offset by higher direct operating expenses associated with the Costar and Lavaca System acquisitions and lower gross margin in our
Transmission segment.
We distributed $46.6 million to holders of our common units, or $1.89 per unit, during the year ended December 31, 2015 , including the distribution with respect
to the three months ended December 31, 2014. The distribution of $1.89 per unit represents a 2% increase in annual distributions, period over period.
The following table and discussion presents certain of our historical consolidated financial data for the periods indicated.
The results of operations by segment are discussed in further detail following this combined overview (in thousands):
64
Statements of Operations Data:
Revenue
Gain (loss) on commodity derivatives
Total revenue
Operating expenses:
Purchases of natural gas, NGLs and condensate
Direct operating expenses
Selling, general and administrative expenses
Equity compensation expense (a)
Depreciation, amortization and accretion expense
Total operating expenses
Gain (loss) on involuntary conversion of property, plant and equipment
Gain (loss) on sale of assets, net
Loss on impairment of property, plant and equipment
Loss on impairment of goodwill
Operating income (loss)
Other income (expenses):
Interest expense
Other income (expense)
Earnings in unconsolidated affiliates
Net income (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss) from continuing operations
Discontinued operations:
Income (loss) from discontinued operations, net of tax
Net income (loss)
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to the Partnership
Other Financial Data:
Gross margin (b)
Adjusted EBITDA (b)
For the Years Ended
December 31,
2015
2014
2013
$
235,034 $
307,309 $
294,051
1,324
236,358
1,091
308,400
105,883
197,952
59,549
27,232
3,774
38,014
45,702
23,103
1,536
28,832
234,452
297,125
—
(3,011)
—
(118,592)
(119,697)
(14,745)
—
8,201
(126,241)
(1,134)
(127,375)
(80)
(127,455)
25
—
(122)
(99,892)
—
(88,739)
(7,577)
(670)
348
(96,638)
(557)
(97,195)
(611)
(97,806)
214
(127,480) $
(98,020) $
28
294,079
215,053
32,236
19,079
2,094
30,002
298,464
343
—
(18,155)
—
(22,197)
(9,291)
—
—
(31,488)
495
(30,993)
(2,413)
(33,406)
633
(34,039)
123,281 $
66,311 $
102,807 $
45,551 $
74,821
31,907
$
$
$
(a) Primarily represents non-cash costs related to our Long-Term Incentive Plans.
(b) For definitions of gross margin and Adjusted EBITDA and reconciliations to their most directly comparable financial measure calculated and presented in
accordance with GAAP, and a discussion of how we use gross margin and Adjusted EBITDA to evaluate our operating performance, please read the
information in this Item under the caption "— How We Evaluate Our Operations."
Year ended December 31, 2015 , compared to year ended December 31, 2014
Revenue . Our total revenue for the year ended December 31, 2015 was $236.4 million compared to $308.4 million for the year ended December 31, 2014 . This
decrease of $72.0 million was primarily due to a decrease in natural gas and condensate revenues of $95.2 million and $11.0 million, respectively. These decreases
were primarily as a result of:
•
lower realized natural gas prices of $2.91 /Mcf, which is a decrease of $2.01 /Mcf, or 40.9% , period over period,
65
•
•
•
lower realized condensate prices of $0.97 /gal, which is a decrease of $0.65 /gal, or 40.1% , period over period, offset by higher gross condensate
production volumes of 24.6 Mgal/d, or 32.7% , period over period, from our Gathering and Processing segment,
converting fixed-margin contracts in our transmission segment to firm or interruptible transportation contracts, and
lower throughput volumes associated with our elective processing arrangements.
The decrease in natural gas and condensate revenues was partially offset by:
•
•
•
an increase in NGL revenues of $15.5 million as a result of higher gross NGL production volumes of 166.9 Mgal/d from our Gathering and Processing
segment, which was offset by lower realized NGL prices of $0.58 /gal, which is a decrease of $0.33 /gal., period over period,
an increase in fee-based revenue of $19.0 million primarily due to increased average throughput volumes in our Gathering and Processing segment of
63.4 MMcf/day, or 23.1% , and
an increase in the Terminals segment revenue of $2.3 million as a result of increased storage utilization from acquiring new customers and contractual
storage rate escalations.
Purchases of Natural Gas, NGLs and Condensate . Our purchases of natural gas, NGLs and condensate for the year ended December 31, 2015 , were $105.9
million compared to $198.0 million in the year ended December 31, 2014 . This decrease of $92.1 million was due to lower natural gas purchases of $94.3 million
primarily as a result of lower natural gas prices and lower natural gas volumes related to our elective processing arrangements in our Gathering and Processing
segment, as well as the conversion of certain fixed-margin contracts to interruptible transportation contracts in our Transmission segment as mentioned above.
This decrease was partially offset by incremental NGL, crude oil and condensate purchases of $2.2 million primarily associated with the gathering and processing
systems acquired in the Costar Acquisition.
Gross Margin . Gross margin for the year ended December 31, 2015 , was $123.3 million compared to $102.8 million for the year ended December 31, 2014 . This
increase of $20.5 million was primarily due to an increase in segment gross margin in our Gathering and Processing segment of $26.0 million as a result of higher
NGL and condensate production of 166.9 Mgal/d and 24.6 Mgal/d, respectively, and higher throughput volumes of 63.4 MMcf/d, as well as higher segment gross
margin in our Terminals segment of $2.0 million . These increases were partially offset by lower segment gross margin in our Transmission segment of $7.5
million as a result of a decrease in average throughput volumes.
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2015 , were $59.5 million compared to $45.7 million for the year ended
December 31, 2014 . This increase of $13.8 million was primarily due to $13.4 million of incremental operating costs, including costs related to direct labor and
benefits, associated with the gathering and processing systems acquired from Costar, and an increase of $2.1 million in operating costs associated with
compression rentals used at our Lavaca System. These increases were partially offset by the timing of activities related to our integrity management and plant
repair and maintenance programs.
Selling, General and Administrative ("SG&A") Expenses . SG&A expenses for the year ended December 31, 2015 , were $27.2 million compared to $23.1
million for the year ended December 31, 2014 . This increase of $4.1 million was primarily due to personnel costs incurred to manage and integrate our recent
acquisitions and support continuing growth.
Equity Compensation Expense . Equity compensation expense related to our Long-Term Incentive Plan for the year ended December 31, 2015 , was $3.8 million
compared to $1.5 million for the year ended December 31, 2014 . This increase of $2.3 million was primarily due to a one-time award made to certain executives
in lieu of cash payments related to our short-term incentive compensation plan during the current year.
Depreciation, Amortization and Accretion Expense . Depreciation, amortization and accretion expense for the year ended December 31, 2015 , was $38.0 million
compared to $28.8 million for the year ended December 31, 2014 . This increase of $9.2 million was primarily due to incremental depreciation of fixed assets and
amortization of certain intangible assets associated with the Costar Acquisition and the continuing capital expansion of the Lavaca System.
Loss on Impairment of Property, Plant and Equipment. During the fourth quarter of 2014, management noted the declining commodity markets and related
impact on producers and shippers to whom we provide gathering and processing services. The decline in the market price of crude oil led to a corresponding
decrease in natural gas and crude oil production and impacted the throughput volume of natural and NGLs we gather and process on certain assets. As a result,
asset impairment charges of $99.9 million related to certain legacy gathering and processing assets were recorded during the fourth quarter of 2014.
66
Loss on Impairment of Goodwill. During the fourth quarter of 2015, management performed the Partnership's annual goodwill impairment test. As a result of the
continuing decline in commodity prices, as well as the decline in the market price for the Partnership's common units during the fourth quarter, key assumptions
relating to expected producer volumes and commodity prices used in management's impairment testing cash flow models were updated. The updated assumptions
resulted in the estimated fair value of the Costar and Lavaca reporting units being less than their respective carrying values, indicating that the related goodwill was
impaired. After completing an allocation of the estimated fair value of each reporting unit to the associated assets and liabilities, management determined that the
goodwill of the Costar and Lavaca reporting units had a nominal fair value and that impairment charges of $118.6 million were required. Such impairment charges
were recorded during the fourth quarter of 2015.
Interest Expense . Interest expense for the year ended December 31, 2015 , was $14.7 million compared to $7.6 million for the year ended December 31, 2014 .
This increase of $7.1 million was primarily due to higher outstanding borrowings under the Credit Agreement to fund our capital growth projects and the Costar
acquisition and Delta House Investment.
Earnings in Unconsolidated Affiliates. Earnings in unconsolidated affiliates for the year ended December 31, 2015 were $8.2 million compared to $0.3 million for
the year ended December 31, 2014 . This increase of $7.9 million was due to incremental earnings of $7.5 million related to Delta House, and higher earnings from
MPOG of $0.4 million .
Year ended December 31, 2014 , compared to year ended December 31, 2013
Revenue . Our revenue for the year ended December 31, 2014 was $307.3 million compared to $294.1 million for the year ended December 31, 2013 . This
increase of $13.2 million was primarily due to:
•
•
•
•
an increase in natural gas revenues of $9.3 million as a result of higher realized natural gas prices of $4.92 /Mcf, an increase of $0.89 /Mcf, or 22.1% ,
period over period;
an increase in NGL revenues of $0.3 million as a result of higher gross NGL production volumes of 12.2 Mgal/d from our Gathering and Processing
segment and higher realized NGL prices of $0.91 /gal, an increase of $0.01 /gal period over period;
an increase in transmission revenues from the transportation of natural gas increased $9.1 million , or 11.6% , primarily due to an increase in throughput
of 134.2 MMcf/d as a result of the benefit of twelve months of revenue from the High Point System in 2014, compared to less than nine months in 2013;
and
an increase in Terminals segment revenue of $5.7 million primarily due to higher contracted storage capacity and auxiliary services as well as having the
benefit of twelve months of revenue from Terminals in 2014 compared to less than nine months in 2013.
These increases were partially offset by a decrease in condensate revenues of $9.0 million as a result of lower realized condensate prices of $1.62 /gal, a decrease
of $0.67 /gal period over period, partially offset by higher condensate production of 29.0 Mgal/d.
Gain on Commodity Derivatives, Net. Gain on commodity derivatives, net presents our commodity derivatives which were comprised of financial swaps, collars
and option contracts used to mitigate commodity price risk that have settled in 2014 or will be settled in 2015. The value of these derivatives increased by $1.1
million due to declining commodity prices. For a discussion of our commodity derivative positions, please read "Item 7a. Quantitative and Qualitative Disclosures
about Market Risk."
Purchases of Natural Gas, NGLs and Condensate . Our purchases of natural gas, NGLs and condensate for the year ended December 31, 2014 were $198.0
million compared to $215.1 million in the year ended December 31, 2013 . This decrease of $17.1 million was primarily due to lower natural gas purchase volumes
associated with our fixed-margin contracts and realized condensate prices, partially offset by higher purchase costs associated with NGL and condensate
production and higher realized natural gas prices related to POP contracts associated with owned processing plants.
Gross Margin . Gross margin for the year ended December 31, 2014 was $102.8 million compared to $74.8 million for the year ended December 31, 2013 . This
increase of $28.0 million was primarily due to: i) an increase in gross margin in our Transmission segment of $10.4 million as a result of increased throughput of
134.2 MMcf/d primarily as a result of twelve months of activity on our High Point Systems in 2014 compared to less than nine months of activity in 2013; ii) an
increase in our Terminals segment of $3.7 million due to incremental storage capacity and associated customers as well as twelve months of activity in 2014
compared to less than nine months of activity in 2013; and iii) an increase in gross margin in our Gathering and Processing segment of $13.8 million due to $16.5
million attributable to the acquired Lavaca System and incremental gross margin of $8.0 million attributable to the assets acquired from Costar, partially offset by
declines in gross margin at our other gathering and processing assets together with lower realized condensate prices of $0.67 , or 29.3% , period over period.
67
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2014 were $45.7 million compared to $32.2 million in the year ended
December 31, 2013 . This increase of $13.5 million was primarily due to: i) $3.4 million of incremental operating expenses associated with the Costar acquisition;
ii) $2.0 million of additional material and supplies associated with our Terminal segment; iii) $3.3 million of incremental costs associated with compression
rentals; iv) $1.0 million of costs associated with additional pipeline inspections; v) higher salaries, wages and related costs of $1.2 million associated with new
personnel additions incurred to manage and integrate our acquisitions and support our continued growth; and vi) $0.8 million associated with integrity management
programs.
Selling, General and Administrative Expenses . SG&A expenses for the year ended December 31, 2014 were $23.1 million compared to $19.1 million for the year
ended December 31, 2013 . This increase of $4.0 million was primarily due to: i) higher salaries, wages and related costs of $3.4 million associated with personnel
additions incurred to manage and integrate our acquisitions and support our continued growth; ii) an increase in legal fees of $0.9 million associated with certain
transactions; and iii) $0.5 million of incremental SG&A associated with the Costar acquisition.
Equity Compensation Expense . Compensation expense related to our LTIP for the year ended December 31, 2014 was $1.5 million compared to $2.1 million for
the year ended December 31, 2013 . This decrease of $0.6 million was primarily due to a one-time grant award made in 2013 associated with the acquisition of the
High Point System that did not occur in 2014.
Depreciation, Amortization and Accretion Expense . Depreciation, amortization and accretion expense for the year ended December 31, 2014 was $28.8 million
compared to $30.0 million for the year ended December 31, 2013 . This decrease of $1.2 million was primarily due to i) $6.8 million of incremental depreciation of
assets associated with acquisitions; and ii) $1.4 million of incremental amortization of intangible assets; which was partially offset by $9.2 million of a reduction in
depreciation of certain assets becoming fully depreciated in the current period.
Loss on Impairment of Property, Plant and Equipment. During the fourth quarter of 2014, management noted the declining commodity markets and related
impact on producers and shippers to whom we provide gathering and processing services. The decline in the market price of crude oil has led to a corresponding
decrease in crude oil and natural gas production and is impacting the volume of natural and NGLs we gather and process on certain assets. As a result, asset
impairment charges of $99.9 million related to certain gathering and processing assets were recorded during the fourth quarter of 2014.
Interest Expense . Interest expense for the year ended December 31, 2014 , was $7.6 million compared to $9.3 million for the year ended December 31, 2013 .
This decrease of $1.7 million was primarily due to i) a lower outstanding debt balance under the Credit Agreement and ii) a slight decrease to our weighted average
interest rate of 0.73% as a result of lower leverage during the year ended December 31, 2014.
Earnings in Unconsolidated Affiliates. Earnings in unconsolidated affiliates of $0.3 million represents our 66.7% share of earnings from MPOG for the year
ended December 31, 2014 which was acquired in August 2014.
Results of Operations — Segment Results
Gathering and Processing Segment
The table below contains key segment performance indicators related to our Gathering and Processing segment (in thousands except operating and pricing data).
68
Segment Financial and Operating Data:
Gathering and Processing segment
Financial data:
Revenue
Gain (loss) on commodity derivatives, net
Total revenue
Purchases of natural gas, NGLs and condensate
Direct operating expenses
Other financial data:
Segment gross margin
Operating data:
Average throughput (MMcf/d)
Average plant inlet volume (MMcf/d) (a)
Average gross NGL production (Mgal/d) (a)
Average gross condensate production (Mgal/d) (a)
Average realized prices:
Natural gas ($/Mcf)
NGLs ($/gal)
Condensate ($/gal)
For the Years Ended
December 31,
2015
2014
2013
$
173,597 $
203,616 $
1,324
174,921
97,580
39,189
1,091
204,707
152,690
23,783
205,179
28
205,207
168,574
14,574
$
76,865 $
50,817 $
36,985
338.2
120.9
231.1
99.8
2.91 $
0.58 $
0.97 $
274.8
89.1
64.2
75.2
4.92 $
0.91 $
1.62 $
277.2
117.3
52.0
46.2
4.03
0.90
2.29
$
$
$
(a) Excludes volumes and gross production under our elective processing arrangements.
Year Ended December 31, 2015 , Compared to Year Ended December 31, 2014
Revenue . Segment total revenue for the year ended December 31, 2015 was $174.9 million compared to $204.7 million for the year ended December 31, 2014 .
This decrease of $29.8 million was primarily due to lower realized natural gas, NGL and condensate prices of 40.9% , 36.3% , and 40.1% , respectively.
These decreases were partially offset by higher average throughput volumes of 63.4 MMcf/d, and higher average NGL and condensate production of 166.9 Mgal/d
and 24.6 Mgal/d, respectively. The increase in average throughput volumes is primarily due to incremental average throughput volumes associated with the
gathering and processing systems related to the Costar and Lavaca System acquisitions.
Purchases of Natural Gas, NGLs and Condensate . Purchases of natural gas, NGLs and condensate for the year ended December 31, 2015 were $97.6 million
compared to $152.7 million for the year ended December 31, 2014 . This decrease of $55.1 million was primarily due to lower purchase costs associated with
natural gas and NGLs, period over period, due to lower realized natural gas and NGL prices and lower natural gas volumes associated with our elective processing
arrangements. These decreases were partially offset by incremental purchases associated with off-spec NGL and condensate throughput volumes related to the
Longview System.
Segment Gross Margin . Segment gross margin for the year ended December 31, 2015 was $76.9 million compared to $50.8 million for the year ended December
31, 2014 . This increase of $26.1 million was primarily due to incremental gross margin of $24.2 million related to the Longview, Chapel Hill, Danville, Yellow
Rose, and Bakken Systems and higher gross margin of $4.8 million at our Lavaca System. These increases were partially offset by lower NGL and condensate
production associated with our elective processing arrangements.
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2015 were $39.2 million compared to $23.8 million for the year ended
December 31, 2014 . This increase of $15.4 million was primarily due to the incremental operating costs associated with the gathering and processing systems
acquired in the Costar and Lavaca acquisitions, partially offset by the timing of activities related to our integrity management and plant repair and maintenance
programs.
69
Year Ended December 31, 2014 , Compared to Year Ended December 31, 2013
Revenue . Segment revenue for the year ended December 31, 2014 , was $204.7 million compared to $205.2 million for the year ended December 31, 2013 . This
decrease of $0.5 million was primarily due to lower average natural gas throughput volumes of 2.4 MMcf/d, or 0.9% , period over period, as a result of reduced
volumes associated with fixed-margin and POP contracts at certain legacy gathering and processing systems and lower realized condensate prices of $0.67 , or
29.3% .
These decreases were offset by higher realized natural gas prices of $0.89 , or 22.1% ; higher average gross condensate production of 29.0 Mgal/d, or a net increase
of 62.8% , primarily as a result of condensate production at our Lavaca System; and higher average gross NGL production amounting to 12.2 Mgal/d, or a net
increase of 23.5% , primarily as a result of NGL production at our Longview and Chapel Hill Systems, partially offset by reduced production at certain legacy
gathering and processing systems and lower NGL volume associated with our elective processing arrangements.
Gain on Commodity Derivatives, Net. Gain on commodity derivatives, net presents our commodity derivatives which was comprised of financial swaps, collars
and option contracts used to mitigate commodity price risk that settled in 2014 or 2015 increased $1.1 million period over period due to holding net short positions
in a declining commodity price market. For a discussion of our commodity derivative positions, please read "Item 7A. Quantitative and Qualitative Disclosures
about Market Risk."
Purchases of Natural Gas, NGLs and Condensate . Purchases of natural gas, NGLs and condensate for the year ended December 31, 2014 , were $152.7 million
compared to $168.6 million for the year ended December 31, 2013 . This decrease of $15.9 million was primarily due to lower natural gas purchase volumes
associated with our fixed-margin contracts and realized condensate prices, offset by higher purchase costs associated with NGL and condensate production and
higher realized natural gas prices related to fixed-margin and POP contracts associated with owned processing plants.
Segment Gross Margin . Segment gross margin for the year ended December 31, 2014 , was $50.8 million compared to $37.0 million for the year ended
December 31, 2013 . This increase of $13.8 million was primarily due to incremental gross margin of $16.5 million at our Lavaca System and incremental gross
margin of $8.0 million at our Longview, Chapel Hill and Yellow Rose Systems. These increases were partially offset by lower gross margin of $4.6 million due to
lower average gross NGL production associated with our elective processing arrangements on our Gloria and Lafitte Systems; as well as lower plant inlet volumes
and corresponding NGL sales associated with certain legacy gathering and processing systems of $5.0 million.
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2014 , were $23.8 million compared to $14.6 million for the year ended
December 31, 2013 . This increase of $9.2 million was primarily due to the incremental operating costs associated with our newly acquired Lavaca System and the
gathering and processing assets of Costar.
Transmission Segment
The table below contains key segment performance indicators related to our Transmission segment (in thousands except operating and pricing data).
Segment Financial and Operating Data:
Transmission segment
Financial data:
Revenue
Purchases of natural gas, NGLs and condensate
Direct operating expenses
Other financial data:
Segment gross margin
Operating data:
Average throughput (MMcf/d)
Average firm transportation - capacity reservation (MMcf/d)
Average interruptible transportation - throughput (MMcf/d)
For the Years Ended
December 31,
2015
2014
2013
$
43,682 $
8,303
13,720
88,189 $
45,262
15,577
79,041
46,479
13,259
$
35,301 $
42,828 $
32,408
708.6
653.7
410.3
778.9
577.9
468.9
644.7
640.7
389.2
70
Revenue . Segment revenue for the year ended December 31, 2015 , was $43.7 million compared to $88.2 million for the year ended December 31, 2014 . This
decrease of $44.5 million in revenue was primarily due to converting certain fixed-margin arrangements to interruptible and firm transportation agreements during
the first quarter of 2015, which substantially reduced the sales of natural gas throughput volumes and also the need for us to purchase such volumes; and lower
average throughput volumes of 70.3 MMcf/d primarily attributable to our Midla and High Point Systems.
Purchases of Natural Gas, NGLs and Condensate . Purchases of natural gas, NGLs and condensate for the year ended December 31, 2015 , were $8.3 million
compared to $45.3 million for the year ended December 31, 2014 . This decrease of $37.0 million was primarily due to converting certain fixed-margin
arrangements to interruptible and firm transportation agreements, and therefore substantially reducing our need to purchase natural gas.
Segment Gross Margin . Segment gross margin for the year ended December 31, 2015 , was $35.3 million compared to $42.8 million for the year ended December
31, 2014 . This decrease of $7.5 million was primarily due to changes in pipeline imbalances and lower interruptible transportation margins period over period due
to lower average throughput volumes of 70.3 MMcf/d, or 9.0% .
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2015 , were $13.7 million compared to $15.6 million for the year ended
December 31, 2014 . This decrease of $1.9 million was primarily related to the timing of activities associated with our integrity management program and lower
insurance premiums, year over year.
Year Ended December 31, 2014 , Compared to Year Ended December 31, 2013
Revenue . Segment revenue for the year ended December 31, 2014 , was $88.2 million compared to $79.0 million for the year ended December 31, 2013 . This
increase of $9.2 million was primarily due to higher realized natural gas prices on our fixed-margin arrangements of $0.84/Mcf, or 22.1%, and an increase in the
average throughput volumes on our transmission systems to 778.9 MMcf/d for the year ended December 31, 2014 compared to 644.7 MMcf/d for the year ended
December 31, 2013, representing a 20.8% increase period over period. This increase in the average throughput volumes was primarily due to higher throughput
volumes at our High Point System of 147.9 MMcf/d resulting from twelve months of activity in 2014 compared to less than nine months in 2013, partially offset
by lower natural gas throughput volumes of 19.5 MMCf/d primarily related to our Midla and Trigas systems. The higher realized natural gas prices on our fixed-
margin arrangements were partially offset by lower sales volumes of 1.9 MMcf, or 19.0%
Purchases of Natural Gas, NGLs and Condensate . Purchases of natural gas, NGLs and condensate for the year ended December 31, 2014 , were $45.3 million
compared to $46.5 million for the year ended December 31, 2013 . This decrease of $1.2 million was primarily due to higher realized natural gas prices, which
resulted in higher natural gas purchase costs associated with our fixed-margin arrangements; and an extinguishment of a reserve associated with lower lost and
unaccounted for gas on our High Point System.
Segment Gross Margin . Segment gross margin for the year ended December 31, 2014 , was $42.8 million compared to $32.4 million for the year ended
December 31, 2013 . This increase of $10.4 million was primarily due to increased gross margin associated with our High Point System of $12.0 million resulting
from twelve months of activity in 2014 compared to less than nine months in 2013; and an extinguishment of a reserve associated with lower lost and unaccounted
for gas on our High Point System.
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2014 , were $15.6 million compared to $13.3 million for the year ended
December 31, 2013 . This increase of $2.3 million was primarily due to increased costs associated with our High Point System having twelve months of activity in
2014 compared to less than nine months in 2013.
Terminals Segment
The table below contains key segment performance indicators related to our Terminals segment (in thousands except operating data).
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Segment Financial and Operating Data:
Terminals segment
Financial data:
Total revenue
Direct operating expenses
Other financial data:
Segment gross margin
Operating data:
Contracted Capacity (Bbls)
Design Capacity (Bbls)
Storage Utilization (a)
For the Years Ended
December 31,
2015
2014
2013
$
$
17,755
$
15,504
$
6,640
6,342
11,115
$
9,162
$
9,831
4,403
5,428
1,487,542
1,688,950
1,247,058
1,363,817
88.1%
91.4%
1,114,792
1,165,600
95.6%
(a) Excludes storage utilization associated with our discontinued operations.
Revenue. Segment total revenue for the year ended December 31, 2015 , was $17.8 million compared to $15.5 million for the year ended December 31, 2014 . The
increase of $2.3 million was primarily attributable to increases in contracted storage capacity due to the expansion efforts at the Harvey and Westwego terminals
and contractual storage rate escalations.
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2015 were $6.6 million compared to $6.3 million for the year ended
December 31, 2014 . The increase of $0.3 million is primarily attributable to additional direct labor associated with providing ancillary services.
Segment Gross Margin . Segment gross margin for the year ended December 31, 2015 , was $11.1 million compared to $9.2 million for the year ended December
31, 2014 . The increase of $1.9 million was primarily attributable to an increase in storage revenue while managing direct labor costs associated with providing
ancillary services.
Year Ended December 31, 2014 , Compared to Year Ended December 31, 2013
The acquisition of Blackwater represented a transaction between entities under common control and a change in reporting entity. Therefore we have accounted for
Blackwater and our Terminals segment as if the transfer occurred as of April 15, 2013, which is the date common control began.
Revenue. Segment total revenue for the year ended December 31, 2014 , was $15.5 million compared to $9.8 million for the year ended December 31, 2013 . The
increase of $5.7 million was primarily attributable to presenting twelve months of activity in 2014 compared to less than nine months in 2013, and an increase in
storage capacity, acquiring new customers and contractual storage rate escalations.
Direct Operating Expenses . Direct operating expenses for the year ended December 31, 2014 , were $6.3 million compared to $4.4 million for the year ended
December 31, 2013 . The increase of $1.9 million is primarily attributable to additional direct labor hours associated with providing ancillary services, and by
presenting twelve months of activity in 2014 compared to less than nine months in 2013.
Segment Gross Margin . Segment gross margin for the year ended December 31, 2014 , was $9.2 million compared to $5.4 million for the year ended
December 31, 2013 as a result of the increase in storage capacity, acquiring new customers and contractual storage rate escalations.
Liquidity and Capital Resources
Our business is capital intensive and requires significant investment for the maintenance of existing assets and the acquisition and development of new systems and
facilities.
Our principal sources of liquidity include borrowings under our Credit Agreement, issuance of equity in the capital markets or through private transactions, and
financial support from ArcLight, who controls our General Partner. In addition, we may seek to
72
raise capital through the issuance of equity and unsecured senior notes. Given our historical success in accessing various sources of liquidity, we believe that cash
generated from our operating activities and the sources of liquidity described above will be sufficient to meet our short-term working capital requirements,
medium-term maintenance capital expenditure requirements, and quarterly cash distributions for at least the next four quarters. In the event these sources are not
sufficient, we would pursue other sources of cash funding, including, but not limited to, additional forms of debt or equity financing. In addition, we would reduce
capital expenditures, direct operating expenses and selling, general and administrative expenses, as necessary, and our Partnership Agreement allows us to reduce
or eliminate quarterly distributions, if required to maintain ongoing operations.
Our liquidity for the year ended December 31, 2015 was impacted by the following:
•
•
•
issuances of 2,571,430 Series A-2 Units for $45.0 million in net proceeds, which were used to pay down outstanding borrowings under the Credit
Agreement;
issuance of 7,500,000 Limited Partner common units for $81.0 million in net proceeds which were used to partially fund our investment in Delta House;
and
completion of the First Amendment to the Credit Agreement dated as of September 5, 2014, which increased our borrowing capacity from $500.0 million
to $750.0 million , with the ability to further increase the borrowing capacity to $900.0 million subject to lender approval.
Changes in natural gas, crude oil, NGL and condensate prices and the terms of our contracts have a direct impact on our generation and use of cash from operations
due to their impact on net income (loss), along with the resulting changes in working capital. During 2015, we mitigated a portion of our anticipated commodity
price risk associated with the volumes from our gathering and processing activities with fixed price commodity swaps. For additional information regarding our
derivative activities, please read Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
The counterparties to certain of our commodity swap contracts are investment-grade rated financial institutions. Under these contracts, we may be required to
provide collateral to the counterparties in the event that our potential payment exposure exceeds a predetermined collateral threshold. Collateral thresholds are set
by us and each counterparty, as applicable, in the master contract that governs our financial transactions based on our and the counterparty's assessment of
creditworthiness. The assessment of our position with respect to the collateral thresholds is determined on a counterparty by counterparty basis, and is impacted by
the representative forward price curves and notional quantities under our swap contracts. Due to the interrelation between the representative natural gas and crude
oil forward price curves, it is not practical to determine a single pricing point at which our swap contracts will meet the collateral thresholds as we may transact
multiple commodities with the same counterparty. Depending on daily commodity prices, the amount of collateral posted can go up or down on a daily basis. As of
December 31, 2015, we had no collateral risk.
Our Credit Agreement
On September 18, 2015, the Partnership entered into the First Amendment to the Partnership's Credit Agreement, which provides for maximum borrowings equal
to $750.0 million , with the ability to further increase the borrowing capacity to $900.0 million subject to lender approval. The Credit Agreement contains certain
financial covenants, including i) a consolidated leverage ratio that requires our indebtedness not to exceed 4.75 times adjusted consolidated EBITDA (as defined in
the Credit Agreement) for the prior twelve month period (except for the current and subsequent two quarters after the consummation of a permitted acquisition, at
which time the covenant is increased to 5.25 times adjusted consolidated EBITDA), and ii) a minimum interest coverage ratio that requires our adjusted
consolidated EBITDA to exceed consolidated interest charges by at least 2.50 times. The financial covenants in our Credit Agreement may limit the amount
available to us for borrowing to less than $750.0 million . We can elect to have loans under our Credit Agreement bear interest either at a Eurodollar-based rate
plus a margin ranging from 2.00% to 3.25% depending on our total leverage ratio then in effect, or a base rate which is a fluctuating rate per annum equal to the
highest of (a) the Federal Funds Rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its
“prime rate”, or (c) the Eurodollar Rate plus 1.00% plus a margin ranging from 1.00% to 2.25% depending on the total leverage ratio then in effect. We also pay a
commitment fee of 0.50% per annum on the undrawn portion of the revolving loan.
Our obligations under the Credit Agreement are secured by a lien on substantially all of our assets. Advances made under the Credit Agreement are guaranteed on
a senior unsecured basis by certain of our subsidiaries (the “Guarantors”). These guarantees are full and unconditional and joint and several among the Guarantors.
The terms of the Credit Agreement include covenants that restrict our ability to make cash distributions and acquisitions in some circumstances. The remaining
principal balance of loans and any accrued and unpaid interest will be due and payable in full on the maturity date, which is September 5, 2019.
73
The Credit Agreement also contains customary representations and warranties (including those relating to organization and authorization, compliance with laws,
absence of defaults, material agreements and litigation) and customary events of default (including those relating to monetary defaults, covenant defaults, cross
defaults and bankruptcy events).
As of December 31, 2015 , our consolidated total leverage ratio was 4.56 and our interest coverage ratio was 8.56 , which were in compliance with the financial
covenants required in the Credit Agreement. The maximum permitted consolidated total leverage ratio was 5.25 for the twelve month period ended December 31,
2015 , as result of our indirect investment in Delta House in September 2015. The maximum permitted consolidated total leverage ratio will revert to 4.75 for the
period ended June 30, 2016. As of December 31, 2015 , we had approximately $525.1 million of outstanding borrowings under the $750.0 million Credit
Agreement.
At December 31, 2015 and 2014 , letters of credit outstanding under the Credit Agreement were $1.8 million and $1.6 million , respectively.
As of December 31, 2015, we were in compliance with the covenants included in the Credit Agreement. Our ability to maintain compliance with the leverage and
interest coverage ratios included in the Credit Agreement may be subject to, among other things, the timing and success of initiatives we are pursuing, which may
include expansion capital projects, acquisitions, or drop down transactions, as well as the associated financing for such initiatives. If required, ArcLight Capital
Partners, which controls the General Partner of the Partnership, has agreed to provide financial support for the Partnership to maintain compliance with the
covenants contained in the Credit Agreement through December 31, 2016.
Working Capital
Working capital is the amount by which current assets exceed current liabilities and is a measure of our ability to pay our liabilities as they become due. Our
working capital requirements are primarily driven by changes in accounts receivable and accounts payable. These changes are impacted by changes in the prices of
commodities that we buy and sell. In general, our working capital requirements increase in periods of rising commodity prices and decrease in periods of declining
commodity prices. However, our working capital needs do not necessarily change at the same rate as commodity prices because both accounts receivable and
accounts payable are impacted by the same commodity prices. In addition, the timing of payments received from our customers or paid to our suppliers can also
cause fluctuations in working capital because we settle with most of our larger suppliers and customers on a monthly basis and often near the end of the month. We
expect that our future working capital requirements will be impacted by these same factors. Our working capital deficit was $10.1 million at December 31, 2015 .
Cash Flows
The following table reflects cash flows for the applicable periods (in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
For the Years Ended
December 31,
2015
2014
2013
$
40,937 $
21,478 $
(171,108)
129,672
(471,870)
450,490
17,223
(28,214)
10,816
Year Ended December 31, 2015 , Compared to Year Ended December 31, 2014
Operating Activities . Net cash provided by operating activities was $40.9 million for year ended December 31, 2015 , compared to $21.5 million for the year
ended December 31, 2014 . Net cash provided by operating activities for the year ended December 31, 2015 increased by $19.4 million period over period
primarily due to increased gross margin of $20.5 million , an increase in the change in operating assets and liabilities of $16.1 million , and an increase in earnings
from unconsolidated affiliates of $7.9 million . These increases in operating cash flows were partially offset by increases in direct operating expenses and selling,
general and administrative expenses of $13.8 million and $4.1 million , respectively, and an increase in interest expense of $7.2 million due to a higher outstanding
borrowings as a result of the Costar acquisition and Delta House Investment; as well as, funding our capital growth projects during the current year.
74
Our long-term cash flows from operating activities are dependent on commodity prices, average throughput volumes, costs required for continued operations and
cash interest expense. Average throughput volume changes also impact cash flow, but have not been as volatile as commodity prices. Another source of variability
in our cash flows from operating activities is fluctuation in commodity prices, which we partially mitigated by entering into commodity derivatives.
Investing Activities . Net cash used in investing activities was $171.1 million for the year ended December 31, 2015 , compared to $471.9 million for the year
ended December 31, 2014 . Cash used in investing activities for the year ended December 31, 2015 decreased by $300.8 million period over period primarily due
to no cost of acquisitions for 2015 and cash received from acquisitions of $7.4 million in 2015 as compared to cost of acquisitions of $362.3 million in 2014,
primarily related to reimbursement for certain capital expenditures that we have incurred, or will incur, related to the Costar acquisition, return of restricted cash of
$6.5 million , and higher cash disbursements received from unconsolidated affiliates in excess of cumulative earnings of $10.7 million . These increases were
offset by higher capital expenditures of $33.6 million primarily related to the Lavaca and Bakken Systems, and higher cash disbursements of $59.6 million related
to equity method investments primarily related to the Delta House Investment.
Financing Activities . Net cash provided by financing activities was $129.7 million for the year ended December 31, 2015 , compared to $450.5 million for the
year ended December 31, 2014 . Cash provided by financing activities for the year ended December 31, 2015 , decreased by $320.8 million period over period
primarily due to lower proceeds from the issuance of common units to the public of $121.8 million , cash distributions in excess of carrying value received related
to the Delta House Investment of $96.3 million , lower net borrowings period over period of $90.1 million , the absence of proceeds received from the issuance of
Series B Units in 2014, and an increase in unit holder distributions of $25.4 million . These decreases in cash flows provided by financing activities were partially
offset by the issuance of Series A-2 units for gross proceeds of $45.0 million.
Year Ended December 31, 2014 , Compared to Year Ended December 31, 2013
Operating Activities . Net cash provided by operating activities was $21.5 million for year ended December 31, 2014 , compared to $17.2 million for the year
ended December 31, 2013 . Net cash provided by operating activities for the year ended December 31, 2014 , increased primarily due to increased gross margin of
$28.0 million and a decrease in interest expense of $1.7 million . These increases were partially offset by $13.5 million of additional direct operating expenses
associated with incremental operating expense of the gathering and processing systems of Costar, an increase in compression rentals, costs associated with integrity
management programs and additional aerial pipeline inspections, an increase of $4.0 million associated with higher salaries and wages associated with new
personnel additions and legal costs incurred to manage and integrate our acquisitions and support our continued growth, and settlement of asset retirement
obligations of $1.0 million .
One of the primary sources of variability in our cash flows from operating activities is fluctuation in commodity prices, which we partially mitigate by entering
into commodity derivatives. Average throughput volume changes also impact cash flow, but have not been as volatile as commodity prices. Our long-term cash
flows from operating activities is dependent on commodity prices, average throughput volumes, costs required for continued operations and cash interest expense.
Investing Activities . Net cash used in investing activities was $471.9 million for the year ended December 31, 2014 , compared to $28.2 million for the year ended
December 31, 2013 . Cash used in investing activities for the year ended December 31, 2014 increased by $443.7 million period over period primarily due to
incremental payments of $362.3 million used to fund the acquisition of gathering and processing assets, $69.8 million of additional capital expenditures primarily
associated with expansion capital programs related to the Lavaca System and new terminal storage facilities at Westwego and Harvey, Louisiana, and $12.0
million associated with acquisition of a 66.7% undivided interest in MPOG. These increases were partially offset by $5.8 million of proceeds related to the
divestiture of non-strategic midstream assets.
Financing Activities . Net cash provided by financing activities was $450.5 million for the year ended December 31, 2014 , compared to net cash provided by
financing activities of $10.8 million for the year ended December 31, 2013 . Cash provided by financing activities for the year ended December 31, 2014 ,
increased by $439.7 million period over period primarily due to incremental proceeds from the issuance of common units to the public of $204.3 million and the
issuance of Series B Units of $30.0 million , and an increase of $239.8 million in net borrowings from our credit facility in order to finance, in part, the acquisition
of Costar.
Off-Balance Sheet Arrangements
We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. At December 31, 2015 , our
material off-balance sheet arrangements and transactions included operating lease arrangements and service contracts. There are no other transactions,
arrangements, or other relationships associated with our investments in unconsolidated affiliates or related parties that are reasonably likely to materially affect our
liquidity or availability of, or
75
requirements for, capital resources. At December 31, 2015 , our off-balance sheet arrangements did not change materially from those listed in "Item 7.
Management's Discussion and Analysis — Contractual Obligations".
Capital Requirements
The energy business is capital intensive, requiring significant investment for the maintenance of existing assets and the acquisition and development of new
systems and facilities. We categorize our capital expenditures as either:
• maintenance capital expenditures, which are cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our
capital assets) made to maintain our operating income or operating capacity; or
•
expansion capital expenditures, incurred for acquisitions of capital assets or capital improvements that we expect will increase our operating income or
operating capacity over the long term.
Historically, our maintenance capital expenditures have not included all capital expenditures required to maintain volumes on our systems. It is customary in the
regions in which we operate for producers to bear the cost of well connections, but we cannot be assured that this will be the case in the future. For the year ended
December 31, 2015 , capital expenditures totaled $130.5 million including expansion capital expenditures of $120.1 million , maintenance capital expenditures of
$4.5 million and reimbursable project expenditures (capital expenditures for which we expect to be reimbursed for all or part of the expenditures by a third party)
of $6.0 million . Although we classified our capital expenditures as expansion and maintenance, we believe those classifications approximate, but do not
necessarily correspond to, the definitions of estimated maintenance capital expenditures and expansion capital expenditures under our Partnership Agreement. We
anticipate maintenance capital expenditures of between $5.5 million and $6.5 million and expansion capital expenditures between $45.0 million and $55.0 million
for the year ending December 31, 2016 . Forecasted growth capital expenditures include construction of midstream infrastructure for the Permian Off-spec treating
facility, expansion of the Harvey terminal, continued build-out of Lavaca system, completion of the Longview Rail and Yellow Rose facilities, and other organic
growth projects.
We intend to make cash distributions to our unitholders and our General Partner and expect that we will distribute most of the cash generated by our operations.
As a result, we expect to fund acquisitions and future capital expenditures with funds generated from our operations, borrowings under our Credit Agreement, and
additional debt and equity issuances. If these sources are not sufficient, we may pursue the divestiture of non-core assets or reduce discretionary spending.
Integrity Management
Certain operating assets require an ongoing integrity management program under regulations of the U.S. Department of Transportation, or DOT. These regulations
require transportation pipeline operators to implement continuous integrity management programs over a seven-year cycle. Our total program addresses
approximately 93 high consequence areas that require on-going testing pursuant to DOT regulations. Over the course of the seven-year cycle, we expect to incur up
to $7.2 million in integrity management testing expenses.
Distributions
On January 25, 2016, we announced a distribution of $0.4725 per unit for the fourth quarter ended December 31, 2015, or $1.89 per unit on an annualized basis.
The cash distribution was paid on February 12, 2016, to unitholders of record as of the close of business on February 3, 2016.
Contractual Obligations
The table below summarizes our contractual obligations and other commitments as of December 31, 2015 (in thousands):
76
Less Than 1 Year
1 - 3 Years
3 - 5 Years
More Than 5 Years
Total
Impact of Seasonality
Total
Long-term debt
Operating leases and
service contracts
Asset retirement
obligation
$
$
12,881 $
3,459
527,451
30,086
2,338 $
—
525,100
—
3,721 $
3,459
2,351
1,537
573,877 $
527,438 $
11,068 $
6,822
—
—
28,549
35,371
Results of operations in our Transmission segment are directly affected by seasonality due to higher demand for natural gas during the winter months, primarily
driven by our LDC customers. On our AlaTenn system, we offer some customers seasonally-adjusted firm transportation rates that require customers to reserve
capacity at rates that are higher in the period from October to March compared to other times of the year. On our Midla system, we offer customers seasonally-
adjusted firm transportation reservation volumes that allow customers to reserve more capacity during the period from October to March compared to other times
of the year. The combination of seasonally-adjusted rates and reservation volumes, as well as higher volumes overall, result in higher revenue and segment gross
margin in our Transmission segment during the period from October to March compared to other times of the year. We generally do not experience seasonality in
our Gathering and Processing and Terminals segment.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the period. Actual results could differ from these estimates. The policies and estimates discussed below are considered by our management to be critical to
an understanding of the financial statements because their application requires the most significant judgments from management in estimating matters for financial
reporting that are inherently uncertain. See the description of our accounting policies in the notes to the financial statements for additional information about our
critical accounting policies and estimates.
Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires
management to make estimates and judgments that affect our reported financial positions and results of operations. We review significant estimates and judgments
affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Estimates and
judgments are based on information available at the time such estimates and judgments are made. Adjustments made with respect to the use of these estimates and
judgments often relate to information not previously available. Uncertainties with respect to such estimates and judgments are inherent in the preparation of
financial statements. Estimates and judgments are used in, among other things, i) estimating unbilled revenue, operating and general and administrative costs,
ii) developing fair value assumptions, including estimates of future cash flows and discount rates, iii) analyzing tangible and intangible assets for possible
impairment, iv) estimating the useful lives of our assets, v) accounting for income taxes, and vi) determining amounts to accrue for contingencies, guarantees and
indemnifications. Actual results could differ materially from our estimates.
Property, Plant and Equipment. In general, depreciation is the systematic and rational allocation of an asset's cost, less its residual value (if any), to the period it
benefits. Our property, plant and equipment is depreciated using the straight-line method over the estimated useful lives of the assets. The costs of renewals and
betterments which extend the useful life of property, plant and equipment are also capitalized. The costs of repairs, replacements and maintenance projects are
expensed as incurred.
Our estimate of depreciation incorporates assumptions regarding the useful economic lives and residual values of our assets. As circumstances warrant,
depreciation estimates are reviewed to determine if any changes are needed. Such changes could involve an increase or decrease in estimated useful lives or
salvage values which would impact future depreciation expense.
Impairment of Long-Lived Assets .
A long-lived asset is tested for impairment whenever events or changes in circumstances indicate its carrying amount may
exceed its fair value. Fair values are based on the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the assets.
An asset or asset group is considered impaired when the estimated undiscounted cash flows are less than the carrying amount. In that event, an impairment loss is
recognized to the extent that the carrying amount of the asset exceeds its fair value as determined by quoted market prices in active markets or present value
techniques. The determination of the fair value using present value techniques requires us to make projections and assumptions
77
regarding future cash flows and weighted average cost of capital. Any changes we make to these projections and assumptions could result in significant revisions
to our evaluation of the recoverability of our property, plant and equipment and the recognition of an impairment loss in our consolidated statements of operations.
We recorded impairments of long-lived assets of $0.0 million , $99.9 million and $18.2 million for the years ended December 31, 2015 , 2014 and 2013 ,
respectively. A hypothetical increase or decrease in fair value by 1.0% would have changed our impairment by less than $1.0 million for the year ended December
31, 2014.
Impairment of Goodwill. We evaluate goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. We determine fair value using widely accepted valuation techniques, namely
discounted cash flow and market multiple analyses. These techniques are also used when allocating the purchase price to acquired assets and liabilities. These
types of analyses require us to make assumptions and estimates regarding industry and economic factors and the profitability of future business strategies. It is our
policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. We
recorded an impairment of goodwill of $118.6 million for the year ended December 31, 2015.
Environmental Remediation .
Current accounting guidelines require us to recognize a liability and expense associated with environmental remediation if:
i) government agencies mandate such activities, ii) the existence of a liability is probable and iii) the amount can be reasonably estimated. As of December 31,
2015 , we did not record any liability for remediation expenditures. If governmental regulations change, we could be required to incur remediation costs that may
have a material impact on our profitability.
Asset Retirement Obligations. As of December 31, 2015 , we recorded liabilities of $35.4 million for future asset retirement obligations associated with our
pipeline and gathering and processing systems. Related accretion expense has been recorded in Depreciation,
amortization
and
accretion
expense
as discussed in
Note 1 in our consolidated financial statements. The recognition of an asset retirement obligation requires that management make numerous estimates, assumptions
and judgments regarding such factors as costs of remediation, timing of settlement to changes in the estimate of the costs of remediation. Any such changes that
result in upward or downward revisions in the estimated obligation will result in an adjustment to the related capitalized asset or corresponding liability on a
prospective basis and an adjustment in our depreciation expense in future periods.
Revenue Recognition. We recognize revenue when all of the following criteria are met: i) persuasive evidence of an exchange arrangement exists, ii) delivery has
occurred or services have been rendered, iii) the price is fixed or determinable and iv) collectability is reasonably assured. We record revenue and cost of product
sold on the gross basis for those transactions where we act as the principal and take title to natural gas, crude oil, NGLs or condensates that is purchased for resale.
When our customers pay us a fee for providing a service such as gathering, treating or transportation, we record those fees separately in revenue. Under keep-
whole contracts, we keep the NGLs extracted and return the processed natural gas or value of the natural gas to the producer. Revenue from firm storage contracts
is recognized ratably, which is typically monthly, over the term of the lease. Revenue from throughput fees and ancillary fees are recognized as services are
provided to the customer and when the fees are realizable.
Equity-Based Awards. We account for equity-based awards in accordance with applicable guidance, which establishes standards of accounting for transactions in
which an entity exchanges its equity instruments for goods or services. Equity-based compensation expense is recorded based upon the fair value of the award at
grant date. Such costs are recognized as expense on a straight-line basis over the corresponding vesting period.
Price Risk Management Activities. We have structured our hedging activities in order to minimize our commodity pricing and interest rate risks and to help
maintain compliance with certain financial covenants in our credit agreement. These hedging activities rely upon forecasts of our expected operations and financial
structure. If our operations or financial structure are significantly different from these forecasts, we could be subject to adverse financial results as a result of these
hedging activities. We mitigate this potential exposure by retaining an operational cushion between our forecasted transactions and the level of hedging activity
executed.
From the inception of our hedging program, we used mark-to-market accounting for our commodity hedges and interest rate caps. We record monthly realized
gains and losses on hedge instruments based upon cash settlements information. The settlement amounts vary due to the volatility in the commodity market prices
throughout each month. We also record unrealized gains and losses quarterly based upon the future value on mark-to-market hedges through their expiration dates.
Recent Accounting Pronouncements
78
For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Note 1
"Organization, Basis of Presentation and Summary of Significant Accounting Policies"
in Part II, Item 8 of this Annual Report, which is incorporated herein by reference.
Accounting Standards Update ("ASU") No. 2015-02, Consolidation
-
Amendments
to
the
Consolidation
Analysis
In February 2015, the FASB issued a final standard that amends the current consolidation guidance. The amendments affect both the variable interest entity
("VIE") and voting interest entity ("VOE") consolidation models. The standard is effective for public reporting entities in the fiscal periods beginning after
December 15, 2015, early adoption is permitted. We have evaluated the impact of this ASU to the Partnership's consolidated financial statements and footnotes
thereto and believe the changes may be significant in the future. Changes to variable and voting interest models associated with certain legal entities under the new
consolidation model could change previous consolidation conclusions.
ASU No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic
606)
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic
606),
which amends the existing accounting standards for
revenue recognition. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 is effective for annual
reporting periods beginning after December 15, 2017, including interim periods therein. Early adoption is not permitted. We have begun assessing the impact of
this ASU to the Partnership's consolidated financial statements and footnotes thereto and believe the level of effort to ensure all transaction types are appropriately
analyzed to be significant. Our assessment to-date considers alternatives of the transition methods, a portfolio approach to significant contract-types and required
changes to disclosure to the consolidated financial statements. In light of performance obligations, effects of variable consideration and enhanced disclosure, we
expect the adoption of this ASU to have a significant impact to the Partnership's consolidated financial statements and footnotes thereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
We are exposed to the impact of market fluctuations in the prices of natural gas, crude oil, NGLs and condensate in our Gathering and Processing segment. Both
our profitability and our cash flow are affected by volatility in the prices of these commodities. Natural gas, crude oil and NGL prices are impacted by changes in
the supply and demand for these energy commodities, as well as market uncertainty. For a discussion of the volatility of natural gas, crude oil, and NGL prices,
please refer to "Item 1A. Risk Factors." Adverse effects on our cash flow from reductions in natural gas, crude oil and NGL prices could adversely affect our
operating cash flows and our ability to make distributions to unitholders. We manage this commodity price exposure through an integrated strategy that includes
management of our contract portfolio, optimization of our assets, and the use of derivative contracts. Our overall direct exposure to movements in natural gas
prices is minimal as a result of natural hedges inherent in our current contract portfolio. Natural gas prices, however, can also affect our profitability indirectly by
influencing the level of drilling activity in our areas of operation. We are a net seller of NGLs, and as such our financial results are exposed to fluctuations in NGLs
pricing.
To minimize the effect of commodity prices and maintain our cash flow and the economics of our development plans, we enter into commodity hedge contracts
from time to time. The terms of the contracts depend on various factors, including management's view of future commodity prices, acquisition economics on
purchased assets and future financial commitments. This hedging program is designed to mitigate the effect of commodity price downturns while allowing us to
participate in some commodity price upside. Management regularly monitors the commodity markets and financial commitments to determine if, when, and at
what level commodity hedging is appropriate in accordance with policies that are established by the Board of Directors of our General Partner. Historically, the
commodity derivatives are in the form of swaps and collars.
We enter into commodity contracts with counterparties. We may be required to post collateral with our counterparties in connection with our derivative positions.
As of December 31, 2015 , we have not been required to post collateral with our counterparties. The counterparties are not required to post collateral with us in
connection with their derivative positions. Netting agreements are in place with our counterparties that permit us to offset our commodity derivative asset and
liability positions.
During 2015, we entered into additional commodity contracts with existing counterparties to hedge our 2015 exposure to commodity prices. Due to declining
commodity prices, we had not entered into commodity contracts to hedge production in 2016 and beyond as of December 31, 2015.
Interest Rate Risk
79
During the year ended December 31, 2015 , we had exposure to changes in interest rates on our indebtedness associated with our Credit Agreement. To manage the
impact of the interest rate risk associated with our Credit Agreement, we enter into interest rate swaps from time to time, effectively converting a portion of the
cash flows related to our long-term variable rate debt into fixed rate cash flows. The notional amount of our interest rate swap that expired on August 1, 2015 was
$100.0 million.
On March 2, 2016, we entered into interest rate swaps with a notional amount of $200.0 million that will expire in September 2019.
The credit markets have recently experienced historical lows in interest rates. As the overall economy strengthens, it is possible that monetary policy will begin to
tighten, resulting in higher interest rates. For example, on December 16, 2015, the Federal Open Market Committee raised the target range for the federal funds rate
by 0.25%. Future interest rates on floating rate credit facilities and future debt offerings could be higher than current levels, causing our financing costs to increase
accordingly.
A hypothetical increase or decrease in interest rates by 1.0% would have changed our interest expense by $4.4 million for the year ended December 31, 2015 .
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the reports of our independent registered public accounting firm, begin on F-1 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or
submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time
periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to the management of our General Partner, including
our General Partner’s principal executive and principal financial officers (whom we refer to as the Certifying Officers), as appropriate to allow timely decisions
regarding required disclosure. The Certifying Officers evaluated the effectiveness of the Partnership’s disclosure controls and procedures as of December 31, 2015.
Based on this assessment, the Certifying Officers concluded that the Partnership’s disclosure controls and procedures were effective as of December 31, 2015.
Inherent
limitations
of
internal
controls
Our management, including our Certifying Officers, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the company have been prevented or detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any
system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Because of the inherent limitations with a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Therefore, management monitors the Partnership’s disclosure controls and procedures and make modifications, as
necessary, with the intent that the disclosure controls and procedures will be adequately designed and operating effectively to prevent or detect material
misstatements to its consolidated financial statements and to deter fraud.
Remediation
of
spreadsheet
deficiencies
80
We did not design and maintain effective internal controls over financial reporting regarding the completeness and accuracy of spreadsheets. Specifically, our
guidelines were not precise enough in describing the level of review to be performed regarding the inputs, assumptions, and formulas used in spreadsheets. This
control deficiency resulted in audit adjustments to goodwill, intangible assets, and amortization expense during the year ended December 31, 2014 and immaterial
out-of-period adjustments to our consolidated financial statements for each of the interim periods in the year-ended December 31, 2014. Additionally, this control
deficiency could have resulted in a material misstatement of our annual or interim consolidated financial statements that may not have been prevented or detected.
Accordingly, management determined that this control deficiency constituted a material weakness.
With respect to the identified material weakness, we have assessed, developed and implemented specific guidance and procedures describing the expected level of
reviews to be performed on our key spreadsheets used in the preparation and analysis of accounting and financial information. This includes the validation of
inputs, assumptions and formulas. We believe this process is appropriately designed to strengthen controls surrounding the use of our key spreadsheets.
Management tested the newly implemented and modified controls and found them to be effective and concluded that as of December 31, 2015, the material
weakness has been remediated.
Management's Annual Report on Internal Control over Financial Reporting
Management of our General Partner is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). The Partnership’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
The Certifying Officers assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2015. This assessment was
based on criteria established in Internal
Control
-
Integrated
Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on their assessment, the Certifying Officers concluded that as of December 31, 2015 the Partnership’s internal control over
financial reporting was effective.
PricewaterhouseCoopers LLP, the independent registered public accounting firm, that audited the consolidated financial statements included in this Annual Report
on Form 10-K, has audited the effectiveness of the Partnership's internal control over financial reporting as of December 31, 2015, as stated in their report which is
included on page F-1 of this Annual Report.
Changes in internal control over financial reporting
Management, including our Certifying Officers, evaluated the changes in our internal control over financial reporting for the quarter ended December 31, 2015. As
outlined above, management remediated the material weakness that existed during 2015. As such, certain changes related to spreadsheets that operated on an
annual basis occurred in the fourth quarter related to the remediation of the material weakness described above and were considered changes to the Partnership’s
internal control over financial reporting during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, its
internal control over financial reporting.
The certifications of our Certifying Officers pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) are filed with this Annual Report on Form 10-K as Exhibits
31.1 and 31.2. The certifications of our Certifying Officers pursuant to 18 U.S.C. 1350 are furnished with this Annual Report on Form 10-K as Exhibits 32.1 and
32.2.
Item 9B. Other Information
Amendment
to
Employment
Agreement
On March 7, 2016, the General Partner entered into the Second Amendment to Employment Agreement (the “Second Amendment”) with Michael D. Suder,
Chief Executive Officer of Blackwater Midstream. The Second Amendment revises the definitions of the terms “Blackwater Harvey” and “Blackwater Direct
SG&A” in the underlying Employment Agreement in order to maintain previously existing economic structure of the Employment Agreement in light of certain
internal contract assignments between entities wholly-owned by the Partnership. This description of the Second Amendment does not purport to be complete and is
qualified in its entirety by reference to the full text of the Second Amendment, which is filed as an exhibit to this Form 10-K and incorporated by reference herein.
81
82
Item 10. Directors, Executive Officers and Corporate Governance
PART III
We do not have directors or officers, which is commonly the case with publicly traded partnerships. We are managed by the directors and executive officers of our
General Partner, American Midstream GP, LLC. Our General Partner is not elected by our unitholders and will not be subject to re-election in the future. HPIP and
AIM Midstream Holdings own all of the membership interests in our General Partner. Our General Partner has a board of directors (the "Board"), and our
unitholders are not entitled to elect the directors or directly or indirectly participate in our management or operations. Our General Partner owes certain fiduciary
duties to our unitholders. Our General Partner is liable, as General Partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or
other obligations that are made specifically nonrecourse to it. Whenever possible, we intend to incur indebtedness that is nonrecourse to our General Partner.
Our partnership agreement provides for the Board of Directors of our General Partner to designate a Conflicts Committee ("Conflicts Committee"), as delegated by
the Board as circumstances warrant, to review conflicts of interest between us and our General Partner or between us and affiliates of our General Partner. If the
Board submits a matter to the Conflicts Committee, which will consist solely of independent directors, for their review and approval, the Conflicts Committee will
determine if the resolution of a conflict of interest that has been presented to it by the Board is fair and reasonable to us. The members of the Conflicts Committee
may not be executive officers or employees of our General Partner or directors, executive officers or employees of its affiliates. In addition, the members of the
Conflicts Committee must meet the independence and experience standards established by the NYSE and the Exchange Act for service on an audit committee of a
board of directors. Any matters approved by the Conflicts Committee will be conclusively deemed to be fair and reasonable to us and not a breach by our General
Partner of any duties it may owe us or our unitholders. In addition, the Board has an Audit Committee ("Audit Committee"), that complies with the NYSE
requirements, a compensation committee ("Compensation Committee"), and a hedge committee that oversees risk management activities.
Even though most companies listed on the NYSE are required to have a majority of independent directors serving on the board of directors of the listed company,
the NYSE does not require a listed limited partnership like us to have a majority of independent directors on the Board.
Our General Partner has adopted a Code of Business Conduct and Ethics, or Code of Ethics, that applies to the directors, officers and employees of our General
Partner. If our General Partner amends the Code of Ethics or grants a waiver, including an implicit waiver, for the Code of Ethics, we will disclose the information
on our website. Our General Partner has also adopted Corporate Governance Guidelines that outline the important policies and practices regarding our governance.
All of the senior officers of our General Partner devote a sufficient portion of their time to overseeing the management, operations, corporate development and
future acquisition initiatives of our business; however, they also devote a portion of their time to overseeing the management, operations, corporate development
and future acquisition initiatives of our General Partner, which has separate ongoing business operations.
The non-management members of our General Partner's board of directors meet in executive sessions without management participation at least quarterly. These
directors do not constitute a committee of the Board and therefore do not take action at such sessions, although the participating directors may make
recommendations for consideration by the full board. Executive sessions shall be chaired by Gerald A. Tywoniuk, the chairman of the Audit Committee according
to the charter of the Audit Committee.
Interested parties may communicate directly with the independent directors by submitting a communication in an envelope marked "Confidential" addressed to the
"Independent Members of the Board of Directors" in the care of the Secretary of our General Partner at: American Midstream GP, LLC, 1400 16th Street, Suite
310, Denver, Colorado 80202.
We make available free of charge, within the "Investor Relations—Corporate Governance" section of our website at http://www.americanmidstream.com, and in
print to any unitholder who so requests, the Code of Ethics and our Corporate Governance Guidelines. Unitholders may request a printed copy of these governance
materials or any exhibit to this report by writing to the Secretary, American Midstream GP, LLC, 1400 16th Street, Suite 310, Denver, Colorado 80202. The
information contained on, or connected to, our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of
this or any other report that we file with or furnish to the SEC.
The independent directors on our Board are Donald R. Kendall Jr., Rose M. Robeson and Gerald A. Tywoniuk. Each of our independent directors serves as a
member of the Audit Committee, with Mr. Tywoniuk serving as chairman. Our General Partner
83
is generally required to have at least three independent directors serving on its board at all times. The Board has determined that Mr. Tywoniuk is a financial expert
as defined by the NYSE and the Exchange Act and therefore eligible to chair the Audit Committee.
Directors are appointed for a term of one year and hold office until their successors have been elected or qualified or until the earlier of their death, resignation,
removal or disqualification. Executive officers serve at the discretion of the Board and are subject to the terms of their employment agreements, if applicable. The
following table shows information for the executive officers and directors of our General Partner as of December 31, 2015 :
Name
Lynn L. Bourdon III (a)
Tom L. Brock
Daniel C. Campbell
Louis J. Dorey
William B. Mathews
Matthew W. Rowland
Michael D. Suder
Stephen W. Bergstrom (b)
John F. Erhard
Donald R. Kendall Jr.
Daniel R. Revers
Rose M. Robeson
Joseph W. Sutton
Lucius H. Taylor
Gerald A. Tywoniuk
Age
53
43
45
60
63
53
61
58
41
63
54
55
67
42
54
Position with American Midstream GP, LLC
Chairman of the Board, President and Chief Executive Officer
Vice President, Chief Accounting Officer and Corporate Controller
Senior Vice President and Chief Financial Officer
Senior Vice President of Business Development
Secretary, General Counsel and Senior Vice President of Legal
Affairs
Senior Vice President and Chief Operating Officer
President and Chief Executive Officer of Blackwater Midstream
Corporation
Director
Director
Director
Director
Director
Director
Director
Director
(a) Mr. Bourdon was appointed to serve as Chairman of the Board, President and Chief Executive Officer effective December 10, 2015.
(b) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr. Bergstrom
allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered compensation for
services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the Partnership. Mr. Bergstrom
retired in December 2015 from these positions but remains on the Board of Directors.
Executive officers
Lynn L. Bourdon III was appointed Chairman, President and Chief Executive Officer in December 2015. Most recently, Mr. Bourdon served as President and
Chief Executive Officer of Enable Midstream Partners, LP. Prior to Enable Midstream, he served as Group Senior Vice President of NGL & Natural Gas
Marketing, Petrochemical, Refined Products & Marine Services at Enterprise Products Partners, LP. Mr. Bourdon joined Enterprise as Senior Vice President of
NGL Supply & Marketing in 2003 and served in various senior management positions during his tenure. Prior to his employment at Enterprise Products, Mr.
Bourdon served as Senior Vice President and Chief Commercial Officer for Orion Refining Corporation. He also held leadership positions at En*Vantage, PG&E
Gas Transmission and Valero, and earlier served in various capacities at the Dow Chemical Company. Lynn received a Bachelor of Science degree in mechanical
engineering from Texas Tech University and an MBA from the University of Houston.
Tom L. Brock was appointed Vice President, Chief Accounting Officer and Corporate Controller of the General Partner and the Partnership in November 2013.
Mr. Brock had previously served as Vice President and Corporate Controller of the General Partner and the Partnership beginning in July 2012. Prior to his
appointment with the General Partner and the Partnership, Mr. Brock held the position of Director of Trading and Finance with BG Group in Houston, Texas,
where he controlled accounting and other functions for its marketing and trading companies beginning in July 2010. Mr. Brock began his career with KPMG LLP,
where
84
he spent 13 years holding various positions serving clients in the energy industry. Mr. Brock holds a Bachelor of Accountancy from New Mexico State University
and is a CPA licensed in the State of Texas.
Daniel C. Campbell was appointed Senior Vice President and Chief Financial Officer in April 2012. Prior to his appointment with the General Partner, Mr.
Campbell served in various leadership roles with MarkWest Energy Partners, LP, from 2006 through 2012, most recently as Vice President of Finance and
Treasurer. Mr. Campbell joined MarkWest from TeleTech Holdings, Inc., where he held various senior finance roles from 1997 to 2006 in finance, treasury,
strategic planning, and investor relations, including Chief Financial Officer of TeleTech Latin America. Mr. Campbell began his career at Arthur Andersen LLP.
He received B.S. and Masters degrees in Accounting from Brigham Young University. Mr. Campbell is a CPA licensed in Colorado.
Louis J. Dorey has served as Senior Vice President of Business Development since joining American Midstream LP, in January of 2014. Previously he served in
various capacities at Continuum Energy Services from 2005 to 2014, including strategic planning, mergers and acquisitions, corporate business development,
capital markets activities and as interim CFO. During his tenure, Continuum acquired or developed 500 miles of gathering systems, 75 MMcf/d of processing
capacity, a rail terminal, a crude oil trucking company and raised two tranches of private equity. Prior to joining Continuum, Mr. Dorey was employed by Dynegy
Inc. from 1997 to 2002 where he held positions including Executive Vice President of Strategy and Planning, President of Marketing and Origination, and Interim
CFO. He participated in over $2 billion of acquisitions and development transactions, managed five regional wholesale marketing offices and retail marketing
group, and worked on the integration of two major mergers. From 1991 to 1997, Mr. Dorey was employed by Destec Energy Inc. where he served as the Vice
President of Mergers and Acquisitions, leading the development or acquisition of over $2 billion of power plant transactions and the sale of Destec Energy Inc. to
Dynegy Inc. He earned a Bachelor of Business Administration from the University of Oklahoma and a Juris Doctorate from the University of Texas.
William B. Mathews has served as Secretary and Vice President of Legal Affairs of our General Partner since November 2009 and General Counsel of our General
Partner since March 2011. Prior to our formation, he served as Vice President, General Counsel and Secretary of Foothills Energy Ventures, LLC from December
2006 to November 2009, as well as a director from August 2009 to November 2009. Prior to Foothills, Mr. Mathews served as Assistant General Counsel for
ONEOK Partners, L.P., Northern Border Partners, L.P., and Bear Paw Energy, LLC, from July 2001 to December 2006 and, previous to that, as Vice President and
General Counsel of Duke Energy Field Services (now DCP Midstream, LLC) until 2000, having joined a predecessor company in 1985. He received a J.D. from
the University of Denver and a B.S. in Civil Engineering from the University of Colorado.
Matthew W. Rowland was appointed Chief Operating Officer in April 2013. Prior to his appointment with the General Partner, Mr. Rowland was a founder and
Managing Director at High Point Energy, LLC (a minority interest owner of HPIP), from 2009 to 2013. Prior to High Point, Mr. Rowland served as Vice President
of Asset Optimization for CIMA ENERGY, LTD. from 2003 to 2009. Mr. Rowland began his career with Tenneco/El Paso where he held various operational and
commercial roles. Mr. Rowland received a B.S. in Mechanical Engineering from Texas A&M University.
Michael D. Suder has served as President and CEO of Blackwater Midstream since 2008. Mr. Suder is the former President and Chief Operating Officer of Delta
Terminal Services in Harvey, Louisiana, and member of the investment group with Citicorp Venture Capital that purchased the terminal in January 1995. He was
responsible for growing the facility from 1.5 million barrels to more than 3 million barrels in storage capacity, including the addition of more than 100 new tanks
and new drumming warehouses. After Delta Terminal Services was sold to Kinder Morgan Energy Partners in December 2000, Mr. Suder became the General
Manager of Kinder Morgan’s Lower Mississippi River region. He was responsible for all aspects of the liquid terminals in the region. He held that position from
2001 until 2005. From September 2005 to June 2007, Mr. Suder was the Director of New Business Development for LBC Tank Terminals. He oversaw the growth
at their Baton Rouge facility, where capacity increased by more than 1 million barrels. LBC Tank Terminals was sold to Challenger Financial Services in June of
2007. In 2008, Mr. Suder, President and CEO of Blackwater Midstream, and his management team commenced operations at Blackwater Midstream’s newly-
acquired Westwego, Louisiana, facility. American Midstream acquired Blackwater Midstream in December 2013. Under Mr. Suder’s guidance, Blackwater has
expanded to four terminal facilities throughout three strategic regions, currently servicing the Gulf Coast, Southeast, and Northeast United States storage markets.
Mr. Suder holds a B.A. from George Washington University in Washington, D.C.
Directors
Stephen W. Bergstrom was elected as a member of the Board in April 2013 and was elected President and Chief Executive Officer in May 2013 and served as
President and Chief Executive Officer until retiring from those positions in December 2015. He remains a member of the Board. He was appointed to the Board in
connection with his affiliation with ArcLight, which controls our General Partner, and due to his breadth of experience in the energy industry. Mr. Bergstrom has
been acting as an exclusive consultant to ArcLight since 2002, assisting ArcLight in connection with its energy investments. Prior to his consultancy with
ArcLight, Mr.
85
Bergstrom worked from 1986 to 2002 for Natural Gas Clearinghouse, which became Dynegy, Inc. Mr. Bergstrom acted in various capacities at Dynegy, ultimately
acting as its President and Chief Operating Officer. Prior to his time at Dynegy, Mr. Bergstrom acted as a gas supply representative for Northern Natural Gas from
1981 to 1986. Mr. Bergstrom began his career at Transco from 1980-1981. Mr. Bergstrom earned a Bachelor of Science from Iowa State University in 1979. We
believe that Mr. Bergstrom's breadth of experience in the energy industry provide him with the necessary skills to be a member of the Board.
John F. Erhard was elected as a member of the Board in April 2013 and was appointed to the Board in connection with his affiliation with ArcLight. Mr. Erhard,
a Partner at ArcLight, joined the firm in 2001 and has 15 years of energy finance and private equity experience. Prior to joining ArcLight, he was an Associate at
Blue Chip Venture Company, a venture capital firm focused on the information technology sector. Mr. Erhard began his career at Schroders, where he focused on
mergers and acquisitions. Mr. Erhard earned a Bachelor of Arts in Economics from Princeton University and a Juris Doctor from Harvard Law School. Mr. Erhard
previously served on the Board of Directors of Patriot Coal. In addition, Mr. Erhard has experience in the MLP sector having served on the board of directors of
Buckeye GP Holdings, the publicly traded General Partner of Buckeye Partners (NYSE: BPL). We believe that Mr. Erhard's 14 years of energy finance and private
equity experience provide him with the necessary skills to be a member of the Board.
Donald R. Kendall, Jr. was elected a member of the Board in July 2013. Mr. Kendall serves as an independent director and as a member of the Audit Committee.
Mr. Kendall is currently Managing Director and Chief Executive Officer of Kenmont Capital Partners, LP, an investment management firm based in Houston
specializing in alternative investments and private equity. Previously, Mr. Kendall was a Portfolio Manager for Carlson Capital, L.P., President of Cogen
Technologies Capital Company, L.P., Chairman and Chief Executive Officer of Palmetto Partners, Ltd., and a Managing Director in the project finance and leasing
group at Credit Suisse First Boston. He also currently serves as a director and audit committee chairperson of SolarCity and Stream Energy and as a director of
Tangent Energy Solutions. In addition, Mr. Kendall serves in various capacities at not-for-profit organizations, including The Jane Goodall Institute, The Houston
Zoo Conservation Committee, and Earthwatch International. He also is on the Board of Overseers of the Amos Tuck School of Business Administration at
Dartmouth College. Mr. Kendall received a B.A. degree from Hamilton College and an M.B.A. with high honors from The Amos Tuck School of Business
Administration. He was a Tuck Scholar and a recipient of the W. M. Bollenbach, Jr. Fellowship. We believe that Mr. Kendall's investment experience and general
business knowledge qualifies him to be a member of the Board. With respect to the Audit Committee, he also qualifies as an "audit committee financial expert."
Daniel R. Revers was elected as a member of the board of directors in April 2013 and was appointed to the Board in connection with his affiliation with ArcLight.
Mr. Revers is Managing Partner of and a co-founder of ArcLight and has 25 years of energy finance and private equity experience. Mr. Revers manages the Boston
office of ArcLight and is responsible for overall investment, asset management, strategic planning, and operations of ArcLight and its funds. Prior to forming
ArcLight in 2000, Mr. Revers was a Managing Director in the Corporate Finance Group at John Hancock Financial Services ("John Hancock"), where he was
responsible for the origination, execution, and management of a $6 billion portfolio consisting of debt, equity, and mezzanine investments in the energy industry.
Prior to joining John Hancock in 1995, Mr. Revers held various financial positions at Wheelabrator Technologies, Inc., where he specialized in the development,
acquisition, and financing of domestic and international power and energy projects. Mr. Revers serves in various capacities for a number of not-for-profit
organizations, currently serving on the Board of Overseers at the Amos Tuck School of Business Administration, and the Board of Directors of The Citizen
Schools. Mr. Revers earned a Bachelor of Arts in Economics from Lafayette College and a Master of Business Administration from the Amos Tuck School of
Business Administration at Dartmouth College. We believe that Mr. Revers' 25 years of energy finance and private equity experience provide him with the
necessary skills to be a member of the Board.
Rose M. Robeson was elected as a member of the Board in June 2014. Ms. Robeson serves as an independent director and as a member of the Audit Committee.
Ms. Robeson also has served as a director of SM Energy since July 2014 and of Tesco Corporation since October 2015. Ms. Robeson most recently served as
Senior Vice President and Chief Financial Officer of DCP Midstream GP, LLC, the General Partner of DCP Midstream Partners LP, from 2012 to 2014. Ms.
Robeson also served as Group Vice President and Chief Financial Officer of DCP Midstream LLC from 2002 to 2012. Prior to her appointment as CFO of DCP
Midstream LLC, Ms. Robeson was the Vice President and Treasurer at DCP, and previously served as Vice President and Treasurer at Kinder Morgan as well as in
a number of finance and accounting positions at Total Petroleum (North America) Ltd. Ms. Robeson began her career primarily with Ernst & Young as a certified
public accountant. We believe Ms. Robeson's extensive accounting, financial and executive management experience, and her prior experience with publicly traded
partnerships, provide her with the necessary skills to be a member of the Board and a member of the Audit Committee. With respect to the Audit Committee, she
also qualifies as an "audit committee financial expert."
Joseph W. Sutton was elected as a member of the Board in May 2013 and was appointed to the Board in connection with his affiliation with ArcLight. Since 2000,
Mr. Sutton has been the manager of Sutton Ventures Group, LLC, an energy investment firm that he founded. In 2007, he founded and has since led Consolidated
Asset Management Services, or CAMS, which provides
86
asset management, operations and maintenance, information technology, budgeting, contract management and development services to power plant ventures, oil
and gas companies, renewable energy companies and other energy businesses. From 1992 to November 2000, Mr. Sutton worked for Enron Corporation, an energy
company, where he most recently served as vice chairman and as chief executive officer of Enron International. We believe that Mr. Sutton's over 20 years of
energy finance experience provide him with the necessary skills to be a member of the Board.
Lucius H. Taylor was elected as a member of the Board in April 2013 and was appointed to the Board in connection with his affiliation with ArcLight. Mr. Taylor
joined ArcLight in 2007. He has 16 years of experience in energy and natural resource finance and engineering. Prior to joining ArcLight, Mr. Taylor was a Vice
President in the Energy and Natural Resource Group at FBR Capital Markets where he focused on raising public and private capital for companies in the power
and energy sectors. Mr. Taylor began his career as a geologist and project manager at CH2M HILL, Inc., a global engineering, construction, and operations firm.
Mr. Taylor earned a Bachelor of Arts in Geology from Colorado College, a Master of Science in Hydrogeology from the University of Nevada, and a Master of
Business Administration from the Wharton School at the University of Pennsylvania. We believe that Mr. Taylor's 16 years of energy finance and private equity
experience provide him with the necessary skills to be a member of the Board.
Gerald A. Tywoniuk was elected as a member of the Board in May 2011. From May 2010 to the present, Mr. Tywoniuk has provided interim and project CFO
services. He also currently serves as a director and audit committee chairperson on the board of the General Partner of Westmoreland Resource Partners, LP
(NYSE:WMLP) and serves as a director and audit committee member on the board of the General Partner of Landmark Infrastructure Partners LP
(NASDAQ:LMRK). From June 2008 through August 2013, Mr. Tywoniuk served Pacific Energy Resources Ltd. in various senior roles (Senior Vice President,
Finance beginning June 2008, Chief Financial Officer beginning August 2008, acting Chief Executive Officer and CFO beginning September 2009, Plan
Representative beginning December 2010). He held these positions as an employee until May 2010 and as a consultant on a part-time basis until August 2013.
Pacific Energy Resources Ltd. was an oil and gas acquisition, exploitation and development company. Mr. Tywoniuk joined the company in June 2008 to help the
management team work through the company's financially distressed situation. The board of the company elected to file for Chapter 11 protection in March 2009.
In December 2009, the company completed the sale of its assets, and in August 2013 completed its liquidation. Prior to joining Pacific Energy Resources Ltd.,
Mr. Tywoniuk acted as an independent consultant in accounting and finance from March 2007 to June 2008. From December 2002 through November 2006,
Mr. Tywoniuk was Senior Vice President and Chief Financial Officer of Pacific Energy Partners, LP. From November 2006 to March 2007, Mr. Tywoniuk assisted
with the integration of Pacific Energy Partners, LP after it was acquired by Plains All American Pipeline, L.P. Mr. Tywoniuk holds a Bachelor of Commerce
degree from The University of Alberta, Canada, and is a Canadian chartered accountant. Mr. Tywoniuk has 33 years of experience in accounting and finance,
including 12 years as the Chief Financial Officer of three public companies and four years as Vice President/Controller of a fourth public company.
Mr. Tywoniuk's extensive accounting, financial and executive management experience, and his prior experience with publicly traded partnerships, provide him
with the necessary skills to be a member of the Board and a member and the chairman of the Audit Committee. With respect to the Audit Committee, he also
qualifies as an "audit committee financial expert."
Family Relationships
There are no family relationships among any of the Partnership's directors and executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our General Partner's board of directors and executive officers, and persons who own more than 10% of a registered
class of our equity securities, to file with the SEC, and any exchange or other system on which such securities are traded or quoted, initial reports of ownership and
reports of changes in ownership of our common units and other equity securities. Officers, directors and greater than 10% unitholders are required by the SEC's
regulations to furnish to us and any exchange or other system on which such securities are traded or quoted with copies of all Section 16(a) forms they file with the
SEC.
Based solely on our review of the copies of such forms received by us, or written representations from reporting persons, we believe that during the year ended
December 31, 2015 , all filing requirements applicable to our officers, directors, and greater than 10% beneficial owners were met in a timely manner, except as set
forth below:
March 4, 2016
•
•
•
•
Late filing of a Form 4 for Timothy Balaski (1 day late);
Late filing of a Form 4 for Tom Brock (1 day late);
Late filing of a Form 4 for Ryan Rupe (1 day late);
Late filing of a Form 4 for Robert Bourne (1 day late);
87
•
•
•
•
•
•
Late filing of a Form 4 for Michael Suder (1 day late);
Late filing of two Forms 4 for Daniel Campbell (1 day late);
Late filing of a Form 4 for Kevin Sullivan (1 day late);
Late filing of a Form 4 for Louis Dorey (1 day late);
Late filing of a Form 4 for Matthew Rowland (1 day late); and
Late filing of two Forms 4 for William Mathews (1 day late).
Item 11. Executive Compensation
Our General Partner, under the direction of the Board is responsible for managing our operations and employs all of the employees that operate our business. The
compensation payable to the officers of our General Partner is paid by our General Partner and such payments are reimbursed by us on a dollar-for-dollar basis.
The following is a discussion of the compensation policies and decisions of the Compensation Committee of the Board, with respect to the following individuals,
who are executive officers of our General Partner and referred to as the "named executive officers" for the fiscal year ended December 31, 2015 :
Name
Lynn L. Bourdon III (a)
Position with American Midstream GP, LLC
Chairman of the Board, President, and Chief Executive Officer
Stephen W. Bergstrom (b)
Former Executive Chairman of the Board, President and Chief Executive Officer
Daniel C. Campbell
Matthew W. Rowland
Louis J. Dorey
Michael D. Suder
Senior Vice President and Chief Financial Officer
Senior Vice President and Chief Operating Officer
Senior Vice President of Business Development
President and Chief Executive Officer of Blackwater Midstream Corporation.
(a) Mr. Bourdon was appointed to serve as Chairman of the Board, President and Chief Executive Officer effective December 10, 2015.
(b) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr. Bergstrom
allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered compensation for
services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the Partnership. Mr. Bergstrom
retired in December 2015 from these positions but remains on the Board of Directors.
Our compensation program is designed to recognize key managers are critical to our Partnership's profitability and growth. We utilize compensation to attract and
retain management talent and to motivate key employees to focus consistently on growth and value creation. In addition, our compensation program aligns
incentives for management and unitholders, focusing on long-term value creation rather than short-term gain. To do this, our compensation program for key
managers is made up of the following main components: i) base salary, designed to compensate our executives for work performed during the fiscal year; ii) short-
term incentive programs, designed to reward our executives for our yearly performance and for their individual performances during the fiscal year; and iii) equity-
based awards, meant to align our executives interests with our long-term performance.
This section should be read together with the compensation tables that follow, which disclose the compensation awarded to, earned by, or paid to, the named
executive officers with respect to the three years ended December 31, 2015 .
Role of the Board, the Compensation Committee and Management
The Board has appointed the Compensation Committee to assist the Board in discharging its responsibilities relating to compensation matters, including matters
relating to compensation programs for directors and executive officers of the General Partner. The Compensation Committee has overall responsibility for
evaluating and approving our compensation plans, policies and programs, setting the compensation and benefits of executive officers, and granting awards under
and administering our equity compensation plans. The Compensation Committee is charged with, among other things, establishing compensation practices and
programs that are i) designed to attract, retain and motivate exceptional leaders, ii) structured to align compensation with our overall performance and growth in
distributions to unitholders, iii) implemented to promote achievement of short-term and long-term business objectives consistent with our strategic plans, and
iv) applied to reward performance.
As described in further detail below under "— Elements of the Compensation Programs," the compensation programs for our executive officers consist of base
salaries, annual incentive bonuses and awards under the American Midstream GP, LLC, Long-Term Incentive Plan, which we refer to as our LTIP, currently in the
form of equity-based phantom units, as well as other customary
88
employment benefits such as a 401(k) plan, and health and welfare benefits. We expect that total compensation of our executive officers and the components of
compensation and allocation among components of their annual compensation will be reviewed on at least an annual basis by the Compensation Committee.
During 2015, the Compensation Committee discussed executive compensation issues at several meetings, and the Compensation Committee expects to hold
additional executive compensation-related meetings in 2016 and in future years. Topics discussed and to be discussed at these meetings included and will include,
among other things, i) assessing the performance of the Chief Executive Officer, with respect to our results for the prior year, ii) reviewing and assessing the
personal performance of the executive officers and other key managers for the preceding year and iii) determining the amount of the bonus pool to be paid to our
executives and other key managers for a given year after taking into account the target bonus amounts established for those executives and other key managers at
the outset of the year. In addition, at these meetings, and after taking into account the recommendations of our Chief Executive Officer only with respect to
executive officers and key managers other than our Chief Executive Officer, base salary levels and target bonus amounts (representing the bonus that may be
awarded expressed as a dollar amount or as a percentage of base salary for the year) for our executive officers will be established by the Compensation Committee.
In addition, the Compensation Committee will make its decisions with respect to any awards under the LTIP and recommend awards to the Board. Our Chief
Executive Officer will provide periodic recommendations to the Compensation Committee regarding the performance and compensation of the other named
executive officers as well as the amounts allocated to the short-term incentive plan and LTIP compensation pools.
Compensation Objectives and Methodology
The principal objective of our executive compensation program is to attract and retain individuals of demonstrated competence, experience and leadership who
share our business aspirations, values, ethics and culture. A further objective is to provide incentives to and reward our executive officers and other key employees
for positive contributions to our business and operations, and to align their interests with our unitholders' interests.
In setting our compensation programs, we consider the following objectives:
•
•
•
•
•
to create unitholder value through sustainable earnings and cash available for distribution;
to provide a significant percentage of total compensation that is "at-risk" or variable;
to encourage significant equity holdings to align the interests of executive officers and other key employees with those of unitholders;
to provide competitive, performance-based compensation programs that allow us to attract and retain superior talent; and
to develop a strong linkage between business performance, safety, environmental stewardship, cooperation and executive compensation.
Taking account of the foregoing objectives, we structure total compensation for our executives to provide a guaranteed amount of cash compensation in the form of
base salaries, while also providing a meaningful amount of annual cash compensation that is at risk and dependent on our performance and individual performance
of the executives, in the form of discretionary annual bonuses. We also seek to provide a portion of total compensation in the form of equity-based awards under
our LTIP, in order to align the interests of executives and other key employees with those of our unitholders and for retention purposes.
Compensation decisions for individual executive officers are the result of the subjective analysis of a number of factors, including the individual executive officer's
experience, skills or tenure with us and changes to the individual executive officer's position. In evaluating the contributions of executive officers and our
performance, although no pre-determined numerical goals were established, a variety of financial measures have been generally considered, including non-GAAP
financial measures used by management to assess our financial performance, such as Adjusted EBITDA and distributable cash flow. For a definition of Adjusted
EBITDA and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP and a discussion of how we use
Adjusted EBITDA to evaluate our operating performance, please read "Management's Discussion and Analysis —How We Evaluate Our Operations". In addition,
a variety of factors related to the individual performance of the executive officer were taken into consideration.
In making individual compensation decisions, the Compensation Committee historically has not relied on pre-determined performance goals or targets. Instead,
determinations regarding compensation have resulted from the exercise of judgment based on all reasonably available information and, to that extent, were
discretionary. The amount of each executive officer's current compensation will be considered as a base against which determinations are made as to whether
increases are appropriate to retain the executive officer in light of competition or in order to provide continuing performance incentives. Subject to the provisions
contained in the executive officer's employment agreement, if any, the Compensation Committee has discretion to adjust any of
89
the components of compensation to achieve our goal of recruiting, promoting and retaining executive officers and key individuals with the skills necessary to
execute our business strategy and develop, grow and manage our business.
The Compensation Committee has also utilized benchmarking compensation levels across a range of publicly traded Master Limited Partnerships operating in the
midstream market to inform specific award levels for named executive officers and key managers. Going forward, we expect that the Compensation Committee
will make compensation decisions taking into account trends occurring within our industry, including from a peer group of companies, which we expect will
include, but not be limited to, the following similar publicly traded partnerships: Blueknight Energy Partners LP, Crestwood Midstream Partners LP, Genesis
Energy LP, JP Energy Partners LP, Martin Midstream Partners LP, and Rose Rock Midstream, LP.
Elements of the Compensation Programs
Overall, the executive officer compensation programs are designed to be consistent with the philosophy and objectives set forth above. The principal elements of
our executive officer compensation programs are summarized in the table below, followed by a more detailed discussion of each compensation element.
90
Element
Base Salaries
Annual Incentive Bonuses
Equity-Based Awards (Phantom-units and
Distribution Equivalent Rights)
Retirement Plan
Health and Welfare Benefits
Base Salaries
Characteristics
Fixed annual cash compensation. Executive officers
are eligible for periodic increases in base salaries.
Increases may be based on performance or such
other factors as the Compensation Committee may
determine.
Performance-related annual cash incentives earned
based on our objectives and individual performance
of the executive officers. Increases or adjustments
may be made based on both company and individual
performance or such factors as the Compensation
Committee may determine.
Performance-related, equity-based awards granted at
the discretion of the Compensation Committee.
Awards are based on our performance and we expect
that, going forward, and take into account
competitive practices at peer companies. Grants
typically consist of phantom units that vest ratably
over four years and may be settled upon vesting with
either a net cash payment or an issuance of Common
Units, at the discretion of the Board. Distribution
Equivalent Rights, or DERs, and options have been
granted on a limited basis. Future awards, such as
options and DERs may be granted at the discretion
of the Compensation Committee and subject to the
approval of the Board.
Qualified retirement plan benefits are available for
our executive officers and all other regular full-time
employees. At our formation, we adopted and are
maintaining a tax-deferred or after-tax 401(k) plan in
which all eligible employees can elect to defer
compensation for retirement up to IRS imposed
limits. The 401(k) plan permits us to make annual
discretionary matching contributions to the plan. For
2015, we matched employee contributions to 401(k)
plan accounts up to a maximum employer
contribution of 5% of the employee's eligible
compensation.
Health and welfare benefits (medical, dental, vision,
disability insurance and life insurance) are available
for our executive officers and all other regular full-
time employees.
Purpose
Keep our annual compensation competitive with the
defined market for skills and experience necessary to
execute our business strategy.
Align performance to our objectives that drive our
business and reward executive officers for achieving
our yearly performance objectives and for their
individual contributions to these objectives during
the fiscal year.
Align interests of executive officers with unitholders
and motivate and reward executive officers to
increase unitholder value over the long term. Ratable
vesting over a four-year period is designed to
facilitate retention of executive officers.
Provide our executive officers and other employees
with the opportunity to save for their future
retirement.
Provide benefits to meet the health and wellness
needs of our executive officers, other employees and
their families.
Base salaries for our executive officers will be determined annually by an assessment of our overall financial and operating performance, each executive officer's
performance evaluation and changes in executive officer responsibilities. While many aspects of performance can be measured in financial terms, senior
management will also be evaluated in areas of performance that are more subjective. These areas include development and execution of strategic plans, leading the
development of management and other employees, innovation and improvement in our business activities and each executive officer's involvement in industry
91
groups and in the communities that we serve. We seek to compensate executive officers for their performance throughout the year with annual base salaries that are
fair and competitive within our marketplace. We believe that executive officer base salaries should be competitive with salaries for executive officers in similar
positions and with similar responsibilities in our marketplace and adjusted for financial and operating performance and each executive officer's performance
evaluation, length of service with us and previous work experience. Individual salaries have historically been established by the Compensation Committee based
on the general industry knowledge and experience of its members, in alignment with these considerations, to ensure the attraction, development and retention of
superior talent. Going forward, we expect that salary decisions will continue to focus on the above considerations and will also take into account relevant market
data, including the market data and peer group data.
We expect that base salaries will be reviewed annually to ensure continuing consistency with market levels and our level of financial performance during the
previous year. Future adjustments to base salaries and salary ranges will reflect movement in the competitive market as well as individual performance. Annual
base salary adjustments, if any, for the Chief Executive Officer will be determined by the Compensation Committee. Annual base salary adjustments, if any, for the
other executive officers will be determined by the Compensation Committee, taking into account input from the Chief Executive Officer.
The Compensation Committee approved the following base salaries for 2015 for the named executive officers as provided in the table below.
Name
Lynn L. Bourdon III (a)
Stephen W. Bergstrom (b)
Daniel C. Campbell
Matthew W. Rowland
Louis J. Dorey
Michael D. Suder
Base Salary
at the end of 2015
$500,000
nm
285,000
285,000
275,520
300,000
(a) Mr. Bourdon was appointed to serve as Chairman of the Board, President and Chief Executive Officer effective December 10, 2015.
(b) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr. Bergstrom
allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered compensation for
services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the Partnership. Mr. Bergstrom
retired in December 2015 from these positions but remains on the Board of Directors.
nm Not meaningful
Annual Incentive Bonuses
As one way of accomplishing our compensation objectives, executive officers are rewarded for their contribution to our financial and operational success through
the award of discretionary annual cash incentive bonuses. Annual cash incentive awards, if any, for the Chief Executive Officer are determined by the
Compensation Committee. Annual cash incentive awards, if any, for the other executive officers are determined by the Compensation Committee taking into
account input from the Chief Executive Officer.
We expect to review cash bonus awards for the named executive officers annually to determine award payments for the prior fiscal year, as well as to establish
target bonus amounts for the current fiscal year. At the beginning of each year, the Compensation Committee meets with the Chief Executive Officer to discuss
Partnership and individual goals for the year and what each executive is expected to contribute in order to help the Partnership achieve those goals. However, the
amounts of the annual bonuses have been and are determined at the discretion of the Compensation Committee with input from the Chief Executive Officer.
While target bonuses for our executive officers who have entered into employment agreements have been initially set at dollar amounts that are between 75% to
100% of their base salaries, the Compensation Committee has had broad discretion to retain, reduce or increase the award amounts when making its final bonus
determinations. Bonuses (similar to other elements of the compensation provided to executive officers) historically have not been solely based on a prescribed
formula or pre-determined goals, specified performance targets but rather have been determined on a discretionary basis and generally have been based on a
subjective evaluation of individual, company-wide and industry performances. Target bonus amounts for 2015 for all of the executive officers, which are specified
in their employment agreements, are set forth in the table below. Please refer to "—Employment Agreements with Named Executive Officers" below for a
description of the employment agreements.
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The Board and the Compensation Committee believe that this approach to assessing performance results in a more comprehensive evaluation for compensation
decisions. In 2015, the Compensation Committee recognized the following factors in making discretionary annual bonus recommendations and determinations:
•
•
•
a subjective company performance evaluation based on company-wide financial performance including actual EBITDA versus budgeted EBITDA to assess
company performance and adjusted as needed for new acquisitions and major capital expenditure programs in 2015;
a subjective individual performance evaluation for executive officers and other factors deemed relevant; and
the scope, level of expertise and experience required for the executive officer's position.
These factors were selected as the most appropriate measures upon which to base the annual incentive cash bonus decisions because our Compensation Committee
believes that they help to align individual compensation with performance and contribution. With respect to its evaluation of company-wide financial performance,
although no pre-determined numerical goals were established, the Compensation Committee generally reviewed our results with respect to Adjusted EBITDA as
compared to operating budget and cash available for distribution in making annual bonus determinations.
Following its performance assessment, and based on our financial performance with respect to these criteria and the Compensation Committee's qualitative
assessment of individual performance, the Compensation Committee determined to award the base salary and incentive bonus amounts, which may be paid in cash
or Common Units, set forth in the table below to our named executive officers for performance in 2015.
Name
Lynn L. Bourdon III (a)
Stephen W. Bergstrom (b)
Daniel C. Campbell
Matthew W. Rowland
Louis J. Dorey
Michael D. Suder
$
2015 Base
Salary
$500,000
nm
285,000
285,000
275,520
300,000
2015
Target
Bonus
2015 Bonus Earned
— $
—
213,750
213,750
206,640
225,000
—
—
130,000
130,000
124,000
200,000
(a) Mr. Bourdon was appointed to serve as Chairman of the Board, President and Chief Executive Officer effective December 10, 2015.
(b) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr.
Bergstrom allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered
compensation for services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the
Partnership. Mr. Bergstrom retired in December 2015 from these positions but remains on the Board of Directors.
Beginning in 2015, the Compensation Committee expected that it would determine base annual incentive compensation award recommendations on additional
company-wide criteria as well as industry criteria, recognizing the following factors as part of its determination of annual incentive bonuses (without assigning any
particular weight to any factor):
•
•
•
•
financial performance for the prior fiscal year, including Adjusted EBITDA and distributable cash flow;
distribution performance for the prior fiscal year;
unitholder total return for the prior fiscal year; and
competitive compensation data of executive officers.
These factors were selected as the most appropriate measures upon which to base the annual cash incentive bonus decisions going forward because the
Compensation Committee believes that they will most directly correlate to increases in long-term value for our unitholders.
Equity-Based Awards
Design. The LTIP was adopted in November 2009 in connection with our formation and was most recently amended and restated in 2012. In adopting the LTIP,
the Board recognized that it needed a source of equity to attract new members to and retain members
93
of the management team, as well as to provide an equity incentive to other key employees and non-employee directors. We believe the LTIP promotes a long-term
focus on results and aligns executive and unitholder interests. In December 2015, we granted phantom units with associated DERs to provide long-term incentives
to a named executive officer. DERs enable the recipients of phantom unit awards to receive cash distributions on our phantom units to the same extent generally as
unitholders receive cash distributions on our Common Units.
The LTIP is designed to encourage responsible and profitable growth while taking into account non-routine factors that may be integral to our success. Long-term
incentive compensation in the form of equity grants are used to provide incentives for performance that leads to enhanced unitholder value, encourage retention
and closely align the executive officers' interests with unitholders' interests. Equity grants provide a vital link between the long-term results achieved for our
unitholders and the rewards provided to executive officers and other key employees.
Phantom Units. A phantom unit is a notional unit granted under the LTIP that entitles the holder to receive an amount of cash equal to the fair market value of one
Common Unit upon vesting of the phantom unit, unless the Board elects to pay such vested phantom unit with a common unit in lieu of cash. Unless an individual
award agreement provides otherwise, the LTIP provides that unvested phantom units are forfeited at the time the holder terminates employment or Board
membership, as applicable. The terms of the award agreements of our named executive officers provide that a termination due to death or long-term disability
results in full acceleration of vesting. In general, phantom units awarded under our LTIP vest as to 25% of the award on each of the first four anniversaries of the
date of grant.
Equity-Based Award Policies. The LTIP is administered by the Compensation Committee of the Board. The Compensation Committee, at its discretion, may elect
to settle such vested phantom units with a number of units equivalent to the fair market value at the date of vesting in lieu of cash.
Generally, grants issued under the LTIP vest in increments of 25% on each grant anniversary date and do not contain any vesting requirements other than
continued employment. Ownership in the awards is subject to forfeiture until the vesting date.
Deferred Compensation. Tax-qualified retirement plans are a common way that companies assist employees in preparing for retirement. We provide our eligible
executive officers and other employees with an opportunity to save for their retirement by participating in our 401(k) plan. The 401(k) plan allows our executive
officers and other employees to defer compensation (up to IRS imposed limits) for retirement and permits us to make annual discretionary matching contributions
to the plan. For 2015, we matched employee contributions to 401(k) plan accounts up to a maximum employer contribution of 5% of the employee's eligible
compensation. Decisions regarding this element of compensation do not impact any other element of compensation.
Other Benefits. Each of the named executive officers is eligible to participate in our employee benefit plans which provide for medical, dental, vision, disability
insurance and life insurance benefits, which are provided on the same terms as available generally to all salaried employees. In 2015 and 2014, no perquisites were
provided to the named executive officers.
Recoupment Policy. We currently do not have a recoupment policy applicable to annual incentive bonuses or equity awards. The Compensation Committee
expects to continue to evaluate the need to adopt such a policy in 2015, in light of current legislative policies as well as economic and market conditions.
Employment, Change in Control and Severance Arrangements. The Board and the Compensation Committee consider the maintenance of a sound management
team to be essential to protecting and enhancing our best interests. To that end, we recognize that the uncertainty that may exist among management with respect to
their "at-will" employment with our General Partner may result in the departure or distraction of management personnel to our detriment. Accordingly, our General
Partner entered into employment agreements with each of Messrs. Campbell, Suder, Bourdon, and Rowland which contain severance arrangements that we
believed were appropriate to encourage the continued attention and dedication of members of our management. These employment agreements are described more
fully below under "— Existing Employment Agreements with Named Executive Officers."
Summary Compensation Table for the Three Years ended December 31, 2015
The following table sets forth certain information with respect to the compensation paid to the named executive officers for the three years ended December 31,
2015 .
94
Lynn L. Bourdon III (b)
Chairman of the Board,
President and Chief Executive
Officer
Stephen W. Bergstrom (c)
Former Executive Chairman,
President and Chief Executive
Officer
Daniel C. Campbell
Senior Vice President and Chief
Financial Officer
Matthew W. Rowland
Senior Vice President and Chief
Operating Officer
Louis J. Dorey
Senior Vice President of
Business Development
Michael D. Suder
President and Chief Executive
Officer of Blackwater Midstream
Year
2015
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2015
2014
2013
Salary
Bonus
Unit
Awards (a)
All Other
Compensation (d)
Total
Compensation
$
32,692 $
— $
1,501,952 $
— $
1,534,644
—
—
—
—
nm
nm
nm
295,962
285,000
235,000
295,962
285,000
122,577
285,577
—
28,000
250,000
132,000
28,000
250,000
—
28,000
311,538
304,423
28,000
40,625
408,750
181,250
—
591,549
352,492
213,230
412,041
352,492
527,000
427,031
437,489
—
—
—
—
—
—
—
—
—
—
—
99,095
—
—
—
—
—
—
915,511
887,492
580,230
736,003
887,492
649,577
839,703
777,027
345,048
590,000
(a) Amounts shown in this column do not reflect dollar amounts actually received by each of our named executive officers. Instead, these amounts
reflect the aggregate grant date value of each phantom unit award granted in each of the three years ended December 31, 2015.
(b) Mr. Bourdon was appointed to serve as Chairman of the Board, President and Chief Executive Officer effective December 10, 2015.
(c) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr.
Bergstrom allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered
compensation for services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the
Partnership. Mr. Bergstrom retired in December 2015 from these positions but remains on the Board of Directors.
(d) Represents relocation expenses.
Grants of Plan-Based Awards for 2015
95
Name
Threshold
#
Target
#
Maximum
#
Estimated Future Payouts
Under
Equity Incentive Plan
Awards
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
200,000
200,000
—
18,130
13,256
14,504
7,157
13,995
8,565
15,267
7,746
Grant
Date
Fair
Value
of Unit Awards
($)
$
1,436,000
65,952
—
356,255
235,294
285,004
127,037
275,002
152,029
299,997
137,492
Lynn L. Bourdon III
12/10/2015 Grant (b)
12/10/2015 Grant (c)
Stephen W. Bergstrom (d)
Daniel C. Campbell
02/23/2015 Grant
03/02/2015 Grant
Matthew W. Rowland
02/23/2015 Grant
03/02/2015 Grant
Louis J. Dorey
02/23/2015 Grant
03/02/2015 Grant
Michael D. Suder
02/23/2015 Grant
03/02/2015 Grant
(a)
(b)
(c)
Amounts shown in this column do not reflect dollar amounts actually received by our named executive officers. Instead, these amounts reflect the
aggregate grant date value of each phantom unit award granted in each of the three years ended December 31, 2015.
In conjunction with the execution of Mr. Bourdon’s employment agreement effective December 10, 2015, the Board approved a grant of 200,000
phantom units. The phantom units contain DERs based on the extent to which the Partnership’s Series A Preferred Unitholders receive distributions in
cash and will vest in one lump sum installment on the three year anniversary of the date of grant, subject to acceleration in certain circumstances.
In conjunction with the execution of Mr. Bourdon’s employment agreement effective December 10, 2015, the Board approved an Option Grant to
purchase 200,000 common units of the Partnership at an exercise price per unit equal to $7.50 under the LTIP. The Option Grant will vest in one lump
sum installment on January 1, 2019, subject to acceleration in certain circumstances, and will expire on March 15 of the calendar year following the
calendar year in which it vests.
(d) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr. Bergstrom
allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered compensation for
services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the Partnership. Mr. Bergstrom
retired in December 2015 from these positions but remains on the Board of Directors.
Employment Agreements with Named Executive Officers
Our General Partner has entered into employment agreements with certain of our named executive officers. The employment agreement with Mr. Bourdon has an
initial term of three years, which will be automatically extended for successive one-year terms until either party elects to terminate the agreement by providing
written notice at least 60 days prior to the end of the expiration of the initial or extended term, as applicable. The employment agreements with each of Messrs.
Campbell and Rowland have an initial term of two years, which will be automatically extended for successive one year terms until either party elects to terminate
the agreement by providing written notice at least 90 days prior to the end of the expiration of the initial or extended term, as applicable. The employment
agreement with Mr. Suder has an initial term of five years, which will be automatically extended for successive one year terms until either party elects to terminate
the agreement by providing written notice at least 30 days prior to the end of the expiration of the initial or extended term, as applicable. The base salary and target
bonus amounts set forth in such employment agreements are shown in the table below. The employment agreements provide that the base salary may be increased
but not decreased. The agreements provide that the executive will be provided with the opportunity to earn an annual cash bonus, a certain percentage of which will
be conditioned and determined on the attainment of personal performance goals and the balance
96
of which will be conditioned and determined on the attainment of organizational performance goals, in each case as set by, and based on performance criteria
established by, the Compensation Committee. The employment agreements also provide that the executive may also be eligible to receive awards under the LTIP
as determined by the Compensation Committee.
Each employment agreement also contains certain confidentiality covenants prohibiting each executive officer from, among other things, disclosing confidential
information relating to our General Partner or any of its affiliates, including us. The employment agreements also contain non-competition and non-solicitation
restrictions, which apply during the term of the executive's employment with our General Partner and, with certain exceptions, continue for a period of 6-
12 months following termination for any reason.
The employment agreements also provide for, among other things, the payment of severance benefits under certain circumstances. Please refer to "— Potential
Payment Upon Termination or Change in Control — Employment Agreements with Named Executive Officers" below for a description of these benefits under the
employment agreements.
Outstanding Equity-Based Awards at December 31, 2015
The following table provides information regarding outstanding split adjusted equity-based awards held by the named executive officers as of December 31, 2015 .
All such equity-based awards consist of phantom units granted under the LTIP.
Name
Lynn L. Bourdon III (b)
Stephen W. Bergstrom (c)
Daniel C. Campbell
Matthew W. Rowland
Louis J. Dorey
Michael D. Suder
Unit Awards
Number of Awards that
Have Not Vested
Market Value of
Awards that
Have Not Vested (a)
400,000 $
1,702,000
—
29,266
33,974
24,933
24,745
—
236,762
274,850
201,708
200,187
(a)
(b)
The market value of phantom units that had not vested as of December 31, 2015, was calculated based on the fair market value of our
Common Units as of December 31, 2015, which was $8.09, which was the closing price of our Common Units on December 31, 2015,
multiplied by the number of unvested phantom units. The market value of the Option Grant that has not vested as of December 31, 2015 is
$0.42. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies
and Estimates - Equity-Based Awards" in the 2014 Annual Report.
In conjunction with the execution of Mr. Bourdon’s employment agreement effective December 10, 2015, the Board approved a grant of
200,000 phantom units and an Option Grant to purchase 200,000 Common Units of the Partnership at an exercise price per unit equal to
$7.50 under the LTIP. The Phantom units contain DERs based on the extent to which the Partnership’s Series A Preferred Unitholders
receive distributions in cash and will vest in one lump sum installment on the three year anniversary of the date of grant, subject to
acceleration in certain circumstances. The Option Grant will vest in one lump sum installment on January 1, 2019, subject to acceleration in
certain circumstances, and will expire on March 15 of the calendar year following the calendar year in which it vests.
(c) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr.
Bergstrom allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was
considered compensation for services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive
Officer of the Partnership. Mr. Bergstrom retired in December 2015 from these positions but remains on the Board of Directors.
Units Vested in 2015
The following table shows the phantom unit awards that vested during 2015 .
97
Name
Lynn L. Bourdon III (b)
Stephen W. Bergstrom (c)
Daniel C. Campbell
02/19/2015 vest
03/01/2015 vest
03/02/2015 vest
Matthew W. Rowland
02/19/2015 vest
03/02/2015 vest
08/22/2015 vest
Louis J. Dorey
02/19/2015 vest
03/02/2015 vest
Michael D. Suder
02/19/2015 vest
03/02/2015 vest
Number of Units
Acquired on Vesting
2015
Fair Market
Value per Unit
Upon Vesting
Value Realized
on Vesting (a)
— $
—
— $
—
3,712
3,230
13,256
3,712
7,157
8,333
3,646
8,565
3,159
7,746
18.81
18.33
18.33
18.81
18.33
13.43
18.81
18.33
18.81
18.33
—
—
69,823
59,206
242,982
69,823
131,188
111,912
68,581
156,996
59,421
141,984
(a) The value realized upon vesting of phantom units is calculated based on the fair market value of our Common Units on the applicable vesting
date.
(b) Mr. Bourdon was appointed to serve as Chairman of the Board, President and Chief Executive Officer effective December 10, 2015.
(c) Mr. Bergstrom was compensated in 2015 through an agreement with HPIP, the majority owner of our General Partner. Accordingly, Mr.
Bergstrom allocated time to HPIP and our General Partner on matters not related to the Partnership during 2015, none of which was considered
compensation for services rendered in conjunction with his former role as Executive Chairman, President and Chief Executive Officer of the
Partnership. Mr. Bergstrom retired in December 2015 from these positions but remains on the Board of Directors.
Long-Term Incentive Plan
The Board has adopted a LTIP for employees, consultants and directors of our General Partner and affiliates who perform services for us. The plan provides for the
issuance of options, unit appreciation rights, restricted units, phantom units, other unit-based awards, unit awards or replacement awards, as well as tandem DERs
granted with respect to an award. To date, phantom units, phantom units with DERs, and options have been issued under the LTIP.
As of December 31, 2015 , 569,759 unvested phantom units were outstanding under our LTIP and 200,000 Option Grants. A phantom unit is a notional unit
granted under the LTIP that entitles the holder to receive an amount of cash equal to the fair market value of one common unit upon vesting of the phantom unit,
unless the Board elects to settle such vested phantom unit with a common unit in lieu of cash. DERs may be granted in tandem with phantom units. Except as
otherwise provided in an award agreement, DERs that are not subject to a restricted period are currently paid to the participant at the time a distribution is made to
the unitholders, and DERs that are subject to a restricted period are paid to the participant in a single lump sum no later than the 15th day of the third calendar
month following the date on which the restricted period ends.
The number of units that may be delivered with respect to awards under the LTIPs may not exceed 7,175,352 units, subject to specified anti-dilution adjustments.
However, if any award is terminated, canceled, forfeited or expires for any reason without the actual delivery of units covered by such award or units are withheld
from an award to satisfy the exercise price or the employer's tax withholding obligation with respect to such award, such units will again be available for issuance
pursuant to other awards granted under the LTIPs. In addition, any units allocated to an award will, to the extent such award is paid in cash, be again available for
delivery under the LTIPs with respect to other awards. There is no limitation on the number of awards that may be granted under the LTIPs and paid in cash. The
LTIPs provide that they are to be administered by the Board, provided that the Board may delegate authority to administer the LTIPs to a committee of non-
employee directors. As of March 4, 2016, there were 4,919,377 units available for future grant awards.
98
The LTIP may be terminated or amended at any time, including increasing the number of units that may be granted, subject to unitholder approval as required by
the NYSE rules. However, no change in any outstanding grant may be made that would materially reduce the benefits of the participant without the consent of the
participant. The LTIP will terminate on the earliest of i) its termination by the Board or the Compensation Committee, ii) the tenth anniversary of the date the LTIP
was adopted or iii) when units are no longer available for delivery pursuant to awards under the LTIP. Unless expressly provided for in the LTIP or an applicable
award agreement, any award granted prior to the termination of the LTIP, and the authority of the Board or the Compensation Committee to amend, adjust or
terminate such award or to waive any conditions or rights under such award, will extend beyond the termination date.
Potential Payments Upon Termination or Change in Control
Employment
Agreement
with
Lynn
L.
Bourdon
The employment agreement with Lynn L. Bourdon provides for, among other things, the payment of severance benefits following certain terminations of
employment by our General Partner or the termination of employment by Mr. Bourdon for “Good Reason” (as defined below). If Mr. Bourdon’s employment is
terminated by our General Partner other than for “Cause” (as defined below) or other than on Mr. Bourdon’s death or disability, or if Mr. Bourdon terminates his
employment for Good Reason, Mr. Bourdon will receive a cash amount equal to his annual base salary in effect on the date of terminations plus the amount of his
current year annual cash bonus for the year of termination at the target calculated as if all goals for a target bonus have been achieved. In these circumstances, Mr.
Bourdon would also receive certain medical premium reimbursements and either accelerated or continued vesting of certain equity incentive awards. The
severance benefits contained in his employment agreement are conditioned on Mr. Bourdon executing a release of claims in favor of our General Partner and its
affiliates, including the Partnership. In the event that such a termination of his employment occurs within two years after a change in control, Mr. Bourdon may be
entitled to receive two times the severance amount.
•
•
“Cause” means Executive has (A) engaged in gross negligence in the performance of the duties required of him; (B) engaged in willful misconduct in the
performance of the duties required of him resulting in a material detriment to our General Partner; (C) unlawfully used (including being under the influence
of) or possessed illegal drugs on our General Partner’s (or any of its affiliate’s) premises or while performing his duties or responsibilities; (D) committed a
material act of fraud or embezzlement against our General Partner, its affiliates, or any of their respective equityholders; (E) been convicted of (or pleaded
guilty or no contest to) a felony, other than a non-injury vehicular offense, that could be reasonably expected to reflect unfavorably and materially on our
General Partner; or (F) materially breached or violated any material provision of the agreement or violated any material provision of any material written
company policy that has been previously provided or made available to Executive .
“Good Reason” means, in connection with or based upon a nonconsensual (A) material alteration in Executive’s responsibilities, duties, authority or titles
or the assignment to Executive of duties or responsibilities inconsistent with Executive’s status and titles as the most senior officer of our General Partner;
(B) assignment of Executive to a principal office located beyond a 30-mile radius of Executive’s then current work place; or (C) material breach by any
party to the agreement other than Executive of any material provision of the agreement.
The employment agreement provides that for a period of twelve months following a termination of employment by Mr. Bourdon for Good Reason (or nine months
following a termination of employment of Mr. Bourdon by our General Partner or Mr. Bourdon due to the Company’s non-renewal of the employment agreement
or a termination of employment by the Company without Cause), Mr. Bourdon will be subject to a non-competition covenant. Furthermore, if our General Partner
elects to pay Mr. Bourdon a cash amount equal to half of the severance amount following a termination of Mr. Bourdon’s employment by our General Partner for
Cause or by Mr. Bourdon without Good Reason, then Mr. Bourdon will be subject to a six month non-competition covenant. Mr. Bourdon is also subject to a non-
solicitation covenant for a period of twelve months following the termination of his employment.
Mr. Bourdon has received an award of phantom units under the LTIP. The terms of the phantom unit award agreement provide that a termination without Cause,
for Good Reason, or due to death or disability, results in full acceleration of vesting of any outstanding phantom units.
Employment
Agreements
with
Daniel
C.
Campbell
and
Matthew
W.
Rowland
The employment agreements with Daniel C. Campbell and Matthew W. Rowland provide for, among other things, the payment of severance benefits following
certain terminations of employment by our General Partner, the termination of employment for "Good Reason" (as defined below) by the executive officer, or,
under certain circumstances, upon expiration of the term of the
99
agreement. Under the employment agreements, if the executive's employment is terminated upon expiration of the initial or extended term of the agreement by
either party upon 90 days' written notice (with certain exceptions, as described below), if the executive's employment is terminated by the General Partner other
than for "Cause" (defined as defined below) or other than upon the executive's death or disability, or if the executive resigns for "Good Reason", the executive will
have the right to severance in an amount equal to the sum of the executive's annual base salary at the rate in effect on the date of termination plus the amount, if
any, paid to the executive as an annual cash bonus for the calendar year ending immediately prior to the date of such termination. Such severance amount will be
paid in installments (on regular pay days scheduled in accordance with our regular payroll practices) beginning on the 60th day following the termination date and
ending on the one year anniversary of the termination date, and will be subject to reimbursement by us to our General Partner. The foregoing severance benefit is
conditioned on the executive executing a release of claims in favor of our General Partner and its affiliates, including us.
•
•
"Cause" is defined in each of the employment agreements as the executive having i) engaged in gross negligence, gross incompetence or willful
misconduct in the performance of the duties required of him under the employment agreement, ii) refused without proper reason to perform the duties and
responsibilities required of him under the employment agreement, iii) willfully engaged in conduct that is materially injurious to our General Partner or its
affiliates including us (monetarily or otherwise), iv) committed an act of fraud, embezzlement or willful breach of fiduciary duty to our General Partner or
an affiliate including us (including the unauthorized disclosure of confidential or proprietary material information of our General Partner or an affiliate
including us) or v) been convicted of (or pleaded no contest to) a crime involving fraud, dishonesty or moral turpitude or any felony.
"Good Reason" is defined in each employment agreement as a termination by the executive in connection with or based upon: i) a material diminution in
the executive's responsibilities, duties or authority, ii) a material diminution in the executive's base compensation, iii) assignment of the executive to a
principal office located beyond a 50-mile radius of the executive's then current work place, or iv) a material breach by us of any material provision of the
employment agreement.
Each employment agreement also contains certain confidentiality covenants prohibiting each executive officer from, among other things, disclosing confidential
information relating to our General Partner or any of its affiliates, including us. The employment agreements also contain non-competition and non-solicitation
restrictions, which apply during the term of the executive's employment with our General Partner and continue for a period of 12 months following termination for
any reason. If the executive's employment is terminated upon expiration of the initial or extended term of the agreement by either party upon 90 days' written
notice, the Board may, in its discretion, release the executive from being subject to the noncompetition covenant following termination of employment; however, in
that case, the executive would not be entitled to receive any severance payment in connection with such termination.
Employment
Agreements
with
Michael
D.
Suder
The employment agreement with Michael D. Suder provides for, among other things, the payment of severance benefits following certain terminations of
employment by our General Partner. Under the employment agreement, if Mr. Suder is terminated by the General Partner other than for "Cause" (as defined below)
or other than Mr. Suder's death or disability, Mr. Suder will have the right to severance in an amount equal to the lesser of (i) the sum of his base salary at the rate
in effect on the date of termination for 12 months and (ii) the sum of his base salary for the remainder of the then current term of the agreement. Such severance
amount will be paid in installments (on regular pay days scheduled in accordance with our regular payroll practices) beginning on the 60th day following the
termination date and ending on the one year anniversary of the termination date. The foregoing severance benefit is conditioned on the executive executing a
release of claims in favor of our General Partner and its affiliates, including us.
“Cause” is defined as
a. Conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony, involves fraud, dishonesty or moral turpitude or results in the
imposition of a term of imprisonment;
b. The occurrence of any of the following acts:
Fraud, willful or intentional misconduct or gross negligence in connection with the business of the company or its affiliates;
i.
ii. Embezzlement or misappropriation of any funds of the company or its affiliates;
iii. Alcohol or substance abuse that has impaired or could reasonably be expected to impair the ability of Mr. Suder to perform his duties to the
company or its affiliates;
iv. Failure to comply with the company’s policies or its affiliates’ policies in any material respect, including those regarding harassment or
discrimination in employment; or
v. Dishonesty or disloyalty that has adversely affected or could reasonably be expected to adversely affect the
100
company or its affiliates in any material respect.
c. Excessive absenteeism, willful or persistent neglect of, or abandonment of his duties (other than due to illness or any other physical condition that could
reasonably be expected to result in disability), which has not been cured after reasonable notice from our General Partner; or
d. Material breach of any provision of the employment agreement.
Mr. Suder’s employment agreement also contains certain confidentiality covenants prohibiting him from, among other things, disclosing confidential information
relating to our General Partner or any of its affiliates, including us. The employment agreements also contain non-competition and non-solicitation restrictions,
which apply during the term of the executive's employment with our General Partner and continue for a period of 12 months following termination for any reason.
Each of Messrs. Bourdon, Campbell, Dorey, Rowland and Suder has received an award of phantom units under the LTIP. The terms of the phantom unit award
agreements of these named executive officers provide that a termination due to death or disability results in full acceleration of vesting of any outstanding phantom
units.
The following table shows the value of the severance benefits and other benefits for the named executive officers under the employment agreements and amended
phantom unit grant agreements at December 31, 2015 :
Name
Lynn L. Bourdon III
Daniel C. Campbell
Matthew W. Rowland
Michael D. Suder
Benefit Type
Severance payment per
employment agreement
Accelerated vesting of phantom
unit awards per award agreement
Severance payment per
employment agreement
Accelerated vesting of phantom
unit awards per award agreement
Severance payment per
employment agreement
Accelerated vesting of phantom
unit awards per award agreement
Severance payment per
employment agreement
Accelerated vesting of phantom
unit awards per award agreement
Death or
Disability(a)
None
Termination
Without
Cause, or
Upon
Expiration(b)
$1,000,000
$1,702,000
$1,702,000
Resignation
for Good
Reason
None
None
Certain
Changes of
Control (a)(c)
$1,000,000
$1,702,000
None
$411,250
$411,250
$411,250
$236,762
None
None
$236,762
None
$275,000
$275,000
None
$274,850
None
None
None
$300,000
None
None
None
None
$274,850
None
None
(a) The amounts shown in this column are calculated based on the fair market value of our Common Units which we have assumed were $8.09, which was the
closing price of our Common Units on December 31, 2015, multiplied by the number of phantom units that would have vested as of December 31, 2015.
The market value of the Option Grant that has not vested as of December 31, 2015 is $0.42.
In connection with a termination of the executive's employment upon expiration of the initial or extended term of the agreement by either party pursuant to
the terms of the employment agreement, the Board may, in its discretion, release the executive from being subject to the non-competition covenant
following termination of employment; however, in such case, the executive would not be entitled to receive the severance payment.
(b)
(c) Pursuant to the amended phantom unit award agreements, accelerated vesting of phantom units would only occur under certain types of change of control
transactions, as described under "— Amended Phantom Unit Grant Agreements" above.
Compensation of Directors
Compensation Committee Interlocks and Insider Participation
101
The Compensation Committee of the Board was comprised of Messrs. Bergstrom and Erhard as of December 31, 2015. The Compensation Committee makes
compensation decisions regarding the executive officers of our General Partner. With the exception of Mr. Bergstrom, none of the members of the Compensation
Committee is or has been one of our officers or employees, and none of our executive officers served during 2015 on a board of directors or compensation
committee of another entity which has employed any of the members of our Board or Compensation Committee.
Director Fees
Each director who is not an officer or employee of our General Partner receives compensation for attending meetings of the Board of Directors, as well as
committee meetings, as follows:
•
•
•
•
a $50,000 annual cash retainer;
a $50,000 annual unit grant;
where applicable, a variable fee for service rendered as member of the Conflicts Committee to the Board; and
where applicable, a committee chair retainer of $10,000 for each committee chaired.
In addition, each non-employee director will receive per meeting fees of:
•
•
•
$1,000 for meetings attended in person;
where applicable, $500 for committee meetings attended in person; and
$500 for telephonic meetings and committee meetings greater than one hour in length.
Generally, non-employee directors listed in the table below are reimbursed for out-of-pocket expenses in connection with attending meetings of the Board of
Directors or its committees. Each director will be fully indemnified by us for actions associated with being a director of our General Partner to the extent permitted
under Delaware law.
Director Compensation Table for 2015
The following table sets forth the compensation paid to our non-employee directors for the year ended December 31, 2015 , as described above. The compensation
paid in 2015 to Messrs. Bergstrom and Bourdon as executive officers is set forth in the summary compensation tables above. Messrs. Bergstrom and Bourdon did
not receive any additional compensation related to their service as director.
Fees Earned or
Paid in Cash
Unit
Awards (a)
All Other
Compensation
Total
Compensation
John F. Erhard
Donald R. Kendall Jr.
Daniel R. Revers
Rose M. Robeson
Joseph W. Sutton
Lucius H. Taylor
$
— $
76,500
—
86,750
—
—
— $
76,506
—
76,761
—
—
Gerald A. Tywoniuk
(a) The amount reported in this column represents the aggregate grant date value of the unit award granted during 2015.
81,039
81,000
— $
—
—
—
—
153,006
—
163,511
—
—
162,039
Compensation Committee Report
During 2015 , the Compensation Committee of the Board was comprised of two directors (Messrs. Bergstrom and Erhard).
The Compensation Committee has discussed and reviewed the above Compensation Discussion and Analysis for fiscal year 2015 with management. Based on this
review and discussion, the Compensation Committee recommended to the Board that this Compensation Discussion and Analysis be included in this Annual
Report on Form 10-K for the fiscal year 2015 .
Stephen W. Bergstrom
John F. Erhard
Compensation Practices as They Relate to Risk Management
We do not believe that our compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the Partnership. We
believe our compensation programs do not encourage excessive and unnecessary risk taking by
102
executive officers (or other employees). Short-term annual incentives are generally paid pursuant to discretionary bonuses enabling the CEO and Compensation
Committee to assess the actual behavior of our employees as it relates to risk taking in awarding a bonus. Our use of equity based long-term compensation serves
our compensation program's goal of aligning the interests of executives and unitholders, thereby reducing the incentives to unnecessary risk taking.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters
The following table sets forth certain information regarding the beneficial ownership of units as of March 4, 2016 and the related transactions by:
•
•
•
•
each person who is known to us to beneficially own 5% or more of such units to be outstanding;
our General Partner;
each of the directors and named executive officers of our General Partner; and
all of the directors and executive officers of our General Partner as a group.
All information with respect to beneficial ownership has been furnished by the respective directors, officers or 5% or more unitholders as the case may be.
Our General Partner is owned 95% by HPIP and 5% by AIM Midstream Holdings. ArcLight controls HPIP.
The amounts and percentage of units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of
securities. Under the rules of the SEC, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the
power to vote or to direct the voting of such security, or "investment power," which includes the power to dispose of or to direct the disposition of such security. In
computing the number of common units beneficially owned by a person and the percentage ownership of that person, common units subject to options or warrants
held by that person that are currently exercisable or exercisable within 60 days of March 4, 2016 , if any, are deemed outstanding, but are not deemed outstanding
for computing the percentage ownership of any other person. Except as indicated by footnote, the persons named in the table below have sole voting and
investment power with respect to all units shown as beneficially owned by them, subject to community property laws where applicable.
103
Name of Beneficial Owner
ArcLight Capital Partners, LLC (a)
High Point Infrastructure Partners, LLC (b)
Energy Spectrum Securities Corp (c)
Neuberger Berman Management, LLC (d)
Oppenheimer Funds, Inc. (e)
Lynn L. Bourdon (f)
Daniel C. Campbell (f)
William B. Mathews (f)
Michael D. Suder (f)
Louis J. Dorey (f)
Matthew W. Rowland (f)
Daniel R. Revers (a)(b)(f)
John F. Erhard (f)
Stephen W. Bergstrom (f)
Donald R. Kendall Jr. (f)
Rose M. Robeson (f)(g)
Joseph W. Sutton (f)
Lucius H. Taylor (f)
Gerald A. Tywoniuk (f)(h)
All directors and executive officers as a group
(consisting of 14 persons)
Common
Units
Beneficially
Owned
Percentage
of
Common
Units
Beneficially
Owned
3,597,980
1,349,609
5,353,915
3,310,194
3,055,094
84,021
26,673
61,105
70,210
11,879
23,312
3,597,980
—
44,208
21,364
8,808
—
—
20,455
3,970,015
104
Preferred Series A Units
Beneficially
Owned
9,499,370
6,650,214
Percentage of
Total
Common and
Preferred Series A Units
Beneficially
Owned
33.9 %
22.6 %
—
—
—
—
—
—
—
—
—
*
*
*
*
*
*
*
*
*
9,499,370
33.9 %
—
—
—
—
—
—
—
*
*
*
*
*
*
*
*
*
17.3 %
10.7 %
9.9 %
*
*
*
*
*
*
*
*
*
*
*
*
*
*
12.9 %
9,449,370
34.8 %
*
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
An asterisk indicates that the person or entity owns less than one percent.
Includes 6,650,214 Series A Units held by HPIP, convertible into 7,299,687 Common Units, which are indirectly owned by Magnolia; 2,849,156 Series
A Units held by Magnolia, convertible into 3,127,410 Common Units; 1,349,609 Common Units held by American Midstream GP, LLC, which is 95%
owned by HPIP; 618,921 Common Units held by Magnolia; and 1,629,450 Common Units held by Busbar II, LLC (“Busbar”). ArcLight Capital
Holdings, LLC (“ArcLight Holdings”) is the sole manager and members of ArcLight. ArcLight Holdings is the investment adviser to ArcLight Energy
Partners Fund V, L.P. (“Fund V”) and ArcLight PEF GP V, LLC (“Fund GP”) is the general partner of Fund V. HPIP is controlled by Magnolia, which
is in turn controlled by Fund V. Busbar is a wholly owned, direct subsidiary of Fund V (collectively, Busbar HPIP, Magnolia, Fund V, Fund GP,
ArcLight Holdings and ArcLight are the “ArcLight Entities”). ArcLight is the manager of the general partner of Fund V. Mr. Revers is a manager of
ArcLight Holdings and a managing partner of ArcLight and has certain voting and dispositive rights as a member of ArcLight’s investment committee.
Fund V, through indirectly controlled subsidiaries, owns approximately 90% of the ownership interest in HPIP, which in turn owns 95% of our General
Partner. As a result, the ArcLight Entities and Mr. Revers may be deemed to indirectly beneficially own the securities of the Partnership held by HPIP
and our General Partner, but disclaim beneficial ownership except to the extent of their respective pecuniary interests therein. The address for this
person or entity is 200 Claredon Street, 55th Floor, Boston, MA 02117.
Includes 6,650,214 Series A-1 Units held by American Midstream GP, LLC. The address for this person or entity is 200 Claredon Street, 55th Floor,
Boston, MA 02117.
Energy Spectrum Securities Corporation (“ESSC”) owns 100% of the issued and outstanding membership interest of Energy Spectrum VI, LLC, a
Texas limited liability company (“ESLLC”), which serves as the general partner of Energy Spectrum Capital VI LP, a Delaware limited partnership
(“ESCLP”), which serves as the general partner of Energy Spectrum Partners VI LP, a Delaware limited partnership (“ESP” and together with ESSC,
ESLLC, and ESCLP, the “Energy Spectrum Entities”). ESP is the record holder of the Common Units and has a direct pecuniary interest in such
Common Units. ESSC, ESLLC, and ESCLP beneficially own the Common Units for the purposes of Section 13(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and have an indirect pecuniary interest in such Common Units. The address for this person or entity is 5956
Sherry Lane, Suite 900, Dallas, TX 75225. This information is based solely on information included in the Schedule 13D/A filed by the beneficial owner
on February 22, 2016.
The address for this person or entity is 605 Third Avenue, New York, NY 10158. This information is based solely on information included in the
Schedule 13G/A filed by the beneficial owner on February 9, 2016.
The address for this person or entity is Two World Financial Center, 225 Liberty Street, New York, NY 10281. This information is based solely on
information included in the Schedule 13G filed by the beneficial owner on February 1, 2016.
The address for this person or entity is c/o American Midstream Partners, LP, 1400 16th Street, Suite 310, Denver, CO 80202.
Includes 8,808 Common Units held in The Rose M. Robeson Revocable Trust, for which Ms. Robeson is the trustee.
Includes 18,455 Common Units held in The Gerald Allen Tywoniuk Trust dated June 25, 2010, for which Mr. Tywoniuk is the trustee.
The percentage of units beneficially owned is based on a total of 30,889,659 common units and 9,499,370 Series A Units, as applicable, outstanding at March 4,
2016 .
Securities Authorized for Issuance Under Equity Compensation Plans
Our General Partner manages our operations and activities and employs the personnel who provide support to our operations. On November 2, 2009, the Board of
Directors of our General Partner adopted a long-term incentive plan for its employees, consultants and directors who perform services for it or its affiliates. On
May 25, 2010, the Board of Directors of our General Partner adopted an Amended and Restated Long-Term Incentive Plan. On July 11, 2012, the Board of
Directors of our General Partner adopted a Second Amended and Restated Long-Term Incentive Plan that effectively increased available awards by 871,750 units.
On November 19, 2015, the Board of Directors of our General Partner approved the Third Amended and Restated Long-Term Incentive Plan, which, subject to
unitholder approval, would increase the number of common units authorized for issuance by 6,000,000 common units. On February 11, 2016, the unitholders
approved the Third Amended and Restated Long-Term Incentive Plan to increase available awards by 6,000,000 common units. At December 31, 2015, 2014 and
2013, there were 15,484 ; 688,976 ; and 855,089 common units, respectively, available for future issuance under the LTIP. In addition, the information provided
under "Item 5. Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities" is incorporated by reference.
105
Item 13. Certain Relationships and Related Transactions and Director Independence
As of March 4, 2016 , HPIP controlled and owned 95% of the General Partner of the Partnership, and AIM Midstream Holdings owned 5%, of our General Partner,
which owned an approximate 1.3% General Partner interest in us and all of our incentive distribution rights. HPIP holds 9,499,370 Series A Units and controls our
General Partner which held 1,349,609 common units.
Distributions and Payments to our General Partner and its Affiliates
The following summarizes the distributions and payments to be made by us to our General Partner and its affiliates in connection with our formation, ongoing
operation and any liquidation of the Partnership. These distributions and payments were determined by and among affiliated entities and, consequently, are not the
result of arm's-length negotiations.
Distributions
of
available
cash
to
our
General
Partner
and
its
affiliates:
HPIP, as the holder of 6,650,214 Series A Units, and Magnolia Infrastructure Partners, LLC (an affiliate of HPIP), as the holder of 2,849,156 Series A Units is
entitled to receive cumulative distributions consisting of cash and Series A PIK preferred units, prior to any other distributions made in respect of any other
partnership interests (the "series A quarterly distribution") in accordance with our Partnership Agreement, as amended (the "Partnership Agreement"). With respect
to the coupon conversion quarter (as defined in our Partnership Agreement) and all quarters thereafter, the series A quarterly distribution shall be paid entirely in
cash in accordance with our Partnership Agreement. To the extent that any portion of a series A quarterly distribution to be paid in cash with respect to any quarter
exceeds the amount of available cash for such quarter, an amount of cash equal to the available cash for such quarter will be paid to the Series A unitholders and
the balance of such series A quarterly distribution shall be unpaid, constitute an arrearage and accrue interest.
After making the Series A convertible preferred quarterly distribution and paying any arrearage and accrued interest with respect to the Series A Units, we will
distribute available cash from operating surplus for any quarter 98.7% to our common unitholders, and 1.3% to our General Partner in respect of its general
partnership interest, assuming it makes any capital contributions necessary to maintain its 1.3% General Partner interest in us. In addition, if distributions exceed
the minimum quarterly distribution and target distribution levels, the holders of our incentive distribution rights will be entitled to increasing percentages of the
distributions, up to 48.0% of the distributions above the highest target distribution level.
Payments
to
our
General
Partner
and
its
affiliates
Our General Partner will not receive a management fee or other compensation for its management of us. However, we will reimburse our General Partner and its
affiliates for all expenses incurred on our behalf. Our Partnership Agreement provides that our General Partner will determine the amount of these reimbursed
expenses.
Withdrawal
or
removal
of
our
General
Partner
If our General Partner withdraws or is removed, its General Partner interest and its incentive distribution rights will either be sold to the new General Partner for
cash or converted into common units, in each case for an amount equal to the fair market value of those interests.
Liquidation
Stage
Upon our liquidation, our partners, including our General Partner, will be entitled to receive liquidating distributions according to their particular capital account
balances.
Ownership Interests of Certain Executive Officers and Directors of Our General Partner
HPIP controls and owns 95%, and AIM Midstream Holdings owns 5%, of our General Partner.
In addition to the approximate 1.3% General Partner interest in us, our General Partner owns the incentive distribution rights, which entitle the holder to increasing
percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $0.4125 per unit per quarter.
Agreements with Affiliates
106
We and other parties have or may enter into the various documents and agreements with certain of our affiliates, as described in more detail below. These
agreements have been negotiated among affiliated parties and, consequently, are not the result of arm's-length negotiations.
Business Development Activity. For the years ended December 31, 2015 and 2014 , our General Partner incurred approximately $1.5 million and $0.9 million ,
respectively, of costs related to business development compensation that were funded by the Partnership. There were no such costs for the year ended December
31, 2013. As of December 31, 2015, the Partnership has been reimbursed for these costs. For the years ended December 31, 2015 , 2014 and 2013 , our General
Partner incurred approximately less than $0.1 million , $0.1 million and $0.8 million of costs associated with other business development activities, respectively. If
the business development activities result in a project that will be pursued and funded by the Partnership, we will reimburse our General Partner for the business
development costs related to that project.
Affiliated Transactions. In April 2013, 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.
In January 2014, in connection with the acquisition of the Lavaca System, the Partnership issued 1,168,225 Series B Units to our General Partner. The net proceeds
related to the issuance was $30.0 million.
In connection with the Blackwater Acquisition, our General Partner contributed the net assets of Blackwater, which were recorded at their historical book value of
$22.7 million for 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.
On March 30, 2015 and June 30, 2015, we entered into two Series A-2 Convertible Preferred Unit Purchase Agreements with Magnolia Infrastructure Partners,
LLC (an affiliate of HPIP) pursuant to which the Partnership issued, in separate private placements, newly-designated Series A-2 Units (the “Series A-2 Units”)
representing limited partnership interests in the Partnership. As a result, the Partnership issued a total of 2,571,430 Series A-2 Units for approximately $45.0
million in aggregate proceeds during the year ended December 31, 2015. The Series A-2 Units will participate in distributions of the Partnership along with
common units in a manner identical to the existing Series A-1 Units (together with the Series A-2 Units, the "Series A Units"), with such distributions being made
in cash or with paid-in-kind Series A Units at the election of the Board of Directors of our General Partner. Since the amendment to our Partnership Agreement in
July 2014, the Board of Directors of our General Partner has elected to pay Series A distributions using paid-in-kind Series A Units.
On September 18, 2015, an affiliate of our General Partner contributed a 12.9% indirect interest in the Delta House floating production system and related pipeline
infrastructure for consideration of $162.0 million .
Procedures for Review, Approval and Ratification of Related-Person Transactions
The Board has adopted a code of business conduct and ethics that provides that the Board of Directors of our General Partner or its authorized committee will
periodically review all related-person transactions that are required to be disclosed under SEC rules and, when appropriate, initially authorize or ratify all such
transactions. In the event that the Board of Directors of our General Partner or its authorized committee considers ratification of a related-person transaction and
determines not to so ratify, the code of business conduct and ethics will provide that our management will make all reasonable efforts to cancel or annul the
transaction.
The Code of Ethics provides that, in determining whether to recommend the initial approval or ratification of a related-person transaction, the Board of Directors of
our General Partner or its authorized committee should consider all of the relevant facts and circumstances available, including (if applicable) but not limited to:
i) whether there is an appropriate business justification for the transaction; ii) the benefits that accrue to us as a result of the transaction; iii) the terms available to
unrelated third parties entering into similar transactions; iv) the impact of the transaction on director independence (in the event the related person is a director, an
immediate family member of a director or an entity in which a director or an immediate family member of a director is a partner, shareholder, member or executive
officer); v) the availability of other sources for comparable products or services; vi) whether it is a single transaction or a series of ongoing, related transactions;
and vii) whether entering into the transaction would be consistent with the code of business conduct and ethics.
The Code of Ethics described above was adopted in connection with the closing of our initial public offering, and as a result the transactions described above were
not reviewed under such policy.
107
In addition, our Partnership Agreement provides for the Conflicts Committee, as delegated by the Board as circumstances warrant, to review conflicts of interest
between us and our General Partner or between us and affiliates of our General Partner. If a matter is submitted to the Conflicts Committee, which will consist
solely of independent directors, for their review and approval, the Conflicts Committee will determine if the resolution of a conflict of interest that has been
presented to it by the Board of Directors of our General Partner is fair and reasonable to us. The members of the Conflicts Committee may not be executive officers
or employees of our General Partner or directors, executive officers or employees of its affiliates. In addition, the members of the Conflicts Committee must meet
the independence and experience standards established by the NYSE and the Exchange Act for service on an audit committee of a board of directors. Any matters
approved by the Conflicts Committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners and not a breach by our General
Partner of any duties it may owe us or our unitholders.
Item 14. Principal Accountant Fees and Services
We have engaged PricewaterhouseCoopers LLP as our principal accountant. The following table summarizes fees we were billed by PricewaterhouseCoopers LLP
for tax, independent auditing and related services for each of the last two years:
Audit fees (a)
Audit related fees (b)
Tax fees (c)
All other fees (d)
Years Ended
December 31,
2015
2014
(in thousands)
1,308 $
24
325
—
1,657 $
1,803
—
573
—
2,376
$
$
(a) Audit fees primarily represent professional services rendered in connection with the i) audits of our annual financial statements for the fiscal years 2015 and
2014 , ii) quarterly reviews of our financial statements included in Forms 10-Q, iii) the audits of our FERC regulated assets for the fiscal years 2015 and
2014 , and iv) those services normally provided in connection with the issuance of consents and other services related to SEC matters.
(b) Audit-related fees represent amounts we were billed in each of the years presented for assurance and related services that are reasonably related to the
performance of the annual audit or quarterly reviews of our financial statements and are not under audit fees.
(c) Tax fees represent amounts we were billed in each of the years presented for professional services rendered in connection with tax compliance, tax advice
and tax planning. This category primarily includes services relating to the preparation of unitholder K-1 statements as well as partnership tax compliance
and tax planning.
(d) All other fees represent amounts we were billed in each of the years presented for services not classifiable under the categories listed in the table above. No
such services were rendered by PricewaterhouseCoopers LLP during the last two years.
Our Audit Committee approved the use of PricewaterhouseCoopers LLP as our independent registered public accounting firm to conduct the audit of our
consolidated financial statements for the year ended December 31, 2015 . All services provided by our independent auditor are subject to pre-approval by the Audit
Committee. The Audit Committee is informed of each engagement of the independent auditor to provide services to us.
108
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
Our consolidated financial statements are included under Part II, Item 8 of the Annual Report. For a listing of these items and accompanying footnotes, see "Index
to Financial Statements: Page F-1 of this Annual Report.
(a)(2) Financial Statement Schedules
All other schedules have been omitted because they are either not applicable, not required or the information called for therein appears in the consolidated financial
statements or notes thereto or will be filed within the required timeframe.
(a)(3) Exhibits
1.1
2.1
2.2
3.1
3.2
3.3
3.4
3.5
3.6
3.7
ATM Equity Offering Sales Agreement by and among Merrill Lynch, Pierce, Fenner & Smith, Inc., SunTrust Robinson Humphrey, Inc.,
American Midstream Partners, L.P., American Midstream GP, LLC and American Midstream, LLC (incorporated by reference to Exhibit 1.1
to the Current Report on Form 8-K filed on October 10, 2015 [File No. 001-35257])
Purchase and Sale Agreement by and between Toga Offshore, LLC and American Midstream Delta House, LLC, dated August 10, 2015
(incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on August 12, 2015 [File No. 001-35257])
Purchase and Sale Agreement, dated October 13, 2014, by and among American Midstream, LLC, Energy Spectrum Partners VI LP and
Costar Midstream Energy, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed October 15, 2014 [File No.
001-35257]).
Certificate of Limited Partnership of American Midstream Partners, LP (incorporated by reference to Exhibit 3.1 to American Midstream
Partners, LP, Form S-1 filed March 31, 2011 [File No. 333-173191])
Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, LP (incorporated by reference to Exhibit
3.1 to American Midstream Partners, LP, Form 8-K filed August 15, 2013 [File No 001-35257])
First Amendment to Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, LP (incorporated by
reference to Exhibit 3.1 to American Midstream Partners, LP, Form 8-K filed November 1, 2013 [File No. 001-35257])
Amendment No. 2 to Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, LP. (incorporated by
reference to Exhibit 3.1 to American Midstream Partners, LP, Form 8-K filed February 4, 2014 [File No. 001-35257])
Amendment No. 3 to Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, L.P., dated January
31, 2014 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed August 6, 2014 [File No. 001-35257])
Amendment No. 4 to Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, L.P., dated March
30, 2015 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed March 31, 2015 [File No. 001-35257])
Amendment No. 5 to Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, L.P., dated July 27,
2015 (incorporated by reference Exhibit 3.1 to the Current Report on Form 8-K filed on July 28, 2015 [File No. 001-35257])
109
3.8
3.9
3.10
3.11
3.12
3.13
4.1
10.1
10.2
10.3
10.4
10.5
10.6
Amendment No. 6 to Fourth Amended and Restated Agreement of Limited Partnership of American Midstream Partners, L.P., dated
September 9, 2015 (incorporated by reference to Exhibit 3.1 the Current Report on Form 8-K filed on November 9, 2015 [File No. 001-
35257])
Certificate of Formation of American Midstream GP, LLC (incorporated by reference to Exhibit 3.4 to American Midstream Partners, LP,
Form S-1 filed March 31, 2011 [File No. 333-173191])
Second Amended and Restated Limited Liability Company Agreement of American Midstream GP, LLC (incorporated by reference to Exhibit
3.2 to American Midstream Partners, LP Form 8-K filed April 19, 2013 [File No. 000-35257])
Amendment No. 1 to Second Amended and Restated Limited Liability Company Agreement of American Midstream GP, LLC (incorporated
by reference to Exhibit 3.1 to American Midstream Partners, LP Form 8-K filed February 10, 2014 [File No.001-35257])
Amendment No. 2 to Second Amended and Restated Limited Liability Company Agreement of American Midstream GP, LLC, dated August
7, 2015 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 12, 2015 [File No. 001-35257])
Amendment No. 3 to Second Limited Liability Company Agreement of American Midstream GP, LLC, dated November 3, 2015
(incorporated by reference Exhibit 3.2 to the Current Report on Form 8-K filed on November 9, 2015 [File No. 001-35257])
Securities Agreement, dated October 13, 2014, by and among American Midstream Partners, LP, Energy Spectrum Partners VI LP and Costar
Midstream Energy, LLC (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed October 15, 2014 [File No. 001-
35257])
Amended and Restated Credit Agreement, dated as of September 5, 2014, by and among American Midstream Partners, LP, American
Midstream, LLC, Blackwater Investments, Inc., Bank of America, N.A., Wells Fargo Bank, National Association, BBVA Compass, Capital
One National Association, Citicorp North America, Inc., Comerica Bank, SunTrust Bank, Merrill, Lynch, Pierce, Fenner & Smith
Incorporated, Wells Fargo Securities, LLC and the lenders party thereto. (incorporated by reference to Exhibit 10.1 to American Midstream
Partners, LP, Form 8-K filed September 10, 2014 [File No. 001-35257])
Third Amended and Restated American Midstream GP, LLC Long-Term Incentive Plan (incorporated by reference to Appendix A of the
Registrant’s Definitive Proxy Statement on Schedule 14A filed on January 11, 2016 (File No. 001-35257
Form of American Midstream Partners, LP Long-Term Incentive Plan Grant of Phantom Units (incorporated by reference to Exhibit 10.8 to
American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Gas Processing Agreement between American Midstream (Louisiana Intrastate), LLC, and Enterprise Gas Processing, LLC, dated June 1,
2011 (incorporated by reference to Exhibit 10.9 to American Midstream Partners, LP Form S-1/A filed July 15, 2011 [File No. 333-173191])
Firm Gas Gathering Agreement Between American Midstream (Seacrest) LP, and Contango Resources Company (incorporated by reference
to Exhibit 10.10 to American Midstream Partners, LP, Form S-1/A filed June 2, 2011 [File No. 333-173191])
Amendment to Firm Gas Gathering Agreement between American Midstream Offshore (Seacrest) LP (formerly Enbridge Offshore Pipelines
[Seacrest[ L.P.), and Contango Operators, Inc. (formerly Contango Resources Company) dated as of August 1, 2008 (incorporated by
reference to Exhibit 10.11 to American Midstream Partners, LP, Form S-1/A filed June 2, 2011 [File No. 333-173191])
110
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
12.20
Base Contract for Sale and Purchase of Natural Gas Between Exxon Gas & Power Marketing Company and Mid Louisiana Gas Transmission,
LLC (incorporated by reference to Exhibit 10.12 to American Midstream Partners, LP, Form S-1/A filed June 2, 2011 [File No. 333-173191])
Gas Processing Agreement Between American Midstream (Mississippi) LLC and Venture Oil and Gas, Inc. (incorporated by reference to
Exhibit 10.13 to American Midstream Partners, LP, Form S-1/A filed June 2, 2011 [File No. 333-173191])
Gas Transportation Contract between Midcoast Interstate Transmission, Inc. and City of Decatur Utilities (incorporated by reference to Exhibit
10.14 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Amendment No. 1 to Gas Transportation Contract between Enbridge Pipelines (AlaTenn) Inc. and the City of Decatur, Alabama (incorporated
by reference to Exhibit 10.15 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Natural Gas Pipeline Construction and Transportation Agreement between Bamagas Company and Calpine Energy Services, L.P.
(incorporated by reference to Exhibit 10.16 to American Midstream Partners, LP Form S-1/A filed June 9, 2011 (File No. 333-173191))
First Amendment to Natural Gas Pipeline Construction and Transportation Agreement dated June 28, 2000 between Bamagas Company and
Calpine Energy Services, L.P. (incorporated by reference to Exhibit 10.17 to American Midstream Partners, LP, Form S-1/A filed June 9,
2011 [File No. 333-173191])
Natural Gas Pipeline Transportation Agreement between Bamagas Company and Calpine Energy Services, L.P. (incorporated by reference to
Exhibit 10.18 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
First Amendment to Natural Gas Pipeline Transportation Agreement dated June 28, 2000 between Bamagas Company and Calpine Energy
Services, L.P. (incorporated by reference to Exhibit 10.19 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-
173191])
Gas Transport Contract between Enbridge Pipelines (AlaTenn), L.L.C., and the City of Huntsville (incorporated by reference to Exhibit 10.20
to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Service Agreement between Enbridge Pipelines (Midla), L.L.C., and Enbridge Marketing (US), LP, dated September 1, 2008 (incorporated by
reference to Exhibit 10.21 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Service Agreement between Enbridge Pipelines (Midla), L.L.C., and Enbridge Marketing (US), LP, dated September 1, 2008 (incorporated by
reference to Exhibit 10.22 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Gas Processing Agreement TOCA Gas Processing Plant between American Midstream, LLC, and Enterprise Gas Processing, LLC, dated
July 1, 2010 (incorporated by reference to Exhibit 10.23 to American Midstream Partners, LP Form S-1/A filed June 9, 2011 [File No. 333-
173191])
Gas Processing Agreement TOCA Gas Processing Plant between American Midstream, LLC, and Enterprise Gas Processing, LLC, dated
November 1, 2010 (incorporated by reference to Exhibit 10.24 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No.
333-173191])
Gas Processing Agreement TOCA Gas Processing Plant between American Midstream, LLC, and Enterprise Gas Processing, LLC, dated
April 1, 2011 (incorporated by reference to Exhibit 10.25 to American Midstream Partners, LP, Form S-1/A filed June 30, 2011 [File No. 333-
173191])
111
10.21+
10.22+
10.23
10.24
10.25
10.26+
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Form of Amendment of Grant of Phantom Units Under the American Midstream Partners, LP, Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.28 to American Midstream Partners, LP, Form S-1/A filed June 9, 2011 [File No. 333-173191])
Employment Agreement by and between American Midstream GP, LLC, and Daniel C. Campbell (incorporated by reference to Exhibit 10.1
to American Midstream Partners, LP, Form 8-K filed April 16, 2012 [File No. 001-35257]).
Purchase and Sale Agreement, dated May 25, 2012, by and between Quantum Resources A1, LP, QAB Carried WI, LP, QAC Carried WI, LP
and Black Diamond Resources, LLC, collectively as Seller and Quantum Resources Management, LLC, and American Midstream Chatom
Unit 1, LLC, American Midstream Chatom Unit 2, LLC, collectively as Buyer (incorporated by reference to Exhibit 10.3 to American
Midstream Partners, LP, Amendment No. 1 to Form 10-Q filed November 13, 2012 [File No. 001-35257]).
Contribution Agreement by and between High Point Infrastructure Partners, LLC, and American Midstream Partners, LP, dated April 15, 2013
(incorporated by reference to Exhibit 10.1 to American Midstream Partners, LP, Form 8-K filed April 19, 2013 [File No. 001-35257])
Equity Restructuring Agreement by and among American Midstream Partners, LP, American Midstream GP, LLC, and High Point
Infrastructure Partners, LLC, dated August 9, 2013 (incorporated by reference to Exhibit 10.1 to American Midstream Partners, LP, Form 8-K
filed August 15, 2013 [File No. 001-35257])
Employment Agreement between Matthew W. Rowland and American Midstream GP, LLC, dated August 22, 2013 (incorporated by
reference to Exhibit 10.1 to American Midstream Partners, LP, Form 8-K filed August 28, 2013 [File No. 001-35257])
Series B PIK Unit Purchase Agreement by and among American Midstream Partners, LP, American Midstream GP, LLC, and High Point
Infrastructure Partners, LLC, dated January 22, 2014 (incorporated by reference to Exhibit 10.1 to American Midstream Partners, LP, Form 8-
K filed January 22, 2014 [File No. 001-35257])
First Amendment to Series B PIK Unit Purchase Agreement by and among American Midstream Partners, LP, American Midstream GP, LLC,
and High Point Infrastructure Partners, LLC, dated January 22, 2014 (incorporated by reference to Exhibit 10.2 to American Midstream
Partners, LP, Form 8-K filed February 4, 2014 [File No. 001-35257])
Construction and Field Gathering Agreement by and between HPIP Lavaca, LLC, and Penn Virginia Oil & Gas, L.P., dated January 31, 2014
(incorporated by reference to Exhibit 10.1 to American Midstream Partners, LP, Form 8-K filed February 4, 2014 [File No. 001-35257])
Change of Control Severance Agreement, dated June 5, 2014, by and between American Midstream GP, LLC and Tom L. Brock (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K filed June 11, 2014 [File No. 001-35257])
Common Unit Purchase Agreement, dated July 14, 2014, by and among American Midstream Partners, LP and the purchasers named therein
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed Jul 15, 2014 [File No. 001-35257])
Waiver of Condition and First Amendment to Common Unit Purchase Agreement, dated August 15, 2014 by
and among American Midstream Partners, LP and the purchasers named therein (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed August 20, 2014 [File No. 001-35257])
Amended and Restated Credit Agreement, dated as of September 5, 2014, by and among American Midstream Partners, LP, American
Midstream, LLC, Blackwater Investments, Inc., Bank of America, N.A., Wells Fargo Bank, National Association, BBVA Compass, Capital
One National Association, Citicorp North America, Inc., Comerica Bank, SunTrust Bank, Merrill, Lynch, Pierce, Fenner & Smith
Incorporated, Wells Fargo Securities, LLC and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed September 10, 2014 [File No. 001-35257])
112
10.34
10.35
10.36
Series A-2 Convertible Preferred Unit Purchase Agreement by and between American Midstream Partners and L.P. and Magnolia
Infrastructure Partners, LLC, dated March 30, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
March 31, 2015 [File No. 001-35257])
Second Series A-2 Convertible Preferred Unit Purchase Agreement by and between American Midstream Partners, L.P. and Magnolia
Infrastructure Partners, LLC, dated June 30, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July
2, 2015 [File No. 001-35257])
First Amendment and Incremental Commitment Agreement by and among American Midstream, LLC, Blackwater Investments, Inc.,
American Midstream Partners, L.P., Bank of America, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference
to the Current Report on Form 8-K filed on September 21, 2015 [File No. 001-35257])
10.37+*
Employment Agreement by and between American Midstream GP, LLC and Michael D. Suder dated October 9, 2012
10.38+
10.39+
10.40+
10.41+
Employment Agreement by and between American Midstream GP, LLC and Lynn L. Bourdon III, dated December 10, 2015 (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 14, 2015 [File No. 001-35257])
Phantom Unit Award Agreement by and between American Midstream GP, LLC and Lynn L. Bourdon III, dated December 10, 2015
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on December 14, 2015 [File No. 001-35257])
Unit Purchase Option Grant Agreement by and between American Midstream GP, LLC and Lynn L. Bourdon III, dated December 10, 2015
(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on December 14, 2015 [File No. 001-35257])
First Amendment to Employment Agreement by and between American Midstream GP, LLC and Michael D. Suder dated November 4, 2015
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 9, 2015 [File No. 001-35257])
10.42+*
Second Amendment to Employment Agreement by and between American Midstream GP, LLC and Michael D. Suder dated March 7, 2016
21.1*
American Midstream Partners, LP, List of Subsidiaries
23.1*
Consent of Independent Registered Public Accounting Firm
23.2*
Consent of Independent Auditor - BDO USA, LLP
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
113
31.2*
32.1*
32.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1*
2015 Pinto Offshore Holdings, LLC Financial Statements
99.2*
2015 Delta House FPS LLC Financial Statements
99.3*
2015 Delta House Oil and Gas Lateral LLC Financial Statements
**101.INS
XBRL Instance Document
**101.SCH
XBRL Taxonomy Extension Schema Document
**101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB
XBRL Taxonomy Extension Label Linkbase Document
**101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
+
**
Filed herewith.
Management contract or compensatory plan arrangement.
Submitted electronically herewith.
114
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SIGNATURES
American Midstream Partners, LP
(Registrant)
By:
/s/ Daniel C. Campbell
Daniel C. Campbell
Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
Date: March 7, 2016
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities
indicated on March 7, 2016 .
115
Signatures
Title
/s/ Lynn L. Bourdon III
Lynn L. Bourdon III
/s/ Daniel C. Campbell
Daniel C. Campbell
/s/ Tom L. Brock
Tom L. Brock
/s/ Stephen W. Bergstrom
Stephen W. Bergstrom
/s/ John F. Erhard
John F. Erhard
/s/ Donald R. Kendall Jr.
Donald R. Kendall Jr.
/s/ Daniel R. Revers
Daniel R. Revers
/s/ Rose M. Robeson
Rose M. Robeson
/s/ Joseph W. Sutton
Joseph W. Sutton
/s/ Lucius H. Taylor
Lucius H. Taylor
/s/ Gerald A. Tywoniuk
Gerald A. Tywoniuk
Chairman, President and Chief Executive Officer of American Midstream Partners, LP
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Vice President, Chief Accounting Officer and Corporate Controller of American Midstream
Partners, LP (Principal Accounting Officer)
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
Director, American Midstream GP, LLC
116
AMERICAN MIDSTREAM PARTNERS, LP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015,
2014 and 2013
Consolidated Statements of Changes in Partners' Capital and Noncontrolling Interest for the Years
Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
117
F-1
F-2
F-3
F-4
F-5
F-6
F-8
To the Partners of American Midstream Partners, LP
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), changes in
partners’ capital and noncontrolling interest and cash flows present fairly, in all material respects, the financial position of American Midstream Partners, LP and
its subsidiaries ("the Partnership") at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Partnership
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control
-
Integrated
Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership's management is
responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the Partnership's internal control over financial reporting based on our audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 7, 2016
F-1
American Midstream Partners, LP, and Subsidiaries
Consolidated Balance Sheets
(In thousands, except unit amounts)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Unbilled revenue
Risk management assets
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Investment in unconsolidated affiliates
Other assets, net
Total assets
Liabilities and Partners' Capital
Current liabilities
Accounts payable
Accrued gas purchases
Accrued expenses and other current liabilities
Current portion of long-term debt
Risk management liabilities
Total current liabilities
Asset retirement obligations
Other liabilities
Long-term debt
Deferred tax liability
Total liabilities
Commitments and contingencies (see Note 19)
Convertible preferred units
Series A convertible preferred units (9,210 thousand and 5,745 thousand units issued and
outstanding as of December 31, 2015 and December 31, 2014, respectively)
Equity and partners' capital
General Partner Interest (536 thousand and 392 thousand units issued and outstanding as of
December 31, 2015 and December 31, 2014, respectively)
Limited Partner Interests (30,427 thousand and 22,670 thousand units issued and outstanding
as of December 31, 2015 and December 31, 2014, respectively)
Series B convertible units (1,350 thousand and 1,255 thousand units issued and outstanding as
of December 31, 2015 and December 31, 2014, respectively)
Accumulated other comprehensive income (loss)
Total partners' capital
Noncontrolling interests
Total equity and partners' capital
December 31,
2015
2014
$
— $
$
$
3,181
15,559
365
10,094
29,199
648,013
16,262
100,965
82,301
14,556
891,296
$
$
4,667
7,281
25,035
2,338
—
39,321
28,549
1,001
525,100
5,826
599,797
499
4,924
24,619
688
15,554
46,284
582,182
142,236
106,306
22,252
14,298
913,558
20,326
14,326
25,800
2,908
215
63,575
34,645
126
372,950
5,113
476,409
169,712
107,965
(104,853)
(2,450)
188,477
294,695
33,593
40
117,257
4,530
121,787
32,220
2
324,467
4,717
329,184
913,558
Total liabilities, equity and partners' capital
$
891,296
$
The accompanying notes are an integral part of these consolidated financial statements.
F-2
American Midstream Partners, LP, and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per unit amounts)
Revenue
Gain (loss) on commodity derivatives, net
Total revenue
Operating expenses:
Purchases of natural gas, NGLs and condensate
Direct operating expenses
Selling, general and administrative expenses
Equity compensation expense
Depreciation, amortization and accretion expense
Total operating expenses
Gain (loss) on involuntary conversion of property, plant and equipment
Gain (loss) on sale of assets, net
Loss on impairment of property, plant and equipment
Loss on impairment of goodwill
Operating income (loss)
Other income (expense):
Interest expense
Other income (expense)
Earnings in unconsolidated affiliates
Net income (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to the Partnership
General Partner's Interest in net income (loss)
Limited Partners' Interest in net income (loss)
Distribution declared per common unit (a)
Limited Partners' net income (loss) per common unit (See Note 3 and Note 15):
Basic and diluted:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Weighted average number of common units outstanding:
Basic and diluted
(a) Declared and paid during the years ended December 31, 2015 , 2014 and 2013 .
Years Ended December 31,
2015
2014
2013
$
235,034 $
307,309 $
294,051
1,324
236,358
1,091
308,400
105,883
197,952
59,549
27,232
3,774
38,014
45,702
23,103
1,536
28,832
234,452
297,125
—
(3,011)
—
(118,592)
(119,697)
(14,745)
—
8,201
(126,241)
(1,134)
(127,375)
(80)
(127,455)
25
—
(122)
(99,892)
—
(88,739)
(7,577)
(670)
348
(96,638)
(557)
(97,195)
(611)
(97,806)
214
(127,480) $
(98,020) $
(1,645) $
(125,835) $
(1,279) $
(96,741) $
28
294,079
215,053
32,236
19,079
2,094
30,002
298,464
343
—
(18,155)
—
(22,197)
(9,291)
—
—
(31,488)
495
(30,993)
(2,413)
(33,406)
633
(34,039)
(1,405)
(32,634)
1.89 $
1.85 $
1.75
(6.00) $
—
(6.00) $
(8.54) $
(0.04)
(8.58) $
(7.15)
(0.27)
(7.42)
24,983
13,472
7,525
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
American Midstream Partners, LP, and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income (loss)
Unrealized gain (loss) on postretirement benefit plan assets and liabilities
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income (loss) attributable to Partnership
Years Ended December 31,
2015
2014
2013
$
$
$
(127,455) $
(97,806) $
38
(102)
(127,417) $
(97,908) $
25 $
214 $
(127,442) $
(98,122) $
(33,406)
(247)
(33,653)
633
(34,286)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Balances at December 31, 2012
$
548 $
79,266 $
— $
351
$
80,165 $
American Midstream Partners, LP, and Subsidiaries
Consolidated Statements of Changes in Partners' Capital and
Noncontrolling Interest
(In thousands)
General Partner
Interest
Limited
Partner
Interests
Series B
Convertible
Units
Accumulated
Other
Comprehensive
Income (loss)
Total Partners'
Capital
Non controlling
Interests
(1,405)
—
12,500
(623)
(30,702)
22,696
(32,634)
54,853
—
(21,628)
3,052
—
(312)
(15,300)
—
37
(2,067)
—
2,024
—
—
1,993
2,067
(630)
—
—
$
2,696 $
71,039 $
(1,279)
—
—
5,678
(2,913)
(7,164)
—
—
(824)
—
1,356
—
(96,741)
351,551
—
—
(39,150)
7,164
—
21
1,067
(256)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
32,220
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(247)
(34,039)
54,853
12,500
(22,251)
(27,650)
22,696
(15,612)
—
2,030
—
(630)
2,024
(247)
104
$
73,839 $
—
—
—
—
—
—
—
—
—
—
—
(102)
(98,020)
351,551
32,220
5,678
(42,063)
—
—
21
243
(256)
1,356
(102)
7,438
633
—
—
—
—
—
—
(661)
(2,782)
—
—
—
—
4,628
214
—
—
—
—
—
(314)
189
—
—
—
—
$
(2,450) $
294,695 $
32,220 $
2
$
324,467 $
4,717
(1,645)
(125,835)
—
—
1,996
(7,023)
(96,297)
—
—
(2,490)
—
3,056
—
82,421
—
—
(64,714)
—
—
(20)
2,686
(756)
—
—
—
—
1,373
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
38
40
(127,480)
82,421
1,373
1,996
(71,737)
(96,297)
—
(20)
196
(756)
3,056
38
25
—
—
—
—
—
(40)
(172)
—
—
—
—
Net income (loss)
Issuance of common units, net of offering costs
Unitholder contributions
Unitholder distributions
Unitholder distribution for acquisition of Blackwater
Unitholder contribution of Blackwater net assets
Fair value of Series A Units in excess of High Point
System net assets received
Net distributions to noncontrolling interests
Acquisition of noncontrolling interests
LTIP vesting
Tax netting repurchase
Equity compensation expense
Other comprehensive income (loss)
Balances at December 31, 2013
Net income (loss)
Issuance of common units, net of offering costs
Issuance of Series B Units
Unitholder contributions
Unitholder distributions
Issuance and exercise of warrants
Net distributions to noncontrolling interests
Acquisition of noncontrolling interests
LTIP vesting
Tax netting repurchase
Equity compensation expense
Other comprehensive income (loss)
Balances at December 31, 2014
Net income (loss)
Issuance of common units, net of offering costs
Issuance of Series B Units
Unitholder contributions
Unitholder distributions
Unitholder distributions for Delta House
Net distributions to noncontrolling interests
Acquisition of noncontrolling interests
LTIP vesting
Tax netting repurchase
Equity compensation expense
Other comprehensive income (loss)
Balances at December 31, 2015
$
(104,853) $
188,477 $
33,593 $
$
117,257 $
4,530
The accompanying notes are an integral part of these consolidated financial statements.
F-5
American Midstream Partners, LP, and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion expense
Amortization of deferred financing costs
Amortization of weather derivative premium
Unrealized (gain) loss on derivative contracts, net
Non-cash compensation
Postretirement expense (benefit)
(Gain) loss on involuntary conversion of property, plant and equipment
(Gain) loss on sale of assets, net
Loss on impairment of property, plant and equipment
Loss on impairment of noncurrent assets held for sale
Loss on impairment of goodwill
Earnings in unconsolidated affiliates
Distributions from unconsolidated affiliates
Deferred tax expense (benefit)
Changes in operating assets and liabilities, net of effects of assets acquired and liabilities assumed:
Accounts receivable
Unbilled revenue
Risk management assets and liabilities
Other current assets
Other assets, net
Accounts payable
Accrued gas purchases
Accrued expenses and other current liabilities
Asset retirement obligations
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Cost of acquisitions, net of cash acquired and settlements
Additions to property, plant and equipment
Proceeds from disposal of property, plant and equipment
Insurance proceeds from involuntary conversion of property, plant and equipment
Investment in unconsolidated affiliates
Proceeds from equity method investment, return of capital
Restricted cash
Net cash used in investing activities
Cash flows from financing activities
F-6
Years Ended December 31,
2015
2014
2013
$
(127,455)
$
(97,806)
$
(33,406)
38,014
1,482
912
71
3,863
(14)
—
3,161
—
—
118,592
(8,201)
8,201
953
1,743
9,060
(875)
(962)
(522)
(3,643)
(7,045)
2,857
(90)
835
40,937
7,383
(130,549)
4,813
—
(71,597)
12,367
6,475
(171,108)
28,832
2,212
1,035
(595)
1,626
(45)
—
207
99,892
673
—
(348)
348
213
13,067
2,272
(809)
(7,533)
6,049
(12,026)
(5,540)
(9,149)
(1,030)
(67)
21,478
(362,316)
(96,998)
6,323
—
(12,000)
1,632
(8,511)
(471,870)
29,999
1,334
662
1,505
2,094
(73)
(343)
75
18,155
2,400
—
—
—
(847)
(790)
(226)
(1,147)
(1,614)
(823)
(845)
462
769
—
(118)
17,223
—
(27,196)
500
482
—
—
(2,000)
(28,214)
Proceeds from issuance of common units to public, net of offering costs
Unitholder contributions
Unitholder distributions
Issuance of Series A Units, net of issuance costs
Issuance of Series B Units
Unitholder distributions for common control transactions
Acquisition of noncontrolling interests
Net distributions to noncontrolling interests
LTIP tax netting unit repurchase
Deferred financing costs
Payments on other debt
Borrowings on other debt
Payments on loan to affiliate
Payments on bank loans
Borrowings on bank loans
Payments on long-term debt
Borrowings on long-term debt
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
Supplemental cash flow information
Interest payments, net
Supplemental non-cash information
(Decrease) increase in accrued property, plant and equipment
Net assets contributed by General Partner in the Blackwater Acquisition (See Note 2)
Net assets contributed by General Partner in exchange for the issuance of Series A Units (see Note
2)
Fair value of Series A Units in excess of net assets received
Accrued and paid-in-kind unitholder distribution for Series A Units
Paid-in-kind unitholder distribution for Series B Units
Common unit issuance related to Costar Acquisition
82,488
1,905
(53,386)
44,768
—
(96,297)
(74)
(40)
(756)
(2,238)
(3,557)
4,709
—
—
—
(189,150)
341,300
129,672
(499)
499
— $
12,013
(25,637)
$
$
—
—
—
16,978
1,373
—
204,255
5,588
(28,009)
—
30,000
—
(8)
(314)
(256)
(3,841)
(2,589)
3,449
—
—
—
(250,870)
493,085
450,490
98
401
499
6,726
31,390
—
—
—
13,154
2,220
147,296
$
$
$
54,853
13,075
(16,120)
14,393
—
(27,650)
(752)
(661)
(630)
(2,113)
(2,640)
3,795
(20,000)
(34,730)
27,546
(131,571)
134,021
10,816
(175)
576
401
6,416
(5,181)
22,121
59,995
15,612
4,811
—
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
American Midstream Partners, LP, and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
General
American Midstream Partners, LP (the "Partnership"), was formed on August 20, 2009 as a Delaware limited partnership for the purpose of operating, developing
and acquiring a diversified portfolio of midstream energy assets. The Partnership's general partner, American Midstream GP, LLC (the "General Partner"), is 95%
owned by High Point Infrastructure Partners, LLC ("HPIP") and 5% owned by AIM Midstream Holdings, LLC. We hold our assets primarily in a number of
wholly owned limited liability companies, two limited partnerships and a corporation. Our capital accounts consist of notional general partner units and limited
partner interests.
Nature of business
We are engaged in the business of gathering, treating, processing, and transporting natural gas; gathering, transporting, storing, treating and fractionating NGLs;
gathering, storing and transporting crude oil and condensates; and storing specialty chemical products, all through our ownership and operation of twelve gathering
systems, five processing facilities, three fractionation facilities, three marine terminal sites, three interstate pipelines, five intrastate pipelines and one crude oil
pipeline. We also own a 66.7% non-operated interest in Main Pass Oil Gathering Company ("MPOG"), a crude oil gathering and processing system; a 50%
undivided, non-operated interest in the Burns Point Plant, a natural gas processing plant; a 46% non-operated interest in Mesquite, an off-spec condensate
fractionation project; and a 12.9% non-operated indirect interest in the Delta House floating production system and related pipeline infrastructure ("Delta House").
Our primary assets, which are strategically located in Alabama, Georgia, Louisiana, Mississippi, North Dakota, Tennessee, Texas and the Gulf of Mexico, provide
critical infrastructure that links producers of natural gas, crude oil, NGLs, condensate and specialty chemicals to numerous intermediate and end-use markets. We
currently operate more than 3,000 miles of pipelines that gather and transport over 1 Bcf/d of natural gas and operate approximately 1.8 million barrels of storage
capacity across three marine terminal sites.
Basis of presentation
We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America ("GAAP").
The results of operations for acquisitions accounted for as business combinations have been included in the consolidated financial statements since their respective
acquisition dates. See Note 2 "Acquisitions and Divestitures" for further information.
Transactions Between Entities Under Common Control
We may enter into transactions with our General Partner and affiliates whereby we receive a contribution of midstream assets or subsidiaries in exchange for
consideration from the Partnership. We account for the net assets received using the historical book value of the asset or subsidiary being contributed or transferred
as these are transactions between entities under common control. Our historical financial statements may be revised to include the results attributable to the assets
contributed from our General Partner as if we owned such assets for all periods presented by the Partnership since either the change in control of our General
Partner, effective April 15, 2013 or later.
Consolidation policy
The accompanying consolidated financial statements include accounts of American Midstream Partners, LP, and its controlled subsidiaries. All significant inter-
company accounts and transactions have been eliminated in the preparation of the accompanying consolidated financial statements.
Investment in Unconsolidated Affiliates
Equity investments in which the Partnership exercises significant influence, but does not control and is not the primary beneficiary, are accounted for using the
equity method and are reported in Investment
in
unconsolidated
affiliates
in the accompanying consolidated balance sheets.
F-8
The Partnership believes the equity method is an appropriate means for it to recognize increases or decreases measured by GAAP in the economic resources
underlying the investments. Regular evaluation of these investments is appropriate to evaluate any potential need for impairment. The Partnership uses evidence of
a loss in value to identify if an investment has declined in value, other than a temporary decline.
The Partnership accounts for its 66.7% non-operated interest in MPOG, its 46.0% non-operated interest in Mesquite and its 12.9% non-operated indirect interest in
Delta House under the equity method.
Use of estimates
When preparing consolidated financial statements in conformity with GAAP, management must make estimates and assumptions based on information available at
the time. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets
and liabilities as of the date of the financial statements. Estimates and assumptions are based on information available at the time such estimates and assumptions
are made. Adjustments made with respect to the use of these estimates and assumptions often relate to information not previously available. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of financial statements. Estimates and assumptions are used in, among other things,
i) estimating unbilled revenues, product purchases and operating and general and administrative costs, ii) developing fair value assumptions, including estimates of
future cash flows and discount rates, iii) analyzing long-lived assets, goodwill and intangible assets for possible impairment, iv) estimating the useful lives of assets
and v) determining amounts to accrue for contingencies, guarantees and indemnifications. Actual results, therefore, could differ materially from estimated
amounts.
Cash and cash equivalents
We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The carrying value of
cash and cash equivalents approximates fair value because of the short term to maturity of these investments.
Allowance for doubtful accounts
We establish provisions for losses on accounts receivable when we determine that we will not collect all or part of an outstanding balance. Collectability is
reviewed regularly and an allowance is established or adjusted, as necessary, using the specific identification method. As of December 31, 2015 and 2014 , the
Partnership recorded no allowances for losses on accounts receivable.
Operational balancing agreements and natural gas imbalances
To facilitate deliveries of natural gas and provide for operational flexibility, we have operational balancing agreements in place with other interconnecting
pipelines. These agreements ensure that the volume of natural gas a shipper schedules for transportation between two interconnecting pipelines equals the volume
actually delivered. If natural gas moves between pipelines in volumes that are more or less than the volumes the shipper previously scheduled, a natural gas
imbalance is created. The imbalances are settled through periodic cash payments or repaid in-kind through future receipt or delivery of natural gas. Natural gas
imbalances are recorded as gas imbalances and classified within Other
current
assets
or Other
current
liabilities
on our consolidated balance sheets at cost which
approximates fair value.
Derivative financial instruments
Our net income (loss) and cash flows are subject to volatility stemming from changes in interest rates on our variable rate debt, commodity prices and fractionation
margins (the relative difference between the price we receive from NGL sales and the corresponding cost of natural gas purchases). In an effort to manage the risks
to unitholders, we use a variety of derivative financial instruments including swaps, collars and interest rate caps to create offsetting positions to specific
commodity or interest rate exposures. In accordance with the authoritative accounting guidance, we record all derivative financial instruments in our consolidated
balance sheets at fair value as current and long-term assets or liabilities on a net basis by counterparty. We record changes in the fair value of our derivative
financial instruments in our consolidated statements of operations as follows:
•
•
Commodity-based derivatives: "Total revenue"
Corporate interest rate derivatives: "Interest expense"
Our formal hedging program provides a control structure and governance for our hedging activities specific to identified risks and time periods, which are subject
to the approval and monitoring by the Board of Directors of our General Partner. We employ
F-9
derivative financial instruments in connection with an underlying asset, liability or anticipated transaction, and we do not use derivative financial instruments for
speculative or trading purposes.
The price assumptions we use to value our derivative financial instruments can affect net income (loss) for each period. We use published market price information
where available, or quotations from over-the-counter, or OTC, market makers to find executable bids and offers. The valuations also reflect the potential impact of
conditions, including credit risk of our counterparties. The amounts reported in our consolidated financial statements change quarterly as these valuations are
revised to reflect actual results, changes in market conditions or other factors, many of which are beyond our control.
Fair value measurements
We apply the authoritative accounting provisions for measuring fair value of our derivative instruments and disclosures associated with our outstanding
indebtedness. We define fair value as an exit price representing the expected amount we would receive when selling an asset or pay to transfer a liability in an
orderly transaction with market participants at the measurement date.
We use various assumptions and methods in estimating the fair values of our financial instruments. The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximated their fair value due to the short-term maturity of these instruments. The carrying amount of our various credit
facilities approximate fair value, because the interest rates on these facilities are variable.
We employ a hierarchy which prioritizes the inputs we use to measure recurring fair value into three distinct categories based upon whether such inputs are
observable in active markets or unobservable. We classify assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value
measurement. Our methodology for categorizing assets and liabilities that are measured at fair value pursuant to this hierarchy gives the highest priority to
unadjusted quoted prices in active markets and the lowest level to unobservable inputs as outlined below:
•
•
•
Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets that are either directly or indirectly observable; and
Level 3 – Inputs are unobservable and considered significant to fair value measurement.
We utilize a mid-market pricing convention, or the "market approach," for valuation for assigning fair value to our derivative assets and liabilities. Our credit
exposure for over-the-counter derivatives is directly with our counterparty and continues until the maturity or termination of the contracts. As appropriate,
valuations are adjusted for various factors such as credit and liquidity considerations.
Property, plant and equipment
We capitalize expenditures related to property, plant and equipment that have a useful life greater than one year for assets purchased or constructed; existing assets
that are replaced, improved, or the useful lives of which have been extended; and all land, regardless of cost. Maintenance and repair costs, including any planned
major maintenance activities, are expensed as incurred.
We record property, plant, and equipment at its original cost, which we depreciate on a straight-line basis over its estimated useful life. Our determination of the
useful lives of property, plant and equipment requires us to make various assumptions, including the supply of and demand for hydrocarbons in the markets served
by our assets, normal wear and tear of the facilities, and the extent and frequency of maintenance programs. We record depreciation using the group method of
depreciation, which is commonly used by pipelines, utilities and similar assets.
We classify long-lived assets to be disposed of through sales that meet specific criteria as held for sale. We cease depreciating those assets effective on the date the
asset is classified as held for sale. We record those assets at the lower of their carrying value or the estimated fair value less the cost to sell. Until the assets are
disposed of, an estimate of the fair value is re-determined when related events or circumstances change.
Impairment of long lived Assets
We evaluate the recoverability of our property, plant and equipment and intangible assets with definite lives when events or circumstances indicate we may not
recover the carrying amount of the assets. We continually monitor our operations, the market, and business environment to identify indicators that could suggest an
asset or asset group may not be recoverable. We evaluate the asset or asset group for recoverability by estimating the undiscounted future cash flows expected to be
derived from their use and disposition. These cash flow estimates require us to make projections and assumptions for many years into the future for
F-10
pricing, demand, competition, operating cost, contract renewals, and other factors. An asset or asset group is considered impaired when the estimated undiscounted
cash flows are less than the carrying amount. In that event, an impairment loss is recognized to the extent that the carrying amount of the asset or asset group
exceeds its fair value as determined by quoted market prices in active markets or present value techniques. The determination of fair values using present value
techniques requires us to make projections and assumptions regarding future cash flows and weighted average cost of capital. Any changes we make to these
projections and assumptions could result in significant revisions to our evaluation of the recoverability of our property, plant and equipment and the recognition of
an impairment loss in our consolidated statements of operations.
Goodwill and intangible assets
We record goodwill for the excess of the cost of an acquisition over the fair value of the net assets of the acquired business. Goodwill is not amortized but is
reviewed for impairment at least annually or more frequently if an event or change in circumstance indicates that an impairment may have occurred. We first
assess qualitative factors to evaluate whether it is more likely than not that an impairment has occurred and it is therefore necessary to perform the two-step
goodwill impairment test. If the two-step goodwill impairment test indicates that the goodwill is impaired, an impairment loss is recorded.
We record the estimated fair value of acquired customer contracts, relationships and dedicated acreage agreements as intangible assets. These intangible assets
have definite lives and are subject to amortization on a straight-line basis over their economic lives, currently ranging between 10 years and 30 years . We assess
intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
Deferred financing costs
Costs incurred in connection with our revolving credit facility are deferred and charged to interest expense over the term of the related credit arrangement. Gains or
losses on debt repurchase and debt extinguishment include any associated unamortized deferred financing costs.
Asset retirement obligations ("AROs")
AROs are legal obligations associated with the retirement of tangible long-lived assets that result from the asset's acquisition, construction, development and
operation. An ARO is initially measured at its estimated fair value. Upon initial recognition, we also record an increase to the carrying amount of the related long-
lived asset. We depreciate the asset using the straight-line method over the period during which it is expected to provide benefits. After initial recognition, we
revise the ARO to reflect the passage of time and for changes in the estimated amount or timing of cash flows.
We have legal obligations requiring us to decommission our offshore pipeline systems at retirement. In certain rate jurisdictions, we are permitted to include annual
charges for removal costs in the regulated cost of service rates we charge our customers. Additionally, legal obligations exist for a minority of our offshore right-
of-way agreements due to requirements or landowner options to compel us to remove the pipe at final abandonment. Sufficient data exists with certain onshore
pipeline systems to reasonably estimate the cost of abandoning or retiring a pipeline system. However, in some cases, there is insufficient information to
reasonably determine the timing and/or method of settlement of estimating the fair value of the asset retirement obligation. In these cases, the asset retirement
obligation cost is considered indeterminate because there is no data or information that can be derived from past practice, industry practice, management's
experience, or the asset's estimated economic life. The useful lives of most pipeline systems are primarily derived from available supply resources and ultimate
consumption of those resources by end users. Variables can affect the remaining lives of the assets which preclude us from making a reasonable estimate of the
asset retirement obligation. Indeterminate asset retirement obligation costs will be recognized in the period in which sufficient information exists to reasonably
estimate potential settlement dates and methods.
Commitments, contingencies and environmental liabilities
We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to past or current operations. We expense
amounts we incur from the remediation of existing environmental contamination caused by past operations that do not benefit future periods by preventing or
eliminating future contamination. We record liabilities for environmental matters when assessments indicate that remediation efforts are probable and the costs can
be reasonably estimated. Estimates of environmental liabilities are based on currently available facts, existing technology and presently enacted laws and
regulation taking into consideration the likely effects of inflation and other factors. These amounts also take into account our prior experience in remediating
contaminated sites, other companies' clean-up experience and data released by government organizations. Our estimates are subject to revision in future periods
based on actual cost or new information. We evaluate recoveries from
F-11
insurance coverage separately from the liability and, when recovery is probable, we record an asset separately from the associated liability in our consolidated
financial statements.
We recognize liabilities for other commitments and contingencies when, after fully analyzing the available information, we determine it is either probable that an
asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. When a range of probable loss can
be estimated, we accrue the most likely amount or if no amount is more likely than another, we accrue the minimum of the range of probable loss. We expense
legal costs associated with loss contingencies as such costs are incurred.
Noncontrolling interests
Noncontrolling interests represent the minority interest holders' proportionate share of the equity of the respective systems. Noncontrolling interests are adjusted
for the minority interest holders' proportionate share of the earnings or losses. Management reports noncontrolling interest in the Chatom system in the financial
statements pursuant to paragraph ASC 810-10-65-1. The 7.8% noncontrolling interest is held by non-affiliated working interest owners.
Revenue recognition and the estimation of revenues and cost of purchases
We recognize revenue when all of the following criteria are met: i) persuasive evidence of an exchange arrangement exists, ii) delivery has occurred or services
have been rendered, iii) the price is fixed or determinable, and iv) collectability is reasonably assured. We record revenue and cost of product sold on a gross basis
for those transactions where we act as the principal and take title to natural gas, crude oil, NGLs or condensates that are purchased for resale. When our customers
pay us a fee for providing a service such as gathering, treating, transportation or storage, we record those fees separately in revenues.
Equity-based compensation
We award equity-based compensation to management, non-management employees and directors under our Long-Term Incentive Plan ("LTIP"), which provides
for the issuance of options, unit appreciation rights, restricted units, phantom units, other unit-based awards, unit awards or replacement awards, as well as tandem
Distribution Equivalent Rights ("DERs"). Compensation expense is measured by the fair value of the award at the date of grant as determined by management.
Compensation expense is recognized in Equity
compensation
expense
over the requisite service period of each award.
Income taxes
The Partnership is not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income are
generally borne by our unitholders through the allocation of taxable income. American Midstream Blackwater, LLC, a subsidiary of the Partnership, owns a
subsidiary that has operations which are subject to both federal and state income taxes. We account for income taxes of that subsidiary using an asset and liability
approach for financial accounting and reporting of income taxes. If it is more than likely that a deferred tax asset will not be realized, a valuation allowance is
recognized.
Certain tax expense results from the enactment of laws by the State of Texas that apply to entities organized as partnerships and is included in Income
tax
(expense)
benefit
in our consolidated statements of operations. The Texas margin tax is computed on our taxable margin apportioned to Texas annually.
Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) allocable to unitholders as a result of differences between
the financial reporting and income tax bases of our assets and liabilities and the taxable income allocation requirement under our Partnership Agreement. The
aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each
partner's tax attributes in us is not available.
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) is comprised solely of adjustments related to the Partnership's postretirement benefit plan.
Limited partners' net income (loss) per unit
We compute earnings per unit using the two-class method. The two-class method requires that securities that meet the definition of a participating security be
considered for inclusion in the computation of basic earnings per unit. Under the two-class method, earnings per unit is calculated as if all of the earnings for the
period were distributed under the terms of the Partnership Agreement,
F-12
regardless of whether the General Partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would
actually be distributed during a particular period from an economic or practical perspective, or whether the General Partner has other legal or contractual
limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.
The two-class method does not impact our overall net income or other financial results; however, in periods in which aggregate net income exceeds our aggregate
distributions for such period, it will have the impact of reducing net income per limited partner unit. This result occurs as a larger portion of our aggregate
earnings, as if distributed, is allocated to the incentive distribution rights of the General Partner, even though we make distributions on the basis of available cash
and not earnings. In periods in which our aggregate net income does not exceed our aggregate distributions for such period, the two-class method does not have
any impact on our calculation of earnings per limited partner unit.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic
606),
which amends the existing accounting standards for revenue recognition. The standard requires an entity to recognize revenue in a manner
that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. ASU 2015-14 was subsequently issued and deferred the effective date to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that period. We are currently evaluating the method of adoption and impact this standard will have on our consolidated
financial statements and related disclosures.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation
-
Amendments
to
the
Consolidation
Analysis,
which amends the current consolidation
guidance. The amendments affect both the variable interest entity ("VIE") and voting interest entity ("VOE") consolidation models. The standard is effective for
public reporting entities in the fiscal periods beginning after December 15, 2015, early adoption is permitted. The Partnership has evaluated the impact of this
standard on its consolidated financial statements and determined it will not have a material impact.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying
the
Presentation
of
Debt
Issuance
Costs.
This amendment requires that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, including interim periods therein, and is applied retrospectively. Early adoption is
permitted for financial statements that have not been previously issued. ASU 2015-15, Presentation
and
Subsequent
Measurement
of
Debt
Issue
Costs
Associated
with
Line
of
Credit
Arrangements,
was subsequently issued to address the absence of authoritative guidance for debt issuance costs related to line-of-credit
arrangements and states that the Securities and Exchange Commission ("SEC") staff will not object to an entity deferring and presenting debt issuance costs as an
asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. Given the Partnership's debt issuance
costs relate to its Credit Agreement (as defined in Note 13 "Debt Obligations"), the Partnership is not required to alter its current accounting for such costs.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles
—
Goodwill
and
Other
—
Internal-Use
Software
(Subtopic
350-40)
, which assists entities in
evaluating the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sales or
license of software. The amendment will be effective prospectively for reporting periods beginning on or after December 15, 2015, and early adoption is permitted.
The Partnership has evaluated the impact of this standard on its financial statements and determined it will not have a material impact.
In April 2015, the FASB issued ASU No. 2015-06, Earnings
Per
Share
(Topic
260)
. This guidance clarifies the process for updating historical earnings per unit
disclosures when a drop-down transaction occurs between entities under common control. Pursuant to the amendment, the earnings (losses) of a transferred
business before the date of a dropdown transaction should be allocated entirely to the general partner. Additionally, the previously reported earnings per unit
measure presented in the historical financial statements would not change as a result of the drop-down transaction. ASU 2015-06 is effective for annual reporting
periods beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted. The Partnership has evaluated this
guidance and determined it will not have a material impact.
In September 2015, the FASB issued ASU No. 2015-16, Business
Combinations
(Topic
805).
This amendment requires that an acquirer recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is
effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted for financial
statements that have not been issued. The Partnership has evaluated this guidance and determined it is consistent with our policy and historical presentation.
F-13
In November 2015, the FASB issued ASU 2015-17, Income
Taxes
(Topic
740).
This amendment requires that deferred tax liabilities and assets be classified as
noncurrent. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is
permitted. The Partnership has evaluated this guidance and elected to adopt this amendment for the fiscal year ended December 31, 2015. As such, the
Partnership’s deferred tax liabilities and assets have been classified as noncurrent in the consolidated balance sheets as of December 31, 2015, and 2014.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic
842).
This amendment requires the recognition of lease assets and lease liabilities by lessees for
those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. We are currently evaluating the method of adoption and impact this standard will have on our
consolidated financial statements and related disclosures.
2. Acquisitions and Divestitures
Delta House Investment
On September 18, 2015, the Partnership acquired a 26.3% interest in Pinto Offshore Holdings, LLC ("Pinto") (the "Delta House Investment"), an entity that owns a
non-operated interest in (i) approximately 49% of the limited liability company interests of Delta House FPS LLC and (ii) approximately 49% of the limited
liability company interests of Delta House Oil and Gas Lateral LLC, which respectively own Delta House floating production system and related pipeline
infrastructure. Delta House is a floating production system platform with associated crude oil and gas export pipelines, located in the Mississippi Canyon region of
the deepwater Gulf of Mexico.
We acquired our 26.3% non-operated interest in Pinto in exchange for $162.0 million in cash, funded by the proceeds of a public offering of 7.5 million of the
Partnership's common units representing Limited Partner interests, or common units, and with borrowings under the Partnership's Credit Agreement. As a result,
we own a minority interest in Pinto, which represents an indirect 12.9% interest in Delta House. Pursuant to the Pinto LLC Agreement, we have no management
control or authority over the day-to-day operations. Our interest in Pinto is accounted for as an equity method investment in the consolidated financial statements.
Because our interest in Delta House was previously owned by an affiliate of our General Partner, we have accounted for our investment at our affiliate's final carry-
over basis resulting in $65.7 million which is recorded in Investments
in
unconsolidated
affiliates
in our consolidated balance sheets and as an investing activity
within the related consolidated statement of cash flows. The amount by which the total consideration exceeded the carry-over basis was $96.3 million and is
recorded as a distribution within the consolidated statements of changes in partners’ capital and noncontrolling interest and a financing activity in the consolidated
statement of cash flows.
For the year ended December 31, 2015 , the Partnership recorded $7.5 million in earnings from its indirect interest in Delta House and also received cash
distributions of $16.6 million from Delta House. The excess of the cash distributions received over the earnings recorded is classified as a return of capital within
cash flows from investing activities in our consolidated statement of cash flows.
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 $258.0 million in cash and 6.9 million of the Partnership's common units ("the Costar Acquisition"). Costar 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 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 expected to be obtained as a result of the acquisition. The operating systems acquired have 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 allocation of that amount to the assets acquired, liabilities
assumed and the noncontrolling interest for the Costar Acquisition based upon their respective fair values as of the acquisition date (in thousands).
F-14
Fair value of consideration transferred (in thousands):
Cash
Limited partner common units
Total fair value of consideration
Fair Value of assets acquired, liabilities assumed and noncontrolling interest (in thousands):
Working capital
Property, plant and equipment:
Processing plants
Pipelines
Land
Buildings
Equipment
Construction in progress
Total property, plant and equipment
Investment in unconsolidated affiliate
Intangible assets:
Customer relationships
Dedicated acreage
Goodwill
Noncontrolling interest
$
$
$
$
258,001
147,296
405,297
8,152
48,357
128,799
1,244
682
9,827
16,146
205,055
11,884
53,400
32,000
95,025
(219)
$
405,297
The fair value of the common units issued for the Costar Acquisition, $147.3 million , differs from 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 common unit market price on the day of the acquisition, ii) the
contractual holding periods, iii) historical common 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.
During 2015, the Partnership reached agreements with the Costar sellers regarding certain matters which resulted in a return of $7.4 million of cash to the
Partnership and related reductions in the goodwill initially recorded. Additionally, in February 2016, the Partnership reached a settlement of certain
indemnification claims with the Costar sellers whereby 1,034,483 common units held in escrow were returned to the Partnership, while the Partnership agreed to
pay the Costar sellers an additional $0.3 million . The net impact of this settlement will be recorded as a reduction in property, plant and equipment in the first
quarter of 2016. As described in Note 9 "Goodwill and Intangible Assets, net", the Partnership recognized a $95.0 million impairment of the remaining Costar
goodwill during the fourth quarter of 2015.
Costar contributed revenue of $19.9 million and operating income of $0.3 million for the period of October 14, 2014 through December 31, 2014, which was
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 our consolidated statement of operations for the year ended December 31, 2014. The
following unaudited pro forma
F-15
summary presents consolidated financial information for the Partnership as if the Costar acquisition had occurred on January 1, 2013 (in thousands):
Revenue
Net loss
Limited partners' net loss per unit
Years Ended December 31,
2014
2013
$
435,133 $
(101,237)
(6.15)
448,748
(30,672)
(3.82)
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 final allocation of the purchase price to the assets acquired in the Lavaca Acquisition based upon their respective fair values as
of the acquisition date (in thousands):
Property, plant and equipment:
Land
Pipelines
Equipment
Total property, plant and equipment
Intangible assets
Goodwill
Total cash consideration
$
$
2
58,737
753
59,492
21,350
23,567
104,409
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.
As described in Note 9 "Goodwill and Intangible Assets, net", the Partnership recognized a $23.6 million impairment of the remaining Lavaca goodwill during the
fourth quarter of 2015.
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 our consolidated statement of operations for the year ended December 31, 2014.
F-16
Pro forma financial information to show the impact on the Partnership’s financial information as if the Lavaca acquisition had been completed on January 1, 2013,
have not been presented as the Partnership was unable to obtain the necessary information from the seller.
Other Acquisitions
Investment in Unconsolidated Affiliate
On August 11, 2014, the Partnership acquired a 66.7% non-operated interest in MPOG, an offshore crude 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.
For the year ended December 31, 2015, the Partnership recorded $0.7 million in earnings from MPOG, and received cash distributions of $3.9 million . For the
year ended December 31, 2014, the Partnership recorded $0.3 million in earnings from MPOG, and received cash distributions of $2.0 million . The excess of the
cash distributions received over the earnings recorded from MPOG is classified as a return of capital within cash flows from investing activities in our consolidated
statements 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 the pipeline facilities to us by sale 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.
Because Blackwater was previously owned by an affiliate our General Partner, we have accounted for the acquisition at our General Partner's carry-over basis. The
Partnership' total consideration distributed for the acquisition was $63.9 million . The amount by which the total consideration exceeded the carry-over basis was
$27.7 million and was recorded as a distribution within the consolidated statements of changes in partners’ capital and noncontrolling interest and as a financing
activity in the consolidated statement of cash flows. 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 Blackwater 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 statements of operations.
High Point System
Effective April 15, 2013, an affiliate of 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
F-17
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. Because the High Point System was
previously owned by our General Partner, we have accounted for this acquisition at our General Partner's final carry-over basis. As such, the amount by which the
value of the Series A Units exceeded the carry-over basis of the net assets contributed by our General Partner was $15.6 million and was recorded as a distribution
to our General Partner and existing limited partners' interest based on their ownership interests within the consolidated statements of changes in partners’ capital
and noncontrolling interest.
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.
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 statements of operations.
Divestitures
On September 14, 2015, the Partnership disposed of certain terminal assets in Salisbury, Maryland, that were previously held for sale, with a book value
approximating the sales proceeds of $0.9 million , resulting in a non-cash loss on disposal of less than $0.1 million . Of the proceeds received, the Partnership
distributed $0.5 million to our General Partner in accordance with the Agreement and Plan of Merger.
On June 1, 2015, the Partnership disposed of certain non-strategic off-shore transmission assets in Louisiana with a net book value of $3.0 million for nominal
proceeds, resulting in a non-cash loss on disposal of $3.0 million .
On March 31, 2014, the Partnership completed the sale of certain gathering and processing assets in Madison County, Texas, in exchange for $6.1 million in cash
which resulted in a nominal gain. The Partnership recognized a $3.0 million impairment charge related to these assets for the year ended December 31, 2013, to
reduce the related carrying value of $6.1 million .
3. Discontinued Operations
During 2013, the Board of Directors of our General Partner approved a plan to sell certain non-strategic gathering and processing assets which met specific criteria,
qualifying them as held for sale. During the year ended December 31, 2013, certain gathering and processing assets were written down by $1.8 million to the
estimated fair value less cost to sell. These fair value measurements were 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 were based on i) present value of estimated EBITDA, ii) an
assumed discount rate of 10% , and iii) a decline in throughput volumes of 2.5% in 2013 and thereafter.
During the second quarter of 2014, the Partnership’s management decided not to sell a portion of the assets that had previously been reclassified to discontinued
operations and assets held for sale in the second quarter of 2013. In accordance with ASC 360, the Partnership reclassified the assets as held and used at the
carrying value of the assets before they were classified as held for sale, adjusted for depreciation expense that would have been recorded. The Partnership has
reclassified the amounts recorded in discontinued operations related to the assets for all prior periods presented.
F-18
As part of the Blackwater Acquisition, we acquired long-lived terminal assets which were immediately classified as held for sale. As of December 31, 2013, these
assets were written down by $0.6 million to the estimated fair value less cost to sell. As a result of deteriorating market conditions, the Partnership recognized an
additional impairment charge on these assets of $0.7 million in 2014. These assets were sold during the third quarter of 2015 at a nominal loss.
Historically, we have classified these assets as discontinued operations within our consolidated statements of operations. We elected not to separately present the
operating, investing and financing cash flows related to the disposal groups in our accompanying consolidated statements of cash flows as this activity was
immaterial for all periods presented.
The following table presents the revenue, expense and (loss) gain from discontinued operations associated with the assets classified as held for sale for the years
ended December 31, 2015 , 2014 , and 2013 (in thousands, except per unit amounts):
Revenue
Expense
Impairment
Loss on sale of assets
Income tax benefit
Income (loss) from discontinued operations, net of tax
Limited partners' net income (loss) per unit from discontinued
operations (basic and diluted)
4. Concentration of Credit Risk and Trade Accounts Receivable
Years Ended December 31,
2015
2014
2013
74 $
474 $
(196)
—
(150)
192
(658)
(673)
(87)
333
2,084
(2,361)
(2,400)
(75)
339
(80) $
(611) $
(2,413)
— $
(0.04) $
(0.27)
$
$
$
Our primary assets, which are strategically located in Alabama, Georgia, Louisiana, Mississippi, North Dakota, Tennessee, Texas and the Gulf of Mexico, provide
critical infrastructure that links customers of natural gas, crude oil, NGLs, condensate and specialty chemicals to numerous intermediate and end-use markets. As a
result of recent acquisitions and geographic diversification, we have reduced the concentration of trade receivable balances due from these customer groups, and
reduced the concentration which may affect our overall credit risk. Our customers' historical financial and operating information is analyzed prior to extending
credit. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions, we
may request letters of credit, prepayments or guarantees. We record allowances for potentially uncollectible accounts receivable when necessary; however, for the
years ended December 31, 2015 , 2014 and 2013 , no allowances or significant write-offs of accounts receivable were required.
The following table summarizes those customers who accounted for more than 10% of the Partnership's consolidated revenue for the each of the last three years:
Customer A
Customer B
Customer C
Customer D
Other
Total
5. Other Current Assets
Other current assets consists of the following (in thousands):
F-19
Years Ended December 31,
2015
2014
2013
10%
—%
—%
—%
90%
100%
22%
—%
12%
10%
56%
100%
28%
13%
12%
10%
37%
100%
Prepaid insurance—current portion
Restricted cash
Other prepaid amounts
Other current assets
December 31,
2015
2014
3,948 $
—
2,866
3,280
10,094 $
4,162
6,475
758
4,159
15,554
$
$
Restricted cash of $6.5 million as of December 31, 2014 consisted of a cash-backed letter of credit related to Costar operations that the Partnership was
contractually obligated to maintain after the Costar Acquisition. The Partnership was released from this obligation in January 2015. Other current assets primarily
consist of natural gas imbalances and amounts due from related parties.
6. Derivatives
Commodity Derivatives
To minimize the effect of commodity price changes and maintain our cash flow and the economics of our development plans, we enter into commodity hedge
contracts from time to time. The terms of the contracts depend on various factors, including management's view of future commodity prices, economics on
purchased assets and future financial commitments. This hedging program is designed to mitigate the effect of commodity price declines while allowing us to
participate in some commodity price upside. Management regularly monitors the commodity markets and financial commitments to determine if, when, and at
what level commodity hedging is appropriate in accordance with policies that are established by the Board of Directors of our General Partner. Due to declining
prices, we had not entered into commodity hedge contracts to hedge production in 2016 and beyond as of December 31, 2015.
From time to time, we enter into commodity contracts with multiple counterparties, and in some cases, may be required to post collateral with our counterparties in
connection with our derivative positions. As of December 31, 2015 , we had not posted collateral with our counterparties. The counterparties are not required to
post collateral with us in connection with their derivative positions. Netting agreements are in place that permit us to offset our commodity derivative asset and
liability positions with our counterparties. We did not designate any of our commodity derivatives as hedges for accounting purposes. As a result, our commodity
derivatives are accounted for at fair value in our consolidated balance sheets with changes in fair value recognized currently in earnings.
Interest Rate Swap
To manage the impact of the interest rate risk associated with our Credit Agreement we enter into interest rate swaps from time to time, effectively converting a
portion of the cash flows related to our long-term variable rate debt into fixed rate cash flows. The notional amount of our interest rate swap that expired on August
1, 2015 was $100.0 million . The interest rate swap was entered into with a single counterparty and we were not required to post collateral. On March 2, 2016, we
entered into interest rate swaps with a notional amount of $200.0 million that will expire in September 2019.
Weather Derivative
In the second quarters of 2015 and 2014, we entered into weather derivatives to mitigate the impact of potential unfavorable weather to our operations under which
we could receive payments totaling up to $10.0 million in the event that a hurricane or hurricanes of certain strength pass through the area as identified in the
derivative agreement. The weather derivatives are accounted for using the intrinsic value method, under which the fair value of the contract was zero and any
amounts received are recognized as gains during the period received. The weather derivatives were entered into with a single counterparty and we were not
required to post collateral.
We paid premiums of $0.9 million and $1.0 million in 2015 and 2014, respectively, which are recorded as current Risk
management
assets
on the consolidated
balance sheets and are amortized to Direct
operating
expenses
on a straight-line basis over the term of the contract of 1 year . Unamortized amounts associated
with weather derivatives were approximately $0.4 million and $0.4 million as of December 31, 2015 and 2014, respectively.
As of December 31, 2015 and 2014 , the value associated with our commodity derivatives, interest rate swap and weather derivative were recorded in our
consolidated balance sheets, under the captions as follows (in thousands):
F-20
Balance Sheet
Classification
Current
Noncurrent
Total assets
Current
Noncurrent
Total liabilities
December 31, 2015
$
365 $
$
$
$
—
365 $
— $
—
— $
Gross Risk Management Assets
Gross Risk Management Liabilities
Net Risk Management Assets (Liabilities)
December 31, 2014
December 31, 2015
December 31, 2014
December 31, 2015
688 $
—
688 $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
(215)
$
—
(215)
$
December 31, 2014
688
365 $
—
365 $
— $
—
— $
—
688
(215)
—
(215)
For the years ended December 31, 2015 , 2014 and 2013 , the realized and unrealized gains (losses) associated with our commodity, interest rate and weather
derivative instruments were recorded in our consolidated statements of operations, under the captions as follows (in thousands):
Realized
Unrealized
2015
Gain
(loss)
on
commodity
derivatives,
net
$
1,610 $
Interest
expense
Direct
operating
expenses
Total
2014
Gain
(loss)
on
commodity
derivatives,
net
Interest
expense
Direct
operating
expenses
Total
2013
Gain
(loss)
on
commodity
derivatives,
net
Interest
expense
Direct
operating
expenses
Total
7. Fair Value Measurement
(240)
(913)
457 $
735 $
(433)
(1,035)
(733) $
1,069 $
(207)
(662)
200 $
$
$
$
$
$
(286)
215
—
(71)
356
239
—
595
(1,041)
(454)
—
(1,495)
We believe the carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity
of these instruments.
The recorded value of the amounts outstanding under the Credit Agreement approximates its fair value, as interest rates are variable, based on prevailing market
rates and the short-term nature of borrowings and repayments under the Credit Agreement.
The fair value of all derivatives instruments is estimated using a market valuation methodology based upon forward commodity price curves, volatility curves as
well as other relevant economic measures, if necessary. Discount factors may be utilized to extrapolate a forecast of future cash flows associated with long dated
transactions or illiquid market points. The inputs are obtained from independent pricing services, and we have made no adjustments to the obtained prices.
We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types
of derivatives contracts held. We will recognize transfers between levels at the end of the reporting period for which the transfer has occurred. There were no such
transfers during 2015, 2014 or 2013.
Fair Value of Financial Instruments
F-21
The following table sets forth by level within the fair value hierarchy, our commodity derivative instruments and interest rate swap, included as part of Risk
management
assets
and Risk
management
liabilities
within the consolidated balance sheets, that were measured at fair value on a recurring basis as of
December 31, 2015 and 2014 (in thousands):
Commodity derivative instruments, net
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
Interest rate swap
$
Carrying
Amount
$
Estimated Fair Value of the Asset (Liability)
Level 1
Level 2
Level 3
Total
— $
286
— $
(215)
— $
—
— $
—
— $
286
— $
(215)
— $
—
— $
—
—
286
—
(215)
The unamortized portion of the premium paid to enter the weather derivative described in Note 6 "Derivatives," is included within Risk
management
assets
on the
consolidated balance sheets but is not included in the above table as it is recorded at amortized cost, not fair value.
8. Property, Plant and Equipment, Net
Property, plant and equipment, net, as of December 31, 2015 and 2014 , were as follows (in thousands):
Land
Construction in progress
Buildings and improvements
Processing and treating plants
Pipelines and compressors
Storage
Equipment
Total property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net
Useful Life
(in years)
N/A
N/A
4 to 40
8 to 40
3 to 40
20 to 40
5 to 20
December 31,
2015
December 31,
2014
$
5,282 $
46,045
9,864
97,784
554,400
58,394
22,207
793,976
(145,963)
$
648,013 $
5,282
77,550
6,855
80,837
476,997
38,151
12,345
698,017
(115,835)
582,182
Of the gross property, plant and equipment balances at December 31, 2015 and 2014 , $111.9 million and $101.9 million , respectively, related to our FERC
regulated interstate and intrastate assets.
Capitalized interest was $1.9 million , $0.8 million and $0.2 million for the years ended December 31, 2015 , 2014 and 2013 , respectively.
Depreciation expense was $31.9 million , $23.9 million and $25.9 million for the years ended December 31, 2015 , 2014 and 2013 , respectively.
2014 Impairments
During the fourth quarter of 2014, management noted the declining commodity markets and related impact on producers and shippers to whom we provide
gathering and processing services. The decline in the market price of crude oil led to a corresponding decrease in natural gas and crude oil production impacting
the volume of natural gas and NGLs we gather and process on certain assets. As a result, an asset impairment charge of $99.9 million was recorded in the three
months ended December 31, 2014. These fair value measurements are based on significant inputs not observable in the market and thus represented a Level 3
measurement as defined by ASC 820. Primarily using the income approach, the fair value estimates were based on i) present value of estimated EBITDA, ii) an
assumed discount rate of 9.5% , and iii) the expected remaining useful life of the asset or asset group. See Note 3 "Discontinued Operations" for discussion related
to additional impairments.
2013 Impairments
F-22
During 2013, management changed its commercial approach towards certain non-strategic gathering and processing assets. As a result, an asset impairment charge
of $15.2 million was recorded in the three months ended June 30, 2013. These fair value measurements were based on significant inputs not observable in the
market and thus represented a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimates were based on i) present
value of estimated EBITDA, ii) an assumed discount rate of 10% , and iii) a decline in throughput volumes of 2.5% in 2013 and thereafter.
9. Goodwill and Intangible Assets, Net
Management performs an annual goodwill assessment at the reporting unit level. This annual goodwill assessment is based on fair value measurements that are
based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined by ASC 820. In its assessment, management
primarily uses a discounted cash flow analysis, supplemented by a market approach analysis. Key assumptions in the analysis include the use of an appropriate
discount rate, volume forecasts, storage utilization, terminal year multiples, and estimated future cash flows including an estimate of operating costs, and
maintenance capital expenditures. In estimating cash flows, management incorporates current market information, as well as historical and other factors into the
forecasted commodity prices and contracted rates used.
Management utilized the fair value approach described above in performing step one of its annual goodwill impairment test during the fourth quarter of 2015. As a
result of our step one analysis, we determined that the estimated fair value of certain reporting units within our Gathering and Processing reportable segment were
less than their respective carrying amounts, primarily due to changes in assumptions related to commodity prices, timing of estimated drilling by producers, and
discount rates. The changes in the assumptions noted were adversely impacted by the continuing decline in market conditions within the energy sector.
The second step of the goodwill impairment test involves allocating the estimated fair value of each reporting unit among the assets and liabilities of the reporting
unit in a hypothetical purchase price allocation. The results of the hypothetical purchase price allocation indicated there was no fair value attributable to goodwill
of the reporting units within our Gathering and Processing reportable segment. As a result, we recognized a Loss
on
impairment
of
goodwill
of $118.6 million
during the fourth quarter of 2015. The impairment consisted of $95.0 million and $23.6 million related to the Costar and Lavaca Acquisitions, respectively.
The carrying value of goodwill as of December 31, 2015 and 2014 , was $16.3 million and $142.2 million , respectively. Goodwill as of December 31, 2015 related
to our Terminal segment, while $125.9 million and $16.3 million related to our Gathering and Processing and Terminal segment, respectively, as of December 31,
2014 .
The goodwill associated with our Terminal segment was obtained primarily as part of the Blackwater Acquisition described in Note 2 "Acquisitions and
Divestitures".
Intangible assets, net, consists of customer contracts, relationships and dedicated acreage agreements identified as part of the Costar, Lavaca and Blackwater
acquisitions. These intangible assets have definite lives and are subject to amortization on a straight-line basis over their economic lives, currently ranging from 10
years to 30 years . Intangible assets, net, consist of the following (in thousands):
F-23
Gross carrying amount:
Customer contracts
Customer relationships
Dedicated acreage
Accumulated amortization:
Customer contracts
Customer relationships
Dedicated acreage
Net carrying amount:
Customer contracts
Customer relationships
Dedicated acreage
December 31,
2015
2014
12,101 $
53,400
53,350
118,851 $
12,101
53,400
53,350
118,851
(12,101) $
(11,110)
(3,124)
(2,661)
(553)
(882)
(17,886) $
(12,545)
— $
50,276
50,689
100,965 $
991
52,847
52,468
106,306
$
$
$
$
$
$
For the years ended December 31, 2015 , 2014 and 2013 , amortization expense on our intangible assets totaled $5.3 million , $ 4.1 million and $3.7 million ,
respectively. Estimated amortization expense for each of the next five fiscal years (2016 – 2020) is approximately $ 4.3 million per year.
10. Investment in Unconsolidated Affiliates
The following table presents the activity in the Partnership's equity investments (in thousands):
MPOG
66.7%
Mesquite
46%
Pinto/Delta House
Total
12.9%
Balances at December 31, 2013
Initial investment
Earnings in unconsolidated affiliates
Distributions
Balances at December 31, 2014
Initial investment
Earnings in unconsolidated affiliates
Contributions
Distributions
Balances at December 31, 2015
$
$
$
— $
12,000
348
(1,980)
— $
11,884
—
—
10,368 $
11,884 $
—
731
—
(3,920)
7,179 $
—
—
6,713
—
— $
—
—
—
— $
65,703
7,470
—
(16,648)
—
23,884
348
(1,980)
22,252
65,703
8,201
6,713
(20,568)
82,301
18,597 $
56,525 $
The following tables present the summarized combined financial information for the Partnership's equity investments (amounts represent 100% of investee
financial information):
Balance Sheets:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Years Ended December 31,
2015
2014
$
2,086 $
288,617
366
23,617
2,196
62,635
398
22,307
F-24
Income Statements:
Total revenue
Operating expense
Net income
Years Ended December 31,
2015
2014
2013
$
37,724 $
3,375
29,437
3,847 $
1,722
510
—
—
—
The unconsolidated affiliates described above were each determined to be Variable Interest Entities ("VIE") due to disproportionate economic interests and
decision making rights. In each case, the Partnership lacks the power to direct the activities that most significantly impact each unconsolidated affiliate's economic
performance. As the Partnership does not hold a controlling financial interest in these affiliates, the Partnership accounts for its related investments using the equity
method. The Partnership’s maximum exposure to loss related to each VIE is limited to its equity investment as presented on the consolidated balance sheet at
December 31, 2015. In each case, the Partnership is not obligated to absorb losses greater than its proportional ownership percentages indicated above. In each
case, the Partnership’s right to receive residual returns is not limited to any amount less than the proportional ownership percentages indicated above.
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were as follows (in thousands):
Current portion of asset retirement obligation
Accrued capital expenditures
Accrued expenses
Due to related parties
Gas imbalances payable
Other
12. Asset Retirement Obligations
The following table presents activity in the Partnership's asset retirement obligations (in thousands):
Beginning asset retirement obligation
Liabilities assumed
Expenditures
Accretion expense
Total ending asset retirement obligation
Less: current portion
Long-term asset retirement obligation
December 31,
2015
2014
$
6,822 $
3,984
3,178
3,894
413
6,744
$
25,035 $
Years Ended December 31,
2015
2014
$
$
34,645 $
—
(91)
817
35,371
6,822
28,549 $
—
17,134
4,560
659
1,055
2,392
25,800
34,636
248
(1,030)
791
34,645
—
34,645
We are required to establish security against any potential secondary obligations relating to the abandonment of certain transmission assets that may be imposed on
the previous owner by applicable regulatory authorities. As such, we have a restricted cash account maintained by a third party that amounted to $5.0 million as of
December 31, 2015 and 2014 , respectively, and is presented in Other
assets,
net
in our consolidated balance sheets.
13. Debt Obligations
Our outstanding borrowings under the credit facility were (in thousands):
F-25
Revolving credit facility
Other debt
Total debt
Less: current portion
Long-term debt
December 31,
2015
2014
$
525,100 $
2,338
527,438
2,338
$
525,100 $
372,950
2,908
375,858
2,908
372,950
On September 14, 2014, the Partnership entered into the Amended and Restated Credit Agreement, which was amended by the First Amendment and Incremental
Commitment Agreement dated as of September 18, 2015 (as amended, the "Credit Agreement"), which provides for maximum borrowings equal to $750.0 million
, with the ability to further increase the borrowing capacity to $900.0 million subject to lender approval. We can elect to have loans under our Credit Agreement
bear interest either at a Eurodollar-based rate, plus a margin ranging from 2.00% to 3.25% depending on our total leverage ratio then in effect, or a base rate which
is a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 0.50% , (b) the rate of interest in effect for such day as publicly announced
from time to time by Bank of America as its "prime rate," or (c) the Eurodollar Rate plus 1.00% plus a margin ranging from 1.00% to 2.25% depending on the total
leverage ratio then in effect. We also pay a commitment fee of 0.50% per annum on the undrawn portion of the revolving loan under the Credit Agreement.
Our obligations under the Credit Agreement are secured by a lien on substantially all of our assets. Advances made under the Credit Agreement are guaranteed on
a senior unsecured basis by certain of our subsidiaries (the “Guarantors”). These guarantees are full and unconditional and joint and several among the Guarantors.
The terms of the Credit Agreement include covenants that restrict our ability to make cash distributions and acquisitions in some circumstances. The remaining
principal balance of loans and any accrued and unpaid interest will be due and payable in full on the maturity date, which is September 5, 2019.
The Credit Agreement contains certain financial covenants, including the requirement that our indebtedness not exceed 4.75 times adjusted consolidated EBITDA
for the prior twelve month period adjusted in accordance with the Credit Agreement (except for the current and subsequent two quarters after the consummation of
a permitted acquisition, at which time the covenant is increased to 5.25 times adjusted consolidated EBITDA) and a minimum interest coverage ratio test that
requires our adjusted consolidated EBITDA to exceed consolidated interest charges by not less than 2.50 times. The financial covenants in our Credit Agreement
may limit the amount available to us for borrowing to less than $750.0 million . In addition to the financial covenants described above, the Credit Agreement also
contains customary representations and warranties (including those relating to organization and authorization, compliance with laws, absence of defaults, material
agreements and litigation) and customary events of default (including those relating to monetary defaults, covenant defaults, cross defaults and bankruptcy events).
For the years ended December 31, 2015 , 2014 and 2013 , the weighted average interest rate on borrowings under our Credit Agreement was approximately 3.67%
, 3.80% , and 4.53% , respectively.
As of December 31, 2015 , our consolidated total leverage was 4.56 and our interest coverage ratio was 8.56 , which was in compliance with the consolidated total
leverage ratio and interest coverage ratio tests in accordance with the financial covenants required in our Credit Agreement. At December 31, 2015 and 2014 ,
letters of credit outstanding under the Credit Agreement were $1.8 million and $1.6 million , respectively. As of December 31, 2015 , we had approximately
$525.1 million of outstanding borrowings under our $750.0 million Credit Agreement.
As of December 31, 2015, we were in compliance with the covenants included in the Credit Agreement. Our ability to maintain compliance with the leverage and
interest coverage ratios included in the Credit Agreement may be subject to, among other things, the timing and success of initiatives we are pursuing, which may
include expansion capital projects, acquisitions, or drop down transactions, as well as the associated financing for such initiatives. If required, ArcLight Capital
Partners, which controls the General Partner of the Partnership, has agreed to provide financial support for the Partnership to maintain compliance with the
covenants contained in the Credit Agreement through December 31, 2016.
Other debt
As of December 31, 2015 , other debt represents insurance premium financing in the original amount of $3.0 million bearing interest at 3.95% per annum, which is
repayable in equal monthly installments of approximately $0.3 million through the third quarter of 2016.
14. Partners' Capital and Convertible Preferred Units
F-26
Our capital accounts are comprised of approximately 1.3% general partner interest and 98.7% limited partner interests as of December 31, 2015 . Our limited
partners have limited rights of ownership as provided for under our Partnership Agreement and the right to participate in our distributions. Our General Partner
manages our operations and participates in our distributions, including certain incentive distributions pursuant to the incentive distribution rights that are non-
voting limited partner interests held by our General Partner. Pursuant to our Partnership Agreement, our General Partner participates in losses and distributions
based on its interest. The General Partner's participation in the allocation of losses and distributions are not limited and therefore, such participation can result in a
deficit to its respective capital account. As such, allocation of losses and distributions for previous transactions between entities under common control have
resulted in a deficit to the General Partner's capital account included in our consolidated balance sheets.
Prior to the conversion of the Series B Units into common units on February 1, 2016, our General Partner held and participated in the distribution on Series B Units
with such distributions being made in cash or with paid-in-kind Series B Units at the election of the Partnership. The holders of Series B Units were entitled to vote
along with the holders of Limited Partner common units prior to conversion.
HPIP holds and participates on the distributions of Series A-1 Units with such distributions being made in paid-in-kind Series A-1 Units, cash or a combination
thereof, at the election of the Board of Directors of our General Partner through the distribution for the earlier of (a) the quarter ended March 31, 2016 or (b) the
time in which the Series A-1 Units are converted into common units. The Series A-1 Units are entitled to vote along with Limited Partner common unitholders and
such units are currently convertible to Limited Partner common units.
Series A-1 Convertible Preferred Units
On April 15, 2013, the Partnership, our General Partner and AIM Midstream Holdings entered into agreements with HPIP, pursuant to which HPIP i) acquired
90% of our General Partner and all of our subordinated units from AIM Midstream Holdings and ii) contributed the High Point System and $15.0 million in cash to
us in exchange for 5,142,857 Series A-1 Units issued by the Partnership as described in Note 2 "Acquisitions and Divestitures". 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. As a result of these transactions, which were also consummated on April 15, 2013, HPIP
acquired both control of our General Partner and a majority of our outstanding limited partnership interests. On April 15, 2013, our General Partner entered into the
Third Amended & Restated Agreement of Limited Partnership (the "Third Amendment") of the Partnership providing for the creation and designation of the rights,
preferences, terms and conditions of the Series A-1 Units.
The Series A-1 Units receive distributions prior to distributions to Partnership common unitholders. The distributions to the Series A-1 Unitholders are equal to the
greater of $0.50 per unit or the declared distribution to common unitholders. The Series A-1 Units may be converted into common units on a one-to-one basis,
subject to customary anti-dilutive adjustments, at the option of the unitholders on or any time after January 1, 2014.
As a result of the equity offering that closed on September 15, 2015, discussed below, the conversion price of the Series A Units were adjusted from $17.50 to
$15.94 in accordance with the terms of the Partnership Agreement so that the holders of those units would maintain their ownership interest on an as-converted
basis.
Upon any liquidation and winding up of the Partnership or the sale of substantially all of the assets of the Partnership, the holders of Series A-1 Units generally will
be entitled to receive, in preference to the holders of any of the Partnership's other securities, an amount equal to the sum of $15.94 multiplied by the number of
Series A-1 Units owned by such holders, plus all accrued but unpaid distributions on such Series A Units.
Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business combination in which the holders of common
units are to receive securities, cash or other assets (a "Partnership Event"), we are obligated to make an irrevocable written offer, subject to consummation of the
Partnership Event, to each holder of Series A Units to redeem all (but not less than all) of such holder's Series A Units for a price per Series A Unit payable in cash
equal to the greater of:
•
•
the sum of $15.94 and all accrued and accumulated but unpaid distributions for each Series A-1 Unit; or
an amount equal to the product of:
i) the number of common units into which each Series A-1 Unit is convertible; and
ii) the sum of:
F-27
(A) the cash consideration per common unit to be paid to the holders of common units pursuant to the Partnership Event, plus
(B) the fair market value per common unit of the securities or other assets to be distributed to the holders of the common units pursuant to the
Partnership Event.
Upon receipt of such a redemption offer from us, each holder of Series A-1 Units may elect to receive such cash amount or a preferred security issued by the
person surviving or resulting from such Partnership Event and containing provisions substantially equivalent to the provisions set forth in the Third Amendment
with respect to the Series A-1 Units without material abridgement.
Except as provided in the Third Amendment, the Series A-1 Units have voting rights that are identical to the voting rights of the common units and will vote with
the common units as a single class, with each Series A-1 Unit entitled to one vote for each common unit into which such Series A-1 Unit is convertible.
As conversion is at the option of the holder and redemption is contingent upon a future event which is outside the control of the Partnership, the Series A-1 Units
have been classified as mezzanine equity in the consolidated balance sheets.
The Partnership executed the Fourth Amendment (the "Fourth Amendment") to the Partnership Agreement related to its outstanding Series A-1 Units which
became effective July 24, 2014. As a result of the Fourth Amendment, distributions on Series A-1 Units will be made with paid-in-kind Series A-1 Units, cash or a
combination thereof, at the discretion of the Board of Directors, which began with the distribution for the three months ended June 30, 2014 and will continue
through the distribution for the quarter ended March 31, 2016. Prior to the Fourth Amendment, the Partnership was required to pay distributions on the Series A-1
Units with a combination of paid-in-kind units and cash.
Series A-2 Convertible Preferred Units
On March 30, 2015 and June 30, 2015, we entered into two Series A-2 Convertible Preferred Unit Purchase Agreements with Magnolia Infrastructure Partners,
LLC (an affiliate of HPIP) pursuant to which the Partnership issued, in separate private placements, newly-designated Series A-2 Units (the “Series A-2 Units”)
representing limited partnership interests in the Partnership. As a result, the Partnership issued a total of 2,571,430 Series A-2 Units for approximately $45.0
million in aggregate proceeds during the year ended December 31, 2015. The Series A-2 Units will participate in distributions of the Partnership along with
common units in a manner identical to the existing Series A-1 Units (together with the Series A-2 Units, the "Series A Units"), with such distributions being made
in cash or with paid-in-kind Series A Units at the election of the Board of Directors of our General Partner. To date, the Board of Directors of our General Partner
has elected to pay Series A distributions using paid-in-kind Series A Units.
On July 27, 2015, we entered into the Fifth Amendment (the “Fifth Amendment”) to our Partnership Agreement. The Fifth Amendment grants us the right (the
“Call Right”) to require the holders of the Series A-2 Units (the “Series A-2 Holders”) to sell, assign and transfer all or a portion of the then outstanding Series A-2
Units to us for a purchase price of $17.50 per Series A-2 Unit (subject to appropriate adjustment for any equity distribution, subdivision or combination of equity
interests in the Partnership). We may exercise the Call Right at any time, in connection with our or our affiliate’s acquisition of assets or equity from
ArcLightEnergy Partners Fund V, L.P., or one of its affiliates, for a purchase price in excess of $100 million . We may not exercise the Call Right with respect to
any Series A-2 Units that a Series A-2 Holder has elected to convert into common units on or prior to the date we have provided notice of our intent to exercise the
Call Right, and may not exercise the Call Right if doing so would result in a default under any of our or our affiliates’ financing agreements or obligations.
As a result of the equity offering that closed on September 15, 2015, discussed below, the conversion price of the Series A Units was adjusted to $15.94 in
accordance with the terms of the Partnership Agreement so that the holders of those units would maintain their ownership interest on an as-converted basis.
Series B Units
Effective January 31, 2014, the Partnership created and issued 1,168,225 Series B Units to its General Partner in exchange for approximately $30.0 million . The
Series B Units participate in distributions of the Board of Directors of our General Partner along with common units, with such distributions being made in cash
distributions or with paid-in-kind Series B Units at the election of the Partnership. The Series B Units are entitled to vote along with common unitholders and such
units will automatically convert to common units two years after the issuance date. Proceeds from the issuance of the Series B Units were used to partially fund the
Lavaca Acquisition.
F-28
During 2014, the Board of Directors of our General Partner elected to pay the Series B distributions using paid-in-kind Series B Units. The number of paid-in-kind
Series B Units is determined by the quotient of: i) the number of Series B Units outstanding at the record date multiplied by the distribution amount declared to
common unit holders ("Series B Unit Distribution Amount"), and ii) the Series B Unit Distribution Amount divided by the original issue price of the Series B
Units. The Partnership records the paid-in-kind Series B Units at fair value at the time of issuance. The fair value measurement uses our unit price as a significant
input in the determination of the fair value and thus represents a Level 2 measurement as defined by ASC 820. For the year ended December 31, 2015 , the
Partnership issued 94,923 of paid-in-kind Series B Units with a fair value of $1.4 million . For the year ended December 31, 2014 , the Partnership issued 86,461 of
paid-in-kind Series B Units with a fair value of $2.2 million .
The Series B Units automatically converted to common units on February 1, 2016.
Equity Restructuring
Effective August 9, 2013, we executed an equity restructuring agreement ("Equity Restructuring") with our General Partner and HPIP. As part of the Equity
Restructuring, the Partnership's 4,526,066 subordinated units and previous incentive distribution rights (the "former IDRs," all of which were owned by our
General Partner, which is controlled by HPIP) were combined into and restructured as a new class of incentive distribution rights (the "new IDRs"). Upon the
issuance of the new IDRs, the subordinated units and former IDRs were canceled. The new IDRs were allocated 85.02% to HPIP and 14.98% to our General
Partner. The new IDRs entitle the holders of our incentive distribution rights to receive 48% of any quarterly cash distributions from available cash after the
Partnership's common unitholders have received the full minimum quarterly distribution ( $0.4125 per unit) for each quarter plus any arrearages from prior
quarters. On February 5, 2014, further amendments were made as a result of a settlement such that:
•
•
•
HPIP and AIM Midstream Holdings amended the LLC Agreement to, among other things, amend the Sharing Percentages (as defined therein) such that
HPIP's sharing percentage thereafter is 95% and AIM Midstream Holdings's Sharing Percentage is 5% ;
HPIP transferred all of the 85.02% of our outstanding new IDRs held by HPIP to our General Partner such that our General Partner owns 100% of the
outstanding new IDRs; and
we issued to AIM Midstream Holdings a warrant to purchase up to 300,000 common units of the Partnership at an exercise price of $0.01 per common unit
(the "Warrant"), which Warrant, among other terms, i) is exercisable at any time on or after February 8, 2014 until the tenth anniversary of February 5, 2014,
ii) contains cashless exercise provisions and iii) contains customary anti-dilution and other protections. The Warrant was exercised on February 21, 2014.
Equity Offerings
On October 13, 2015, the Partnership and certain of its affiliates entered into an ATM Equity Offering Sales Agreement (the “Sales Agreement”) with Merrill
Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc (each, a "Sales Agent"). Pursuant to the Sales Agreement, the Partnership may
issue and sell from time to time, through the Sales Agents, common units having an aggregate offering price of up to $100,000,000 .
On September 10, 2015, the Partnership and certain of its affiliates entered into an underwriting agreement with Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as representative for the underwriters named therein, providing for the issuance and sale by the Partnership of 7,500,000 common units at a price to
the public of $11.31 per common unit. The offering closed on September 15, 2015 and the Partnership used the net proceeds of approximately $81.0 million to
fund a portion of the Delta House Investment. In connection with this offering, we completed the issuance of an additional 151,937 common units at a price of
$11.31 per unit pursuant to the partial exercise of the underwriters' overallotment option on October 8, 2015 for net proceeds of approximately $1.7 million .
On October 14, 2014, the Partnership acquired Costar from Energy Spectrum Partners VI LP and Costar Midstream Energy, LLC which was funded, in part, with
6,900,000 of common units issued directly to Energy Spectrum and Costar Midstream Energy LLC, which are subject to customary lock-up provisions. In
February 2016, the Partnership reached a settlement of certain indemnification claims with the Costar sellers whereby approximately 1,034,483 common units held
in escrow were returned to the Partnership.
On July 14, 2014, the Partnership entered into a common unit purchase agreement with certain institutional investors, which was subsequently amended on August
15, 2014, to provide for the sale of 4,622,352 common units representing limited partner interests
F-29
in the Partnership in a private placement at a price of $25.8075 per common unit (reflecting an adjustment for the Partnership's second quarter distribution of
$0.4625 per unit), for cash consideration of $119.3 million .
On January 29, 2014, the Partnership and certain of its affiliates entered into an underwriting agreement (the "Underwriting Agreement") with Barclays Capital
Inc. and UBS Securities LLC (the "Underwriters"), providing for the issuance and sale by the Partnership, and the purchase by the Underwriters, of 3,400,000
common units representing limited partner interests in the Partnership at a price to the public of $26.75 per common unit. The Partnership used the net proceeds of
$86.9 million to fund a portion of the Lavaca Acquisition.
On December 11, 2013, the Partnership and certain of its affiliates entered into an underwriting agreement (the "Underwriting Agreement") with Barclays Capital
Inc. (the "Underwriter"), providing for the issuance and sale by the Partnership, and the purchase by the Underwriter, of 2,568,712 common units representing
limited partner interests in the Partnership at a price to the public of $22.47 per common unit. The Partnership used the net proceeds of $54.9 million to fund a
portion of the purchase price for the Blackwater Acquisition.
General Partner Units
In connection with the equity offerings discussed above and to maintain its ownership percentage, we received proceeds of $1.9 million from our General Partner
as consideration for the issuance of 143,517 additional notional general partner units for the year ended December 31, 2015 and proceeds of $5.7 million for the
issuance of 206,810 additional notional general partner units for the year ended December 31, 2014 . There were no such contributions in 2013.
Outstanding Units
The numbers of units outstanding were as follows (in thousands):
Series A convertible preferred units
Series B convertible units
Limited Partner common units
General Partner units
Distributions
We made cash distributions as follows (in thousands):
Series A convertible preferred units
Limited Partner common units
Limited Partner subordinated units
General Partner units
General Partners' incentive distribution rights
2015
9,210
1,350
30,427
536
December 31,
2014
2013
5,745
1,255
22,670
392
Years Ended December 31,
2015
2014
2013
$
$
— $
46,597
—
1,187
5,602
2,658 $
22,656
—
333
2,362
53,386 $
28,009 $
5,279
—
7,414
185
2,375
8,207
5,073
284
181
16,120
On January 25, 2016, we announced that the Board of Directors of our General Partner declared a quarterly cash distribution of $0.4725 per unit for the fourth
quarter ended December 31, 2015, or $1.89 per unit on an annualized basis. The cash distribution was paid on February 12, 2016, to unitholders of record as of the
close of business on February 3, 2016. At December 31, 2015 , we had accrued $4.4 million for the paid-in-kind Series A Units that were issued in February 2016 .
The fair value of the paid-in-kind Series A Unit distributions for all years presented was determined primarily using the market and income approach utilizing
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 for all three years presented were based on i) present value of estimated future contracted distributions, ii) option values ranging from $0.07 per
unit to $9.68 per unit using a Black-Scholes model, iii) assumed discount rates of 10.0% , and iv) assumed distribution growth rates of 1.0% .
F-30
For the year ended December 31, 2015 , the Partnership issued 893,830 of paid-in-kind Series A Units and recorded accrued and paid-in-kind unitholder
distributions for Series A Units with a fair value of $17.0 million . For the year ended December 31, 2014 , the Partnership issued 466,638 of paid-in-kind Series A
Units and recorded accrued and paid-in-kind unitholder distributions for Series A Units with a fair value of $13.2 million . For the year ended December 31, 2013 ,
the Partnership issued 135,705 of paid-in-kind Series A Units and recorded accrued and paid-in-kind unitholder distributions for Series A Units with a fair value of
$4.8 million .
15. Net Income (Loss) per Limited Partner Unit
Net income (loss) is allocated to the General Partner and the limited partners in accordance with their respective ownership percentages, after giving effect to
distributions on Series A Units, declared distributions on the Series B Units, limited partner and to the General Partner units, including IDRs. Unvested unit-based
payment awards that contain non-forfeitable rights to distributions (whether paid or unpaid) are classified as participating securities and are included in our
computation of basic and diluted net income per limited partner unit. Basic and diluted net income (loss) per limited partner unit is calculated by dividing limited
partners' interest in net income (loss) by the weighted average number of outstanding limited partner units during the period. We determined basic and diluted net
income (loss) per limited partner unit as follows, (in thousands, except per unit amounts):
Years Ended December 31,
2015
2014
2013
$
(127,375) $
(97,195) $
Net income (loss) from continuing operations
Net income (loss) attributable to noncontrolling interests
Net income (loss) from continuing operations attributable to the Partnership
Less:
Distributions on Series A preferred units
Declared distributions on Series B Units
General partner's distributions
General partner's share in undistributed loss
Blackwater net loss from continuing operations
Net income (loss) from continuing operations available to limited Partners
Net income (loss) from discontinued operations available to Limited Partners
Net income (loss) available to Limited Partners
Weighted average number of units used in computation of Limited Partners' net income (loss)
per unit (basic and diluted)
Limited Partners' net income (loss) from continuing operations per unit (basic and diluted)
Limited Partners' net income (loss) from discontinued operations per unit (basic and diluted)
Limited Partners' net income (loss) per unit (basic and diluted)
16. Long-Term Incentive Plan
$
$
$
25
(127,400)
16,978
1,373
6,790
(2,569)
—
(149,972)
(80)
214
(97,409)
14,492
2,220
2,694
(1,820)
—
(114,995)
(603)
(150,052) $
(115,598) $
(30,993)
633
(31,626)
24,117
—
464
(1,708)
(716)
(53,783)
(2,051)
(55,834)
24,983
13,472
7,525
(6.00) $
—
(6.00) $
(8.54) $
(0.04)
(8.58) $
(7.15)
(0.27)
(7.42)
Our General Partner manages our operations and activities and employs the personnel who provide support to our operations. On November 2, 2009, the Board of
Directors of our General Partner adopted a long-term incentive plan for its employees, consultants and directors who perform services for it or its affiliates. On
May 25, 2010, the Board of Directors of our General Partner adopted an Amended and Restated Long-Term Incentive Plan. On July 11, 2012, the Board of
Directors of our General Partner adopted a Second Amended and Restated Long-Term Incentive Plan that effectively increased available awards by 871,750 units.
On November 19, 2015, the Board of Directors of our General Partner approved the Third Amended and Restated Long-Term Incentive Plan, which, subject to
unitholder approval, would increase the number of common units authorized for issuance by 6,000,000
F-31
common units. On February 11, 2016, the unitholders approved the Third Amended and Restated Long-Term Incentive Plan to increase the number of available
awards by 6,000,000 common units. At December 31, 2015 , 2014 and 2013 , there were 15,484 , 688,976 and 855,089 common units, respectively, available for
future grant under the LTIP.
All such equity-based awards issued under the LTIP consist of phantom units, DERs or Option Grants. DERs and options have been granted on a limited basis.
Future awards, such as options and DERs, may be granted at the discretion of the Compensation Committee and subject to the Board of Directors of our General
Partner.
Phantom Unit Awards. Ownership in the awards is subject to forfeiture until the vesting date. The LTIP is administered by the Compensation Committee of the
Board of Directors of our General Partner, which at its discretion, may elect to settle such vested phantom units with a number of units equivalent to the fair market
value at the date of vesting in lieu of cash. Although our General Partner has the option to settle in cash upon the vesting of phantom units, our General Partner has
not historically settled these awards in cash. Under the LTIP, grants issued typically vest in increments of 25% on each grant anniversary date and do not contain
any vesting requirements other than continued employment.
In December 2015, the Board of Directors of our General Partner approved a grant of 200,000 phantom units under the LTIP which contains distribution equivalent
rights based on the extent to which the Partnership’s Series A Preferred Unitholders receive distributions in cash and will vest in one lump sum installment on the
three year anniversary of the date of grant, subject to acceleration in certain circumstances.
The following table summarizes our phantom unit-based awards, in units:
Outstanding at beginning of period
Granted
Forfeited
Vested
Outstanding at end of period
Years Ended December 31,
Units
Weighted-Average
Exercise Price
201,132 $
546,329
(31,298)
(146,404)
569,759 $
19.85
12.25
15.62
18.47
13.15
The fair value of our phantom units, which are subject to equity classification, is based on the fair value of our units at the grant date. Compensation costs related to
these phantom awards for the years ended December 31, 2015 , 2014 , and 2013 was $3.8 million , $1.5 million and $2.1 million , respectively, and are classified
as Equity
compensation
expense
in our consolidated statements of operations and the equity compensation expense in partners' capital on our consolidated balance
sheets.
The total fair value of vesting units at the time of vesting was $2.6 million , $1.4 million , and $2.2 million for the years ended December 31, 2015 , 2014 , and
2013 , respectively.
The total compensation cost related to unvested phantom awards not yet recognized at December 31, 2015 , 2014 , and 2013 was $5.9 million , $3.1 million , and
$0.9 million , respectively, and the weighted average period over which this cost is expected to be recognized as of December 31, 2015 , is approximately 2.75
years years.
Performance and Service Condition Awards. In November 2015, the Board of Directors of our General Partner modified awards that introduced certain
performance and service conditions that are probable, amounting to $2.0 million payable in a variable amount of phantom units awards at the time of grant. As
such, these awards are accounted for as liability-based awards and equity-based compensation is to be accrued from the service-inception date through the
estimated date of meeting both the performance and service conditions. Compensation costs related to these awards for the years ended December 31, 2015 was
$0.5 million . Compensation cost related to unvested awards not yet recognized at December 31, 2015 was $1.5 million .
Option to Purchase Common Units. In December 2015, the Board of Directors of our General Partner approved the grant of an option to purchase 200,000
common units of the Partnership at an exercise price per unit equal to $7.50 (the “Option Grant”). The Option Grant will vest in one lump sum installment on
January 1, 2019, subject to acceleration in certain circumstances, and will expire on March 15th of the calendar year following the calendar year in which it vests.
The fair value of each unit-based option award is estimated on the date of grant using a Black-Scholes pricing model that incorporates the assumptions noted in the
following table.
F-32
Weighted average volatility
Expected dividend yield
Weighted average expected term (in years)
Weighted average risk-free rate
47.0%
26.3%
3.5
1.3%
Estimated expected volatilities were based upon historical volatility of our common units. The expected dividend yield was based on an annualized distribution
divided by the closing unit price on the date of grant. The expected term was based on the midpoint between the date of vest and the date of expiration. The risk-
free rate was based on the U.S. Treasury yield curve in effect on the date of grant.
Compensation costs related to these awards for the years ended December 31, 2015 was immaterial. Compensation cost related to unvested awards not yet
recognized at December 31, 2015 was $0.1 million .
The following table summarizes our Option Grant awards, in units:
Outstanding at beginning of period
Granted
Forfeited
Vested
Outstanding at end of period
17. Postretirement Benefits
Year Ended December 31, 2015
Units
Weighted-Average
Exercise Price
— $
200,000
—
—
200,000 $
—
7.50
—
—
7.50
One of the Partnership’s subsidiaries has a contributory postretirement benefit plan that provides medical, dental and life insurance benefits for qualified retirees.
Plan obligations totaled $0.6 million and $0.7 million at December 31, 2015 and 2014 , respectively, while plan assets totaled $1.8 million and $1.7 million as of
those dates. Plan assets are invested primarily in fixed income securities. Net periodic benefit plan costs, which are included in Direct
operating
expenses
in our
consolidated statements of operations, are less than $(0.1) million for the years ended December 31, 2015 , 2014 and 2013 . The Partnership expects that annual
benefit payments will be made from plan assets in the future and will be less than $0.1 million per year.
18. Income Taxes
With the exception of certain subsidiaries in our Terminals Segment, the Partnership is not subject to U.S. federal or state income taxes as such income taxes are
generally borne by our unitholders through the allocation of our taxable income (loss) to them. The State of Texas does impose a franchise tax that is assessed on
the portion of our taxable margin which is apportioned to Texas.
Our income tax (expense) benefit for the years ended December 31, 2015, 2014 and 2013 is as follows:
Current income tax benefit (expense)
Deferred income tax benefit (expense)
Years Ended December 31,
2015
2014
2013
$
— $
(10)
$
(1,134)
(547)
—
495
Effective income tax rate
0.9%
0.6%
1.6%
A reconciliation of our expected income tax (expense) benefit calculated at the U.S. federal statutory rate of 34% to our actual tax (expense) for the years ended
December 31, 2015, 2014 and 2013 is as follows:
F-33
Net loss before income tax benefit (expense)
US Federal statutory tax rate
Federal income tax benefit at statutory rate
Reconciling items:
Partnership loss not subject to income tax
Income not subject to corporate-level tax
State and local tax benefit (expense)
Other
Income tax benefit (expense)
Years Ended December 31,
2015
2014
2013
$
(126,241)
$
(96,638)
$
(31,488)
34%
42,922
34%
32,857
34%
10,706
(43,812)
(33,216)
(10,296)
—
(103)
(141)
$
(1,134)
$
—
(159)
(39)
(557)
$
222
71
(208)
495
The Partnership’s deferred tax assets and liabilities as of December 31, 2015 and 2014 are summarized below:
Deferred tax assets:
Net operating loss carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Intangible assets
Total deferred tax liabilities
Deferred income tax liability, net
December 31,
2015
2014
$
7,570 $
493
8,063
13,889
—
13,889
4,173
213
4,386
9,112
387
9,499
$
(5,826) $
(5,113)
As of December 31, 2015 , certain subsidiaries in our Terminals Segment had net operating losses for federal income tax purposes of approximately $19.3 million
which begin to expire in 2028. The annual utilization of the federal net operating losses may be limited by changes in control of the subsidiaries which occurred in
2012 and 2013.
We recognize the tax benefits from uncertain tax positions if it is more likely than not that the position will be sustained on examination by the taxing authorities.
As of December 31, 2015, we have not recognized tax benefits from uncertain tax positions.
The preparation of our income tax returns requires the use of management's estimates and interpretations which may be subjected to review by the respective
taxing authorities and may result in an assessment of additional taxes, penalties and interest. Tax years subsequent to 2009 remain subject to examination by
federal and state taxing authorities.
19. Commitments and Contingencies
Legal proceedings
We are not currently party to any pending litigation or governmental proceedings, other than ordinary routine litigation incidental to our business. While the
ultimate impact of any proceedings cannot be predicted with certainly, our management believes that the resolution of any of our pending proceeds will not have a
material adverse effect on our financial condition or results of operations.
Environmental matters
We are subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent to natural gas pipeline, NGL
and crude pipelines and operations, as well as terminal operations and we could, at times, be subject to environmental cleanup and enforcement actions. We
attempt to manage this environmental risk through appropriate environmental policies and practices to minimize any impact our operations may have on the
environment.
F-34
Regulatory matters
On October 8, 2014, American Midstream (Midla), LLC ("Midla") reached an agreement in principle with its customers regarding the interstate pipeline that
traverses Louisiana and Mississippi in order to provide continued service to its customers while addressing safety concerns with the existing pipeline.
On December 11, 2014, Midla filed a Stipulation and Agreement (the "Midla Agreement") which resolved all of the related outstanding issues.
On April 16, 2015, the FERC approved the Midla Agreement allowing Midla to retire the existing 1920s vintage pipeline and replace it with a new pipeline from
Winnsboro, Louisiana to Natchez, Mississippi (the “Midla-Natchez Line”) to serve existing residential, commercial, and industrial customers. Under the Midla
Agreement, customers not served by the new Midla-Natchez Line will be connected to other interstate or intrastate pipelines, other gas distribution systems, or
offered conversion to propane service. On June 29, 2015, the Partnership filed with the FERC for authorization to construct the Midla-Natchez pipeline, which was
approved on December 17, 2015. Construction is expected to commence in the first half of 2016 with service beginning in late 2016. Under the Midla Agreement,
Midla plans to execute long-term agreements seeking to recover its investment in the Midla-Natchez Line.
Commitments and contractual obligations
Future non-cancelable commitments related to the following contractual obligations as of December 31, 2015 , are presented below (in thousands):
2016
2017
2018
2019
2020
Thereafter
Operating leases and
service contracts
Asset Retirement
Obligation
Total
$
3,721 $
6,822 $
2,286
1,173
1,345
1,006
1,537
$
11,068 $
—
—
—
—
28,549
35,371 $
10,543
2,286
1,173
1,345
1,006
30,086
46,439
For the years ended December 31, 2015 , 2014 and 2013 , total expenses related to operating leases, land site leases and right-of-way agreements were $12.0
million , $5.8 million , and $1.1 million , respectively.
20. Related-Party Transactions
Employees of our General Partner are assigned to work for the Partnership or affiliates of our General Partner. Where directly attributable, the costs of all
compensation, benefits expenses and employer expenses for these employees are charged directly by our General Partner to American Midstream, LLC, which, in
turn, charges the appropriate subsidiary or affiliate. Our General Partner does not record any profit or margin for the administrative and operational services
charged to us. During the years ended December 31, 2015 , 2014 , and 2013 , administrative payroll and operational services expenses of $28.7 million , $22.6
million and $14.2 million , respectively, were charged to the Partnership by our General Partner.
For the years ended December 31, 2015 and 2014 , our General Partner incurred approximately $1.5 million and $0.9 million , respectively, of costs related to
business development compensation that were funded by the Partnership. There were no such costs for the year ended December 31, 2013. As of December 31,
2015, the Partnership has been reimbursed for these costs. For the years ended December 31, 2015 , 2014 and 2013 , our General Partner also incurred
approximately less than $0.1 million , $0.1 million and $0.8 million of costs associated with other business development activities, respectively. If the business
development activities result in a project that will be pursued and funded by the Partnership, we will reimburse our General Partner for the business development
costs related to that project and record those costs in our consolidated statements of operations.
During the year ended December 31, 2015 , the Partnership and an affiliate of HPIP entered into arrangements under which the affiliate reimbursed the Partnership
for right-of-ways purchased on the affiliate's behalf for approximately $3.9 million . During the year ended December 31, 2015 , the Partnership purchased certain
equipment from an affiliate for $0.3 million .
F-35
During the second quarter of 2014, the Partnership and an affiliate of its General Partner entered into a Management Service Fee arrangement under which the
affiliate pays a monthly fee to reimburse the Partnership for administrative expenses incurred on the affiliate's behalf. For the years ended December 31, 2015 and
2014 , the Partnership recognized $1.4 million and $0.9 million , respectively, in management fee income that has been recorded as a reduction to Selling,
general
and
administrative
expenses
.
As of December 31, 2015, the Partnership had $3.8 million due to our General Partner, which has been recorded in Accrued
expenses
and
other
current
liabilities
and relates primarily to compensation. This payable is generally settled on a quarterly basis. As of December 31, 2014, the Partnership had $0.7 million due to our
General Partner and $0.8 million due from affiliates of our General Partner, which are recorded in Accrued
expenses
and
other
current
liabilities
and Other
current
assets
, respectively.
Other
Transactions
with
Affiliates
On March 30, 2015 and June 30, 2015, we entered into two Series A-2 Convertible Preferred Unit Purchase Agreements with Magnolia Infrastructure Partners,
LLC (an affiliate of HPIP) pursuant to which the Partnership issued, in separate private placements, newly-designated Series A-2 Units (the “Series A-2 Units”)
representing limited partnership interests in the Partnership. As a result, the Partnership issued a total of 2,571,430 Series A-2 Units for approximately $45.0
million in aggregate proceeds during the year ended December 31, 2015. See Note 14 "Partners' Capital and Convertible Preferred Units" for more information.
In April 2013, 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.
In January 2014, in connection with the acquisition of the Lavaca System, the Partnership issued 1,168,225 Series B Units to our General Partner. The net proceeds
related to the issuance was $30.0 million .
In connection with the Blackwater Acquisition in December 2013, our General Partner contributed the net assets of Blackwater which were recorded at their
historical book value of $22.7 million for 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 . See Note 2 "Acquisitions and Divestitures" for more information.
21. Reportable Segments
Our operations are located in the United States and are organized into three reportable segments: i) Gathering and Processing, ii) Transmission and iii) Terminals.
Gathering and Processing
Our Gathering and Processing segment provides "wellhead-to-market" services to producers of natural gas and crude oil, which include transporting raw natural
gas from the wellhead through gathering systems, treating the raw natural gas, processing raw natural gas to separate the NGLs from the natural gas, fractionating
NGLs, and selling or delivering pipeline-quality natural gas and NGLs to various markets and pipeline systems.
Transmission
Our Transmission segment transports and delivers natural gas from producing wells, receipt points or pipeline interconnects for shippers and other customers,
including local distribution companies, or LDCs, utilities and industrial, commercial and power generation customers.
Terminals
Our Terminals segment provides above-ground storage services at our marine terminals that support various commercial customers, including commodity brokers,
refiners and chemical manufacturers to store a range of products, including petroleum products, distillates, chemicals and agricultural products.
These segments are monitored separately by management for performance and are consistent with the Partnership's internal financial reporting. These segments
have been identified based on the differing products and services, regulatory environment and the
F-36
expertise required for these operations. Gross margin is a performance measure utilized by management to monitor the results of each segment.
The following tables set forth our segment information for the periods indicated (in thousands):
Revenue
Year Ended December 31, 2015
Gathering
and
Processing
Transmission
Terminals
$
173,597 $
43,682 $
17,755 $
Gain (loss) on commodity derivatives, net
1,324
—
—
Total
235,034
1,324
Total revenue
Operating expenses:
Purchases of natural gas, NGL's and condensate
Direct operating expenses
Selling, general and administrative expenses
Equity compensation expense
Depreciation, amortization and accretion expense
Total operating expenses
Gain (loss) on sale of assets, net
Loss on impairment of goodwill
Interest expense
Earnings in unconsolidated affiliates
Income tax (expense) benefit
Income (loss) from discontinued operations, net of tax
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to the Partnership
174,921
43,682
17,755
236,358
97,580
39,189
8,303
13,720
—
105,883
6,640
59,549
27,232
3,774
38,014
234,452
(3,011)
(118,592)
(14,745)
8,201
(1,134)
(80)
(127,455)
25
$
(127,480)
Segment gross margin (a)
$
76,865 $
35,301 $
11,115 $
123,281
F-37
Revenue
Year Ended December 31, 2014
Gathering
and
Processing
Transmission
Terminals
$
203,616 $
88,189 $
15,504 $
Gain (loss) on commodity derivatives, net
1,091
—
—
Total
307,309
1,091
Total revenue
Operating expenses:
Purchases of natural gas, NGL's and condensate
Direct operating expenses
Selling, general and administrative expenses
Equity compensation expense
Depreciation, amortization and accretion expense
Total operating expenses
Gain (loss) on sale of assets, net
Loss on impairment of property, plant and equipment
Interest expense
Other income (expense)
Earnings in unconsolidated affiliates
Income tax (expense) benefit
Income (loss) from discontinued operations, net of tax
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to the Partnership
204,707
88,189
15,504
308,400
152,690
23,783
45,262
15,577
—
197,952
6,342
45,702
23,103
1,536
28,832
297,125
(122)
(99,892)
(7,577)
(670)
348
(557)
(611)
(97,806)
214
$
(98,020)
Segment gross margin (a)
$
50,817 $
42,828 $
9,162 $
102,807
F-38
Revenue
Year Ended December 31, 2013
Gathering
and
Processing
Transmission Terminals (b)
$
205,179 $
79,041 $
9,831 $
Gain (loss) on commodity derivatives, net
28
—
—
Total
294,051
28
Total revenue
Operating expenses:
Purchases of natural gas, NGL's and condensate
Direct operating expenses
Selling, general and administrative expenses
Equity compensation expense
Depreciation, amortization and accretion expense
Total operating expenses
Gain (loss) on involuntary conversion of property, plant and
equipment
Loss on impairment of property, plant and equipment
Interest expense
Income tax (expense) benefit
Income (loss) from discontinued operations, net of tax
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to the Partnership
205,207
79,041
9,831
294,079
168,574
14,574
46,479
13,259
—
215,053
4,403
32,236
19,079
2,094
30,002
298,464
343
(18,155)
(9,291)
495
(2,413)
(33,406)
633
$
(34,039)
Segment gross margin (a)
$
36,985 $
32,408 $
5,428 $
74,821
Segment assets:
Gathering and Processing
Transmission
Terminals
Other (c)
Total assets
December 31,
2015
2014
$
$
572,824 $
133,870
84,449
100,153
891,296 $
686,395
132,767
68,094
26,302
913,558
(a) Segment gross margin for our Gathering and Processing segment consists of revenue less purchases of natural gas, NGLs and condensate and COMA.
Segment gross margin for our Transmission segment consists of revenue, less purchases of natural gas and COMA. Segment gross margin for our
Terminals segment consists of revenue, less direct operating expenses. Gross margin consists of the sum of the segment gross margin amounts for each of
these segments. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net
income or cash flow from operations as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of
another company because other entities may not calculate gross margin in the same manner.
(b) Terminals segment amounts are for the period from April 15, 2013 to December 31, 2013.
(c) Other assets not allocable to segments consist of investment in unconsolidated affiliate, corporate leasehold improvements, and other assets.
For a definition of gross margin and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP
and a discussion of how we use gross margin to evaluate our operating performance, please read Item 7. "Management's Discussion and Analysis, How We
Evaluate Our Operations."
F-39
The following table summarizes the percentage of revenue earned from those customers in each segment that exceed 10% of the Partnership's consolidated
segment's revenue for the each of the periods presented below:
Gathering and Processing:
Customer A
Customer B
Customer J
Other
Total
Transmission:
Customer C
Customer D
Customer K
Other
Total
Terminals:
Customer F
Customer B
Customer G
Customer H
Customer I
Other
Total
Years Ended December 31,
2015
2014
2013
12%
—%
12%
76%
100%
—%
16%
19%
65%
100%
13%
13%
21%
—%
13%
40%
33%
12%
—%
55%
100%
43%
16%
—%
41%
100%
19%
20%
15%
11%
—%
35%
43%
19%
—%
38%
100%
39%
16%
—%
45%
100%
20%
17%
16%
13%
—%
34%
100%
100%
100%
F-40
22. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for 2015 and 2014 are as follows (in thousands, except per unit amounts):
Year Ended December 31, 2015
Total revenues
Gross margin (a)
Operating income (loss)
Net income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss) attributable to noncontrolling interest
Net income (loss) attributable to the Partnership
General Partner's Interest in net income (loss)
Limited Partners' Interest in net income (loss)
Limited Partners' income (loss) per unit:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Year Ended December 31, 2014
Total revenues
Gross margin (a)
Operating income (loss)
Net income (loss) from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss) attributable to noncontrolling interest
Net income (loss) attributable to the Partnership
General Partner's Interest in net income (loss)
Limited Partners' Interest in net income (loss)
Limited Partners' income (loss) per unit:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter (b)
$
64,609 $
67,509 $
55,641 $
33,776
3,434
835
5
14
826
10
32,304
1,867
(2,002)
(31)
32
(2,065)
(25)
29,134
(1,523)
(4,574)
(53)
34
(4,661)
(60)
48,599
28,067
(123,475)
(121,634)
(1)
(55)
(121,580)
(1,570)
$
$
$
$
$
$
$
816 $
(2,040) $
(4,601) $
(120,010)
(0.19) $
(0.35) $
(0.48) $
—
—
—
(0.19) $
(0.35) $
(0.48) $
80,238 $
77,680 $
70,305 $
23,081
2,450
558
(50)
108
400
7
22,167
734
(1,095)
(506)
66
(1,667)
(22)
21,332
(290)
(2,397)
(26)
33
(2,456)
(32)
393 $
(1,645) $
(2,424) $
(4.16)
—
(4.16)
80,177
36,227
(91,633)
(94,261)
(29)
7
(94,297)
(1,232)
(93,065)
(0.31) $
(0.01)
(0.32) $
(0.55) $
(0.04)
(0.59) $
(0.58) $
—
(0.58) $
(4.98)
—
(4.98)
(a) For a definition of gross margin and a reconciliation to its most directly comparable financial measure calculated and presented in accordance with GAAP
and a discussion of how we use gross margin to evaluate our operating performance, please read Item 7. "Management's Discussion and Analysis, How We
Evaluate Our Operations."
In the fourth quarter of 2015, we recognized a Loss
on
impairment
of
goodwill
of $118.6 million . In the fourth quarter of 2014, we recognized a Loss
on
impairment
of
property,
plant
and
equipment
of $99.9 million .
(b)
F-41
Exhibit 10.37
THIS EMPLOYMENT AGREEMENT (“ Agreement ”) is made by and between American Midstream GP, LLC, a Delaware
limited liability company (the “ Company ”), and Michael D. Suder (“ Executive ”).
EMPLOYMENT AGREEMENT
W I T N E S S E T H:
WHEREAS , Executive was a party to an Employment Agreement with Blackwater Midstream Corp. (“ Blackwater ”), dated as of
October 9, 2012 (the “ Blackwater Agreement ”); and
WHEREAS , is connection with American Midstream Partners, LP acquisition of Blackwater Midstream Holdings LLC (“
Blackwater Holdings ”) and its subsidiaries pursuant to that Agreement and Plan of Merger by and among AL Blackwater, LLC (“ Newco
”), Blackwater Holdings, American Midstream Partners, LP and Blackwater Merger Sub, LLC, dated as of December 10, 2013 (the “
Merger Agreement ”), Executive and Blackwater have terminated the Blackwater Agreement in consideration for entering into this
Agreement; and
WHEREAS , the Company wishes to secure the services of Executive subject to the contractual terms and conditions set forth
herein; and
WHEREAS , Executive is willing to enter into this Agreement upon the terms and conditions set forth herein; and
NOW, THEREFORE , for and in consideration of the mutual promises, covenants and obligations contained herein, the Company
and Executive agree as follows:
ARTICLE I DEFINITIONS
In addition to the terms defined in the body of this Agreement, for purposes of this Agreement, the following capitalized words shall
have the meanings indicated below:
1.
“ Accrued Obligation ” shall mean the sum of (a) Executive’s Base Salary through the Date of Termination and (b) any
accrued vacation pay earned (and unused) by Executive as of the Date of Termination.
2.
“ Benefit Obligation ” shall mean payment by the Company to Executive (or his designated beneficiary or legal
representative, as applicable), in accordance with the terms of the applicable plan document, of all vested benefits to which Executive is
entitled under the terms of the employee benefit plans and compensation arrangements in which Executive is a participant as of the Date of
Termination.
3.
“ Blackwater Entity ” means, all or any, as applicable, of Blackwater Holdings, Blackwater Investments, Inc., a Delaware
close corporation, Blackwater, Blackwater New Orleans, L.L.C., a Louisiana limited liability company, Blackwater Georgia, L.L.C., a
Georgia
limited liability company, and Blackwater Maryland, L.L.C., a Maryland limited liability company.
4.
“ Cause ” shall mean:
dishonesty or moral turpitude or results in the imposition of a term of imprisonment;
(a)
Executive’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony, involves fraud,
(b)
The occurrence of any of the following acts on the part of Executive:
(i)
Company or its affiliates;
Fraud, willful or intentional misconduct or gross negligence in connection with the business of the
Exhibit 10.37
or its affiliates;
(ii)
Embezzlement or misappropriation of any funds of the Company
Executive to perform Executive’s duties to the Company or its affiliates;
(iii)
Alcohol or substance abuse that has impaired or could reasonably be expected to impair the ability of
those regarding harassment or discrimination in employment; or
(iv)
Failure to comply with the Company’s policies or its affiliates’ policies in any material respect, including
(v)
the Company or its affiliates in any material respect;
Dishonesty or disloyalty that has adversely affected or could reasonably be expected to adversely affect
Executive’s excessive absenteeism, willful or persistent neglect of, or abandonment of Executive’s duties (other
than due to illness or any other physical condition that could reasonably be expected to result in disability), which has not been cured after
reasonable notice from the Company; or
(c)
(d)
Executive’s material breach of any provision of this Agreement.
“ Code ” shall mean the Internal Revenue Code of 1986, as amended.
“ Confidential Information ” shall mean all information, trade secrets, designs, ideas, concepts, improvements, product
5.
6.
developments, discoveries and inventions, whether patentable or not, that are conceived, made, developed or acquired by Executive,
individually or in conjunction with others, during the period of Executive’s employment by the Company or its affiliates (whether during
business hours or otherwise and whether on the Company’s (or its affiliates) premises or otherwise) that relate to the Company’s (or its
affiliates) business, trade secrets, products or services (including, without limitation, all such information relating to corporate opportunities,
product specification, compositions, manufacturing and distribution methods and processes, research, financial and sales data, pricing terms,
evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts
within the customer’s organizations or within the organization of acquisition
prospects, or production, marketing and merchandising techniques, prospective names and marks) and all writings or materials of any type
embodying any of such information, ideas, concepts, improvements, discoveries, inventions and other similar forms of expression.
7.
“ Date of Termination ” shall mean the date specified in the Notice of Termination relating to termination of Executive’s
employment with the Company, where applicable, and otherwise shall mean the date that Executive’s employment with the Company is
terminated as provided in Section 4.5.
8.
“ Disabled ” shall mean that Executive is unable to perform the essential functions of Executive’s job or fulfill Executive’s
obligations under this Agreement by reason of any medically determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than three months as determined by the Company, which is certified in
writing by a competent medical physician selected by the Company and approved by Executive (or Executive’s legally authorized
representative), which approval shall not be unreasonably withheld.
9.
“ Notice of Termination ” shall mean a written notice delivered by the Company or Executive to the other party indicating
the specific termination provision in this Agreement relied upon for termination of Executive’s employment and the Date of Termination
that sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.
10.
“ Work Product ” shall mean all documents, videotapes, written presentations, brochures, drawings, memoranda, notes,
records, files, correspondence, manuals, models, specifications, computer programs, E-mail, voice mail, electronic databases, maps,
architectural renditions and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements,
discoveries, inventions and other similar forms of expression that are conceived, made, developed or acquired by Executive individually or
in conjunction with others during the period of Executive’s employment by the Company or its affiliates (whether during business hours or
otherwise and whether on the Company’s (or its affiliates) premises or otherwise) that relate to the Company’s (or its affiliates) business,
trade secrets, products or services.
Exhibit 10.37
ARTICLE II
EMPLOYMENT AND DUTIES
1.
Employment; Effective Date . The Company agrees to employ Executive, and Executive agrees to be employed by the
Company, pursuant to the terms of this Agreement beginning as of December 17, 2013 (the “ Effective Date ”) and continuing for the period
of time set forth in Article IV of this Agreement, subject to the terms and conditions of this Agreement.
2.
Positions . From and after the Effective Date, Executive shall serve in the position of President and Chief Executive
Officer of Blackwater Holdings or its successor, or in such other position or positions as the parties mutually may agree.
3.
Duties and Services . Executive agrees to serve in the positions referred to in Section 2.2 hereof and to perform diligently
and to the best of Executive’s abilities the usual and
customary duties and services appertaining to such positions, as well as such additional duties and services appropriate to such positions
which the Company and Executive mutually may agree upon from time to time. Executive’s employment shall also be subject to the policies
maintained and established by the Company and Blackwater that are of general applicability to the Company’s and/or Blackwater’s
executive employees, as such policies may be amended from time to time.
4.
Other Interests . Executive agrees, during the period of Executive’s employment by the Company, to devote substantially
all of Executive’s business time, energy and best efforts to the business and affairs of the Company and its affiliates. Notwithstanding the
foregoing, the parties acknowledge and agree that Executive may (a) engage in and manage Executive’s passive personal investments, (b)
engage in charitable and civic activities, and (c) engage in such other activities that the Company and Executive mutually agree to; provided,
however, that such activities shall be permitted so long as such activities do not conflict with the business and affairs of the Company or its
affiliates or interfere with the performance of Executive’s duties hereunder.
5.
Duty of Loyalty . Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and
allegiance to act in the best interests of the Company and to do no act that would materially injure the business, interests, or reputation of the
Company or any of its affiliates. In keeping with these duties, Executive shall make full disclosure to the Company of all business
opportunities pertaining to the Company’s or its affiliates’ businesses and shall not appropriate for Executive’s own benefit business
opportunities concerning the subject matter of the fiduciary relationship.
1.
Base Salary . During the Term (as defined in Section 4.1), Executive shall receive a minimum, annualized base salary of
$300,000 ($325,000 for remainder of 2013) (the “ Base Salary ”). Executive’s Base
ARTICLE III
COMPENSATION AND BENEFITS
Salary shall be paid in equal installments in accordance with the Company’s standard policy regarding payment of compensation to
employees but no less frequently than monthly. Executive’s Base Salary is subject to an annual performance review and potential increase.
Exhibit 10.37
2.
Bonuses and Incentive Awards .
(a)
STIP
Bonus.
Provided that Executive remains employed by the Company on December 31, 2013, the Company will pay
Executive 3/12ths of Executive’s target short term incentive bonus amount of $162,500 which equals $40,625 (the “ STIP Bonus Target ”).
Payment will be made in a lump sum no later than March 15, 2014.
(i)
For 2014 and after, Executive will be eligible to earn the STIP Bonus Target provided that Executive
satisfies the terms and conditions for such bonus that will be established by the Company, which terms and conditions are expected to
include annual performance targets.
(b)
LTIP
Awards.
For 2014 and after, Executive will be eligible for an annual award under the Company’s long term
(ii)
incentive plan, as it may be established from time to time.
(c)
Harvey
Incentive
Bonus.
Executive is eligible for a bonus (the “ Harvey Incentive Bonus ”) if Blackwater Harvey,
LLC, a Delaware limited liability company (“ Harvey ”), which operates the storage facility located in Harvey, Louisiana, achieves as of the
end of any trailing twelve-month period during the Term a minimum threshold EBITDA of $5 million (the “ Harvey Target ”), provided
that Executive remains employed by the Company on the date that the Harvey Target is achieved. For this purpose, EBITDA means, with
respect to the applicable calculation period, the net income before interest, income taxes, depreciation and amortization of Harvey, in each
case calculated in accordance with United States generally accepted accounting principles and practices as in effect on the date hereof. In
calculating EBITDA, no addition or deduction shall be taken for: (i) non-recurring expenses, including but not limited to those related to
corporate transactions; (ii) non-cash expenses, including but not limited to equity-based compensation and asset retirement obligations; (iii)
any gains resulting from any write-up of any assets or any loss resulting from any write-down or impairments; and
hedging or other similar activities; provided
, further and for the avoidance of doubt, in calculating EBITDA, the net income (or
(i)
net loss) shall specifically include deductions for any general and administrative expenses and corporate overhead of any Blackwater Entity
or any of their affiliates that is allocated to or realized by Harvey. The calculation of EBITDA, including deductions for any general and
administrative expenses and corporate overhead allocated to Harvey, will be subject to audit and review by Newco in accordance with the
procedures set forth in the Merger Agreement. Executive’s bonus will be equivalent to 46.15% of the “Harvey Bonus Pool” as defined
below.
(i)
“ Harvey Bonus Pool ” will be equivalent to 10% of the difference between “Harvey FMV” and “Harvey
Cost.” For this purpose, “ Harvey FMV ” means 8 multiplied by next twelve months’ EBITDA, as forecasted by the Company as of the date
that the Harvey Target is achieved. For this purpose, “ Harvey Cost ” means the cumulative investment in Harvey, including costs to date,
including without limitation fully burdened allocated employee costs and corporate overhead, as determined by the Company. The amount
of the Harvey bonus pool may not exceed $1 million.
Executive’s Harvey Incentive Bonus, if any, will be paid within 90 days after the Company’s
determination that the Harvey Target is achieved, but in no event later than March 15th of the year following the year in which the Harvey
Target is achieved.
(ii)
Executive’s Harvey Incentive Bonus, if any, will be paid in the form of American Midstream Partners, LP
common units, subject to an 18-month lockup with terms similar to the lock up agreement contained in the Contribution and Rollover
Agreement by and among the Company, Executive and the other investors listed on Schedule 1 thereto dated on or about the date hereof.
(iii)
3.
Employee Benefits . During Executive’s employment hereunder, Executive and, to the extent
Exhibit 10.37
applicable, Executive’s spouse, dependents and beneficiaries, shall be allowed to participate in all benefits, plans and programs, including
improvements or modifications of the same, which are now, or may hereafter be, available to other executive employees of the
Company. Such benefits, plans and programs shall include, without limitation, any profit sharing plan, thrift plan, health insurance or health
care plan, life insurance, disability insurance, pension plan, supplemental retirement plan, and the like which may be maintained by the
Company. The Company shall not, however, by reason of this Section be obligated to institute, maintain, or refrain from changing,
amending, or discontinuing, any such benefit plan or program, so long as such changes are similarly applicable to executive employees
generally.
4.
Vacation and Leave . Executive shall be entitled to paid vacation days in accordance with Company policy. Executive
shall also be entitled to all paid holidays given by the Company to its employees generally.
5.
Expenses . The Company shall promptly reimburse Executive for all reasonable business expenses incurred by Executive
in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request
of and in the service of the Company; provided, in each case, that such expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company. Any such reimbursement of expenses shall be made by the Company upon or as soon
as practicable following receipt of supporting documentation reasonably satisfactory to the Company (but in any event not later than the
close of Executive’s taxable year following the taxable year in which the expense is incurred by Executive). In no event shall any
reimbursement be made to Executive for such fees and expenses incurred after the date that is one year after the date of Executive’s
termination of employment with the Company.
6.
Offices . Subject to Articles II, III, and IV hereof, Executive agrees to serve without additional compensation, if elected or
appointed thereto, as a director or manager of the Company or any of the Company’s affiliates and as a member of any committees of the
board of directors or similar governing bodies of any such entities, and in one or more executive positions of any of the Company’s
affiliates.
ARTICLE IV
TERM AND TERMINATION OF EMPLOYMENT
1.
Term . Subject to the remaining terms of this Article IV, this Agreement shall be for an initial term that begins on the
Effective Date and continues in effect through October 31, 2017 (the “ Initial Term ”) and, unless terminated sooner as herein provided,
shall renew for successive one-year periods after the fifth anniversary of the Effective Date (each a “ Renewal Term ” and together with the
Initial Term, the “ Term ”). If the Company or Executive desires to elect not to renew this Agreement, the Company or Executive must give
written notice (which may be included in a Notice of Termination) to the other party at least 30 days before the expiration of the then-
current Initial Term or Renewal Term, as applicable. In the event that one party provides the other with a written notice of election not to
renew this Agreement pursuant to this Section 4.1, no further automatic extensions will occur and this Agreement shall terminate at the end
of the then-existing Initial Term or Renewal Term, as applicable. If the Company elects not to renew this Agreement and Executive’s
employment with the Company is not terminated, Executive shall continue as an at-will employee of the Company and this Agreement shall
terminate, subject to Section 9.13, at the end of the current Term.
2.
Company’s Right to Terminate . Notwithstanding the provisions of Section 4.1, the Company may terminate Executive’s
employment under this Agreement at any time for any of the following reasons by providing Executive with a Notice of Termination:
(a)
(b)
(c)
upon the determination that Executive is Disabled; or
Executive’s death; or
for Cause; or
Exhibit 10.37
(d)
for any other reason whatsoever or for no reason at all, in the sole discretion of the Company.
3.
Executive’s Right to Terminate . Notwithstanding the provisions of Section 4.1, Executive shall have the right to
terminate Executive’s employment under this Agreement for any reason whatsoever or no reason at all, in the sole discretion of Executive,
by providing the Company with a Notice of Termination.
4.
Deemed Resignations . Unless otherwise agreed to in writing by the Company and Executive prior to the termination of
Executive’s employment, any termination of Executive’s employment shall constitute an automatic resignation of Executive as an officer of
the Company and each affiliate of the Company, and an automatic resignation of Executive from the board of directors or similar governing
body of any affiliate of the Company and from the board of directors or similar governing body of any corporation, limited liability entity or
other entity in which the Company or any affiliate holds an equity interest and with respect to which board or similar governing body
Executive serves as the Company’s or such affiliate’s designee or other representative.
5.
Meaning of Termination of Employment . For all purposes of this Agreement, Executive shall be considered to have
terminated employment with the Company when Executive incurs a “separation from service” with the Company within the meaning of
Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance issued thereunder.
ARTICLE V
EFFECT OF TERMINATION OF EMPLOYMENT ON COMPENSATION
1.
Effect of Termination of Employment on Compensation .
(a)
Disability;
Death
. Following the termination of Executive’s employment due to death or a determination that
Executive is Disabled pursuant to Section 4.2(a) or Section 4.2(b) hereof, the Company shall pay to Executive (or his designated beneficiary
or legal representative, if applicable) the Accrued Obligation within 10 days following the Date of Termination. Following such payment,
the Company shall have no further obligations to Executive other than as may be required by law or the terms of an employee benefit plan
of the Company. The Company shall pay Executive (or his designated beneficiary or legal representative, if applicable) the Benefit
Obligation at the times specified in and in accordance with the terms of the applicable employee benefit plans and compensation
arrangements unless otherwise required by law.
(b)
By
the
Company
for
Cause
. If during the Term Executive’s employment is terminated by the Company for Cause
pursuant to Section 4.2(c) hereof, the Company shall pay to Executive the Accrued Obligation within 10 days following the Date of
Termination. Following such payment, the Company shall have no further obligations to Executive other than as may be required by law or
the terms of an employee benefit plan of the Company. The Company shall pay Executive the Benefit Obligation at the times specified in
and in accordance with the terms of the applicable employee benefit plans and compensation arrangements unless otherwise required by
law.
(c)
By
Executive
For
Any
Reason
. If during the Term Executive terminates his employment for any reason, the
Company shall pay to Executive the Accrued Obligation within 10 days following the Date of Termination. Following such payment, the
Company shall have no further obligations to Executive other than as may be required by law or the terms of an employee benefit plan of
the Company. The Company shall pay Executive the Benefit Obligation at the times specified in and in accordance with the terms of the
applicable employee benefit plans and compensation arrangements unless otherwise required by law. Executive shall not have breached this
Agreement if Executive terminates Executive’s employment for any reason.
(d)
At
the
End
of
the
Term
. If during the Term either party provides the other with a written notice of its election not
to renew the Agreement and Executive’s employment with the Company is terminated at the end of the Term, the Company shall pay to
Executive the Accrued Obligation within 10 days following the Date of Termination. Following such payment, the Company shall have no
further obligations to Executive other
Exhibit 10.37
than as may be required by law or the terms of an employee benefit plan of the Company. The Company shall pay Executive the Benefit
Obligation at the times specified in and in accordance with the terms of the applicable employee benefit plans and compensation
arrangements unless otherwise required by law. The party providing written notice of its election not to renew the Agreement to the other
party shall not have breached this Agreement if such notice is timely provided.
By
the
Company
Without
Cause
. If during the Term Executive’s employment is terminated by the Company other
than for Cause, or other than due to death or a determination that Executive is Disabled, then, Executive shall receive the following benefits
and compensation from the Company:
(e)
Termination;
(i)
the Company shall pay Executive the Accrued Obligation within 10 days following the Date of
months or (2) the remainder of the current Term, in either case with such amount payable in 12 equal monthly installments commencing on
the 60th day following Executive’s Date of Termination;
(ii)
the Company shall pay to Executive an amount equal to the lesser of Executive’s Base Salary for (1) 12
(iii)
the Company shall pay Executive the Benefit Obligation at the times specified in and in accordance with
the terms of the applicable employee benefit plans and compensation arrangements; and
(iv)
during the 12-month period following Executive’s Date of Termination, to the extent that Executive (and
his eligible dependents as of Executive’s Date of Termination) are eligible for and elect continuation (COBRA) coverage under any
medical, vision and dental benefit plans (excluding disability insurance) maintained by the Company under which Executive was covered
immediately prior to Executive’s Date of Termination, the Company agrees to pay Executive a taxable amount equal to the amount (if any)
that the Company contributes towards the cost of coverage for a similarly situated active employee. Such amount may be taxable to
Executive, and will be paid on the six and twelve month anniversaries of Executive’s Date of Termination.
Notwithstanding the foregoing, neither Executive, nor his estate, shall be permitted to specify the taxable year in which a payment
described in this Section 5.1(e) shall be paid.
(f)
General
Release
of
Claims
. Payments to Executive under Section 5.1(e) (other than Accrued Obligations and
Benefit Obligations) are contingent upon Executive’s execution of a release within 50 days of Executive’s Date of Termination in a form
reasonably satisfactory to the Company that, if applicable, is not revoked by Executive during the revocation period provided in such
release, and which shall release and discharge the Company and its affiliates, and their officers, directors, managers, employees and agents
from any and all claims or causes of action of any kind or character, including but not limited to all claims or causes of action arising out of
Executive’s employment with the Company or its affiliates or the termination of such employment.
ARTICLE VI
PROTECTION OF THE COMPANY’S INFORMATION
1.
Disclosure to and Property of the Company . For purposes of this Article VI, the term the “Company” shall include the
Company and any of its affiliates, and any reference to “employment” or similar terms shall include a director, manager and/or consulting
relationship. All Confidential Information shall be retained for and, to the extent practicable, disclosed to the Company and are and shall be
the sole and exclusive property of the Company. Moreover, all Work Product is and shall be the sole and exclusive property of the
Company. Executive agrees to perform all actions reasonably requested by the Company to establish and confirm such exclusive ownership.
Upon termination of Executive’s employment by the Company, for any reason, Executive promptly shall deliver such Confidential
Information and Work Product, and all copies thereof, to the Company.
2.
Disclosure to Executive . During the Term, the Company shall disclose to Executive, or place
Exhibit 10.37
Executive in a position to have access to or develop, Confidential Information and Work Product of the Company; and shall entrust
Executive with business opportunities of the Company; and shall place Executive in a position to develop business good will on behalf of
the Company.
3.
No Unauthorized Use or Disclosure . Executive agrees to use reasonable efforts to preserve and protect the confidentiality
of all Confidential Information and of all Work Product containing Confidential Information of the Company and its affiliates. Executive
agrees that Executive will not, at any time during or after Executive’s employment with the Company,
make any unauthorized disclosure of, and Executive shall not remove from the Company premises, Confidential Information or Work
Product of the Company or its affiliates, or make any use thereof, except, in each case, in the carrying out of Executive’s responsibilities
hereunder. Executive shall use all reasonable efforts to obligate all persons or entities to whom any Confidential Information shall be
disclosed by Executive hereunder to preserve and protect the confidentiality of such Confidential Information. Executive shall have no
obligation hereunder to keep confidential any Confidential Information if and to the extent (a) such Confidential Information has become
publicly available other than as a result of a breach of this Agreement by Executive or (b) disclosure thereof is specifically required by law;
provided, however, that in the event disclosure is required by applicable law, Executive shall provide the Company with prompt notice of
such requirement prior to making any such disclosure, so that the Company may seek an appropriate protective order. At the request of the
Company at any time, Executive agrees to deliver to the Company all Confidential Information that Executive may possess or control.
Executive agrees that all Confidential Information of the Company (whether now or hereafter existing) conceived, discovered or made by
Executive during the period of Executive’s employment by the Company exclusively belongs to the Company (and not to Executive), and
upon request by the Company for specified Confidential Information, Executive will promptly disclose such Confidential Information to the
Company and perform all actions reasonably requested by the Company to establish and confirm such exclusive ownership. Affiliates of the
Company shall be third party beneficiaries of Executive’s obligations under this Article VI. As a result of Executive’s employment by the
Company, Executive may also from time to time have access to, or knowledge of, confidential information or work product of third parties,
such as customers, suppliers, partners, joint venturers, and the like, of the Company and its affiliates. Executive also agrees to use
reasonable efforts to preserve and protect the confidentiality of such third party Confidential Information and Work Product.
4.
Ownership by the Company . If, during Executive’s employment by the Company, Executive creates any work of
authorship fixed in any tangible medium of expression that is the subject matter of copyright (such as videotapes, written presentations, or
acquisitions, computer programs, E-mail, voice mail, electronic databases, drawings, maps, architectural renditions, models, manuals,
brochures, or the like) relating to the Company’s business, products, or services, whether such work is created solely by Executive or jointly
with others (whether during business hours or otherwise and whether on the Company’s premises or otherwise), including any Work
Product, the Company shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s
employment; or, if the work relating to the Company’s business, products, or services is not prepared by Executive within the scope of
Executive’s employment but is specially ordered by the Company as a contribution to a collective work, as a part of a motion picture or
other audiovisual work, as a translation, as a supplementary work, as a compilation, or as an instructional text, then the work shall be
considered to be work made for hire and the Company shall be the author of the work. If the work relating to the Company’s business,
products, or services is neither prepared by Executive within the scope of Executive’s employment nor a work specially ordered that is
deemed to be a work made for hire during Executive’s employment by the Company, then Executive hereby agrees to assign, and by these
presents does assign, to the Company all of Executive’s worldwide right, title, and interest in and to such work and all rights of copyright
therein.
5.
Assistance by Executive . During the period of Executive’s employment by the Company, Executive shall assist the
Company and its nominee, at any time, in the protection of the Company’s or its affiliates’ worldwide right, title and interest in and to
Confidential Information and Work Product and the execution of all formal assignment documents requested by the Company or its
nominee and the execution of all lawful oaths and applications for patents and registration of copyright in the United States and foreign
countries. After Executive’s employment with the Company terminates, at the request from time to time and expense of the
Company or its affiliates, Executive shall reasonably assist the Company and its nominee, at reasonable times and for reasonable periods
and for reasonable compensation, in the protection of the Company’s or its affiliates’ worldwide right, title and interest in and to
Confidential Information and Work Product and the execution of all formal assignment documents requested by the Company or its
nominee and the execution of all lawful oaths and applications for patents and registration of copyright in the United States and foreign
countries.
Exhibit 10.37
ARTICLE VII
NON-COMPETITION AGREEMENT
1.
Definitions . As used in this Article VII, the following terms shall have the following meanings:
(a)
“ Business ” means any endeavor in which Blackwater, including its subsidiaries, is engaged in during the
Restricted Period, and the provision of products or services that are substantially similar to the products or services provided by any
business, partnership, firm, corporation or other entity which Blackwater or one of its subsidiaries has made substantial progress toward
acquiring on or before the Date of Termination. For the purposes of this definition, the execution by the Company, Blackwater or one of
their affiliates of a binding or non-binding letter of intent, term sheet, or similar agreement or a confidentiality agreement or similar
agreement with respect to the acquisition of a business, partnership, firm, corporation or other entity on or before the Date of Termination
shall constitute sufficient evidence of Blackwater or one of its subsidiaries having made substantial progress towards acquiring such
business, partnership, firm, corporation or other entity.
(b)
“ Competing Business ” means any business, individual, partnership, firm, corporation or other entity which
wholly or in any significant part engages in any business competing with the Business in the Restricted Area. In no event will the Company
or any of its affiliates be deemed a Competing Business.
(c)
“ Governmental Authority ” means any governmental, quasi-governmental, state, county, city or other political
subdivision of the United States or any other country, or any agency, court or instrumentality, foreign or domestic, or statutory or regulatory
body thereof.
(d)
“ Legal Requirement ” means any law, statute, code, ordinance, order, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license, authorization, or other directional requirement (including, without limitation, any of the
foregoing that relates to environmental standards or controls, energy regulations and occupational, safety and health standards or controls
including those arising under environmental laws) of any Governmental Authority.
(e)
“ Restricted Area ” means any county or parish, or subdivision thereof in which the Company or its affiliates
engages in the Business, including specifically but not limited to the parishes in Louisiana set forth on Exhibit A, Wicomico County,
Maryland and Glynn County, Georgia.
(f)
“ Restricted Period ” means the period during which Executive is employed by the Company hereunder and a
period of one year following Executive’s Date of Termination.
2.
Non-Competition; Non-Solicitation . Executive and the Company agree to the non-competition and non-solicitation
provisions of this Article VII; (i) in consideration for the Confidential Information provided by the Company to Executive pursuant to
Article VI of this Agreement; (ii) as part of the consideration for the compensation and benefits to be paid to Executive hereunder; (iii) to
protect the trade secrets and confidential information of the Company or its affiliates disclosed or entrusted to Executive by the Company or
its affiliates or created or developed by Executive for the Company or its affiliates, the business goodwill of the Company or its affiliates
developed through the efforts of Executive and/or the business opportunities disclosed or entrusted to Executive by the Company or its
affiliates; and (iv) as an additional incentive for the Company to enter into this Agreement.
(a)
Subject to the exceptions set forth in Section 7.2(b) below, Executive expressly covenants
Exhibit 10.37
and agrees that during the Restricted Period (i) Executive will refrain from carrying on or engaging in, directly or indirectly, any Competing
Business in the Restricted Area and (ii) Executive will not, and Executive will cause Executive’s affiliates not to, directly or indirectly, own,
manage, operate, join, become an employee, partner, owner or member of (or an independent contractor to), control or participate in or loan
money to, sell or lease equipment to or sell or lease real property to any business, individual, partnership, firm, corporation or other entity
which engages in a Competing Business in the Restricted Area.
(b)
Notwithstanding the restrictions contained in Section 7.2(a), Executive or any of Executive’s affiliates may own
an aggregate of not more than 1% of the outstanding stock of any class of any corporation engaged in a Competing Business, if such stock is
listed on a national securities exchange or regularly traded in the over-the-counter market by a member of a national securities exchange,
without violating the provisions of Section 7.2(a), provided that neither Executive nor any of Executive’s affiliates has the power, directly or
indirectly, to control or direct the management or affairs of any such corporation and is not involved in the management of such corporation.
(c)
Executive further expressly covenants and agrees that during the Restricted Period, Executive will not, and
Executive will cause Executive’s affiliates not to (i) engage or employ, or solicit or contact with a view to the engagement or employment
of, any person who is an officer or employee of the Company or any of its affiliates or (ii) canvass, solicit, approach or entice away or cause
to be canvassed, solicited, approached or enticed away from the Company or any of its affiliates any person who or which is a customer of
any of such entities during the period during which Executive is employed by the Company.
(d)
Executive expressly recognizes that Executive is a high-level, executive employee who will be provided with
access to trade secrets as part of Executive’s employment
and that the restrictive covenants set forth in this Section 7.2 are reasonable and necessary in light of Executive’s executive position and
access to the Company’s trade secrets.
3.
Relief; Remedies . Executive and the Company agree and acknowledge that the limitations as to time, geographical area
and scope of activity to be restrained as set forth in Section 7.2 hereof are reasonable and do not impose any greater restraint than is
necessary to protect the legitimate business interests of the Company. Executive and the Company also acknowledge that money damages
would not be sufficient remedy for any breach of Article VI or this Article VII by Executive, and the Company or its affiliates shall be
entitled to enforce the provisions of Article VI and this Article VII by seeking in a court of competent jurisdiction specific performance and
injunctive relief as remedies for such breach or any threatened breach. Such remedies shall not be deemed the exclusive remedies for a
breach of Article VI or this Article VII but shall be in addition to all remedies available at law or in equity, including the recovery of
damages from Executive and Executive’s agents.
4.
Reasonableness; Enforcement . Executive hereby represents to the Company that Executive has read and understands,
and agrees to be bound by, the terms of this Article VII. Executive acknowledges that the geographic scope and duration of the covenants
contained in this Article VII are the result of arm’s-length bargaining and are fair and reasonable in light of
(a) the nature and wide geographic scope of the operations of the Business, (b) Executive’s level of control over and contact with the
Business in all jurisdictions in which it is conducted, (c) the fact that the Business is conducted throughout the Restricted Area and (d) the
amount of compensation, trade secrets and Confidential Information that Executive is receiving in connection with the performance of
Executive’s duties hereunder. It is the desire and intent of the parties that the provisions of this Article VII be enforced to the fullest extent
permitted under applicable Legal Requirements, whether now or hereafter in effect and therefore, to the extent permitted by applicable
Legal Requirements, Executive and the Company hereby waive any provision of applicable Legal Requirements that would render any
provision of this Article VII invalid or unenforceable.
5.
Reformation . The Company and Executive agree that the foregoing restrictions are reasonable under the circumstances
and that any breach of the covenants contained in this Article VII would cause irreparable injury to the Company. Executive expressly
represents that enforcement of the restrictive covenants
set forth in this Article VII will not impose an undue hardship upon Executive or any person or entity affiliated with Executive. Executive
understands that the foregoing restrictions may limit Executive’s ability to engage in certain businesses anywhere in the Restricted Area
during the Restricted Period, but acknowledges that Executive will receive sufficiently high remuneration and other benefits from the
Company to justify such restriction. Further, Executive acknowledges that Executive’s skills are such that Executive can be gainfully
employed in non-competitive employment, and that the agreement not to compete will not prevent Executive from earning a living.
Nevertheless, if any of the aforesaid restrictions are found by a court of competent jurisdiction to be unreasonable, or overly broad as to
geographic area or time, or otherwise unenforceable, the parties intend for the restrictions herein set forth to be modified by the court
making such determination so as to be reasonable and enforceable and, as so modified, to be fully enforced. By agreeing to this contractual
modification prospectively at this time, the Company and Executive intend to make this provision enforceable under the law or laws of all
applicable jurisdictions so that the entire
agreement not to compete and this Agreement as prospectively modified shall remain in full force and effect and shall not be rendered void
or illegal. Such modification shall not affect the payments made to Executive under this Agreement.
Exhibit 10.37
ARTICLE VIII
STATEMENTS CONCERNING THE COMPANY
8.1 Statements by Executive . Executive shall refrain, both during and after the termination of the employment relationship,
from publishing any oral or written statements about the Company, any of its affiliates or any of the Company’s or such affiliates’ directors,
managers, officers, employees, consultants, agents or representatives that (a) are slanderous, libelous or defamatory, (b) disclose
Confidential Information (other than Confidential Information that has become publicly available other than as a result of a breach of this
Agreement by Executive) of the Company, any of its affiliates or any of the Company’s or any such affiliates’ business affairs, directors,
managers, officers, employees, consultants, agents or representatives, or (c) place the Company, any of its affiliates, or any of the
Company’s or any such affiliates’ directors, managers, officers, employees, consultants, agents or representatives in a false light before the
public. A violation or threatened violation of this prohibition may be enjoined by a court of competent jurisdiction. The rights afforded the
Company and its affiliates under this provision are in addition to any and all rights and remedies otherwise afforded by law. The foregoing
notwithstanding, nothing shall prevent Executive from testifying in any legal proceeding pursuant to a subpoena or other legal process.
ARTICLE IX MISCELLANEOUS
1.
Notices . For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and
shall be deemed to have been duly given (a) when received if delivered personally, by courier or by electronic mail, (b) on the date receipt is
acknowledged if delivered by certified mail, postage prepaid, return receipt requested or (c) one day after transmission if sent by facsimile
transmission with confirmation of transmission, as follows:
If to Executive, addressed to: Michael D. Suder
1750 St. Charles Ave. #511
New Orleans, LA 70130 Facsimile: (504) 340-9406 Email: Michaels@bwmsc.com
If to the Company, addressed to:
American Midstream GP, LLC.
c/o American Midstream Partners, LP 1614 15th Street, Suite 300.
Denver, CO 80202 Attention: General Counsel
bmathews@americanmidstream.com Facsimile: (720) 457-6040
Exhibit 10.37
or to such other address as either party may furnish to the other in writing in accordance herewith, except that notices or changes of address
shall be effective only upon receipt.
2.
Applicable Law; Submission to Jurisdiction .
(a)
This Agreement is entered into under, and shall be governed for all purposes by, the laws of the State of Colorado,
without regard to conflicts of laws principles thereof.
to the exclusive jurisdiction, forum and venue of the state and federal courts located in the State of Colorado.
(b)
With respect to any claim or dispute related to or arising under this Agreement, the parties hereto hereby consent
3.
Litigation . Executive agrees to cooperate, in a reasonable and appropriate manner, with the Company and its attorneys,
both during and after the termination of his employment, in connection with any litigation or other proceeding arising out of or relating to
matters in which Executive was involved prior to the termination of his employment to the extent the Company pays all expenses Executive
incurs in connection with such cooperation and to the extent such cooperation does not unduly interfere (as determined by Executive in good
faith) with Executive’s personal or professional schedule.
4.
Dispute Resolution . Except as provided otherwise in Sections 7.3 and 8.1, all claims, demands, causes of action, disputes,
controversies or other matters in question (“ Claims ”) arising out of this Agreement or Executive’s service (or termination from service)
with the Company, whether arising in contract, tort or otherwise and whether provided by statute, equity or common law, that the Company
may have against Executive or that Executive may have against the Company, or its parents or subsidiaries, or against each of the foregoing
entities’ respective officers, directors, employees or agents in their capacity as such or otherwise, shall be settled in accordance with the
procedures described in Section 9.4(a) and (b). Claims covered by this Section 9.4 include, without limitation, claims by Executive for
breach of this Agreement, wrongful termination, discrimination (based on age, race, sex, disability, national origin, sexual orientation, or
any other factor), harassment and retaliation.
(a)
Agreement
to
Negotiate
. First, the parties shall attempt in good faith to resolve any Claims promptly by
negotiations between Executive and executives or directors of the Company or its affiliates who have authority to settle the Claims. Either
party must give the other disputing party written notice of any Claim not resolved in the normal course of business.
Within five days after the effective date of that notice, Executive and such executives or directors of the Company shall agree upon a
mutually acceptable time and place to meet in person or by phone and shall meet at that time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to attempt to resolve the Claim. The first of those meetings shall take
place within 30 days of the date of the disputing party’s notice. If the Claim has not been resolved within 60 days of the date of the disputing
party’s notice, or if the parties fail to agree on a time and place for an initial meeting within five days of that notice, either party may elect to
undertake arbitration in accordance with Section 9.4(b).
(b)
Agreement
to
Arbitrate
. If a Claim is not resolved by negotiation pursuant to Section 9.4(a), such Claim must be
resolved through arbitration regardless of whether the Claim involves claims that the Agreement is unlawful, unenforceable, void, or
voidable or involves claims under statutory, civil or common law. Any arbitration shall be conducted in accordance with the then-current
Employment Rules of the American Arbitration Association (“ AAA ”). If a party refuses to honor its obligations under this Section 9.4(b),
the other party may compel arbitration in any federal or state court of competent jurisdiction. The arbitrator shall apply the substantive law
of Colorado (excluding choice-of-law principles that might call for the application of some other jurisdiction’s law) or federal law, or both
as applicable to the Claims asserted. The arbitrator shall have exclusive authority to resolve any dispute relating to the interpretation,
applicability or enforceability or formation of this
Exhibit 10.37
Agreement (including this Section 9.4), including any claim that all or part of the Agreement is void or voidable and any Claim that an issue
is not subject to arbitration. Unless otherwise agreed, claims may only be brought on an individual basis; neither the Company nor
Executive may submit a class action, collective action, representative action, or multi-claimant action for resolution in arbitration. The
results of arbitration will be binding and conclusive on the parties hereto. The arbitration shall take place in the State of Colorado where all
hearings shall take place unless agreed otherwise by the parties. Any and all of the arbitrator’s orders, decisions and awards may be
enforceable in, and judgment upon any award rendered by the arbitrator may be confirmed and entered by any federal or state court having
jurisdiction. All evidentiary privileges under applicable state and federal law, including attorney-client, work product and party
communication privileges, shall be preserved and protected. The decision of the arbitrator will be binding on all parties. Arbitrations will be
conducted in such a manner that the final decision of the arbitrator will be made and provided to Executive and the Company no later than
120 days after a matter is submitted to arbitration. All proceedings conducted pursuant to this agreement to arbitrate, including any order,
decision or award of the arbitrators, shall be kept confidential by all parties. Each party shall pay its own attorneys’ fees and disbursements
and other costs of arbitration.
The Company shall pay the cost of the arbitration, including the arbitrator’s fees, unless otherwise ordered by the arbitrator. EXECUTIVE
ACKNOWLEDGES THAT, BY SIGNING THIS AGREEMENT, EXECUTIVE IS WAIVING ANY RIGHT THAT EXECUTIVE MAY
HAVE TO A JURY TRIAL OR A COURT TRIAL OF ANY SERVICE RELATED CLAIM ALLEGED BY EXECUTIVE.
5.
No Waiver . No failure by either party hereto at any time to give notice of any breach by the other party of, or to require
compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
6.
Severability . If a court of competent jurisdiction determines that any provision of this Agreement is invalid or
unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of
this Agreement, and all other provisions shall remain in full force and effect.
7.
Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an
original, but all of which together will constitute one and the same Agreement.
8.
Withholding of Taxes and Other Employee Deductions . The Company may withhold from any benefits and payments
made pursuant to this Agreement (whether actually or constructively made to Executive or treated as included in Executive’s income under
Section 409A of the Code) all federal, state, city and other applicable taxes and withholdings as may be required pursuant to any law or
governmental regulation or ruling and all other customary deductions made with respect to the Company’s employees generally.
9.
purposes.
Headings . The Section headings have been inserted for purposes of convenience and shall not be used for interpretive
10.
Gender and Plurals . Wherever the context so requires, the masculine gender includes the feminine or neuter, and the
singular number includes the plural and conversely.
11.
Affiliate . As used in this Agreement, the term “affiliate” as used with respect to a particular person or entity shall mean
any other person or entity which owns or controls, is owned or controlled by, or is under common ownership or control with, such particular
person or entity.
12.
Successors . This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the
Company. Except as provided in the preceding sentence, this Agreement, and the rights and obligations of the parties hereunder, are
personal and neither this Agreement, nor any right, benefit or obligation of either party hereto, shall be subject to voluntary or involuntary
assignment, alienation or transfer, whether by operation of law or otherwise, without the prior written consent of the other party. In addition,
any payment owed to Executive hereunder after the date of Executive’s death shall be paid to Executive’s estate.
13.
Term . Termination of this Agreement shall not affect any right or obligation of any party which is
Exhibit 10.37
accrued or vested prior to such termination. Without limiting the scope of the preceding sentence, the provisions of Articles V, VI, VII, VIII
and IX shall survive any termination of the employment relationship and/or of this Agreement.
14.
Entire Agreement . Except as provided in any signed written agreement contemporaneously or hereafter executed by the
Company and Executive, this Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and
contains all the covenants, promises, representations, warranties and agreements between the parties with respect to employment of
Executive by the Company. Without limiting the scope of the preceding sentence, all understandings and agreements preceding the date of
execution of this Agreement and relating to the subject matter hereof (including the Blackwater Agreement) are hereby null and void and of
no further force and effect. The parties further acknowledge that the
termination of the Blackwater Agreement does not constitute a separation from service by Executive from Blackwater and that no benefits
or payments are due to Executive from Blackwater or the Company as a result of the termination of the Blackwater Agreement.
15.
Modification; Waiver . Any modification to or waiver of this Agreement will be effective only if it is in writing and
signed by the parties to this Agreement; provided that the Company may, with prospective or retroactive effect, amend this Agreement at
any time (to the extent Executive is not adversely affected by such amendment), if determined to be necessary, appropriate or advisable in
response to administrative guidance issued under Section 409A of the Code or to comply with the provisions of Section 409A of the Code.
16.
Compliance with Section 409A of the Code . It is intended that the payments and benefits provided under this
Agreement shall be exempt from or comply with the application of the requirements of Section 409A of the Code. This Agreement shall be
construed, administered and governed in a manner that affects such intent. Specifically, (a) each payment under this Agreement, including
each payment in a series of installment payments, is deemed to be a separate installment payment and (b) any taxable benefits or payments
provided under this Agreement are deemed to be separate payments that qualify for the “short-term deferral” exclusion from Section 409A
of the Code to the maximum extent possible, and to the extent they do not so qualify, are intended to qualify for the “involuntary separation
pay” exclusion from Section 409A of the Code, to the maximum extent possible. To the extent that none of these exceptions (or any other
available exception) applies, then notwithstanding anything contained herein to the contrary, and to the extent required to comply with
Section 409A of the Code (as determined by the Company), if Executive is a “specified employee,” as determined by the Company, as of
his Date of Termination, then all amounts due under this Agreement that constitute a “deferral of compensation” within the meaning of
Section 409A of the Code, that are provided as a result of a “separation from service” within the meaning of Section 409A of the Code, and
that would otherwise be paid or provided during the first six months following Executive’s Date of Termination, shall be accumulated
through and paid or provided on the first business day that is more than six months after Executive’s Date of Termination (or, if Executive
dies during such six-month period, within 90 days after Executive’s death).
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this 17 th day of December, 2013.
Exhibit 10.37
AMERICAN MIDSTREAM GP, LLC
By:
/s/ Daniel C. Campbell
Name:
Title:
Daniel C. Campbell
Senior Vice President and Chief Financial Officer
EXECUTIVE
/s/ Michael D. Suder
Michael D. Suder
SIGNATURE PAGE TO EMPLOYMENT AGREEMENT
Exhibit 10.37
Acadia
Assumption
Bienville
Calcasieu
Catahoula
De Soto
East Feliciana
Grant
Jackson
La Salle
Lincoln
Morehouse
Ouachita
Rapides
Sabine
St. Helena
St. Landry
St. Tammany
Terrebonne
Vernon
West Baton Rouge
Winn
EXHIBIT A
List of Parishes
Allen
Avoyelles
Bossier
Caldwell
Claiborne
East Baton Rouge
Evangeline
Iberia
Jefferson
Lafayette
Livingston
Natchitoches
Plaquemines
Red River
St. Bernard
St. James
St. Martin
Tangipahoa
Union
Washington
West Carroll
Ascension
Beauregard
Caddo
Cameron
Concordia
East Carroll
Franklin
Iberville
Jefferson Davis
Lafourche
Madison
Orleans
Pointe Coupee
Richland
St. Charles
St. John the Baptist
St. Mary
Tensas
Vermilion
Webster
West Feliciana
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
Exhibit 10.42
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (this “ Amendment ”) is entered into effective as of the 7th
day of March, 2016 (the “ Amendment Effective Date ”) by and between American Midstream GP, LLC, a Delaware limited partnership (“
Company ”) and Michael D. Suder (“ Executive ”).
Company and Executive may be referred to herein individually as a “ Party ” or collectively as the “ Parties ”. Capitalized terms
utilized but not otherwise defined herein shall have the meanings set forth in that certain Employment Agreement dated as of December 17,
2013, by and between Company and Executive (the “ Agreement ”).
WHEREAS, Company and Executive are parties to the Agreement; and
RECITALS
WHEREAS, Company and Executive desire to amend the Agreement to amend the definition of Backwater Harvey.
AGREEMENT
NOW, THEREFORE , Company and Executive, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and intending to be legally bound, hereby agree as follows:
1.
Defined Terms . The definitions set forth below are hereby amended and restated as follows:
1.1
“ Blackwater Harvey ” means, collectively, Blackwater Harvey, LLC, a Delaware limited liability company, and
American Midstream Terminaling, LLC, a Delaware limited liability company.
1.2
“ Blackwater Direct SG&A ” means (i) the total cost of the Blackwater Midstream Corporate Cost Center
(Number 3602), less long term incentive plan compensation expense, interest expense and non-cash expenses, for the applicable
calculation period, as maintained by on the books and records of the Blackwater Entities, multiplied by (ii) (A) (1) total Blackwater
Harvey revenue, excluding intercompany revenues, for the applicable calculation period plus (2) fifty percent (50%) of Blackwater
Harvey construction in progress for the applicable calculation period, including assets placed into service during the applicable
calculation period, divided by (B) (1) the aggregate of revenue for all Blackwater Entities, excluding intercompany revenues, for the
applicable calculation period plus (2) fifty percent (50%) the aggregate construction in progress for the applicable calculation period
for all Blackwater Entities, all calculated in accordance with GAAP.
2.
Ratification; Primacy . Except as amended by this Amendment, all of the terms, provisions, covenants and conditions
contained in the Agreement remain in full force and effect; provided
, if there is ever any conflict between the Agreement and this
Amendment, the terms, provisions, covenants and conditions contained in this Amendment shall govern. The terms and provisions of this
Amendment are binding upon and inure to the benefit of the Parties, their representatives, successors and assigns. As amended
Exhibit 10.42
by this Amendment, the Agreement is ratified and confirmed by the Parties, and declared to be a valid and enforceable contract between
them.
3.
Counterparts . This Amendment may be executed in as many counterparts as deemed necessary. When so executed, the
aggregate counterparts shall constitute one agreement and shall have the same effect as if all Parties signing counterparts had executed the
same instrument.
4.
Amendment; Waiver . This Amendment may not be amended or modified except pursuant to a written instrument signed
by all of the Parties. Each Party may waive on its own behalf compliance by any other Party with any term or provision hereof; provided
,
however
, that any such waiver shall be in writing and shall not bind the non-waiving Party. The waiver by any Party of a breach of any term
or provision shall not be construed as a waiver of any subsequent breach of the same or any other provision.
5.
Joint Preparation . The Parties agree and confirm that this Amendment was prepared jointly by all Parties and not by any
one Party to the exclusion of the other.
6.
No Third Party Beneficiaries . This Amendment is not intended to confer upon any person not a party hereto any rights
or remedies hereunder, and no person other than the Parties is entitled to rely on or enforce any provision hereof.
[ Signature
Page
Follows
]
IN WITNESS WHEREOF, the undersigned have executed and delivered this Amendment as of the date first above written.
Exhibit 10.42
AMERICAN MIDSTREAM GP, LLC
By: /s/ Daniel C. Campbell
Name: Daniel C. Campbell
Senior Vice President and Chief Financial
Officer
Title:
EXECUTIVE
/s/ Michael D. Suder
Michael D. Suder
Name
American Midstream, LLC
American Midstream AMPAN, LLC
American Midstream (Alabama Gathering), LLC
American Midstream (Alabama Intrastate), LLC
American Midstream (AlaTenn), LLC
American Midstream Bakken, LLC
American Midstream (Bamagas Intrastate), LLC
American Midstream Blackwater, LLC
American Midstream (Burns Point), LLC
American Midstream Chatom, LLC
American Midstream Chatom Unit 1, LLC
American Midstream Chatom Unit 2, LLC
American Midstream Costar, LLC
American Midstream Delta House, LLC
American Midstream East Texas Rail, LLC
American Midstream EnerTrade, LLC*
American Midstream Gas Solutions GP, LLC
American Midstream Gas Solutions LP, LLC
American Midstream Gas Solutions, LP
American Midstream (Lavaca), LLC
American Midstream (Louisiana Intrastate), LLC
American Midstream Madison, LLC
American Midstream Marketing, LLC
American Midstream Mesquite, LLC
American Midstream (Midla), LLC
American Midstream (Mississippi), LLC
American Midstream Offshore (Seacrest), LP
American Midstream Onshore Pipelines, LLC
American Midstream Permian, LLC
American Midstream Republic, LLC
American Midstream (SIGCO Intrastate), LLC
American Midstream (Tennessee River), LLC
American Midstream Terminaling, LLC
American Midstream Transtar Gas Processing, LLC
American Panther, LLC*
Blackwater Georgia, LLC
Blackwater Harvey, LLC
Blackwater Investments, Inc.
Blackwater Maryland, LLC
Blackwater Midstream Corp.
Blackwater New Orleans, LLC
Centana Gathering, LLC
Centana Oil Gathering, LLC
American Midstream Partners, LP
List of Subsidiaries
EXHIBIT 21.1
Jurisdiction of
Organization
Delaware
Delaware
Alabama
Alabama
Alabama
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Texas
Delaware
Delaware
Delaware
Delaware
Alabama
Delaware
Delaware
Delaware
Georgia
Delaware
Delaware
Maryland
Nevada
Louisiana
Delaware
Delaware
High Point Gas Gathering, LLC
High Point Gas Gathering Holdings, LLC
High Point Gas Transmission, LLC
High Point Gas Transmission Holdings, LLC
Main Pass Oil Gathering Company, LLC
Mid Louisiana Gas Transmission, LLC
*Not wholly owned
Texas
Delaware
Delaware
Delaware
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Forms S‑3 (Nos. 333-198888, 333-201434, and 333-201436) and on Forms
S-8 (Nos. 333-176438, 333-183290, and 333-209614) of American Midstream Partners, LP of our report dated March 7, 2016 , relating to the financial statements
and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 7, 2016
CONSENT OF INDEPENDENT AUDITOR
Exhibit 23.2
American Midstream Partners, LP
Denver, Colorado
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-198888, 333-201434 and 333-201436) and Form
S-8 (File Nos. 333-176438, 333-183290 and 333-209614) of American Midstream Partners, LP of our reports dated February 29, 2016, relating to the financial
statements of Pinto Offshore, LLC, Delta House FPS, LLC and Delta House Oil and Gas Lateral, LLC, which appear in this Form 10-K.
/s/ BDO USA, LLP
Houston, Texas
March 7, 2016
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Lynn L. Bourdon III, certify that:
1
2
3
4
5
I have reviewed this Annual Report on Form 10-K of American Midstream Partners, LP;
Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Annual Report;
Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and
(d) Disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date:
March 7, 2016
/s/ Lynn L. Bourdon III
Lynn L. Bourdon III
President and Chief Executive Officer of
American Midstream GP, LLC
(the general partner of
American Midstream Partners, LP)
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Daniel C. Campbell, certify that:
1
2
3
4
5
I have reviewed this Annual Report on Form 10-K of American Midstream Partners, LP;
Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Annual Report;
Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and
(d) Disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 7, 2016
/s/ Daniel C. Campbell
Daniel C. Campbell
Senior Vice President & Chief Financial Officer
American Midstream GP, LLC
(the general partner of
American Midstream Partners, LP)
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of American Midstream Partners, LP (the “Registrant”) on Form 10-K for the period ended December 31, 2015 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lynn L. Bourdon III, President and Chief Executive Officer of American
Midstream GP, LLC, the general partner of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date:
March 7, 2016
/s/ Lynn L. Bourdon III
Lynn L. Bourdon III
President and Chief Executive Officer of
American Midstream GP, LLC
(the general partner of
American Midstream Partners, LP)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document. A
signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the
Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of American Midstream Partners, LP (the “Registrant”) on Form 10-K for the period ended December 31, 2015 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel C. Campbell, Senior Vice President & Chief Financial Officer of
American Midstream GP, LLC, the general partner of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: March 7, 2016
/s/ Daniel C. Campbell
Daniel C. Campbell
Senior Vice President & Chief Financial Officer
American Midstream GP, LLC
(the general partner of
American Midstream Partners, LP)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document. A
signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the
Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
PINTO OFFSHORE HOLDINGS, LLC
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report - BDO USA, LLP
Balance Sheet as of December 31, 2015
Statement of Operations for the period from September 9, 2015 (Inception) through December 31, 2015
Statement of Members’ Equity for the period from September 9, 2015 (Inception) through December 31, 2015
Statement of Cash Flows for the period from September 9, 2015 (Inception) through December 31, 2015
Notes to the financial statements
1
Exhibit 99.1
Page
2
3
4
5
6
7-10
Exhibit 99.1
Members
Pinto Offshore Holdings, LLC
Houston, Texas
Independent Auditor’s Report
We have audited the accompanying financial statements of Pinto Offshore Holdings, LLC, which comprise the balance sheet as of December 31, 2015, and the
related statements of operations, members’ equity, and cash flows for the period from September 9, 2015 (Inception) through December 31, 2015, and the related
notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in
the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend
on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pinto Offshore Holdings, LLC as of
December 31, 2015, and the results of its operations and its cash flows for the period from September 9, 2015 (Inception) through December 31, 2015 in
accordance with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Houston, Texas
February 29, 2016
2
ASSETS:
Current assets
Investment in unconsolidated affiliates
Total assets
LIABILITIES AND MEMBERS' EQUITY:
Current liabilities
Accounts payable and accrued liabilities
Total current liabilities
Total liabilities
Commitments and contingencies, Note 3
Members' equity
Total liabilities and members' equity
PINTO OFFSHORE HOLDINGS, LLC
BALANCE SHEETS
(in thousands)
See accompanying notes to financial statements.
3
Exhibit 99.1
December 31,
2015
$
$
$
$
—
214,824
214,824
10
10
10
214,814
214,824
Equity in earnings of unconsolidated affiliates
General and administrative expenses
Net income (loss)
PINTO OFFSHORE HOLDINGS, LLC
STATEMENT OF OPERATIONS
(in thousands)
See accompanying notes to financial statements.
4
Exhibit 99.1
September 9, 2015
(Inception) through
December 31, 2015
28,482
111
28,371
$
$
PINTO OFFSHORE HOLDINGS, LLC
STATEMENT OF MEMBERS' EQUITY
(in thousands, except unit amounts)
Balance, September 9, 2015 (Inception)
Issuance of membership units in exchange for assets contributed
Distributions
Capital contributions
Net income
Balance, December 31, 2015
See accompanying notes to financial statements.
5
Exhibit 99.1
Units
Issued
Amount
— $
10,000
—
—
—
10,000 $
—
235,334
(48,992)
101
28,371
214,814
PINTO OFFSHORE HOLDINGS, LLC
STATEMENT OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of unconsolidated affiliates
Distributions from Delta House FPS, LLC and Delta House Oil and Gas Lateral, LLC
Changes in operating assets and liabilities:
Accounts payable and other current liabilities
Net cash provided by operating activities
Cash flows from investing activities
Cash flows from financing activities
Distributions to members
Net cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Non-Cash Investing and Financing Activities
Assets contributed in exchange for membership units
Capitalization of amount due to members
See accompanying notes to financial statements.
6
Exhibit 99.1
September 9, 2015
(Inception) through
December 31, 2015
$
28,371
(28,482)
48,992
10
48,891
—
—
(48,891)
(48,891)
—
—
—
235,334
101
$
$
$
Exhibit 99.1
PINTO OFFSHORE HOLDINGS, LLC
NOTES TO FINANCIAL STATEMENTS
(in thousands)
1. Organization and Nature of Operations
Pinto Offshore Holdings, LLC (the “Company”) was formed in the state of Delaware as a limited liability company on September 9, 2015. The Company will
continue in existence until it is dissolved and terminated by the members of the Company in accordance with the provisions of the Amended and Restated Limited
Liability Agreement (the “LLC Agreement”). The purpose of the Company is to directly or indirectly acquire, own, hold, manage, and dispose of the limited
liability company interests of Delta House FPS LLC, a Delaware limited liability company (“FPS”), and Delta House Oil and Gas Lateral LLC, a Delaware limited
liability company (“OGL”).
OGL receives and transports hydrocarbons from the Marmalard, Neidermeyer, and SOB 2 prospects (the “Anchor Prospects”), the Blue Wing Olive, Malachite,
and SOB III prospects (“Secondary Prospects”), and the Otis and Odd Job prospects (“Additional Priority Prospects”) in the Gulf of Mexico, and any future
additional prospects from a floating production system (the “Base FPS”), which has been developed and is operated by FPS, to commercial pipeline operators. The
Base FPS and the oil and gas lateral transportation facilities initiated operations in April 2015.
Profits and losses are allocated to the members in proportion to their equity percentage interests. Assets were contributed to the Company and all privileges,
preferences, duties, liabilities, obligations, and rights set forth in the LLC Agreement commenced on September 18, 2015.
The Company has reviewed its relationships with FPS and OGL and determined that the relationships meet the criteria to be considered variable interest entities
(“VIEs”) as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 810, Consolidation
. However, the Company has
determined it does not have the power to direct the activities of FPS and OGL that most significantly impact their performance, such as oversight of day-to-day
operations, hiring, scheduling, and maintaining the workforce that operates FPS and OGL, ongoing repairs and maintenance including selecting and hiring the
contractors or employees performing that work, and operating the facilities. The power to direct those activities and decisions are held by FPS and OGL’s operator.
Additionally there are no substantive kick-out or liquidation rights to remove the operator. As the Company is not the primary beneficiary of FPS and OGL but can
exercise significant influence, the Company accounts for its investments in FPS and OGL as equity method investments.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in U.S. dollars using accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Equity Method Investments
Investments in which the Company has the ability to exercise significant influence, but are not deemed to have control, are accounted for under the equity method.
The Company’s unconsolidated affiliates, FPS and OGL, are accounted for under the equity method. The investment in unconsolidated affiliates represents the
carrying amount on the Company’s balance sheet of its investment its equity method investees. This is not an indicator of the fair value of the investments, rather it
is the initial cost adjusted for the entity's share of earnings and losses of the investees, adjusted for any distributions (dividends) and other than temporary
impairment losses recognized. Equity in the earnings of unconsolidated affiliates reported on the statement of income represents the Company’s proportionate
share of the net income of its investees for the period to which the equity method of accounting is applied.
Fair Value of Financial Instruments
The Company’s financial instruments consist of accounts payable and accrued liabilities. The carrying amount approximates fair value due to the short-term nature
of those instruments.
Use of Estimates
When preparing financial statements in conformity with U.S. GAAP, management must make estimates and assumptions based
7
Exhibit 99.1
on information available at the time. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, as well as the
disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates and assumptions are based on information available at the time
such estimates and assumptions are made. Adjustments made with respect to the use of these estimates and assumptions often relate to information not previously
available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. Actual results could differ materially
from estimated amounts.
Concentration of Credit Risk
The Company’s investments in unconsolidated affiliates are composed of operations located in the Gulf of Mexico which provide infrastructure capacity and
transportation services to producers of oil and natural gas. Those affiliates have a concentration of accounts receivable balances due from companies engaged in the
production of oil and natural gas in the Gulf of Mexico. The affiliates’ customers may be similarly affected by changes in economic, regulatory, weather, or other
factors.
Income Taxes
The Company files its federal income tax return as a limited liability corporation under the Internal Revenue Code. In lieu of corporate income taxes, the members
of the Company are taxed on their proportionate share of the Company’s taxable income. Accordingly, no provision or liability has been recognized for federal
income tax purposes in the accompanying financial statements, as taxes are the responsibility of the individual members of the Company.
The Company’s assets are located in federal waters in the Gulf of Mexico, and therefore, are not subject to state income taxes.
Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position
will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not
criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. The
Company had no uncertain tax positions as of December 31, 2015.
For the period from September 9, 2015 (inception) through December 31, 2015, the Company did not incur any income tax-related interest or penalties.
Recent Accounting Pronouncements
The FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which creates Topic 606, Revenue
from
Contracts
with
Customers
, which
supersedes the revenue recognition requirements Topic 605, Revenue
Recognition
, including most industry-specific revenue recognition guidance throughout the
Industry Topics of the Codification. ASU 2014-09 is based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition,
ASU 2014-09 requires enhanced financial statement disclosures over the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers. ASU 2014-09 is effective for public entities for annual and interim periods beginning after December 15, 2017 and effective for nonpublic entities
for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Both public and nonpublic
entities are permitted to early adopt and apply ASU 2014-09 starting with annual periods beginning after December 15, 2016. ASU 2014-09 may be applied
retrospectively to each prior period presented, or retrospectively with the cumulative effect recognized as of date of adoption. The Company is currently evaluating
the impact of the adoption of ASU 2014-09 on its financial statements.
The FASB issued Accounting Standards Update No. 2015-02 (“ASU 2015-02”), which clarifies Topic 810, Consolidation
, and sets forth Amendments
to
the
Consolidation
Analysis
. The revised standard clarifies the consolidated reporting guidance under U.S. GAAP for limited partnerships, limited liability companies
(LLCs), and other types of off-balance-sheet vehicles used for mortgage-backed securities, collateralized loan obligations, and collateralized debt obligations. The
amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15,
2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal
years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the
amendments in this Update using a modified retrospective approach by recording a cumulative- effect adjustment to equity as of the beginning of the fiscal year of
adoption. A reporting entity also may apply the amendments retrospectively. The Company is currently evaluating the impact of the adoption of ASU 2015-02 on
its financial statements.
8
Exhibit 99.1
3. Commitments and Contingencies
Legal Proceedings
The Company is not currently party to any pending litigation or governmental proceedings, other than ordinary routine litigation incidental to its business. While
the ultimate impact of any proceedings cannot be predicted with certainty, the Company believes that the resolution of any of its pending proceedings will not have
a material effect on its financial condition or results of operations.
Environmental Matters
Both FPS and OGL are subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent to processing
platform operations and oil and natural gas pipeline transportation, and the Company, at times, in connection with its investment in FPS and OGL, could be subject
to environmental cleanup and enforcement actions. The Company is not aware of any material environmental matters.
4.
Investments in Unconsolidated Affiliates
On September 18, 2015, Toga Offshore, LLC (“Toga”), the Company’s majority owner, contributed 49% of the outstanding Class A membership units of FPS and
49% of the outstanding Class A membership units of OGL to the Company for no consideration. As this was a transaction between entities under common control,
the investments in FPS and OGL were transferred at Toga’s carrying value as of the contribution date. The change in the Company’s investments in FPS and OGL
are summarized as follows:
Beginning balance, September 9, 2015 (Inception)
Contribution of investment
Distributions
Equity in earnings of unconsolidated affiliates
Ending balance, December 31, 2015
FPS
OGL
Total
— $
— $
145,261
(40,519)
20,476
90,073
(8,473)
8,006
125,218 $
89,606 $
—
235,334
(48,992)
28,482
214,824
$
$
Summarized financial information for FPS and OGL as of December 31, 2015, and for the period from September 18, 2015 through December 31, 2015 is as
follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Revenues
Income from operations
Net income
FPS
OGL
125,260 $
665,215 $
129,056 $
358,008 $
48,154 $
45,364 $
41,790 $
11,565
173,536
33
2,198
17,737
16,337
16,337
$
$
$
$
$
$
$
As holders of 49% of the Class A membership units of FPS and OGL, the Company is exposed to the risk of loss of its entire investment. Additionally, pursuant to
the Amended and Restated Limited Liability Company Operating Agreements for both FPS and OGL, Class A members can be required to contribute additional
funds for operating costs to the extent such operating costs exceed available cash held by FPS or OGL and for expansion projects as voted upon by the Class A
members.
5. Members' Equity
There is one class of equity units (the “Units”), as established by the LLC Agreement, which may be divided into one or more types, classes, or series, in
accordance with the terms and conditions of the LLC Agreement. The Units shall have the privileges, preferences, duties, liabilities, obligations, and rights set
forth in the LLC Agreement. There were 10,000 units authorized and
9
Exhibit 99.1
outstanding as of December 31, 2015.
For purposes of adjusting the capital accounts of the members, the net profits, net losses, and, to the extent necessary, individual items of income, gain, loss and
deduction, for any fiscal year, or other period, shall be allocated among the members in a manner such that the adjusted capital account of each member,
immediately after making such allocation, is, as nearly as possible, equal (proportionately) to then distributions that would be made to such member if the
Company were dissolved, its affairs wound up, and its properties sold for cash equal to their gross asset values, all Company liabilities were satisfied (limited with
respect to each nonrecourse liability to the gross asset value of the asset securing such liability), and the net assets of the Company were distributed to the members
immediately after making such allocation.
On September 18, 2015, Toga, the majority owner of Stork Offshore Holdings, LLC and an affiliate of ArcLight Asset Management, LLC, contributed their
ownership interest in FPS (approximately 49%) to the Company. Subsequently, on September 18, 2015, American Midstream Delta House, LLC (an affiliate of
American Midstream Partners, LP) (“AMID”), purchased a 26.33% interest in the Company, resulting in AMID owning an approximate 12.9% indirect interest in
FPS.
On September 18, 2015, Toga, the majority owner of Otter Offshore Holdings, LLC and an affiliate of ArcLight Asset Management, LLC, contributed their
ownership interest in OGL (approximately 49%) to the Company. Subsequently, on September 18, 2015, AMID purchased a 26.33% interest in the Company,
resulting in AMID owning an approximate 12.9% indirect interest in OGL.
From October 2015 through December 2015, FPS and OGL declared distributions totaling $48,992 to the Company. Simultaneously, the Company declared
distributions of $48,992 to its members, Toga and AMID. The distributions were paid to the members by FPS and OGL on behalf of the Company.
In 2015, OGL paid accounting fees totaling $101 on behalf of the Company, which is reflected as a capital contribution in the statement of members’ equity.
6. Subsequent Events
The Company has evaluated subsequent events through February 29, 2016, which is the date these financial statements were available for issuance.
10
DELTA HOUSE FPS, LLC
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report - BDO USA, LLP
Balance Sheets as of December 31, 2015 and December 31, 2014
Statements of Operations for the years ended December 31, 2015 and 2014
Statements of Members’ Equity for the years ended December 31, 2015 and 2014
Statements of Cash Flows for the years ended December 31, 2015 and 2014
Notes to the financial statements
Exhibit 99.2
Page
2
3
4
5
6
7-15
1
Exhibit 99.2
Members
Delta House FPS, LLC
Houston, Texas
Independent Auditor’s Report
We have audited the accompanying financial statements of Delta House FPS, LLC, which comprise the balance sheets as of December 31, 2015 and 2014, and the
related statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in
the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend
on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delta House FPS, LLC as of December 31,
2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the
United States of America.
Emphasis of Matter
As discussed in Note 2 to the financial statements, Delta House FPS, LLC adopted the provisions of Accounting Standards Update No. 2015-03, Simplifying
the
Presentation
of
Debt
Issuance
Costs
.
/s/ BDO USA, LLP
Houston, Texas
February 29, 2016
2
DELTA HOUSE FPS, LLC
BALANCE SHEETS
(in thousands)
Exhibit 99.2
December 31,
2015
2014
$
— $
ASSETS:
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable - related party
Prepaid expenses
Total current assets
Restricted cash - decommissioning
Accounts receivable - related party - decommissioning
Property and equipment, net
Derivative asset
Total assets
LIABILITIES AND MEMBERS' EQUITY:
Current liabilities
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities - affiliates
Derivative liability
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term debt, net of debt issuance costs
Deferred revenue
Asset retirement obligations
Total liabilities
Commitments and contingencies, Note 7
Members' equity
Total liabilities and members' equity
See accompanying notes to financial statements.
3
43,004
82,081
175
125,260
284
125
664,638
168
790,475 $
102 $
19
1,027
121
127,787
129,056
165,623
177,928
14,457
487,064
2,314
5,325
48
—
7,687
—
—
611,075
841
619,603
8,049
674
2,196
—
27,760
38,679
291,451
—
—
330,130
303,411
790,475 $
289,473
619,603
$
$
$
DELTA HOUSE FPS, LLC
STATEMENTS OF OPERATIONS
(in thousands)
Exhibit 99.2
Years ended December 31,
2015
2014
$
90,948 $
1,397
538
4,818
6,753
—
47
—
—
47
Revenues - related party
Expenses:
General and administrative expenses
Accretion of asset retirement obligations
Depreciation and amortization
Total expenses
Income (loss) from operations
84,195
(47)
Other expenses:
Interest expense
Loss on derivatives
Total other expenses
Net income (loss)
9,980
1,349
11,329
$
72,866 $
—
1,355
1,355
(1,402)
See accompanying notes to financial statements.
4
Exhibit 99.2
DELTA HOUSE FPS, LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(in thousands, except unit amounts)
Balance at December 31, 2013
92,164 $
380,398
— $
—
— $
—
3 $
3 $ 380,401
Class A
Class B
Class C
Class D
Units
Amount
Units
Amount
Units
Amount
Units
Amount
Members'
Equity
Units issued for capital
contributions
Capital contributions
Distributions
Net loss
—
—
—
—
—
6,466
6,466
186,386
(282,378)
(1,402)
—
—
—
—
—
—
Balance at December 31, 2014
92,164
283,004
6,466
6,466
Units issued for capital
contributions
Capital contributions
Distributions
Net loss
—
—
—
—
—
41,392
41,392
8,219
(108,539)
72,866
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2015
92,164 $
255,550
47,858 $
47,858
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
6,466
186,386
(282,378)
(1,402)
3
289,473
—
—
—
—
41,392
8,219
(108,539)
72,866
3 $
3 $ 303,411
See accompanying notes to financial statements.
5
DELTA HOUSE FPS, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
Accretion of asset retirement obligations
Amortization of debt issuance costs
Loss on derivatives
Changes in operating assets and liabilities:
Accounts receivable
Accounts payable and other current liabilities
Prepaid expenses
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Change in restricted cash
Additions to property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Capital contributions
Debt issuance costs
Debt borrowing
Debt repayment
Distributions
Settlements on derivatives, net of amounts capitalized
Net cash flows provided by financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized
Non-Cash Investing Activities
Changes in asset retirement cost
Changes in property and equipment financed by accounts payable and accrued liabilities
Capitalized amortization of debt acquisition costs
See accompanying notes to financial statements.
6
Exhibit 99.2
Years ended December 31,
2015
2014
$
72,866 $
(1,402)
4,818
538
1,415
1,349
(82,158)
(244)
(175)
177,928
176,337
(37,963)
(52,238)
(90,201)
49,611
(38)
480
(28,119)
(108,539)
(1,845)
(88,450)
(2,314)
2,314
— $
8,101 $
13,919 $
(8,358) $
582 $
—
—
—
1,355
(47)
—
—
—
(94)
(5,325)
(241,840)
(247,165)
192,852
(14,946)
333,000
—
(282,378)
—
228,528
(18,731)
21,045
2,314
—
—
(18,214)
1,156
$
$
$
$
$
Exhibit 99.2
DELTA HOUSE FPS, LLC
NOTES TO FINANCIAL STATEMENTS
(in thousands)
1. Organization and Nature of Operations
Delta House FPS, LLC (the “Company”) was formed in the state of Delaware as a limited liability company on October 18, 2012. The Company is to continue in
existence until it is dissolved and terminated by the members of the Company in accordance with the provisions of the Limited Liability Agreement (the “LLC
Agreement” or “Operating Agreement”). The Company was formed to finance, design, construct, and own and operate a floating production system (“Base FPS”)
for use in the Gulf of Mexico. The planned capacity of the Base FPS is 80,000 barrels per day of oil, 40,000 barrels per day of water, and 200 MMCF per day of
natural gas. The oil lateral facilities attached to the Base FPS have a planned capacity of 100,000 barrels per day of oil. The natural gas lateral facilities attached to
the Base FPS have a planned capacity of 240 MMCF per day of natural gas.
The Base FPS became operational in April 2015.
On December 6, 2012, the Company entered into a processing agreement with the producers (the “Producers”) of the Marmalard, Neidermeyer, and SOB 2
prospects (the “Anchor Prospects”), Blue Wing Olive, Malachite, and SOB III prospects (the “Secondary Prospects”), and Otis and Odd Job prospects (the
“Additional Priority Prospects”) in the Gulf of Mexico for the use of the Company’s Base FPS. The Producers have agreed to pay the Company a production
handling fee based on the oil, natural gas, and condensate produced from the Anchor Prospects. It is expected that production from other prospects near the Anchor
Prospects also may be processed through the facility in the future. In the event of a suspension of production, the Producers are contractually obligated to pay a
suspension fee as defined in the processing agreement. The Producers will also pay a decommissioning fee on the production processed through the facility, which
will be used to fund the decommissioning and abandonment costs of the Base FPS.
Profits and losses are allocated to the members in proportion to their equity percentage interests, with certain restrictions dictated by specific terms under the LLC
Agreement.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in U.S. dollars using accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments, with original maturities of three months or less. There were no cash
equivalents as of December 31, 2015 and 2014.
Restricted Cash
The Company is required under the terms of its credit agreement to maintain restricted cash deposits for construction, revenue receipts, debt service,
decommissioning, operating expenses, and loss proceeds.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, debt, and derivative assets and
liabilities. See Note 4 regarding the fair value of derivative assets and liabilities. The carrying amounts of the other financial instruments approximate fair value
due to the short-term nature of these instruments or market rates of interest.
Accounts Receivable
Receivables from the sale of oil and natural gas processing services are unsecured. Allowance for doubtful accounts are determined based on management’s
assessment of the creditworthiness of the customer. Past due accounts are written off against the allowance for doubtful accounts only after all collection attempts
have been exhausted. At December 31, 2015 and 2014, management believed that all balances from customers were fully collectible such that no allowance for
doubtful accounts was deemed necessary.
7
Property and Equipment
Property and equipment are recorded at cost. Betterments are capitalized. Repair and maintenance costs are expensed as incurred. Property and equipment
consisted of the following:
Exhibit 99.2
Floating production system
Capitalized asset retirement costs
Accumulated depreciation
Property and equipment, net
Construction-in-progress
Total property and equipment, net
Useful Life (Years)
2015
2014
December 31,
40
40
$
655,537 $
13,919
(4,818)
664,638
—
$
664,638 $
—
—
—
—
611,075
611,075
Construction in-progress consisted of capitalized costs incurred in association with the acquisition and construction of the Base FPS.
The Company capitalized interest on expenditures incurred for the construction of the floating production platform until the time construction was completed and
the asset was ready for its intended use. During the years ended December 31, 2015 and 2014, the Company capitalized interest and realized interest rate swap
settlements of $4,554 and $6,410, respectively.
Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, net of salvage value. Depreciation expense for the
year ended December 31, 2015 was $4,818. Since the Base FPS had not been placed in service as of December 31, 2014, no depreciation expense was recognized
during the year ended December 31, 2014.
The recoverability of long-lived assets are evaluated when events or changes in circumstances indicate that the carrying amount of the long-lived asset might not be
recoverable. If such impairment indicators exist, the Company performs a two-step impairment test. First, the undiscounted future cash flows of the long-lived
assets are estimated and compared to assets’ carrying value, and, if the undiscounted cash flows are less than the carrying value, the assets are considered impaired.
Second, the impairment loss is measured by reducing the carrying value to the estimated fair value of the assets which is determined through either quoted market
prices in active markets or present value techniques. No impairment losses were recorded for the years ended December 31, 2015 and 2014.
Asset Retirement Obligations (“AROs”)
AROs are legal obligations associated with the removal and abandonment of tangible long-lived assets and are recognized in the period in which it is incurred, if a
reasonable estimate of fair value can be made. AROs are initially measured at their estimated fair values and recorded as liabilities with an increase as well to the
carrying amount of the related long-lived asset. In future periods subsequent to initial recognition, accretion of the liability is recognized each period and the asset
is depreciated using the straight-line method over its useful life. During the year ending December 31, 2015, the Company recorded an ARO for the dismantlement
of the Base FPS.
The following table provides the changes in the ARO liability for the year ended December 31, 2015:
Balance at December 31, 2014
Liabilities incurred in the current period
Accretion
Balance at December 31, 2015
Revenue Recognition
$
$
—
13,919
538
14,457
The Producers will pay the Company a production handling fee per barrel of oil equivalent (“BOE”), which is tiered, and which will decrease throughout the term
of the contract, based on delivery of specific levels of production to the FPS, a suspension fee
8
Exhibit 99.2
if targeted capacity levels are not met, and a decommissioning fee, which will be used to fund the decommissioning and abandonment of the Base FPS. All costs
relating to the operation of the facility are the obligation of the Producers, with the exception of certain excluded costs.
As a result of the tiered fee structure, the Company recognizes revenue from the production handling fees based on the estimated average production handling fee
and the production handled during the period from each prospect. The estimated average production handling fee is determined as the estimated remaining
expected fees divided by the estimated future production (risk-adjusted proved, probable and possible reserves) from the Anchor Prospects and Additional Priority
Prospects.
Production handling fees billed in excess of revenue recognized are recorded as deferred revenue. At December 31, 2015, deferred revenue related to the
production handling fees was $177,519. There were no fees billed or earned in 2014.
The Company bills the Producers a suspension fee when a "suspension event" occurs. A suspension event is considered to occur if prior to FPS owner-payout on a
rolling 30-day production from any Anchor prospect ceases or is suspended for a period of at least 336 hours and the total processing fees for that month for all
production, including any production from third party prospects, delivered to the FPS are less than the suspension fee. The suspension fee paid by the Producers of
the prospects is determined as one-twelfth of eight (8) percent of the amount required to achieve FPS owner-payout. No suspension fees were earned or billed
during the years end December 31, 2015 and 2014.
The Company invoices the Producers a decommissioning fee for each BOE processed. The decommissioning fee per BOE processed is determined based on the
estimated future decommissioning costs for the Base FPS and the estimated future production. Within 90 days of the date of last sustainable production from the
Anchor Prospects and Additional Priority Prospects, the Company may elect to (i) abandon and remove the Base FPS using the decommissioning fees collected
from the Producers, (ii) retain ownership of the Base FPS and assume the obligation of the abandonment and removal costs, including refunding the
decommissioning fees collected from the Producers, or (iii) delay provisionally for a further 90 days its determination to abandon and remove or retain ownership
of the Base FPS. At the current time it is uncertain which election will be taken by the Company. Due to the significant length of time before the removal and
abandonment costs are expected to occur, the decommissioning fees are recorded as long-term accounts receivable and long-term deferred revenue when billed.
Cash collected on the fees are recorded as long-term restricted cash. The Company has billed $409 of decommissioning fees and has collected and recorded $284
of long- term restricted cash during the year ended December 31, 2015.
Operating Costs
The Base FPS is operated by LLOG Exploration Offshore, LLC (the “Base Operator”) on behalf of the Producers (See Note 6). With the exception of certain
excluded costs, the Base Operator initially pays and discharges all necessary and reasonable costs incurred in connection with the performance, operation, repair,
and maintenance activities of the Base FPS. The Base Operator receives reimbursements of costs incurred from the Producers under Production Handling and
Floating Production System Use Agreements (“Production Agreements”) (See Note 6). The Base Operator allocates the Base FPS costs and related overhead
among the producers in accordance with the applicable provisions of the Production Agreements.
Use of Estimates
When preparing financial statements in conformity with U.S. GAAP, management must make estimates and assumptions based on information available at the
time. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and
liabilities as of the date of the financial statements. Estimates and assumptions are based on information available at the time such estimates and assumptions are
made. Adjustments made with respect to the use of these estimates and assumptions often relate to information not previously available. Uncertainties with respect
to such estimates and assumptions are inherent in the preparation of financial statements. Estimates and assumptions are used in, among other things i) developing
fair value estimates, including assumptions for future cash flows and discount rates, for the interest rate swap derivative valuations, ii) analyzing long-lived assets
for possible impairment, iii) estimating the useful lives of assets, iv) estimating the inputs required in calculating the asset retirement obligations, and v)
determining the estimated average production handling fee rates using third- party oil and natural gas reserve estimates for revenue recognition purposes. Actual
results could differ materially from estimated amounts.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash,
accounts receivable, and derivative instruments.
9
Exhibit 99.2
Cash and cash equivalents and restricted cash include investments in money market securities and securities backed by the U.S. government. The Company’s cash
accounts, which at times exceed federally insured limits, are held by major financial institutions. The Company believes that no significant concentration of credit
risk exists with respect to cash and cash equivalents or its derivative instruments.
The Company has concentrations of credit risk from its sources of revenue and accounts receivable due to the limited geographic area in which the Company
operates and its single revenue generating asset. The Base FPS, which is located in the Gulf of Mexico, provides processing capacity that links producers of oil,
natural gas, liquids, and condensate, to onshore markets in the region. The Company has a concentration of accounts receivable balances due from the Producers
engaged in the production of oil and natural gas in the Gulf of Mexico through the Base FPS. These customers may be similarly affected by changes in economic,
regulatory, weather, or other factors.
Debt Issuance Costs
The Company incurred debt issuance costs of $14,983 in connection with the Credit Facility entered into on June 20, 2014. Debt issuance costs are recorded as a
reduction of the related long-term debt and amortized over the term of the debt. Amortization related to debt issuance costs totaled $1,997 and $1,156 for the years
ended December 31, 2015 and 2014, respectively. Amortization of debt issuance costs is included in interest expense or was capitalized as a component of interest
cost prior to the Base FPS being placed into service. The Company adopted Accounting Standards Update No. 2015-03 (“ASU 2015-03”) in 2015, therefore, at
December 31, 2015 and 2014, the Company had $11,830 and $13,789, respectively, of deferred financing costs which have been classified as a reduction of long-
term debt.
Income Taxes
The Company files its federal income tax return as a limited liability corporation under the Internal Revenue Code. In lieu of corporate income taxes, the members
of the Company are taxed on their proportionate share of the Company’s taxable income. Accordingly, no provision or liability has been recognized for federal
income tax purposes in the accompanying financial statements, as taxes are the responsibility of the individual members of the Company.
The Base FPS operates in federal waters in the Gulf of Mexico, and is therefore not subject to state income tax.
Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position
will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not
criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. The
Company includes tax-related interest and penalties in income tax expense. The Company had no uncertain tax positions as of December 31, 2015 and 2014.
During the years ended December 31, 2015 and 2014, the Company did not incur any income tax-related interest or penalties.
None of the Company’s federal income tax returns are currently under examination by the Internal Revenue Service (“IRS”). However, fiscal years 2012 and later
remain subject to examination by the IRS.
Derivative Financial Instruments
Financial derivatives are used as part of the Company’s overall risk management strategy in order to reduce the effects of interest rate fluctuations on its variable
interest rate debt.
The Company has not designated any of its derivative contracts as accounting hedges, and therefore, all of the derivative instruments are being marked-to-market
on the balance sheets, with changes in fair value recorded in the statements of operations.
Although the counterparties provide no collateral, the derivative agreements with each counterparty allow the Company, so long as it is not a defaulting party, after
a default or the occurrence of a termination event, to set-off an unpaid derivative agreement receivable against the interest of the counterparty in any outstanding
balance under the credit facility. If a counterparty were to default in payment of an obligation under the derivative agreements, the Company could be exposed to
interest rate fluctuations.
Revision
The Company has corrected its 2014 statement of members’ equity to reflect a correction of the number of class A units outstanding. In the previously issued 2014
financial statements, the Company incorrectly reflected Class A units outstanding of 383,363 and 569,749 as of December 31, 2013 and 2014, respectively, and
186,386 Class A units issued in 2014. These amounts have been
10
Exhibit 99.2
corrected to 92,164 Class A units outstanding as of December 31, 2013 and 2014 with none issued during 2014. This correction had no impact on the Company’s
balance sheet or statements of operations or cash flows. The Company has evaluated the impact of these revisions and determined that they were not material.
The Company has also reclassified and allocated its previously reported accumulated deficit as of December 31, 2014 and 2013 of $4,367 and $2,965, respectively,
to the respective class of equity interests pursuant to the LLC Agreement. This reclassification had no impact on the Company’s balance sheet or statements of
operations or cash flows.
Recent Accounting Pronouncements
The FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which creates Topic 606, Revenue
from
Contracts
with
Customers
, which
supersedes the revenue recognition requirements of Topic 605, Revenue
Recognition,
including most industry-specific revenue recognition guidance throughout the
Industry Topics of the Codification. ASU 2014-09 is based on the core principle that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition,
ASU 2014-09 requires enhanced financial statement disclosures over the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers. ASU 2014-09 is effective for public entities for annual and interim periods beginning after December 15, 2017 and effective for nonpublic entities
for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Both public and nonpublic
entities are permitted to early adopt and apply ASU 2014-09 starting with annual periods beginning after December 15, 2016. ASU 2014-09 may be applied
retrospectively to each prior period presented, or retrospectively with the cumulative effect recognized as of date of adoption. The Company is currently evaluating
the impact of the adoption of ASU 2014-09 on its financial statements.
3. Debt
On June 20, 2014, the Company entered into a $400 million credit facility with a consortium of banks to issue term construction loans of $333 million, with a
maturity date of September 20, 2021, and issue letters of credit of $67 million supporting the Company’s debt service reserve obligations. The outstanding balance
of the term loans as of December 31, 2015 and 2014 was
$293,410 and $319,211, net of debt issuance costs of $11,830 and $13,789, respectively. The credit facility bears interest at the applicable London Interbank
Offered Rate plus a margin of 3.25% for the first three years, 3.5% for the next three years, and 3.75% for the years thereafter, or an alternate margin computed
based on the Prime Loan Rate plus applicable margins of 2.25% for the first three years, 2.5% for the next three years, and 2.75% thereafter. As of December 31,
2015 and 2014, the Company’s interest rate was 3.68% and 3.42%, respectively.
The credit facility requires repayments beginning on the conversion date, which occurs when each of the following conditions are met: (i) final completion of the
platform has occurred, (ii) all project costs have been paid in full, and (iii) all material governmental authorizations have been obtained. The repayment schedule
requires four payments per year through the maturity date of the credit facility. Repayments began in August 2015.
The credit facility is secured by mortgages on the Company’s Base FPS.
The Company must comply with various restrictive covenants in the credit agreement. These covenants include, among others: maintenance of insurance,
obtaining interest rate protection agreements, performance under the project documents, limitations on additional indebtedness, and restrictions on the declaration
or payment of dividends. As of December 31, 2015 and 2014, the Company was in compliance with all of the restrictive covenants.
The future maturities under the credit facility as of December 31, 2015 were as follows:
Year ending December 31,
2020
Thereafter
2016 $
127,787
2017
2018
2019
84,132
40,237
21,627
20,440
11,017
$
305,240
11
During the year ended December 31, 2015, the Company entered into a short-term note to finance its excess liability insurance policy. The note has an 11-month
term and an annual percentage rate of 3.49%. The aggregate balance of the note as of December 31, 2015 was $121.
4. Derivative Instruments
The Company is exposed to interest rate risk through its long-term borrowings, which are variable interest rate instruments. In July 2014, the Company entered into
interest rate swap contracts, expiring through November 2018, under which the Company agreed to pay an amount equal to a specified fixed rate of interest times a
notional principal amount, and to receive in return, an amount equal to a specified variable rate of interest times the same notional principal amount.
The Company’s interest rate swaps at December 31, 2015 and 2014, and related fair values, were as follows:
Exhibit 99.2
Period
1/15 - 11/18
1/15 - 11/18
1/15 - 11/18
1/15 - 11/18
Fair Value Interest Rate Swaps at December 31, 2015 (in thousands)
Notional Amount
Contract Rate
Variable Rate Range
Fair Value
$
78,047
78,047
46,828
46,828
1.266%
1.266%
1.266%
1.266%
LIBOR-BBA
$
LIBOR-BBA
LIBOR-BBA
LIBOR-BBA
$
Total
$
249,750
Period
1/15 - 11/18
1/15 - 11/18
1/15 - 11/18
1/15 - 11/18
Fair Value Interest Rate Swaps at December 31, 2014 (in thousands)
Notional Amount
Contract Rate
Variable Rate Range
Fair Value
$
78,047
78,047
46,828
46,828
1.266%
1.266%
1.266%
1.266%
LIBOR-BBA
$
LIBOR-BBA
LIBOR-BBA
LIBOR-BBA
(269)
(268)
(161)
(161)
(859)
(419)
(424)
(257)
(255)
Total
$
249,750
$
(1,355)
The following table summarizes the fair values of the interest rate swaps, on a gross basis, at December 31, 2015 and 2014, and identifies the balance sheet
location of these assets and liabilities:
Derivatives not designated as hedging instruments under ASC 815:
Asset Derivatives
Liability Derivatives
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Total Asset
(Liability)
As of December 31, 2015
Current Asset
Non-Current Asset
Total
As of December 31, 2014
Current Asset
Non-Current Asset
Total
$
$
$
$
— Current Liability
$
168 Non-Current Liability
168
$
— Current Liability
$
841 Non-Current Liability
841
$
12
(1,027) $
—
(1,027) $
(2,196) $
—
(2,196) $
(1,027)
168
(859)
(2,196)
841
(1,355)
For the years ended December 31, 2015 and 2014, the Company recognized an unrealized gain/(loss) on derivatives of $496 and $(1,355), respectively, which is
included as loss on derivatives in the Company’s statements of operations. For the years ended December 31, 2015 and 2014, the Company paid cash settlements
of $2,275 and $0, respectively, to the counterparties. The Company capitalized $430 of those settlements as a component of interest cost prior to the Base FPS
being placed into service during the year ended December 31, 2015.
5. Fair Value Measurements
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The Company utilizes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad
levels, which are described below:
Exhibit 99.2
Level
1
-
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level
2
-
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data .
Level
3
-
Unobservable inputs are used when little or no market data is available.
The following table sets forth, by the fair value hierarchy, the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis as
of December 31, 2015 and 2014:
At December 31, 2015
Liabilities
Interest Rate Swap
At December 31, 2014
Liabilities
Interest Rate Swap
Market Prices for
Identical Items (Level
1)
Significant Other
Observable Inputs
(Level 2)
Significant unobservable
Inputs (Level 3)
Total
$
$
— $
859 $
— $
859
— $
1,355 $
— $
1,355
6. Related Party Transactions
Production Handling and Floating Production System Use Agreements
The Company entered into separate production handling agreements with the Producers which are effective for an initial term of five (5) years and will be
automatically extended for successive five (5)-year periods unless and until terminated by the Company or the Producers pursuant to the terms of the agreements.
Termination of the agreements may occur i) at the end of the economic life of the reserves of the prospects; ii) upon the occurrence of an event of default (as
defined in the agreement); iii) any act of omission that constitutes gross negligence or willful misconduct; iv) by the Company, if after first commercial production,
there has been no production for two (2) years, and there are no then-current operations underway to reestablish production, or the aggregate production being
processed by the FPS is less than 2,000 BOE per day for 180 consecutive days; v) if damage to the FPS renders the FPS an actual or constructive loss; vi) if
maintenance or repair, or a change mandated by a government authority to the FPS requires major work and the Producers decline to become a participating
producer; or vii) by the Company, if a suspension period for a producer does not terminate by July 31, 2018.
The Producers currently hold Class A Units in the Company. Under the Production Agreements, the Company agreed to construct and decommission the Base FPS
that accepts dedicated production from the Anchor Prospects, which then processes the production and delivers comingled processed oil, natural gas, and
condensate to the oil and natural gas laterals, which connect to pipelines, which transport the oil, natural gas, and condensate to shore. In addition, the Company
ensures that the Base Operator operates the Base FPS according to the project agreements.
The Company billed the Producers a total of $268,875 for production handling fees and decommissioning fees for services performed during the year ended
December 31, 2015. As of December 31, 2015, the Company had a receivable of $82,081 due from the Producers. There were no fees billed during 2014.
13
Exhibit 99.2
Asset Management Agreement
Consolidated Asset Management Services (Texas), LLC (“CAMS”), provides construction and asset management services to the Company under the terms of an
Asset Management Agreement (“AMA”). CAMS is indirectly owned by Tessa Group, LLC, a general partner holding a 60% partnership interest in CAMS and
ArcLight Asset Management, LLC, a limited partner holding a 40% partnership interest in CAMS, and an affiliate of ArcLight Capital Partners, LLC (“ArcLight”).
At December 31, 2015, ArcLight holds an effective 38.8% interest in the Company’s Class A units through its subsidiaries Stork Offshore Holdings, LLC and
Pinto Offshore Holdings, LLC (51.7% at December 31, 2014).
The initial term of the AMA was through the date of First Commercial Production, which is defined as the date on which the last of the following occurs: (a) the
Base FPS has been constructed, installed, and commissioned pursuant to the Construction Contracts and the Project Management Agreement, (b) production is
delivered from an Anchor Prospect to the Base FPS and the Base FPS accepts such delivery, or (c) the Base FPS delivers hydrocarbons to the Lateral Facilities for
delivery to the Commercial Pipeline Delivery Point. The initial term of the AMA ended in April 2015. As no party declined to extend the AMA with one hundred
twenty (120) days written notice before the end of the initial term, the AMA was and will continue to be automatically renewed for successive periods of one (1)
year each until such an extension decline occurs. CAMS is paid a fixed monthly fee and recovers the expenses it incurs under the AMA.
During the years ended December 31, 2015 and 2014, the Company incurred costs of $225 and $493, respectively, related to the AMA, of which $66 and $493,
respectively, were capitalized as costs related to the Floating Production Platform.
As of December 31, 2015 and 2014, the Company had accounts payable due to CAMS of $19 and $19, respectively.
Project Management Agreement and Operating Agreement
LLOG Exploration Offshore, LLC (“LLOG”), provided project management services to the Company under the terms of a Project Management Agreement
(“PMA”). LLOG, along with its subsidiary, LLOG Bluewater Holdings, LLC holds a combined interest in the Company of 5.5%.
The PMA terminated on the earliest of: (a) First Commercial Production and the substantial completion of all activities under the Construction Contracts and
payment of Project Costs; (b) written consent of all Parties terminating the PMA; or (c) at the election of each Owner, with respect to its respective Project
Facilities or the election by all Owners with respect to all Project Facilities, upon termination of all Production Handling Agreements or Transportation
Agreements, in accordance with their termination provisions. First Commercial Production and the substantial completion of all activities under the Construction
Contracts and payment of Project Costs occurred in April 2015, at which point, the PMA terminated, and the Operating Agreement between the Company and
LLOG became effective. LLOG was paid a fee equal to 2.5% of the incurred project costs, and recovered the expenses it incurred under the PMA. Under the
Operating Agreement, LLOG operates the Base FPS and is paid a fee of 12% of the cost of operating the Base FPS, exclusive of certain legal expenses. These fees
were billed directly to the Producers.
During the years ended December 31, 2015 and 2014, the Company incurred costs of $988 and $13,696, respectively, related to the PMA, which were capitalized
as costs related to the floating production platform. As of December 31, 2015 and 2014, the Company had accounts payable due to LLOG of $0 and $655,
respectively.
7. Commitments and Contingencies
Legal Proceedings
The Company is not currently party to any pending litigation or governmental proceedings, other than ordinary routine litigation incidental to its business. While
the ultimate impact of any proceedings cannot be predicted with certainty, the Company believes that the resolution of any of its pending proceedings will not have
a material effect on its financial condition or results of operations.
Environmental Matters
The Company is subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent to processing
platform operations, and it could, at times, be subject to environmental cleanup and enforcement actions. The Company is not aware of any material environmental
matters.
8. Members’ Equity
14
Exhibit 99.2
There are four classes of equity units established by the LLC Agreement:
•
•
•
•
Class A Units - a class of capital interests issued in connection with the construction and operation of the Base FPS
Class B Units - a class of capital interests issued in connection with construction cost overruns with respect to the Base FPS
Class C Units - a class of capital interests issued in connection with expansions to the Base FPS
Class D Units - a class of capital interests issued in connection with unreimbursed major expenditures related to the Base FPS
Class B, C and D units have no voting rights. Distributions to members holding each class of equity units are subject to waterfall provisions contained in the
amended and restated limited liability company operating agreement.
For purposes of adjusting the capital accounts of the members, the net profits, net losses, and to the extent necessary, individual items of income, gain, loss, and
deduction, for any fiscal year, or other period, shall be allocated among the members in a manner such that the adjusted capital account of each member,
immediately after making such allocation, is, as nearly as possible, equal (proportionately) to then distributions that would be made to such member if the
Company were dissolved, its affairs wound up, and its properties sold for cash equal to their gross asset values, all Company liabilities were satisfied (limited with
respect to each nonrecourse liability to the gross asset value of the asset securing such liability), and the net assets of the Company were distributed to the members
immediately after making such allocation.
During 2014, $186,386 and $6,466 of Class A and Class B capital contributions, respectively, were made by the members.
On June 20, 2014, the Company declared and paid distributions to the members of Class A units of $282,378 using proceeds obtained from the Company’s credit
facility.
During 2015, $8,219 and $41,392 of Class A and Class B capital contributions, respectively, were made by the members.
On August 31, 2015, and November 30, 2015, the Company declared and paid distributions to the members of Class A units of $25,848 and $82,691, respectively,
using proceeds received from the production handling fees.
On September 18, 2015, Toga Offshore, LLC, the majority owner of Stork Offshore Holdings, LLC and an affiliate of ArcLight, contributed its ownership interest
in the Company (approximately 49%) to its affiliate, Pinto Offshore Holdings, LLC. Subsequently, on September 18, 2015, American Midstream Delta House,
LLC (an affiliate of American Midstream Partners, LP) purchased a 26.33% interest in Pinto Offshore Holdings, LLC, resulting in American Midstream Delta
House, LLC owning an approximate 12.9% effective interest in the Company.
9. Subsequent Events
The Company has evaluated subsequent events through February 29, 2016, which is the date these financial statements were available for issuance.
15
DELTA HOUSE OIL AND GAS LATERAL, LLC
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report - BDO USA, LLP
Balance sheets as of December 31, 2015 and December 31, 2014
Statements of Operations for the years ended December 31, 2015 and 2014
Statements of Members’ Equity for the years ended December 31, 2015 and 2014
Statements of Cash Flows for the years ended December 31, 2015 and 2014
Notes to the financial statements
1
Exhibit 99.3
Page
2
3
4
5
6
7-12
Exhibit 99.3
Members
Delta House Oil and Gas Lateral, LLC
Houston, Texas
Independent Auditor’s Report
We have audited the accompanying financial statements of Delta House Oil and Gas Lateral, LLC, which comprise the balance sheets as of December 31, 2015
and 2014, and the related statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial
statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in
the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend
on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delta House Oil and Gas Lateral, LLC as
of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally
accepted in the United States of America.
/s/ BDO USA, LLP
Houston, Texas
February 29, 2016
2
DELTA HOUSE OIL AND GAS LATERAL, LLC
BALANCE SHEETS
(in thousands)
ASSETS:
Current assets
Cash and cash equivalents
Accounts receivable - related party
Total current assets
Restricted cash - decommissioning
Accounts receivable - related party - decommissioning
Property and equipment, net
Total assets
LIABILITIES AND MEMBERS' EQUITY:
Current liabilities
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities-affiliate
Total current liabilities
Asset retirement obligations
Total liabilities
Commitments and contingencies, Note 3
Members' equity
Total liabilities and members' equity
See accompanying notes to financial statements.
3
Exhibit 99.3
December 31,
2015
2014
$
1,364 $
$
$
10,201
11,565
135
60
173,341
185,101 $
14 $
19
33
2,198
2,231
3,138
2,098
5,236
—
—
156,097
161,333
9,569
201
9,770
—
9,770
$
182,870
185,101 $
151,563
161,333
DELTA HOUSE OIL AND GAS LATERAL, LLC
STATEMENTS OF OPERATIONS
(in thousands)
Exhibit 99.3
Year Ended December 31,
2015
2014
$
30,902 $
189
3,162
99
3,450
—
22
—
—
22
Revenues - related party
Operating Expenses:
General and administrative
Depreciation
Accretion of asset retirement obligation
Total operating expenses
Net income (loss)
$
27,452 $
(22)
See accompanying notes to financial statements.
4
Exhibit 99.3
DELTA HOUSE OIL AND GAS LATERAL, LLC
STATEMENTS OF MEMBERS' EQUITY
(in thousands, except unit amounts)
Class A
Class B
Class C
Class D
Units
Amount
Units
Amount
Units
Amount
Units
Amount
Members'
Equity
Balance at December 31, 2013
5,409 $
75,505
— $
Capital contributions
Net loss
—
—
76,077
(22)
Balance at December 31, 2014
5,409
151,560
Capital contributions
Distributions
Net income
—
—
—
24,287
(20,432)
27,452
—
—
—
—
—
—
Balance at December 31, 2015
5,409 $
182,867
— $
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
3 $
3 $
—
—
3
—
—
—
—
—
3
—
—
—
75,508
76,077
(22)
151,563
24,287
(20,432)
27,452
3 $
3 $
182,870
See accompanying notes to financial statements.
5
DELTA HOUSE OIL AND GAS LATERAL, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Exhibit 99.3
Year ended December 31,
2015
2014
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
$
27,452 $
Depreciation
Accretion of asset retirement obligation
Changes in operating assets and liabilities:
Accounts receivable
Accounts payable and other current liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Change in restricted cash
Additions to property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Capital contributions
Distributions
Net cash provided by financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Non-Cash Investing Activities
Changes in property and equipment funded through accounts payable and accrued liabilities
Change in asset retirement cost
See accompanying notes to financial statements.
6
$
$
$
(22)
—
—
(2,098)
—
(2,120)
—
(119,399)
(119,399)
76,077
—
76,077
(45,442)
48,580
3,138
3,162
99
(8,163)
(2)
22,548
(135)
(28,042)
(28,177)
24,287
(20,432)
3,855
(1,774)
3,138
1,364 $
(9,735) $
2,099 $
(3,320)
—
Exhibit 99.3
DELTA HOUSE OIL AND GAS LATERAL, LLC
NOTES TO FINANCIAL STATEMENTS
(in thousands)
1. Organization and Nature of Operations
Delta House Oil and Gas Lateral, LLC (“the Company”) was formed in the state of Delaware as a limited liability company on October 18, 2012. The Company
will continue in existence until it is dissolved and terminated by the members of the Company in accordance with the provisions of the Limited Liability
Agreement (the “LLC Agreement” or “Operating Agreement”). The Company was formed to finance, design, construct, and own and operate oil and natural gas
lateral transportation facilities, which receive and transport production of hydrocarbons from the Marmalard, Neidermeyer, and SOB 2 prospects (“the Anchor
Prospects”), the Blue Wing Olive, Malachite, and SOB III prospects (“Secondary Prospects”), and the Otis and Odd Job prospects (“Additional Priority
Prospects”) in the Gulf of Mexico and any future additional prospects from a floating production platform (“Base FPS”) which has been developed by Delta House
FPS, LLC, to commercial pipeline operators. The planned capacity of the oil lateral facilities is 100,000 barrels of oil per day and 240 MMCF per day of natural
gas for the natural gas lateral facilities.
The Base FPS and the oil and natural gas lateral transportation facilities commenced operations in April 2015.
On December 6, 2012, the Company entered into a processing agreement with the producers (the “Producers”) of the Anchor Prospects and the Secondary
Prospects to provide oil and natural gas transportation services. The Company subsequently entered into a processing agreement with the Producers of the
Additional Priority Prospects to provide oil and natural gas transportation services. The Producers have agreed to pay the Company a variable fee for each barrel of
oil and MMBtu of natural gas produced from the Anchor Prospects and delivered to the Base FPS. Additionally, beginning on the earlier of the date on which all
Producers have delivered production to the lateral facility, the Producers are contractually obligated to pay a fixed monthly fee of $925 for oil and $943 for natural
gas for the right to use the lateral transportation facilities.
Profits and losses are allocated to the members in proportion to their equity percentage interests, with certain restrictions dictated by specific terms under the LLC
Agreement.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in U.S. dollars using accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments, with original maturities of three months or less. There were no cash
equivalents as of December 31, 2015 and 2014.
Restricted Cash
The Company maintains restricted cash deposits for decommissioning, and has collected and recorded $135 of long-term restricted cash during the year ended
December 31, 2015.
Accounts Receivable
Receivables from the sale of oil and natural gas transportation services are unsecured. Allowance for doubtful accounts are determined based on management’s
assessment of the creditworthiness of the customer. Past due accounts are written off against the allowance for doubtful accounts only after all collection attempts
have been exhausted. At December 31, 2015 and 2014, management believed that all balances from customers were fully collectible such that no allowance for
doubtful accounts was deemed necessary.
Revenue Recognition
Revenue from our oil and natural gas export offshore pipelines is based on a fixed monthly fee for the right to use the lateral transportation facilities and a fixed fee
per unit of volume gathered or transported multiplied by the volume delivered. Transportation fees are based on contractual arrangements. Revenue associated with
these fee-based contracts is recognized when volumes have
7
been delivered.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable. The carrying amounts
approximate fair value due to the short term nature of these instruments.
Property and Equipment
Property and equipment are recorded at cost. Betterments are capitalized. Repair and maintenance costs are expensed as incurred. Property and equipment consists
of the following:
Exhibit 99.3
Pipelines
Capitalized asset retirement costs
Accumulated depreciation
Property and equipment, net
Construction-in-progress
Total property and equipment, net
Useful Life (Years)
2015
2014
December 31,
40
40
$
174,404 $
2,099
(3,162)
173,341
—
$
173,341 $
—
—
—
—
156,097
156,097
Construction-in-progress consisted of capitalized costs incurred in association with the acquisition and construction of the oil and gas lateral transportation
facilities.
Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, net of salvage value. Depreciation expense was
$3,162 for the year ended December 31, 2015. Since the facilities had not been placed in service as of December 31, 2014, no depreciation expense was recognized
during the year ended December 31, 2014.
The recoverability of long-lived assets are evaluated when events or changes in circumstances indicate that the carrying amount of the long-lived asset might not be
recoverable. If such impairment indicators exist, the Company performs a two-step impairment test. First, the undiscounted future cash flows of the long-lived
assets are estimated and compared to assets’ carrying value and, if the undiscounted cash flows are less than the carrying value, the assets are considered impaired.
Second, the impairment loss is measured by reducing the carrying value to the estimated fair value of the assets which is determined through either quoted market
prices in active markets or present value techniques. No impairment losses were recorded for the years ended December 31, 2015 and 2014.
Asset Retirement Obligations (“AROs”)
AROs are legal obligations associated with the removal and abandonment of tangible long-lived assets and are recognized in the period in which it is incurred, if a
reasonable estimate of fair value can be made. AROs are initially measured at their estimated fair values and recorded as liabilities with an increase as well to the
carrying amount of the related long-lived asset. In future periods subsequent to initial recognition, accretion of the liability is recognized each period and the asset
is depreciated using the straight-line method over its useful life. During the year ending December 31, 2015, the Company recorded an ARO relating to the future
dismantlement of the oil and natural gas lateral transportation facilities.
The following table provides an analysis of changes in the ARO liability for the year ended December 31, 2015:
Balance at December 31, 2014
Liabilities incurred
Accretion
Balance at December 31, 2015
Use of Estimates
8
$
$
—
2,099
99
2,198
Exhibit 99.3
When preparing financial statements in conformity with U.S. GAAP, management must make estimates and assumptions based on information available at the
time. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and
liabilities as of the date of the financial statements. Estimates and assumptions are based on information available at the time such estimates and assumptions are
made. Adjustments made with respect to the use of these estimates and assumptions often relate to information not previously available. Uncertainties with respect
to such estimates and assumptions are inherent in the preparation of financial statements.
Estimates and assumptions are used in, among other things i) estimating unbilled revenues, ii) analyzing long-lived assets and assets for possible impairment, iii)
estimating the useful lives of assets, and iv) estimating the inputs required in calculating the asset retirement obligations. Actual results could differ materially from
estimated amounts.
Income Taxes
The Company files its federal income tax return as a limited liability corporation under the Internal Revenue Code. In lieu of corporate income taxes, the members
of the Company are taxed on their proportionate share of the Company’s taxable income. Accordingly, no provision or liability has been recognized for federal
income tax purposes in the accompanying financial statements, as taxes are the responsibility of the individual members of the Company.
The Company’s assets are located in federal waters in the Gulf of Mexico, and therefore, are not subject to state income taxes.
Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position
will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not
criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. The
Company had no uncertain tax positions as of December 31, 2015 or 2014. For the years ended December 31, 2015 and 2014, the Company did not incur any
income tax-related interest or penalties.
None of the Company’s federal income tax returns are currently under examination by the Internal Revenue Service (“IRS”). However, fiscal years 2012 and later
remain subject to examination by the IRS.
Concentration of Credit Risk
The Company’s primary assets, which are located in the Gulf of Mexico, provide transportation services to producers of oil and natural gas from the Base FPS. The
Company has a concentration of accounts receivable balances due from companies engaged in the production of oil and natural gas in the Gulf of Mexico. These
customers may be similarly affected by changes in economic, regulatory, weather, or other factors.
The Company maintains cash and cash equivalents and restricted cash balances at financial institutions in the United States of America, which at times exceed
federally insured amounts. The Company has not experienced any losses in such accounts, and does not believe a significant concentration of credit risk exists with
its cash and cash equivalents.
Revisions
The Company has corrected its 2014 statement of members’ equity to reflect a correction of the number of class A units outstanding. In the previously issued 2014
financial statements, the Company incorrectly reflected Class A units outstanding of 76,788 and 152,865 as of December 31, 2013 and 2014, respectively, and
76,077 Class A units issued in 2014. These amounts have been corrected to 5,409 Class A units outstanding as of December 31, 2013 and 2014 with none issued
during 2014. This correction had no impact on the Company’s balance sheet or statements of operations or cash flows. The Company has evaluated the impact of
these revisions and determined that they were not material.
The Company has also reclassified and allocated its previously reported accumulated deficit as of December 31, 2014 and 2013 of $1,305 and $1,283, respectively,
to the respective class of equity interests pursuant to the LLC Agreement. This reclassification had no impact on the Company’s balance sheet or statements of
operations or cash flows.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which creates Topic 606, Revenue
from
Contracts
with
Customers
, which supersedes the revenue recognition requirements Topic 605,
9
Revenue
Recognition,
including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. ASU 2014-09 is based on
the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 requires enhanced financial statement
disclosures over the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for public
entities for annual and interim periods beginning after December 15, 2017 and effective for nonpublic entities for annual periods beginning after December 15,
2018 and interim periods within annual periods beginning after December 15, 2019. Both public and nonpublic entities are permitted to early adopt and apply ASU
2014-09 starting with annual periods beginning after December 15, 2016. ASU 2014-09 may be applied retrospectively to each prior period presented, or
retrospectively with the cumulative effect recognized as of date of adoption. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on
its financial statements.
Exhibit 99.3
3. Commitments and Contingencies
Legal Proceedings
The Company is not currently party to any pending litigation or governmental proceedings, other than ordinary routine litigation incidental to its business. While
the ultimate impact of any proceedings cannot be predicted with certainty, the Company believes that the resolution of any of its pending proceedings will not have
a material effect on its financial condition or results of operations.
Environmental Matters
The Company is subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent to processing
platform operations and oil and natural gas pipeline transportation, and it could, at times, be subject to environmental cleanup and enforcement actions. The
Company is not aware of any material environmental matters.
4. Related Party Transactions
Transportation Agreements
The Company entered into separate oil lateral transportation and natural gas lateral transportation agreements (the “Transportation Agreements”) with the
Producers. Under the terms of the Transportation Agreements, the Company agreed to construct, install, and decommission the oil and natural gas lateral
transportation facilities (“the Facilities”) that accepts dedicated production from the Anchor Prospects at the Base FPS in the Gulf of Mexico, and deliver the
production to pipeline operators. In addition, the Company ensures that LLOG Exploration Offshore, LLC (“Lateral Operator”) operates the Company’s Facilities
according to the project agreements. The Producers currently hold Class A Units in the Company.
The Company billed the Producers a total of $30,902 for transportation and decommissioning fees for services performed during the year ended December 31,
2015. As of December 31, 2015, $10,201 was due from the Producers. There were no fees billed during 2014.
Asset Management Agreement
Consolidated Asset Management Services (Texas), LLC (“CAMS”), provided construction and asset management services to the Company under the terms of an
Asset Management Agreement (“AMA”). CAMS is indirectly owned by Tessa Group, LLC, a general partner holding a 60% partnership interest in CAMS, and
ArcLight Asset Management, LLC, a limited partner holding a 40% partnership interest in CAMS, and an affiliate of ArcLight Capital Partners, LLC (“ArcLight”).
At December 31, 2015, ArcLight holds an effective 38.8% of the Class A units in the Company through its subsidiaries, Otter Offshore Holdings, LLC and Pinto
Offshore Holdings, LLC (51.7% at December 31, 2014).
The initial term of the AMA was through the date of First Commercial Production, which is defined as the date on which the last of the following occurs: (a) the
Base FPS has been constructed, installed, and commissioned pursuant to the Construction Contracts and the Project Management Agreement by Delta House FPS,
LLC, (b) production is delivered from an Anchor Prospect to the Base FPS, and the Base FPS accepts such delivery, or (c) the Base FPS delivers Hydrocarbons to
the Lateral Facilities owned by the Company for delivery to the Commercial Pipeline Delivery Point. The initial term of the AMA ended in April 2015. As no
party declined to extend the AMA with one hundred twenty (120) days written notice before the end of the initial term, the AMA was and would continue to be
automatically renewed for successive periods of one (1) year each until such an extension decline occurs. CAMS is paid a fixed monthly fee and recovers the
expenses it incurs under the AMA.
10
Exhibit 99.3
During the year ended December 31, 2015, the Company incurred costs of $225 related to the AMA, of which $94 was capitalized and $131 was expensed.
As of December 31, 2015 and 2014, the Company had accounts payable due to CAMS of $19 and $20, respectively.
Project Management Agreement and Operating Agreement
LLOG Exploration Offshore, LLC (“LLOG”) provided project management services to the Company under the terms of a Project Management Agreement
(“PMA”). LLOG, along with its subsidiary, LLOG Bluewater Holdings, LLC, holds a combined partnership interest in the Company of 5.5%.
The PMA terminated on the earliest of: (a) First Commercial Production and the substantial completion of all activities under the Construction Contracts and
payment of Project Costs, (b) written consent of all Parties terminating the PMA, or (c) at the election of each Owner, with respect to its respective Project
Facilities, or the election by all Owners with respect to all Project Facilities, upon termination of all Production Handling Agreements or Transportation
Agreements, in accordance with their termination provisions. First Commercial Production and the substantial completion of all activities under the Construction
Contracts and payment of Project Costs occurred in April 2015, at which point, the PMA terminated, and the Operating Agreement between the Company and
LLOG became effective. LLOG was paid a fee equal to 2.5% of the incurred project costs and recovered the expenses it incurred under the PMA. Under the
Operating Agreement, LLOG operates the Base FPS and is paid a fee of 12% of the cost of operating the Base FPS, exclusive of certain legal expenses. These fees
were billed directly to the Producers.
During the years ended December 31, 2015 and 2014, the Company incurred costs of $877 and $3,400, respectively, related to the PMA, which were capitalized.
As of December 31, 2015 and 2014, the Company had accounts payable due to LLOG of $0 and $181, respectively.
5. Members’ Equity
There are four classes of equity units as established by the LLC Agreement:
•
•
•
•
Class A units - a class of capital interests in respect of construction and operation of the Lateral Facilities
Class B units - a class of capital interests in respect of construction cost overruns with respect to the Lateral Facilities
Class C units - a class of capital interests in respect of expansions to the Lateral Facilities
Class D units - a class of capital interests in respect of unreimbursed major expenditures related to the Lateral Facilities
Producers receive Class D units in the Company for funding operating costs of major work that exceed $10,000 in aggregated cost. In addition, the Producers have
been assigned an overriding royalty interest in the dedicated production of the Anchor Prospects, which triggers upon an activation event.
Class B, C, and D units have no voting rights. Distributions to members holding each class of equity units are subject to waterfall provisions contained in the
operating agreement.
For purposes of adjusting the capital accounts of the members, the net profits, net losses, and, to the extent necessary, individual items of income, gain, loss and
deduction, for any fiscal year or other period, shall be allocated among the members in a manner such that the adjusted capital account of each member,
immediately after making such allocation, is, as nearly as possible, equal (proportionately) to then distributions that would be made to such member, if the
Company were dissolved, its affairs wound up, and its properties sold for cash equal to their gross asset values, all Company liabilities were satisfied (limited with
respect to each nonrecourse liability to the gross asset value of the asset securing such liability), and the net assets of the Company were distributed to the members
immediately after making such allocation.
During the years ended December 31, 2015 and 2014, $24,287 and $76,077, respectively, of Class A capital contributions were made by the members.
On September 3, 2015, October 28, 2015, November 30, 2015, and December 31, 2015, the Company declared and paid distributions of $3,140, $7,271, $4,795,
and $5,226, respectively, to the members of Class A units, using proceeds received from the transportation fees.
On September 18, 2015, Toga Offshore, LLC, the majority owner of Otter Offshore Holdings, LLC and an affiliate of ArcLight, contributed its ownership interest
in the Company, (approximately 49%) to its affiliate, Pinto Offshore Holdings, LLC.
11
Subsequently, on September 18, 2015, American Midstream Delta House, LLC (an affiliate of American Midstream Partners, LP) purchased a 26.33% interest in
Pinto Offshore Holdings, LLC; resulting in American Midstream Delta House, LLC owning an approximate 12.9% effective interest in the Company.
6. Subsequent Events
The Company has evaluated subsequent events through February 29, 2016, which is the date these financial statements were available for issuance.
Exhibit 99.3
12