Exhibit 99.3

 

bREITBurn Energy Partners L.P.

 

	Page
Unaudited Pro Forma Combined Balance Sheet as of September 30, 2014	1
Unaudited Pro Forma Combined Statement of Operations for the Nine Months Ended September 30, 2014	2
Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2013	3
Notes to Unaudited Pro Forma Combined Financial Statements	4

 

  

Breitburn Energy Partners LP and Subsidiaries

Unaudited Pro Forma Combined Balance Sheet

As of September 30, 2014

 

		Breitburn				QRE Historical				Pro Forma Adjustments				Breitburn
Thousands of dollars		Historical				(Note 2)				(Note 3)				Pro Forma
ASSETS
Current assets
Cash		$	3,227			$	16,159			$	755,219	(b)(c)(d)(e)		$	19,386
											(755,219	)(b)(c)(d)(e)
Accounts and other receivables, net			98,360				51,379				-				149,739
Derivative instruments			44,256				33,744				-				78,000
Related party receivables			1,509				-				-				1,509
Inventory			4,418				-				-				4,418
Prepaid expenses			3,831				3,338				-				7,169
Total current assets			155,601				104,620				-				260,221
Equity investments			6,551				-				-				6,551
Property, plant and equipment
Oil and gas properties			5,102,392				2,098,577				(450,970	)(a)			6,749,999
Non-oil and gas assets			36,138				15,901				(462	)(a)			51,577
Property, plant and equipment			5,138,530				2,114,478				(451,432	)			6,801,576
Accumulated depletion and depreciation			(1,148,185	)			(411,764	)			411,764	(a)			(1,148,185	)
Net property, plant and equipment			3,990,345				1,702,714				(39,668	)			5,653,391
Other long-term assets
Intangibles			9,286				-				-				9,286
Goodwill			-				-				951,536	(a)			951,536
Derivative instruments			25,863				29,681				-				55,544
Other long-term assets			76,008				57,844				(7,469	)(a)(b)			145,957
											19,574	(c)
Total assets		$	4,263,654			$	1,894,859			$	923,973			$	7,082,486
LIABILITIES AND EQUITY
Current liabilities
Accounts payable		$	64,199			$	60,152			$	-			$	124,351
Related party payables			-				887				-				887
Current portion of asset retirement obligation			-				4,895				-				4,895
Derivative instruments			7				7,378				-				7,385
Distributions payable			733				14,212				-				14,945
Revenue and royalties payable			32,401				-				-				32,401
Wages and salaries payable			12,173				-				-				12,173
Accrued interest payable			42,856				4,625				-				47,481
Accrued liabilities			32,604				9,320				-				41,924
Total current liabilities			184,973				101,469				-				286,442
Credit facility			719,000				755,000				345,645	(a)(b)			2,229,219
											350,000	(d)
											40,000	(e)
											19,574	(c)
Senior notes, net			1,156,589				296,981				(296,981	)(b)			1,156,589
Deferred Class B unit obligation			-				134,894				(134,894	)(f)			-
Deferred income taxes			2,902				2,154				-				5,056
Asset retirement obligation			133,216				159,543				-				292,759
Derivative instruments			5,145				5,283				-				10,428
Other long-term liabilities			5,530				10,035				-				15,565
Total liabilities			2,207,355				1,465,359				323,344				3,996,058
Commitments and contingencies
Equity
Series A preferred units			193,215				-				-				193,215
Common units			1,863,084				-				1,060,585	(f)			2,883,669
											(40,000	)(e)
Class C convertible preferred unitholders			-				400,710				(400,710	)(d)			-
Public common unitholders			-				120,463				(120,463	)(f)			-
Affiliated common unitholders			-				(103,900	)			103,900	(f)			-
Accumulated other comprehensive income			-				2,683				(2,683	)(a)			-
Noncontrolling interest			-				9,544				-	(a)			9,544
Total equity			2,056,299				429,500				600,629				3,086,428
Total liabilities and equity		$	4,263,654			$	1,894,859			$	923,973			$	7,082,486

 

See the accompanying notes to the unaudited pro forma combined financial statements.

 

  

Breitburn Energy Partners LP and Subsidiaries

Unaudited Pro Forma Combined Statement of Operations

For the Nine Months Ended September 30, 2014

 

		Breitburn				QRE Historical				Pro Forma Adjustments				Breitburn
Thousands of dollars, except per unit amounts		Historical				(Note 2)				(Note 4)				Pro Forma
Revenues and other income items
Oil, NGLs and natural gas sales		$	658,753			$	372,188			$	-			$	1,030,941
Loss on commodity derivative instruments, net			(21,057	)			(18,691	)			-				(39,748	)
Other revenue, net			4,240				13,929				-				18,169
Total revenues and other income items			641,936				367,426				-				1,009,362
Operating costs and expenses
Operating costs			248,161				160,617				315	(g)			409,093
Depletion, depreciation and amortization			204,417				99,737				(25,051	)(h)			279,103
Impairments			29,434				-				-				29,434
General and administrative expenses			53,886				38,261				(7,025	)(j)			85,122
Loss on sale of assets			357				-				-				357
Total operating costs and expenses			536,255				298,615				(31,761	)			803,109
Operating income			105,681				68,811				31,761				206,253
Interest expense, net of capitalized interest			90,360				38,418				(10,437	)(k)			118,341
Gain on Deferred Class B unit obligation			-				(6,883	)			6,883	(l)			-
Other income, net			(1,223	)			(520	)			-				(1,743	)
Total other expense			89,137				31,015				(3,554	)			116,598
Income before taxes			16,544				37,796				35,315				89,655
Income tax expense			384				626				-				1,010
Net income			16,160				37,170				35,315				88,645
Less: Net income attributable to noncontrolling interest			-				1,037				-				1,037
Net income attributable to the partnership			16,160				36,133				35,315				87,608
Less: Distributions to preferred unitholders			5,958				-				-				5,958
Net income attributable to common unitholders		$	10,202			$	36,133			$	35,315			$	81,650
Basic net loss per unit		$	0.08											$	0.45
Diluted net loss per unit		$	0.08											$	0.45
Weighted average number of units used to calculate (d)
Basic net income per unit			121,638								72,002	(m)			193,640
Diluted net income per unit			122,376								72,002	(m)			194,378

 

See the accompanying notes to the unaudited pro forma combined financial statements.

 

  

Breitburn Energy Partners LP and Subsidiaries

Unaudited Pro Forma Combined Statement of Operations

For the Year Ended December 31, 2013

 

		Breitburn				QRE Historical				Whiting and Permian Basin Acquisitions				Pro Forma Adjustments				Breitburn
Thousands of dollars, except per unit amounts		Historical				(Note 2)				Historical				(Note 4)				Pro Forma
Revenues and other income items
Oil, NGLs, and natural gas sales		$	660,665			$	446,801			$	191,648			$	-			$	1,299,114
Loss on commodity derivative instruments, net			(29,182	)			(1,217	)			-				-				(30,399	)
Other revenue, net			3,175				8,828				-				-				12,003
Total revenues and other income items			634,658				454,412				191,648				-				1,280,718
Operating costs and expenses
Operating costs			262,822				180,698				43,648				614	(g)			487,782
Depletion, depreciation and amortization			216,495				122,640				-				(33,674	)(h)			351,989
															46,528	(i)
Impairments			54,373				-				-				-				54,373
General and administrative expenses			58,707				43,388				-				(3,399	)(j)			98,696
Gain on sale of assets			(2,015	)			-				-				-				(2,015	)
Total operating costs and expenses			590,382				346,726				43,648				10,069				990,825
Operating income			44,276				107,686				148,000				(10,069	)			289,893
Interest expense, net of capitalized interest			87,067				48,000				-				16,642	(k)			151,709
Other expense, net			(25	)			(1,589	)			-				-				(1,614	)
Total other expense			87,042				46,411				-				16,642				150,095
Income before taxes			(42,766	)			61,275				148,000				(26,711	)			139,798
Income tax expense  (benefit)			905				(353	)			-				-				552
Net income			(43,671	)			61,628				148,000				(26,711	)			139,246
Less: Net income attributable to noncontrolling interest			-				663				-				-				663
Net income (loss) attributable to the partnership		$	(43,671	)		$	60,965			$	148,000			$	(26,711	)		$	138,583
Basic net income (loss) per unit		$	(0.43	)														$	0.72
Diluted net income (loss) per unit		$	(0.43	)														$	0.72
Weighted average number of units used to calculate
															72,002	(m)
Basic net income (loss) per unit			101,604												18,714	(n)			192,320
															72,002	(m)
Diluted net income (loss) per unit			101,604												19,078	(n)			192,684

 

See the accompanying notes to the unaudited pro forma combined financial statements.

 

 

Notes to the Unaudited Pro Forma Combined Financial Statements

  

1.

General

 

On November 19, 2014, Breitburn Energy Partners LP, a Delaware limited partnership (“Breitburn”), and Breitburn GP LLC, a Delaware limited liability company (“Breitburn GP”), completed the previously announced transactions contemplated by the Agreement and Plan of Merger, dated as of July 23, 2014 (the “Merger Agreement”), by and among Breitburn, Breitburn GP, Boom Merger Sub, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Breitburn (“Merger Sub”), QR Energy LP, a Delaware limited partnership (“QR Energy”) and QRE GP, LLC, a Delaware limited liability company (“QRE GP”). Pursuant to the terms of the Merger Agreement, Merger Sub was merged with and into QR Energy, with QR Energy continuing as the surviving entity and as a direct wholly owned subsidiary of Breitburn (the “Merger”). Under the terms of the Merger Agreement, holders of QRE common units and Class B units received 0.9856 common units of Breitburn for each QRE unit held and Breitburn issued approximately 72 million Breitburn common units. In addition, under the terms of the Merger Agreement, each Class C Convertible Preferred Unit (collectively, the “Class C units”) of QRE issued and outstanding was converted into the right to receive cash in an amount equal to (i) $350 million divided by (ii) the number of Class C units outstanding immediately prior to the closing of the merger.

 

On December 30, 2013, Breitburn completed acquisitions of oil and natural gas properties located in the Permian Basin in Texas from CrownRock, L.P. for approximately $282 million in cash, and in December 2013, Breitburn completed the acquisition of additional interests in certain of the acquired assets in the Permian Basin from other sellers for an additional $20 million (collectively, the “Permian Basin Acquisitions”).

 

On July 15, 2013, Breitburn completed the acquisition of certain oil and natural gas and midstream assets located in Oklahoma, New Mexico and Texas, certain CO2 supply contracts, certain crude oil swaps and interests in certain entities from Whiting Oil and Gas Corporation (“Whiting”) for approximately $845 million in cash (the “Whiting Acquisition”), including post-closing adjustments.

 

The unaudited pro forma financial statements have been prepared using the acquisition method of accounting for business combinations under U.S. GAAP. The historical financial information included in the columns entitled “Breitburn” was derived from the unaudited financial statements included in Breitburn’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and its Annual Report on Form 10-K for the year ended December 31, 2013. The historical financial information included in the columns entitled “QRE” was derived from QRE’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 and Annual Report on Form 10-K for the year ended December 31, 2013.

 

The unaudited pro forma combined balance sheet as of September 30, 2014 has been presented to show the effect as if the merger and the pro forma adjustments had occurred on September 30, 2014. The Whiting Acquisition and the Permian Basin Acquisitions were included in Breitburn’s historical balance sheet as of September 30, 2014, and, as such, there are no pro forma adjustments related to the Permian Basin Acquisitions and the Whiting Acquisition.

 

The unaudited pro forma combined statement of operations for the nine months ended September 30, 2014 and for the year ended December 31, 2013 have been presented based on Breitburn’s individual statement of operations, and reflect the pro forma operating results attributable to the Merger Agreement, the Permian Basin Acquisitions and the Whiting Acquisition as if the merger and acquisitions and the related transactions had occurred on January 1, 2013. Breitburn’s historical statements of operations include operating results from the Permian Basin Acquisitions for the nine months ended September 30, 2014 and, as such, there are no pro forma adjustments related to the Permian Basin Acquisitions for this period. Breitburn’s historical statements of operations include operating results from the Whiting Acquisition for the period from July 15, 2013 to September 30, 2014 and, as such, the pro forma adjustments related to the Whiting Acquisition for the period January 1, 2013 to July 15, 2013 are included for the year ended December 31, 2013.

 

Pro forma data is based on currently available information and certain estimates and assumptions as explained in the notes to the unaudited pro forma combined financial statements. Pro forma data is not necessarily indicative of the financial results that would have been attained had the Merger Agreement and Permian Basin Acquisitions and Whiting Acquisition occurred on January 1, 2013. As actual adjustments may differ from the pro forma adjustments, the pro forma amounts presented should not be viewed as indicative of operations in future periods.

 

 

The unaudited pro forma combined financial information is based on assumptions that Breitburn believes are reasonable under the circumstances and are intended for informational purposes only. Actual results may differ from the estimates and assumptions used. The unaudited pro forma combined financial information is not necessarily indicative of the financial results that would have occurred if these transactions had taken place on the dates indicated, nor is it indicative of future consolidated results.

 

The effect of the offering of 14 million Breitburn common units completed in October 2014 is not included in the pro forma financial statements as it occurred after the pro forma balance sheet date and was not a direct result of the QRE acquisition.

 

2.

The QRE Historical Financial Statements

 

The QRE historical financial statements reflect the results of operations derived from QRE’s audited financial statements for the year ended December 31, 2013 and the unaudited financial statements as of and for the nine months ended September 30, 2014. The QRE historical financial statements as presented include the following reclassifications to conform to Breitburn’s financial statement presentation.

 

		QRE Historical				QRE Historical
Thousands of dollars		As filed				As presented
Balance Sheet as of September 30, 2014
Other property, plant and equipment		$	15,901			$	-
Non-oil and gas assets			-				15,901
Accrued and other Liabilities		$	88,309			$	-
Accounts Payable			-				60,152
Distributions payable			-				14,212
Accrued interest payable			-				4,625
Accrued liabilities			-				9,320
Long-term debt		$	1,051,981			$	-
Credit facility			-				755,000
Senior notes, net			-				296,981
Income Statement for the Nine Months ended September 30, 2014
Other income (expense)
Gain (loss) on commodity derivative contracts, net		$	(18,691	)		$	-
Revenues and other income items
Gain (loss) on commodity derivative instruments, net			-				(18,691	)
Production expenses		$	148,967			$	-
Disposal and related expenses			11,650				-
Operating costs			-				160,617
Depreciation, depletion and amortization		$	93,203			$	99,737
Accretion of asset retirement obligation			6,534				-
General and administrative expenses		$	29,819			$	38,261
Acquisition and transaction costs			8,442				-
Income Statement for the Year ended December 31, 2013
Other income (expense)
Gain (loss) on commodity derivative contracts, net		$	(1,217	)		$	-
Revenues and other income items
Gain (loss) on commodity derivative instruments, net			-				(1,217	)
Production expenses		$	174,101			$	-
Disposal and related expenses			6,597				-
Operating costs			-				180,698
Depreciation, depletion and amortization		$	115,184			$	122,640
Accretion of asset retirement obligation			7,456				-
General and administrative expenses		$	41,901			$	43,388
Acquisition and transaction costs			1,487				-

 

 

3.

Pro Forma Adjustments to the Unaudited Combined Balance Sheet

 

The Merger Agreement provided that, at the closing date, each QRE common unit and Class B unit issued and outstanding or deemed issued (including contingent Class B units) and outstanding as of immediately prior to the closing date was converted into the right to receive 0.9856 Breitburn common units. At closing, Breitburn issued approximately 72 million Breitburn common units. Using Breitburn’s unit price at market closing on November 19, 2014, of $14.73, the value of Breitburn’s common unit consideration is $1,060.6 million.

 

In addition, under the terms of the Merger Agreement, the holders of QRE Class C units received an amount of cash equal to $350 million divided by the number of Class C units outstanding immediately prior to the effective time.

 

The preliminary estimated purchase price allocation is based on discounted cash flows, quoted market prices and estimates made by management, the most significant assumptions related to the estimated fair values assigned to oil and gas properties. To estimate the fair values of the properties, estimates of oil and gas reserves were prepared by management in consultation with independent engineers. We applied strip pricing to the estimated reserve quantities acquired and used strip prices as of November 19, 2014. We also estimate future operating and development costs to arrive at estimates of future net revenues. Estimated future net revenues are discounted using a weighted average cost of capital of approximately 9%. Accordingly, the pro forma fair value adjustments are preliminary and have been made solely for the purpose of providing pro forma financial statements. The actual fair values of the assets acquired and liabilities assumed may differ materially from the amounts presented in the purchase price allocation below as further analysis is completed, including valuations by third-party consultants. As a result, the final allocation of the purchase price may result in different adjustments than those shown in the unaudited pro forma financial statements, and these differences may have a material impact on the accompanying pro forma financial statements and the combined future results of operations and financial position.

 

(a)

Pro forma adjustments to the unaudited combined balance sheet as of September 30, 2014 reflect the merger and the preliminary estimated purchase price for the QRE merger. The preliminary allocation of the purchase price for the QRE merger is as follows:

 

Thousands of dollars
Oil and gas properties		$	1,647,607
Non-oil and gas assets - ETSWDC			15,439
Goodwill			951,536
Other assets acquired net of liabilities assumed			70,630
Current portion of asset retirement obligation			(4,895	)
Long-term portion of asset retirement obligation			(159,543	)
Credit facility debt assumed			(755,000	)
Senior Notes assumed - at fair value			(345,645	)
Non-controlling interest			(9,544	)
Total common unit and cash consideration		$	1,410,585

 

i.

The estimated fair value of the oil and gas properties using the strip pricing noted above is $1,647.6 million. QRE historical accumulated depletion and depreciation was eliminated by a pro forma adjustment of $411.8 million, resulting in a downward fair value pro forma adjustment of $39.7 million.

 

QRE owns a 59% ownership interest in East Texas Salt Water Disposal Company (“ETSWDC”) and it consolidates the results for this company as it holds a majority interest. At September 30, 2014, the fair value was approximately $15.4 million, which is reflected in non-oil and gas assets.  The non-controlling interest for ETSWDC at September 30, 2014 was $9.5 million.

 

ii.

Estimated goodwill of $951.5 million was determined based on the fair value of the common unit consideration using the closing price as of November 19, 2014 and the estimated fair value of the oil and gas properties acquired determined using strip prices as of November 19, 2014. Under the acquisition method of accounting for business combinations, the final purchase price, including final goodwill, are determined based on the fair value of the common unit consideration, the oil and gas properties and other assets acquired and liabilities assumed on the transaction closing date.

 

 

(b)

QRE’s senior notes have a face value of $300 million, a net book value of $297.0 million and a fair value of $345.6 million. We assume the senior notes are retired and are refinanced with borrowings under our new credit facility, and, as such, pro forma adjustments include a reduction to senior notes of $297.0 million, an increase to credit facility debt of $345.6 million and a reduction of other long-term assets by $7.5 million, to eliminate QRE’s debt issuance costs associated with its senior notes and existing credit facility, which will be refinanced under our new credit facility (see (c) below).

 

(c)

Other long-term assets and credit facility debt reflect $19.6 million in pro forma adjustments for borrowings to fund estimated debt issuance costs related to the increase in our borrowing base and lender commitments under our new credit facility from $1.6 billion to $2.5 billion. The debt issuance costs are amortized over a five-year term.

 

(d)

Reflect $350 million of pro forma borrowings under our new credit facility to pay the holders of QRE Class C units and a pro forma adjustment of $400.7 million to eliminate the book value of QRE Class C units.

 

(e)

Reflect borrowings to pay $40 million in estimated transaction costs, consisting of investment banking fees, legal fees and other merger-related transaction costs. The transaction costs are excluded from the pro forma statements of operations, and instead included as an adjustment to common unit equity, as they reflect non-recurring charges not expected to have a continuing impact on the combined results.

 

(f)

Based on the terms of the Merger Agreement, holders of QRE common units and Class B units (including contingent Class B units) received approximately 72 million Breitburn common units, or 0.9856 Breitburn common unit for each QRE common unit or Class B unit. As such, pro forma adjustments include $1,060.6 million for the issuance of Breitburn common units. In addition, pro forma adjustments to eliminate QRE’s historical equity accounts include $134.9 million for the Class B unit obligation, $120.5 million for QRE common units held by the public and $103.9 million for QRE common units held by affiliates.

 

4. Pro Forma Adjustments to the Unaudited Combined Statements of Operations

 

The unaudited pro forma combined statements of operations have been adjusted as follows:

 

(g)

For the nine months ended September 30, 2014 and the year ended December 31, 2013:

 

Reflect an increase in operating costs of $0.3 million and $0.6 million, respectively, to account for geological, geophysical and delay rental expenditures using the successful efforts method rather than the full cost method used by QRE.

 

(h)

For the nine months ended September 30, 2014:

 

Reflect a $25.1 million decrease attributable to differences in depletion, depreciation and amortization (“DD&A”) calculated under the successful efforts method using the estimated fair value of QRE’s oil and gas properties.

 

For the year ended December 31, 2013:

 

Reflect a $33.7 million decrease attributable to differences in DD&A calculated under the successful efforts method using the estimated fair value of QRE’s oil and gas properties.

 

(i)

Reflect $46.5 million of incremental DD&A related to the oil and gas properties acquired in the Permian Basin Acquisitions and Whiting Acquisition.

 

(j)

For the nine months ended September 30, 2014:

 

Reflect a $7.0 million adjustment to remove acquisition transaction costs from G&A expenses related to the Whiting, Permian Basin and QRE assets.

 

 

For the year ended December 31, 2013:

 

Reflect $1.1 million in incremental general and administrative (“G&A”) expenses for the Whiting Acquisition and Permian Basin Acquisitions and an adjustment to remove acquisition transaction costs from G&A expenses related to the Whiting assets of $4.5 million.

 

(k)

For the nine months ended September 30, 2014:

 

Reflect a $10.4 million decrease in interest expense associated with QRE’s debt, assuming the retirement of QRE’s senior notes and the refinancing of all debt under our new credit facility (as detailed in 2 (a) through 2 (e) above). The assumed variable rate was 2.404% for the nine months ended September 30, 2014. If the variable interest rate increased or decreased by 0.125% from the assumed variable rate, the nine month ended September 30, 2014 pro forma interest expense would have increased or decreased by $2.8 million.

 

For the year ended December 31, 2013:

 

Reflect a $16.6 million increase in interest expense associated with borrowings to fund the QRE merger, the Whiting Acquisition and Permian Basin Acquisitions, partially offset by a decrease in interest expense associated with refinancing QRE’s debt (as detailed in 3 (a) through 3 (e) above) give effect as of January 1, 2013, of the use of proceeds from our February 2013 and November 2013 equity offering and our November 2013 senior note offering to pay down debt under our credit facility. The assumed variable rate was 2.439% for the year ended December 31, 2013. If the variable interest rate increased or decreased by 0.125% from the assumed variable rate, the year ended December 31, 2013 pro forma interest expense would have increased or decreased by $2.6 million.

 

(l)

For the nine months ended September 30, 2014:

 

Eliminate the $6.9 million gain on Deferred Class B unit obligation based on the terms of the Merger Agreement (see 4 (f) above for a discussion of the Class B units).

 

(m)

For the nine months ended September 30, 2014 and the year ended December 31, 2013:

 

Give effect, as of January 1, 2013, of the 72.0 million Breitburn common units issued as partial consideration for the QRE merger to the denominator for calculating net income (loss) per unit.

 

(n)

For the year ended December 31, 2013:

 

Give effect, as of January 1, 2013, of the Breitburn common units issued in the February 2013 (15.0 million) and November 2013 (19.0 million) equity offerings. Also, include weighted average participating securities and dilutive units (previously not included in the denominator of net income (loss) per unit) as the pro forma combined statement of operations is in an income position compared to a loss position for the Breitburn’s historical statement of operations.