Attached files
| file | filename |
|---|---|
| 8-K/A - 8-K/A - American Midstream Partners, LP | a2014costar8-ka.htm |
| EX-99.6 - EXHIBIT - American Midstream Partners, LP | ex996proformafinancials-8x.htm |
| EX-99.5 - EXHIBIT - American Midstream Partners, LP | ex995historicalfinancials-.htm |
| EX-23.1 - EXHIBIT - American Midstream Partners, LP | ex231heinconsent8-kacostar.htm |
Exhibit 99.4
COSTAR MIDSTREAM, LLC
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 | 2 |
Condensed consolidated statements of operations for the nine months ended September 30, 2014 and 2013 | 3 |
Condensed consolidated statement of changes in members' capital for the nine months ended September 30, 2014 and the year ended December 31, 2013 | 4 |
Condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 | 5 |
Notes to the condensed consolidated financial statements | 6 |
Exhibit 99.4
COSTAR MIDSTREAM, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2014 | December 31, 2013 | |||||||||
(unaudited) | ||||||||||
ASSETS: | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 9,609 | $ | 6,829 | ||||||
Restricted cash | 414 | 22,325 | ||||||||
Accounts receivable | 11,497 | 15,131 | ||||||||
Commodity derivatives | 37 | 144 | ||||||||
Prepaid expenses and other current assets | 323 | 199 | ||||||||
Assets of discontinued operations held for sale | 604 | 712 | ||||||||
Total current assets | 22,484 | 45,340 | ||||||||
Property and equipment, net | 201,892 | 163,642 | ||||||||
Commodity derivatives | 61 | — | ||||||||
Deposits and other assets | 68 | 8 | ||||||||
Processing contracts, net of accumulated amortization of $100 and $65, respectively | 187 | 220 | ||||||||
Deferred loan fees, net of accumulated amortization of $716 and $552, respectively | 387 | 551 | ||||||||
Note receivable from managing member | 3,564 | 3,461 | ||||||||
Total assets | $ | 228,643 | $ | 213,222 | ||||||
LIABILITIES AND MEMBERS' CAPITAL: | ||||||||||
Current liabilities | ||||||||||
Accounts payable and accrued liabilities | $ | 18,785 | $ | 12,701 | ||||||
Financial instrument derivatives | 108 | 196 | ||||||||
Commodity derivatives | 126 | 531 | ||||||||
Liabilities of discontinued operations held for sale | 128 | 117 | ||||||||
Current portion of long-term debt | 10,000 | 10,000 | ||||||||
Total current liabilities | 29,147 | 23,545 | ||||||||
Long-term liabilities | ||||||||||
Revolving line of credit | 11,000 | — | ||||||||
Term loan | 37,500 | 45,000 | ||||||||
Contingent consideration payable | 9,174 | 4,547 | ||||||||
Financial derivatives | — | 30 | ||||||||
Commodity derivatives | 12 | 356 | ||||||||
Deferred income taxes | 269 | 285 | ||||||||
Total liabilities | 87,102 | 73,763 | ||||||||
Commitments and contingencies, Note 3, 4 and 7 | ||||||||||
Members' capital | 141,541 | 139,459 | ||||||||
Total liabilities and members' capital | $ | 228,643 | $ | 213,222 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Exhibit 99.4
COSTAR MIDSTREAM, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Nine Months ended September 30, | ||||||||
2014 | 2013 | |||||||
(unaudited) | ||||||||
Operating revenue | $ | 123,018 | $ | 120,256 | ||||
Operating costs and expenses: | ||||||||
Cost of revenues | 87,430 | 83,553 | ||||||
Operating expenses | 10,451 | 9,455 | ||||||
Administrative expenses | 2,457 | 1,968 | ||||||
Depreciation and amortization expense | 15,043 | 14,017 | ||||||
Total operating expenses | 115,381 | 108,993 | ||||||
Income from operations | 7,637 | 11,263 | ||||||
Other income (expense): | ||||||||
Interest expense | (1,389 | ) | (1,413 | ) | ||||
Acquisition expenses | — | (17 | ) | |||||
Unrealized commodity derivative gain (loss) | 704 | (2,008 | ) | |||||
Realized gain (loss) on commodity derivatives | (245 | ) | 2,719 | |||||
Unrealized loss on contingent consideration | (4,627 | ) | (145 | ) | ||||
Gain on sale of assets | 21 | 13 | ||||||
Interest income from managing member | 103 | — | ||||||
Total other income (expense) | (5,433 | ) | (851 | ) | ||||
Income from continuing operations before taxes | 2,204 | 10,412 | ||||||
State income taxes, current | 15 | 2 | ||||||
State income taxes, deferred | 16 | 173 | ||||||
Income from continuing operations | 2,173 | 10,237 | ||||||
Gain (loss) from discontinued operations | (91 | ) | 54 | |||||
Net income | $ | 2,082 | $ | 10,291 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Exhibit 99.4
COSTAR MIDSTREAM, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
(in thousands)
Members' Capital | ||||
Balance, December 31, 2012 | $ | 105,798 | ||
Contributions | 23,000 | |||
Net income | 10,661 | |||
Balance, December 31, 2013 | 139,459 | |||
Net income | 2,082 | |||
Balance, September 30, 2014 (unaudited) | $ | 141,541 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Exhibit 99.4
COSTAR MIDSTREAM, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended September 30, | |||||||||
2014 | 2013 | ||||||||
(unaudited) | |||||||||
Cash flows from operating activities | |||||||||
Net income | $ | 2,082 | $ | 10,291 | |||||
Adjustments to reconcile net cash provided by operating activities: | |||||||||
Depreciation and amortization | 15,043 | 14,017 | |||||||
Amortization of deferred loan costs and contingent consideration | 164 | 186 | |||||||
Unrealized loss on contingent consideration | 4,627 | 145 | |||||||
Interest income from managing member | (103 | ) | — | ||||||
Gain on sale of asset | (21 | ) | (13 | ) | |||||
Deferred income taxes | (16 | ) | 108 | ||||||
Changes in fair value of derivatives | (821 | ) | 1,845 | ||||||
Changes in assets and liabilities: | |||||||||
Accounts receivable | 3,634 | 3,411 | |||||||
Prepaid and other current assets | (184 | ) | (304 | ) | |||||
Accounts payable and other current liabilities | 6,084 | (1,345 | ) | ||||||
Net cash provided by operating activities-continuing operations | 30,489 | 28,341 | |||||||
Net cash provided by operating activities-discontinued operations | 33 | 480 | |||||||
Net cash provided by operating activities | 30,522 | 28,821 | |||||||
Cash flows from investing activities: | |||||||||
Proceeds from sale of assets | 32 | 21 | |||||||
Change in restricted cash for construction of midstream assets | 21,997 | — | |||||||
Additions to property and equipment | (53,271 | ) | (7,506 | ) | |||||
Net cash flows used in investing activities | (31,242 | ) | (7,485 | ) | |||||
Cash flows from financing activities: | |||||||||
Borrowing under credit facility | 11,000 | — | |||||||
Payments of amounts outstanding under credit facility | (7,500 | ) | (12,500 | ) | |||||
Net cash flows provided by (used in) financing activities | 3,500 | (12,500 | ) | ||||||
Net change in cash and cash equivalents | 2,780 | 8,836 | |||||||
Cash and cash equivalents at beginning of period | 6,829 | 2,041 | |||||||
Cash and cash equivalents at end of period | $ | 9,609 | $ | 10,877 | |||||
Supplemental cash flow disclosures | |||||||||
Cash paid for interest | $ | 1,232 | $ | 1,429 | |||||
Cash paid for taxes | $ | 60 | $ | 188 | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Exhibit 99.4
COSTAR MIDSTREAM, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business |
Costar Midstream LLC (the “Company”), a Texas limited liability company, was established on March 25, 2011 as a midstream natural gas business. Operations through December 31, 2011 consisted of the leasing of certain processing assets. The Company’s operations are established under the wholly owned subsidiaries Costar GS GP, LLC, Costar GS LP, LLC, Costar Bakken LLC. Costar Mesquite LLC, Costar East Texas Rail LLC and Costar Permian LLC, and the majority (75%) owned TranStar Gas Processing LLC (“TranStar”). On December 31, 2012, the Company committed to a plan to dispose of TranStar, and all operations of TranStar are therefore reclassified to discontinued operations at September 30, 2014 and 2013.
On January 4, 2012, Costar GS GP LLC and Costar GS LP LLC purchased all of the issued and outstanding general and limited partnership interests of Gas Solutions II Ltd, a Texas limited partnership. Gas Solutions II Ltd operates over 600 miles of gathering pipe and three cryogenic gas processing plants in East Texas. The partnership is owned by Costar GS GP, LLC (1% interest - general partner) and Costar GS LP, LLC (99% interest- limited partner).
On March 11, 2013, the Company established Costar Bakken LLC, a Texas limited liability company and wholly owned subsidiary, in order to construct and operate midstream oil assets in the Bakken. On August 19, 2013, the Company established Costar Permian LLC, a Texas limited liability company and wholly owned subsidiary, in order to construct and operate midstream natural gas assets in the Permian Basin. On August 15, 2014, the Company established Costar East Texas Rail LLC, in order to construct and operate a rail terminal in East Texas. Also on August 15, 2014, the Company established Costar Mesquite LLC.
The Company is organized as a limited liability company among Costar Midstream Energy, LLC, a Texas limited liability company, as managing member and Energy Spectrum Partners VI LP, a Delaware limited partnership, (“VI LP”).
2. | Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Reclassifications
The Company has committed to a plan to dispose of TranStar. As of January 1, 2012, all of the operations, as well as the resulting loss recognized from the exit activity, are reported as discontinued operations in the consolidated financial statements. See Note 4. Certain prior year amounts have been reclassified to conform with current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Cash held by TranStar is considered restricted pending the units’ disposition. Cash held by TranStar as of September 30, 2014 and December 31, 2013 was $414 and $500, respectively. Cash held by Costar Permian LLC exclusively for the construction of midstream natural gas assets in the Permian Basin of $21,825 at December 31, 2013 is considered restricted.
Accounts Receivable
Receivables consist of amounts due from the sale of natural gas liquid products and dry gas sales and the amounts billed for management and processing fees pursuant to operating agreements with various customers. Management periodically reviews accounts receivable amounts for collectability and records an allowance for uncollectible receivables under specific identification method. The Company recorded no allowance for uncollectible receivables at September 30, 2014 or December 31, 2013.
Fair Value of Financial Instruments
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Exhibit 99.4
Financial instruments consist of cash, trade receivables, trade payables, and accrued liabilities. The carrying value of cash and cash equivalents, trade receivables, trade payables and accrued liabilities are considered to be representative of their fair market value, due to the short maturity of these instruments.
Processing Equipment
Processing equipment is recorded at cost less accumulated depreciation. Depreciation expense is provided using the straight-line method, which, in the opinion of management, is adequate to allocate the costs of these assets over the estimated useful lives as follows:
Processing plant | 10 years | |
Pipeline and related equipment | 10 years | |
Buildings | 25 years | |
Office equipment and vehicles | 3 to 10 years | |
Processing equipment consists of the following:
September 30, 2014 | December 31, 2013 | |||||||
Processing plant | $ | 56,053 | $ | 55,542 | ||||
Pipeline and related equipment | 141,710 | 138,924 | ||||||
Buildings | 1,881 | 1,702 | ||||||
Construction in progress | 50,793 | 2,455 | ||||||
Land | 1,402 | 341 | ||||||
Office equipment and vehicles | 1,493 | 1,119 | ||||||
Total processing equipment | $ | 253,332 | $ | 200,083 | ||||
Expenditures for maintenance and repairs are expensed as incurred. Costs of major replacements and betterments are capitalized. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from appropriate accounts and any gain or loss is included in income. Depreciation expense of $15,043 and $14,017 was recognized on other property and processing equipment for the nine months ended September 30, 2014 and 2013, respectively.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. Based upon this evaluation, the Company recorded no impairment for the nine months ended September 30, 2014 and 2013, respectively.
Note Receivable - Managing Member
On October 30, 2013, the Company entered into a $3,437 promissory note receivable with its managing member. Interest accrues at an annual rate of 4%. The note is due and payable in full upon the date that the Company makes any distribution to the holders of any equity interest. Interest income from the managing member was $103 for the nine months ended September 30, 2014.
Deferred Financing Costs
The Company incurred debt issuance costs in the course of obtaining financing under a credit facility. These costs are recorded on the balance sheet and amortized over the term of the debt using the straight-line method, which approximates the effective yield method. Amortization expense of $164 and $186 was recorded for the nine months ended September 30, 2014 and 2013, respectively, on deferred financing costs using the effective yield method and are included in interest expense.
Revenue
The Company generates revenue from gas gathering/compression, NGL processing, transportation, fractionation services, and trucked condensate stabilization. NGL products are sold at Mt. Belvieu, TX pricing and condensate is sold at OPIS pricing. Compression, transportation and fractionation services are contract based fees. Related cost of sales are either a percentage of proceeds, wellhead purchase, or redelivered equivalent wellhead volumes. All products are metered and revenues are recognized on a monthly basis for product delivered.
Derivative Activity
7
Exhibit 99.4
The Company entered into certain commodity and financial derivative contracts to reduce their exposure to fluctuations in natural gas liquids prices and future interest rate increases. Derivative instruments are not designated as cash flow hedges for accounting purposes. Unrealized gains and losses, at fair value, are included on the balance sheet as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair values of commodity derivative instruments and cash flows resulting from the settlement of instruments are included in other income (expense) in the statement of operations. Changes in the fair value of the financial derivative instrument and cash flows resulting from the settlement of that instrument are included in interest expense in the statement of operations. See Note 5.
Processing Contracts
Acquired processing equipment contracts are amortized using the effective interest method over the estimated remaining lives of the contracts of approximately 7 years. Amortization expense of $33 and $46 was recognized on processing contracts costs using the straight-line method amortization on these processing contracts for the nine months ended September 30, 2014 and 2013, respectively.
Income Taxes
The Company is not subject to federal income taxation because the effects of its activities accrue to the members. Accordingly, no provision for federal income taxes is included in the accompanying financial statements. The Company remains liable for state income taxes. The Company accounts for state income taxes in accordance with the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences, at enacted statutory rates, between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Income tax expense or benefit represents the current tax payable or refundable for the period, plus or minus the tax effect of the net change in the deferred tax assets and liabilities. The Company has reflected in the accompanying financial statements their liability for state income taxes due and payable by the Company. The primary difference resulting in a deferred tax liability reflected in the financial statements is the result of differences between book and tax depreciation.
The Company is subject to certain provisions related to uncertain tax positions. The Company has reviewed their pass-through status and determined no uncertain tax positions exist. The Company’s income tax returns for the years 2013, 2012 and 2011 remain open for examination by the respective federal and state authorities.
Risks and Uncertainties
The Company maintains their cash balances primarily in one financial institution. The balances are partially insured by the Federal Deposit Insurance Corporation (“FDIC”). At September 30, 2014, the Company had uninsured cash balances which exceeded FDIC insured limits.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
3. | Contingent Consideration |
In January 2012, the Company purchased all of the issued and outstanding general and limited partnership interests of Gas Solutions II Ltd, a Texas limited partnership, for $172,526 cash plus a contingent payment whose estimated fair value was determined to be $4,164 and is capped at $28,000. As of December 31, 2013, the contingent payment was based upon 20% of cash flow after a return of 200% initial investment adjusted for debt principal and interest payments, and income taxes. As of September 30, 2014, the Company estimated the fair value based upon the Company's sales price (see Note 9). Unrealized loss on this contingent consideration was $4,627 and $145 for the nine months ended September 30, 2014 and 2013, respectively.
4. | Discontinued Operations |
On December 31, 2012, the Company committed to a plan to dispose of TranStar. The assets and liabilities related to TranStar are reported as assets and liabilities held for sale in the consolidated balance sheet at September 30, 2014 and December 31, 2013, and TranStar operations are classified as discontinued operations.
Discontinued operations on the consolidated statement of operations for the nine months ended September 30, 2014 and 2013 are as follows:
8
Exhibit 99.4
2014 | 2013 | |||||||
Revenue | $ | 113 | $ | 238 | ||||
Operating and administrative expenses | 98 | 179 | ||||||
Depreciation and amortization | 106 | 5 | ||||||
Net income (loss) from discontinued operations | $ | (91 | ) | $ | 54 | |||
The impairment of assets held for sale resulted from the adjustment of assets and liabilities held for sale to estimated fair value. The Company estimated fair value based on market quotes and third-party valuation indicators.
As of September 30, 2014 and December 31, 2013, assets and liabilities as held for sale on the consolidated balance sheet consisted the following:
September 30, 2014 | December 31, 2013 | |||||||
Assets held for sale: | ||||||||
Accounts receivable | — | — | ||||||
Prepaid expenses | 2 | 3 | ||||||
Processing equipment, net | 602 | 709 | ||||||
Total assets held for sale | $ | 604 | $ | 712 | ||||
Liabilities held for sale: | ||||||||
Accrued expenses | $ | 128 | $ | 9 | ||||
Security deposits | — | 108 | ||||||
Total liabilities held for sale | $ | 128 | $ | 117 | ||||
5. | DERIVATIVES |
Derivatives consist of commodity derivatives and an interest rate swap arrangement. The Company entered into certain commodity and financial derivative contracts to reduce its exposure to fluctuations in natural gas liquids prices and future interest rates. These derivative instruments are not designated as cash flow hedges.
Commodity Derivatives
The following is a summary of the Company’s natural gas liquids commodity derivatives at September 30, 2014. Natural gas liquids volumes are measured in gallons (“gals”):
Production Period | Type | Product | Product Volumes | Weighted Average Price | Fair Market Value | Commodity Derivative Classification | |||||||||
Oct 2014 - Sept 2015 | Collar | Propane | 5,159,000 | $0.75 - $1.19 | $ | (102 | ) | Short-term liability | |||||||
Oct 2015 - Mar 2016 | Collar | Propane | 1,312,000 | $0.80 - $1.29 | (12 | ) | Long-term liability | ||||||||
Nov 2015 - Apr 2016 | Collar | Propane | 1,670,000 | $0.85 - $1.32 | 3 | Long-term asset | |||||||||
Oct 2014 - Sept 2015 | Collar | IButane | 1,230,000 | $1.03 - $1.60 | 14 | Short-term asset | |||||||||
Oct 2015 - Sept 2016 | Collar | IButane | 657,000 | $0.99 - $1.55 | 5 | Long-term asset | |||||||||
Oct 2014 - Sept 2015 | Collar | NButane | 2,421,000 | $0.99 - $1.55 | 23 | Short-term asset | |||||||||
Oct 2015 - Sept 2016 | Collar | IButane | 1,417,000 | $0.97 - $1.52 | 13 | Long-term asset | |||||||||
Oct 2014 - Sept 2015 | Collar | Nat Gas | 5,065,000 | $1.47 - $2.29 | (24 | ) | Short-term liability | ||||||||
Oct 2015 - Sept 2016 | Collar | Nat Gas | 3,044,000 | $1.50 - $2.34 | 40 | Long-term asset | |||||||||
The following is a summary of the Company’s natural gas liquids commodity derivatives at December 31, 2013. Natural gas liquids volumes are measured in gallons (“gals”):
9
Exhibit 99.4
Production Period | Type | Product | Product Volumes | Weighted Average Price | Fair Market Value | Commodity Derivative Classification | |||||||||
Jan - May 2014 | Collar | Ethane | 1,528,000 | $0.29 - $0.46 | $ | 41 | Short-term asset | ||||||||
Jan - Dec 2014 | Collar | Propane | 4,810,000 | $0.73 - $1.13 | (366 | ) | Short-term liability | ||||||||
Jan - Jul 2015 | Collar | Propane | 2,970,000 | $0.74 - $1.17 | (178 | ) | Long-term liability | ||||||||
Jan - Nov 2014 | Collar | NButane | 2,040,000 | $1.15 - $1.76 | 59 | Short-term asset | |||||||||
Dec - Dec 2014 | Collar | NButane | 212,000 | $0.98 - $1.54 | (9 | ) | Short-term liability | ||||||||
Jan - Jul 2015 | Collar | NButane | 1,373,000 | $0.97 - $1.51 | (62 | ) | Long-term liability | ||||||||
Jan - Nov 2014 | Collar | IButane | 1,166,000 | $1.22 - $1.88 | 44 | Short-term asset | |||||||||
Dec - Dec 2014 | Collar | IButane | 118,000 | $1.02 - $1.58 | (5 | ) | Short-term liability | ||||||||
Jan - Jul 2015 | Collar | IButane | 682,000 | $1.00 - $1.55 | (24 | ) | Long-term liability | ||||||||
Jan - Dec 2014 | Collar | Natural Gas | 4,625,000 | $1.53 - $2.30 | (151 | ) | Short-term liability | ||||||||
Jan - Jul 2015 | Collar | Natural Gas | 2,904,000 | $1.48 - $2.31 | (92 | ) | Long-term liability | ||||||||
Changes in the fair values of the Company’s commodity contracts are recorded in earnings as they occur and included in other income (expense). Realized gains and losses are also included in other income (expense). For the nine months ended September 30, 2014, the Company recognized an unrealized gain of $704 and a realized loss of $245 on commodity derivative instruments. For the nine months ended September 30, 2013, the Company recognized an unrealized loss of $2,008 and a realized gain of $2,719 on commodity derivative instruments.
Interest Rate Swap Agreement
On February 14, 2012, the Company entered into a three-year LIBOR interest rate basis swap contract. Under the terms of the transaction, the Company will pay, in one-month intervals, a fixed rate of 1.23% and the counterparty will pay the prevailing one-month LIBOR rate. The notional value amortizes on a monthly basis until expiration on April 1, 2015. As of September 30, 2014, the notional value was $40,375.
Unrealized gains and losses, at fair value, are included on the Company’s balance sheet as current or noncurrent assets and liabilities based on the anticipated timing of settlements under the related contracts. As of September 30, 2014, the Company had recorded a current liability of $108. As of December 31, 2013, the Company had recorded a current liability of $196 and non-current liability of $30.
Changes in the fair value of the Company’s financial derivative contracts are recorded in earnings as they occur and are included in interest expense. Realized gains and losses are also included in interest expense. For the nine months ended September 30, 2014, the Company recognized an unrealized gain of $117 and a realized loss of $175 on financial derivative instruments. For the nine months ended September 30, 2013, the Company recognized an unrealized gain of $163 and a realized losses of $194, respectively, on financial derivative instruments.
Fair Value
Accounting standards define fair value as 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 (exit price). The Company uses market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and attempt to use the best available information. Accounting standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At September 30, 2014 and December 31, 2013, the Company had no Level 1 measurements.
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At
10
Exhibit 99.4
September 30, 2014 and December 31, 2013, the Company’s commodity and financial derivatives were measured using Level 2 measurements.
Level 3: Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. As of September 30, 2014 and December 31, 2013, the contingent liability described at Note 3 estimated fair value was measured using level 3 measurements. The only change during the nine months ended September 30, 2014 was $4,627, resulting from the change in fair value.
6. | Credit Facility |
The Company financed the Gas Solutions acquisition utilizing a $70,000 term debt with a seven-year payment amortization maturing on November 30, 2016, and a $35,000 revolving line of credit maturing on January 4, 2017. As of September 30, 2014, there is an outstanding balance of $11,000 on the revolving line of credit. The interest rate offers a Eurodollar or prime rate component plus an applicable margin grid based upon various leverage ratios and includes a commitment fee. The debt is collateralized by a security interest to all property of the Company, whether now or hereafter existing, owned, arising, or acquired. The effective interest rate as of September 30, 2014 was 2.24% on the term debt and 3.88% on the revolving line of credit.
Subject to the terms and conditions of the credit facility, the Company may require issue of letters of credit in an aggregate amount of $10,000. A $25 letter of credit has been drawn as of September 30, 2014.
Under the terms of the credit facility, the Company must maintain certain financial ratios including a ratio of debt to EBITDA of no more than 4.0 to 1.0 and an EBITDA to fixed charges ratio of no less than 1.25 to 1.0. At September 30, 2014, the Company was in compliance with these debt covenants.
Future scheduled maturities of debt existing at September 30, 2014 are as follows:
2015 | 10,000 | |||
2016 | 48,500 | |||
$ | 58,500 | |||
On October 22, 2013, Costar Permian LLC entered into a Security Agreement which issued a $3,450 and a $3,000 standby letter of credit in relation to the construction of certain midstream natural gas assets in the Permian Basin.
7. | Commitments and Contingencies |
On October 2, 2013, the Company entered into a Gas Processing and Gathering Agreement with an independent oil and natural gas producer. This contract specifies that Costar Permian LLC must commence to take delivery and process certain minimum amounts of product by July 1, 2014. This contract required the construction of certain midstream assets and contained a liquidated damages penalty if Costar does not meet this obligation. Prior to meeting the obligation in September 2014, the Company incurred $926 in penalties for the nine months ended September 30, 2014, which is included in cost of revenues.
On June 12, 2014, the Company entered into a Gas Processing and Gathering Agreement with an independent oil and natural gas producer. This contract requires the construction of certain midstream assets before December 12, 2016 and contains a maximum liquidated damages penalty of $1,512 if the Company does not meet this obligation.
8. | Concentration of Credit Risk |
During the nine months ended September 30, 2014, the Company derived 85% of its revenues from six customers. The major customers had accounts receivable balances totaling $7,285 at September 30, 2014. During the nine months ended September 30, 2013, the Company derived 90% of its revenues from six customers.
9. | Subsequent Events |
Subsequent events were assessed through December 23, 2014, the date this report was available for issuance.
11
Exhibit 99.4
On October 13, 2014, the Company was acquired by American Midstream, LLC for a total purchase price of $471.5 million. The total purchase price consisted of 6.9 million American Midstream common units valued at $199.9 million in the purchase and sale agreement, and $271.6 million of cash.
12