NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Southcross Energy Partners, L.P. (the "Partnership," "Southcross," "we," "our" or "us") is a Delaware limited partnership formed in April 2012. Our common units are listed on the New York Stock Exchange under the symbol “SXE.” We are a master limited partnership, headquartered in Dallas, Texas, that provides natural gas gathering, processing, treating, compression and transportation services and access to NGL fractionation and transportation services. We also source, purchase, transport and sell natural gas and NGLs. Our assets are located in South Texas, Mississippi and Alabama and include
two
gas processing plants,
one
fractionation facility,
one
treating facility and gathering and transportation pipelines.
Southcross Holdings LP, a Delaware limited partnership (“Holdings”), indirectly owns
100%
of Southcross Energy Partners GP, LLC, a Delaware limited liability company and our General Partner (“General Partner”) (and therefore controls us), all of our subordinated and Class B convertible units and
54.5%
of our common units. Our General Partner owns an approximate
2.0%
interest in us and all of our incentive distribution rights. EIG Global Energy Partners, LLC (“EIG”) and Tailwater Capital LLC (“Tailwater”) (collectively, the “Sponsors”) each indirectly own approximately one-third of Holdings, and a group of consolidated lenders under Holdings' term loan (the "Lenders") own the remaining one-third of Holdings.
The AMID Transactions
Contribution Agreement.
On October 31, 2017, we and our General Partner entered into an Agreement and Plan of Merger (“Merger Agreement”) with American Midstream Partners, LP (“AMID”), American Midstream GP, LLC, the general partner of AMID (“AMID GP”), and a wholly-owned subsidiary of AMID (“Merger Sub”). The Merger Agreement provides that we will be merged with Merger Sub (the “Merger”), with the Partnership surviving the merger as a wholly-owned subsidiary of AMID.
Simultaneously with the execution of the Merger Agreement, on October 31, 2017, AMID and AMID GP entered into a Contribution Agreement (the “Contribution Agreement”) with Holdings. Upon the terms and subject to the conditions set forth in the Contribution Agreement, Holdings will contribute its equity interests in a new wholly-owned subsidiary, which will hold substantially all the current subsidiaries (Southcross Holdings Intermediary LLC, a Delaware limited liability company, Southcross Holdings Guarantor GP LLC, a Delaware limited liability company, and Southcross Holdings Guarantor LP, a Delaware limited partnership, which in turn directly or indirectly own
100%
of the limited liability company interest of our General Partner and
54.5%
of the Partnership’s common units) and business of Holdings, to AMID and AMID GP in exchange for (i) the number of common units representing limited partner interests in AMID (each an “AMID Common Unit”) equal to
$185,697,148
, subject to certain adjustments for cash, indebtedness, working capital and transaction expenses contemplated by the Contribution Agreement, divided by
$13.69
, (ii)
4.5 million
million new Series E convertible preferred units of AMID (the “AMID Preferred Units”), (iii) options to acquire
4.5 million
AMID Common Units (the “Options”), and (iv)
15%
of the equity interest in AMID GP (the transactions contemplated thereby and the agreements ancillary thereto, the “Contribution” and, together with the Merger, the “Transaction”).
The Contribution Agreement contains customary representations and warranties and covenants by each of the parties. Holdings has also undertaken several additional obligations under the Contribution Agreement with respect to the Partnership and our subsidiaries. These include, without limitation, Holdings’ indemnification of AMID for certain obligations with respect to breaches of representations and warranties regarding the Partnership and our subsidiaries. In addition, Holdings is indemnifying AMID for certain contingent liabilities of the Partnership and our subsidiaries, including several ongoing litigation matters. A portion of the consideration, including approximately
$25 million
of the AMID Common Units to be received by Holdings will be deposited into escrow in order to secure the potential indemnification obligations until the longer of the end of
12
months from the closing of the Contribution Agreement, May 31, 2019 or the final resolution of the Special Indemnity Matters (as defined in the Contribution Agreement). In addition, all of the AMID Common Units, AMID Preferred Units and the Options received by Holdings as consideration under the Contribution Agreement will be subject to a lock-up agreement whereby such securities will be locked up until the longer of
12
months (with respect to the AMID Common Units) and
24
months (with respect to the AMID Preferred Units and Options) and, together with the AMID GP equity interests, the final resolutions of the Special Indemnity Matters (as defined in the Contribution Agreement). Further, during this time, cash distributions made by AMID or AMID GP to Holdings will be restricted, must remain within Holdings, and will be subject to recapture by AMID. The closing under the Contribution Agreement is conditioned upon, among other things: (i) expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the”HSR Act”), which was received on December 8, 2017, (ii) the absence of certain legal impediments prohibiting the transactions and (iii) with respect to AMID’s obligation to close only, the conditions precedent contained in the Merger Agreement having been satisfied and the Merger having become effective substantially concurrently with the closing of the Contribution Agreement.
The Contribution Agreement contains provisions granting both parties the right to terminate the Contribution Agreement for certain reasons. The Contribution Agreement further provides that, upon termination by Holdings of the Contribution Agreement in the event of a Funding Failure (as defined in the Contribution Agreement), AMID may be required to pay a reverse termination fee in an amount up to
$17 million
.
Merger Agreement
. On October 31, 2017, we and our General Partner entered into the Merger Agreement with AMID and AMID GP. At the effective time of the Merger, each common unit of the Partnership issued and outstanding or deemed issued and outstanding as of immediately prior to the effective time, will be converted into the right to receive
0.160
(the “Exchange Ratio”) of an AMID Common Unit, except for those common units held by affiliates of the Partnership and our General Partner, which will be cancelled for no consideration. Each of our common units, subordinated units and Class B Convertible Units held by Holdings, or any of its subsidiaries, issued and outstanding as of the effective time, will be canceled for no consideration in connection with the closing of the Merger. The incentive distributions rights held by our General Partner outstanding immediately prior to the effective time will be cancelled for no consideration in connection with the closing of the Merger.
Completion of the Merger is subject to the satisfaction of customary closing conditions, including (i) receipt of required regulatory approvals in connection with the Merger, including the expiration or termination of any applicable waiting period under the HSR Act and effectiveness of a registration statement on Form S-4 registering the AMID Common Units to be issued in connection with the Merger, (ii) the absence of certain legal impediments prohibiting the Merger Agreement and the transactions contemplated thereby, (iii) the closing of the Contribution in accordance with the terms of the Contribution Agreement and (iv) holders of at least a majority of our outstanding common units that are not held by our General Partner or its affiliates, holders of at least a majority of the outstanding subordinated units, voting as a class, and holders of at least a majority of the Class B Convertible Units, voting as a class, for the approval of the Merger Agreement and the transactions contemplated thereby.
The Merger Agreement contains customary termination rights for both the Partnership and AMID. The Merger Agreement further provides that, upon termination of the Merger Agreement, under certain specified circumstances, the Partnership may be required to reimburse AMID’s expenses, subject to certain limitations, up to
$0.5 million
(“AMID Expenses”) or to pay AMID a termination fee of
$2.0 million
less any previous AMID expenses reimbursed by the Partnership (the “Termination Fee”).
Letter Agreement.
In connection with the Merger Agreement and Contribution Agreement, Holdings and the Partnership entered into a Letter Agreement (the “Letter Agreement”) providing that Holdings will reimburse the Partnership for all fees or expenses of the Partnership in connection with the Merger Agreement including (i) any fees or expenses of counsel, accountants, investment bankers and consultants retained by the Partnership or the conflicts committee of the Partnership, and (ii) the payment of any Termination Fee or the reimbursement of any AMID Expense, in each case, if the Merger has not closed and (a) the Merger Agreement is terminated because the Contribution Agreement has been terminated under certain specified circumstances or (b) the Merger Agreement is terminated without the prior approval of the conflicts committee of the Partnership under certain specified circumstances.
On November 28, 2017, AMID and the Partnership filed Notification and Report Forms with the Antitrust Division of the Department of Justice and the Federal Trade Commission. On December 8, 2017, AMID and the Partnership received early termination of the applicable waiting period under the HSR Act.
On January 11, 2018, AMID filed with the Securities Exchange Commission (the “SEC”) a Registration Statement on Form S-4 (file no. 333-222501) that includes a Proxy Statement of the Partnership and a Prospectus of AMID (the “Proxy Statement”). The S-4 was declared effective by the SEC on February 12, 2018, and the Proxy Statement was mailed to unitholders of the Partnership on or about February 14, 2018.
On March 27, 2018, the Partnership held a special meeting of its unitholders (the “Special Meeting”) to consider and vote on proposals (i) to adopt and approve the Merger Agreement, and the transactions contemplated thereby, including the Merger, and (ii) to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to the named executives officers of our General Partner in connection with the Merger. At the Special Meeting, our unitholders approved the Merger Agreement and the transactions contemplated thereby, including the Merger, and approved the Merger related executive compensation.
Liquidity Consideration
Our future cash flow will be materially adversely affected if the prices for natural gas, NGL and crude oil continue to affect the drilling for oil or natural gas in our primary operating area, the Eagle Ford Shale.
The majority of our revenue is derived from fixed-fee and fixed-spread contracts, which have limited direct exposure to commodity price levels since we are paid based on the volumes of natural gas that we gather, process, treat, compress and transport and the volumes of NGLs we fractionate and transport, rather than being paid based on the value of the underlying natural gas or NGLs. In addition, a portion of our contract portfolio contains minimum volume commitment arrangements. The majority of our volumes are dependent upon the level of producer drilling activity. We remain focused on our efforts to improve future liquidity, and continue our cost-saving efforts to lower our operating and general and administrative cost structure. Additionally, we have explored various strategic options resulting in the execution of the Merger Agreement and Contribution Agreement.
On December 29, 2016, we entered into the fifth amendment (the “Fifth Amendment”) to the Third Amended and Restated Revolving Credit Agreement with Wells Fargo, N.A., UBS Securities LLC, Barclays Bank PLC and a syndicate of lenders (the "Third A&R Revolving Credit Agreement"), pursuant to which, (i) the total aggregate commitments under the Third A&R Revolving Credit Agreement were reduced from
$200 million
to
$125 million
(then further reduced to
$120 million
on June 30, 2018) and the sublimit for letters of credit also was reduced from
$75 million
to
$50 million
(total aggregate commitments will be periodically further reduced through December 31, 2018); (ii) the Consolidated Total Leverage Ratio and Consolidated Senior Secured Leverage Ratio (each as defined in the Fifth Amendment) financial covenants were suspended until the quarter ending March 31, 2019; and (iii) the Consolidated Interest Coverage Ratio (as defined in the Fifth Amendment) financial covenant requirement was reduced from
2.50
to 1.00 to
1.50
to 1.00 for all periods ending on or prior to December 31, 2018 (the “Ratio Compliance Date”). Prior to the Ratio Compliance Date, we are required to maintain minimum levels of Consolidated EBITDA (as defined in the Fifth Amendment) on a quarterly basis and are subject to certain covenants and restrictions related to liquidity and capital expenditures. See Note 5.
In connection with the execution of the Fifth Amendment, on December 29, 2016, the Partnership entered into (i) an Investment Agreement (the "Investment Agreement") with Holdings and Wells Fargo Bank, N.A., (ii) a Backstop Agreement (the "Backstop Agreement") with Holdings, Wells Fargo Bank, N.A. and the Sponsors and (iii) a First Amendment to Equity Cure Contribution Agreement (the "Equity Cure Contribution Amendment") with Holdings. Pursuant to the Equity Cure Contribution Amendment, on December 29, 2016, Holdings contributed
$17.0 million
to us in exchange for
11,486,486
common units. The proceeds of the
$17.0 million
contribution were used to pay down the outstanding balance under the Third A&R Revolving Credit Agreement and for general corporate purposes. In addition, on January 2, 2018, we notified Holdings that a Full Investment Trigger (as defined in the Investment Agreement) occurred on December 31, 2017. Pursuant to the Backstop Agreement, on January 2, 2018, Holdings delivered a Backstop Demand (as defined in the Investment Agreement) for each Sponsor to fund their respective pro rata portions of the Sponsor Shortfall Amount (as defined in the Investment Agreement) of
$15.0 million
in accordance with the Backstop Agreement. As consideration for the amount provided directly to us by the Sponsors pursuant to the Backstop Agreement, we issued to the Sponsors senior unsecured notes of the Partnership in an aggregate principal amount of
$15.0 million
(each, an "Investment Note" and collectively, the “Investment Notes”). The Investment Notes mature on November 5, 2019 and bear interest at a rate of
12.5%
per annum. Interest on the Investment Notes shall be paid in kind (other than with respect to interest payable (i) on or after the maturity date, (ii) in connection with prepayment, or (iii) upon acceleration of the Investment Note, which shall be payable in cash); provided that all interest shall be payable in cash on or after December 31, 2018. The Investment Notes are the unsecured obligation of the Partnership subordinate in right of payment to any of our secured obligations under the Third A&R Revolving Credit Agreement.
We continue to face a challenging corporate capital structure with substantial financial leverage and we remain focused on our overall profitability, including managing Partnership-wide, cost-savings initiatives.
During management's ongoing assessment of the Partnership's financial forecast, the board of directors of Southcross Holdings GP, LLC (the “Holdings GP Board”) and the board of directors of our General Partner (the “SXE GP Board”), together with our management, determined that in our current corporate capital structure and absent continued access to equity cures from our Sponsors or a significant equity infusion from a third party, which the Partnership may not be able to obtain, or absent additional amendments to its Third A&R Revolving Credit Agreement or waivers of the March 31, 2019 requirement to comply with the Consolidated Total Leverage Ratio (as defined in the Fifth Amendment), the Partnership will not be able to comply with such financial covenant, which will trigger an event of default under the Senior Credit Facilities (as defined in Note 5). As a result of the Partnership’s expected inability to comply with its financial covenants twelve months from the issuance of this Form 10-Q, management has determined that there are conditions and events that raise substantial doubt about the Partnership’s ability to continue as a going concern.
If the Partnership's independent registered public accounting firm reports in a subsequent audit report the existence of substantial doubt regarding the Partnership's ability to continue as a going concern, this would lead to an event of default under the Senior Credit Facilities which, in turn, would trigger a cross default of Southcross Holdings Borrowers’ credit facilities. Such events of default, if not cured, would allow the lenders under each of these borrowing arrangements to accelerate the maturity of the debt, making it due and payable immediately.
On October 31, 2017, we and our General Partner entered into the Merger Agreement, which provides that we will be merged with Merger Sub with the Partnership surviving the Merger as a wholly-owned subsidiary of AMID.
As a condition to the closing of the Merger, AMID is required to repay all of the outstanding debt of the Partnership and Holdings. Upon completion of the Merger and the payoff of such debt, the conditions and events that have caused the existence of substantial doubt described above will be eliminated. Should the Merger Agreement not close, management plans to pursue all available options to generate liquidity and maintain compliance with the Partnership’s financial covenants and other commitments including refinancing its indebtedness and negotiating with its lenders for more favorable terms. Management cannot reasonably assure that it will be effective in implementing any such strategy, and consequently, has concluded that substantial doubt exists regarding SXE’s ability to continue as a going concern.
Basis of Presentation
We prepared this report under the rules and regulations of the SEC and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Accordingly, these condensed consolidated financial statements do not include all of the disclosures required by GAAP and should be read in conjunction with our
2017
Annual Report on Form 10-K (“
2017
Annual Report on Form 10-K”). The condensed consolidated financial statements as of
March 31, 2018
and
December 31, 2017
, and for the
three months ended March 31, 2018
and
2017
, are unaudited and have been prepared on the same basis as the audited financial statements included in our
2017
Annual Report on Form 10-K. However, on January 1, 2018, the Partnership adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASC 606”), using the modified retrospective method. Accordingly, our condensed consolidated financial statements for the
three months ended March 31, 2018
have been prepared in accordance with the updated accounting principles under the new standard. Adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations and financial position have been included herein. All intercompany accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements were prepared in conformity with GAAP, which requires management to make various estimates and assumptions that may affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from those estimates. Information for interim periods may not be indicative of our operating results for the entire year.
We evaluate events that occur after the balance sheet date, but before the financial statements are issued, for potential recognition or disclosure. Based on the evaluation, we determined that there were no material subsequent events for recognition or disclosure other than those disclosed in this report. See Note 13.
The condensed consolidated statement of cash flows for the three months ended March 31, 2017, has been reclassified for consistency with the current period presentation for aid-in-construction payment receipts. Beginning in the second quarter of 2017, and continuing throughout the rest of 2017, we reclassified payments for aid-in-construction projects to a separate line item. Previously, such payments were included in the capital expenditures line item. Aid-in-construction projects refer to certain capital projects in which third parties are obligated to reimburse us for all or a portion of the project expenditures.
Segments
Our chief operating decision-maker is the Chief Executive Officer who reviews financial information presented on a consolidated basis in order to assess our performance and make decisions about resource allocations. There are no segment managers who are held accountable by the chief operating decision-maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we have determined that we have
one
reportable segment.
Significant Accounting Policies
During the three months ended March 31,
2018
, the Partnership adopted ASC 606. As a result, there was a change to our significant accounting policies described in Note 1 of our 2017 Annual Report on Form 10-K, as described below.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law and made significant changes to the U.S. Internal Revenue Code. Such changes include a reduction in the corporate and individual tax rates and limitations on certain deductions and credits, among other changes. This will not have a material impact to our ongoing business operations.
Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, which is a comprehensive new revenue recognition standard that superseded substantially all existing revenue recognition guidance under GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers and in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Since 2014, the FASB has issued a series of accounting pronouncements that update the identifying performance obligations and licensing implementation guidance. The Partnership implemented ASC 606 effective on January 1, 2018, applying ASC 606 to customer contracts which were not completed as of the effective date, using the modified retrospective method of adoption. As a result, we anticipate the timing of our revenue to remain the same with respect to the majority of our contracts.
Under the new standard, we identified certain natural gas purchase contracts that contained fees which were previously recognized as revenue for services provided to producers. Beginning on January 1, 2018, the fee revenue which previously was presented within revenue is now presented within the costs of natural gas and liquids sold line item within the condensed consolidated statement of operations. We also have certain natural gas sales contracts with customers whereby the customers provide certain aid-in-construction capital expenditure payments to us to construct pipelines on our operating assets which we own and operate. We previously accounted for these arrangements as a reduction to property, plant and equipment. Under the new standard, we reclassified these payments as deferred revenue on our condensed consolidated balance sheets at January 1, 2018, which resulted in a
$2.7 million
cumulative effect of accounting change being recorded to increase property, plant and equipment. The deferred revenue will be amortized over five years, the expected length of the contract.
Recent Accounting Pronouncements
Accounting standard-setting organizations frequently issue new or revised accounting pronouncements. We review and evaluate new pronouncements and existing pronouncements to determine their impact, if any, on our condensed consolidated financial statements. We are evaluating the impact of each pronouncement on our condensed consolidated financial statements.
In February 2016, the FASB issued a pronouncement amending disclosure and presentation requirements for lessees and lessors on the face of the balance sheet. The pronouncement states that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. In January 2018, the FASB issued an updated accounting pronouncement which permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of the new leasing standard and that were not previously accounted for as leases. The lease pronouncement will become effective beginning in 2019.
2. NET LOSS PER LIMITED PARTNER UNIT AND DISTRIBUTIONS
Net Loss Per Limited Partner Unit
The following is a reconciliation of net loss attributable to limited partners and the limited partner units used in the basic and diluted earnings per unit calculations for the
three months ended March 31, 2018
and
2017
(in thousands, except unit and per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Net loss
|
|
$
|
(16,837
|
)
|
|
$
|
(15,383
|
)
|
General partner unit in-kind distribution
|
|
(11
|
)
|
|
(8
|
)
|
Net loss attributable to partners
|
|
$
|
(16,848
|
)
|
|
$
|
(15,391
|
)
|
|
|
|
|
|
General partner's interest
(1)
|
|
$
|
(348
|
)
|
|
$
|
(316
|
)
|
Class B Convertible limited partner interest
(1)
|
|
(3,849
|
)
|
|
(3,335
|
)
|
Limited partners' interest
(1)
|
|
|
|
|
Common
|
|
$
|
(10,112
|
)
|
|
$
|
(9,380
|
)
|
Subordinated
|
|
(2,539
|
)
|
|
(2,360
|
)
|
|
|
(1)
|
General Partner's and limited partners’ interests are calculated based on the allocation of net losses for the period, net of the General Partner unit in-kind distributions. The Class B Convertible Unit interest is calculated based on the allocation of only net losses for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Common Units
|
|
2018
|
|
2017
|
Interest in net loss
|
|
$
|
(10,112
|
)
|
|
$
|
(9,380
|
)
|
Effect of dilutive units - numerator
(1)
|
|
—
|
|
|
—
|
|
Dilutive interest in net loss
|
|
$
|
(10,112
|
)
|
|
$
|
(9,380
|
)
|
|
|
|
|
|
Weighted-average units - basic
|
|
48,626,521
|
|
|
48,521,512
|
|
Effect of dilutive units - denominator
(1)
|
|
—
|
|
|
—
|
|
Weighted-average units - dilutive
|
|
48,626,521
|
|
|
48,521,512
|
|
|
|
|
|
|
Basic and diluted net loss per common unit
|
|
$
|
(0.21
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Subordinated Units
|
|
2018
|
|
2017
|
Interest in net loss
|
|
$
|
(2,539
|
)
|
|
$
|
(2,360
|
)
|
Effect of dilutive units - numerator
(1)
|
|
—
|
|
|
—
|
|
Dilutive interest in net loss
|
|
$
|
(2,539
|
)
|
|
$
|
(2,360
|
)
|
|
|
|
|
|
Weighted-average units - basic
|
|
12,213,713
|
|
|
12,213,713
|
|
Effect of dilutive units - denominator
(1)
|
|
—
|
|
|
—
|
|
Weighted-average units - dilutive
|
|
12,213,713
|
|
|
12,213,713
|
|
|
|
|
|
|
Basic and diluted net loss per subordinated unit
|
|
$
|
(0.21
|
)
|
|
$
|
(0.19
|
)
|
|
|
(1)
|
Because we had a net loss for all periods for common units and the subordinated units, the effect of the dilutive units would be anti-dilutive to the per unit calculation. Therefore, the weighted average units outstanding are the same for basic and dilutive net loss per unit for those periods. The weighted average units that were not included in the computation of diluted per unit amounts were
215,878
and
89,089
unvested awards granted under the LTIP for the three months ended March 31, 2018 and 2017, respectively.
|
Our calculation of the number of weighted-average units outstanding includes the common units that have been awarded to our directors that are deferred under our Non-Employee Director Deferred Compensation Plan (the “Plan”). In connection with the execution of the Merger Agreement, the board of directors of our General Partner approved an amendment (the “Amendment”) to the Plan. In connection with and pursuant to the terms of the Merger Agreement, the Partnership is required to terminate the Plan and liquidate the sole participant’s account within 30 days prior to the closing of the Merger. The Amendment terminates the Plan effective as of one business day prior to the closing of the Merger and provides that the participant’s account will be liquidated and paid to the participant or his beneficiary, if applicable, in the form of a lump sum cash payment as soon as practical following the effective time of the Merger. The Amendment will be null and void in the event that the closing of the Merger does not occur.
Cash Distributions
Our agreement of limited partnership (as amended and restated, the “Partnership Agreement”), requires that within
45 days
after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date, as determined by our General Partner. There is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. Beginning with the third quarter of 2014, until such time that we have a distributable cash flow divided by cash distributions ratio (“Distributable Cash Flow Ratio”) of at least
1.0
, Holdings, the indirect holder of all of our subordinated units, waived the right to receive distributions on any subordinated units that would cause the Distributable Cash Flow Ratio to be less than
1.0
. More importantly, the First Amendment (as defined in Note 5) imposed additional restrictions on our ability to declare and pay quarterly cash distributions with respect to our subordinated units. Additionally, we are restricted under the Fifth Amendment from paying a distribution with respect to our common units until our Consolidated Total Leverage Ratio is below
5.0
. See Note 5.
The SXE GP Board suspended paying a quarterly distribution with respect to the fourth quarter of 2015, every quarter of 2016 and 2017 and the first quarter of 2018 to conserve any excess cash for the operation of our business. The SXE GP Board and our management believe this suspension to be in the best interest of our unitholders and will continue to evaluate our ability to reinstate the distribution in future periods. More importantly, we are restricted under the terms of the Fifth Amendment from paying a distribution until our Consolidated Total Leverage Ratio is below
5.0
and we are also restricted from paying such distribution under the terms of the Merger Agreement.
Paid In-Kind Distributions
Class B Convertible Units.
As of
March 31, 2018
, the Class B Convertible Units consisted of
18,656,071
of such units including the additional Class B Convertible Units issued in-kind as a distribution (“Class B PIK Units”). The Class B Convertible Units are not participating securities for purposes of the earnings per unit calculation. Commencing with the quarter ended September 30, 2014 and until converted, as long as certain requirements are met, the holders of the Class B Convertible Units will receive quarterly distributions in an amount equal to
$0.3257
per unit. These distributions will be paid quarterly in Class B PIK Units within
45 days
after the end of each quarter. Our General Partner was entitled, and has exercised
its right, to retain its
2.0%
general partner interest in us in connection with the original issuance of the Class B Convertible Units. In connection with future distributions of Class B PIK Units, the General Partner is entitled to a corresponding distribution to maintain its
2.0%
general partner interest in us. The Class B Convertible Units have the same rights, preferences and privileges, and are subject to the same duties and obligations, as our common units, with certain exceptions. See Note 7.
The following table represents the Class B PIK unit distribution paid on the Class B Convertible Units for the periods ended December 31, 2017 and March 31, 2018 (in thousands, except per unit and in-kind distribution units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Date
|
|
Attributable to the Quarter Ended
|
|
Per Unit Distribution
|
|
In-Kind Class B Convertible Unit
Distributions to Class B Convertible Holders
|
|
In-Kind
Class B Convertible Distributions
Value
(1)
|
|
In-Kind
Unit
Distribution
to General
Partner
|
|
In-Kind General Partner Distribution Value
(1)
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
May 3, 2018
|
|
March 31, 2018
|
|
$
|
0.3257
|
|
|
$
|
326,506
|
|
|
$
|
532
|
|
|
$
|
6,663
|
|
|
$
|
11
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
February 9, 2018
|
|
December 31, 2017
|
|
$
|
0.3257
|
|
|
320,890
|
|
|
$
|
542
|
|
|
6,549
|
|
|
$
|
11
|
|
November 11, 2017
|
|
September 30, 2017
|
|
0.3257
|
|
|
315,370
|
|
|
741
|
|
|
6,436
|
|
|
15
|
|
August 11, 2017
|
|
June 30, 2017
|
|
0.3257
|
|
|
309,946
|
|
|
983
|
|
|
6,325
|
|
|
20
|
|
May 11, 2017
|
|
March 31, 2017
|
|
0.3257
|
|
|
304,615
|
|
|
1,060
|
|
|
6,216
|
|
|
22
|
|
|
|
(1)
|
The fair value was calculated as required, based on the common unit price at the quarter end date for the period attributable to the distribution, multiplied by the number of units distributed.
|
3. FINANCIAL INSTRUMENTS
Fair Value Measurements
We apply recurring fair value measurements to our financial assets and liabilities. In estimating fair value, we generally use a market approach and incorporate assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. The fair value measurement inputs we use vary from readily observable inputs that represent market data obtained from independent sources to unobservable inputs that reflect our own market assumptions that cannot be validated through external pricing sources. Based on the observability of the inputs used in the valuation techniques, the financial assets and liabilities carried at fair value in the financial statements are classified as follows:
|
|
•
|
Level 1—Represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes our cash and cash equivalents.
|
|
|
•
|
Level 2—Represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category primarily includes variable rate debt, over-the-counter swap contracts based upon natural gas price indices and interest rate derivative transactions.
|
|
|
•
|
Level 3—Represents derivative instruments whose fair value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from market sources. We do not have financial assets and liabilities classified as Level 3.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy must be determined based on the lowest level input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable represent fair values based on the short-term nature of these instruments. The fair value of our Credit Facility (defined in Note 5) approximates its carrying amount due primarily to the variable nature of the interest rate of the instrument and is considered a Level 2 fair value measurement. As of March 31, 2018, the fair value of our term loan was
$426.9 million
and the fair value of the Investment Notes (defined in Note 5) was
$15.2 million
, based on recent trading levels and are considered Level 2 fair value instruments.
Derivative Financial Instruments
Interest Rate Derivative Transactions
We enter into interest rate cap contracts to limit our London Interbank Offered Rate (“LIBOR”) based interest rate risk on the portion of debt hedged at the contracted cap rate. Our interest rate cap position was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
Notional Amount
|
|
Cap Rate
|
|
Effective Date
|
|
Maturity Date
|
|
March 31, 2018
|
50,000
|
|
|
3.000
|
%
|
|
June 30, 2016
|
|
June 30, 2018
|
|
—
|
|
40,000
|
|
|
3.000
|
%
|
|
December 31, 2016
|
|
January 1, 2018
|
|
—
|
|
40,000
|
|
|
3.000
|
%
|
|
December 31, 2016
|
|
July 1, 2018
|
|
—
|
|
40,000
|
|
|
3.000
|
%
|
|
December 31, 2016
|
|
January 1, 2019
|
|
—
|
|
60,000
|
|
|
3.000
|
%
|
|
June 30, 2017
|
|
June 30, 2019
|
|
7
|
|
85,000
|
|
|
3.000
|
%
|
|
December 31, 2017
|
|
June 30, 2018
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
7
|
|
These interest rate derivatives are not designated as cash flow hedging instruments for accounting purposes and as a result, changes in the fair value are recognized in interest expense immediately.
The fair value of our interest rate derivative transactions is determined based on a discounted cash flow method using contractual terms of the transactions. The floating coupon rate is based on observable rates consistent with the frequency of the interest cash flows. We have elected to present our interest rate derivatives net in the balance sheets. There was no effect of offsetting in the balance sheets as of
March 31, 2018
or
December 31, 2017
.
The fair values of our interest rate derivative transactions were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
Fair Value Measurement as of
|
|
March 31, 2018
|
|
December 31, 2017
|
Current interest rate derivative assets
|
$
|
6
|
|
|
$
|
1
|
|
Non-current interest rate derivative assets
|
1
|
|
|
1
|
|
Total interest rate derivatives
|
$
|
7
|
|
|
$
|
2
|
|
The realized and unrealized amounts recognized in interest expense associated with derivatives were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Unrealized loss (gain) on interest rate derivatives
|
$
|
(5
|
)
|
|
$
|
2
|
|
Realized gain on interest rate derivatives
|
—
|
|
|
(15
|
)
|
4. LONG-LIVED ASSETS
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life (yrs)
|
|
March 31, 2018
|
|
December 31, 2017
|
Pipelines
|
15-30
|
|
$
|
571,730
|
|
|
$
|
571,730
|
|
Gas processing, treating and other plants
|
15
|
|
520,480
|
|
|
520,765
|
|
Compressors
|
5-15
|
|
78,997
|
|
|
78,997
|
|
Rights of way and easements
|
15
|
|
49,897
|
|
|
49,897
|
|
Furniture, fixtures and equipment
|
5
|
|
9,746
|
|
|
9,746
|
|
Capital lease vehicles
|
3-5
|
|
2,315
|
|
|
2,114
|
|
Total property, plant and equipment
|
|
|
1,233,165
|
|
|
1,233,249
|
|
Accumulated depreciation and amortization
|
|
|
(352,223
|
)
|
|
(334,528
|
)
|
Total
|
|
|
880,942
|
|
|
898,721
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
6,759
|
|
|
2,173
|
|
Land and other
|
|
|
13,653
|
|
|
13,653
|
|
Property, plant and equipment, net
|
|
|
$
|
901,354
|
|
|
$
|
914,547
|
|
Depreciation is provided using the straight-line method based on the estimated useful life of each asset. Depreciation expense for the three months ended March 31, 2018 and 2017, was
$17.9 million
, respectively.
As part of Partnership-wide, cost-saving initiatives, management elected to idle the Bonnie View fractionation facility (“Bonnie View”) in the second quarter of 2017. As a result, all of our Y-grade product is being sold to Holdings in accordance with our affiliate Y-grade sales agreement and is being fractionated at the Holdings’ Robstown fractionation facility (“Robstown”). We utilize Bonnie View as a backup option to the extent Robstown is unable to fractionate our Y-grade product.
We received a settlement payment of
$2.0 million
from our insurance carriers in the first quarter of 2017 related to the fire at our Gregory facility in 2015, and recorded a
$1.5 million
gain related to insurance proceeds received in excess of expenditures incurred to repair the Gregory facility. As stipulated in the Term Loan Agreement (defined in Note 5), we used
$1.0 million
(
$2.0 million
of proceeds, net of the 2015 insurance deductible of
$0.5 million
and additional expenditures to repair Gregory of
$0.5 million
) of the proceeds to make a mandatory prepayment on our term loan.
Intangible Assets
Intangible assets of
$1.3 million
as of
March 31, 2018
and
December 31, 2017
, respectively, represent the unamortized value acquired to long-term supply and gathering contracts. These intangible assets are amortized on a straight-line basis over the
30
-year expected useful lives of the contracts through 2041. Amortization expense over the next
five
years related to intangible assets is not significant.
5. LONG-TERM DEBT
Our outstanding debt and related information at
March 31, 2018
and
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Revolving credit facility due 2019
|
$
|
83,124
|
|
|
$
|
94,555
|
|
Term loans due 2021
|
432,332
|
|
|
433,396
|
|
Senior unsecured notes payable due 2019
|
15,349
|
|
|
—
|
|
Original issuance discount on term loans due 2021
|
(1,053
|
)
|
|
(1,134
|
)
|
Total long-term debt (including current portion)
|
529,752
|
|
|
526,817
|
|
Current portion of long-term debt
|
(4,256
|
)
|
|
(4,256
|
)
|
Deferred financing costs
|
(7,704
|
)
|
|
(8,295
|
)
|
Total long-term debt
|
$
|
517,792
|
|
|
$
|
514,266
|
|
|
|
|
|
|
Outstanding letters of credit
|
$
|
25,061
|
|
|
$
|
24,911
|
|
Remaining unused borrowings
|
$
|
16,815
|
|
|
$
|
15,534
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Weighted average interest rate
|
6.60
|
%
|
|
5.80
|
%
|
Average outstanding borrowings
|
$
|
531,328
|
|
|
$
|
553,699
|
|
Maximum borrowings
|
$
|
532,952
|
|
|
$
|
553,805
|
|
Senior Credit Facilities
Our long-term debt arrangements consist of (i) the Third A&R Revolving Credit Agreement and (ii) a Term Loan Credit Agreement with Wilmington Trust, National Association, UBS Securities LLC and Barclays Bank PLC and a syndicate of lenders (the “Term Loan Agreement” and, together with the Third A&R Revolving Credit Agreement, the “Senior Credit Facilities”). Substantially all of our assets are pledged as collateral under the Senior Credit Facilities, with the security interest of the facilities ranking pari passu.
Third A&R Revolving Credit Agreement
The Third A&R Revolving Credit Agreement is a
five
-year
$200 million
revolving credit facility due August 4, 2019 (the “Credit Facility”). Borrowings under our Credit Facility bear interest at the LIBOR plus an applicable margin or a base rate as defined in the Third A&R Revolving Credit Agreement. Pursuant to the Third A&R Revolving Credit Agreement, among other things:
|
|
(a)
|
the letters of credit sublimit was set at
$75 million
; and
|
|
|
(b)
|
if we fail to comply with the Consolidated Total Leverage Ratio, Consolidated Senior Secured Leverage Ratio and
|
the Consolidated Interest Coverage Ratio covenants (each as defined in the Third A&R Revolving Credit Agreement, and collectively the “Financial Covenants”) (each such failure, a “Financial Covenant Default”), we have the right (a limited number of times) to cure such Financial Covenant Default by having the Sponsors purchase equity interests in or make capital contributions to us resulting in, among other things, proceeds that, if added to Consolidated EBITDA (as defined in the Third A&R Revolving Credit Agreement) would result in us satisfying the Financial Covenants.
Amendments to Third A&R Revolving Credit Agreement
On May 7, 2015, we entered into the first amendment to our Third A&R Revolving Credit Agreement among the Partnership, as the borrower, the lenders and other parties thereto (the “First Amendment”).
The First Amendment, among other things:
(i) revised the maximum Consolidated Total Leverage Ratio set at
5.00
to 1.0 as of the last day of each fiscal quarter after September 30, 2016, without any step-ups in connection with acquisitions;
(ii) increased the applicable margins used in connection with the loans and the commitment fee so that the applicable margin for Eurodollar Loans (as used in the Third A&R Revolving Credit Agreement) ranges from
2.00%
to
4.50%
, the applicable margin for base rate loans ranges from
1.00%
to
3.50%
and the applicable rate for commitment fees ranges from
0.375%
to
0.500%
; and
(iii) allowed us an unlimited number of quarterly equity cures related to our Financial Covenant Default through the fourth quarter of 2016, and no more than two in a twelve month period thereafter for the life of the agreement. Beginning on January 1, 2017, we are limited to no more than four equity cures, with no more than two in a twelve month period.
On December 29, 2016, we entered into the Fifth Amendment which, among other things:
(i) permitted a full waiver for all defaults or events of default arising out of our failure to comply with the financial covenant to maintain a Consolidated Total Leverage Ratio less than
5.00
to
1.00
for the quarter ended September 30, 2016;
(ii) reduced the total aggregate commitments under the Third A&R Revolving Credit Agreement from
$200 million
to
$145 million
and reduced the sublimit for letters of credit from
$75 million
to
$50 million
. Total aggregate commitments was reduced to
$125 million
on March 31, 2018, and will be further reduced to
$120 million
on June 30, 2018 and
$115 million
on December 31, 2018 and will also be reduced in an amount equal to the net proceeds of any Permitted Note Indebtedness (as defined in the Fifth Amendment) we may incur in the future;
(iii) modified the borrowings under the Third A&R Revolving Credit Agreement to bear interest at the LIBOR or a base rate plus an applicable margin that cumulatively increases pursuant to the Fifth Amendment by (a) 125 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
5.00
to
1.00
, plus (b) 100 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
6.00
to
1.00
, plus (c) 100 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
7.00
to
1.00
, plus (d) 100 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
8.00
to
1.00
. At our election, the 100 basis point increase to the applicable margin upon our Consolidated Total Leverage Ratio being greater than or equal to
8.00
to
1.00
may be replaced with a 150 basis point increase that is payable in kind;
(iv) suspended the Consolidated Total Leverage Ratio and Consolidated Senior Secured Leverage Ratio financial covenants and reduced the Consolidated Interest Coverage Ratio financial covenant requirement from
2.50
to
1.00
to
1.50
to
1.00
for all periods ending on or prior to the Ratio Compliance Date;
(v) requires us to generate Consolidated EBITDA in certain minimum amounts beginning with the quarter ending December 31, 2016 and rolling forward thereafter through the quarter ending December 31, 2018;
(vi) requires us to maintain at least
$3 million
of Liquidity (as defined therein) as of the last business day of each calendar week;
(vii) restricts our capital expenditures for growth and maintenance to not exceed certain amounts per fiscal year; and
(viii) beginning with the fiscal quarter ending March 31, 2019, our Consolidated Total Leverage Ratio cannot exceed
5.00
to
1.00
and our Consolidated Senior Secured Leverage Ratio cannot exceed
3.50
to
1.00
. Until such time as our Consolidated Total Leverage Ratio is less than
5.00
to
1.00
, we will also be restricted from making cash distributions to our unitholders and from entering into acquisition or merger agreements with third-party businesses involving a purchase price greater than
$10 million
, unless such acquisition is funded entirely using the proceeds from the issuance of equity. In addition, until such time as our Consolidated Total Leverage Ratio is less than or equal to
5.00
to
1.00
, we will be required to repay any outstanding borrowings under the Credit Facility in an amount equal to
50%
of our Excess Cash Flow (as defined in the Fifth Amendment). Our Consolidated Total Leverage Ratio was
8.64
to 1.00 as of March 31, 2018.
Term Loan Agreement
The Term Loan Agreement is a
$450 million
senior secured term loan facility maturing on August 4, 2021. Borrowings under our Term Loan Agreement bear interest at LIBOR plus
4.25%
or a base rate as defined in the respective credit agreement with a LIBOR floor of
1.00%
. The facility will amortize in equal quarterly installments in an aggregate amount equal to
1%
of the original principal amount, less any mandatory prepayments (as defined in the Term Loan Agreement),
$1.064 million
, with the remainder due on the maturity date.
Senior Unsecured Note
On January 2, 2018, Holdings delivered a Backstop Demand (as defined in the Investment Agreement) for each Sponsor to fund their respective pro rata portions of the Sponsor Shortfall Amount (as defined in the Investment Agreement) of
$15.0 million
in accordance with the Backstop Agreement. As consideration for the amount contributed directly to us by a Sponsor pursuant to the Backstop Agreement, we issued to the Sponsors senior unsecured notes of the Partnership in an aggregate principal amount of
$15.0 million
(each, an "Investment Note" and collectively, the “Investment Notes”). The Investment Notes mature on November 5, 2019 and bear interest at a rate of 12.5% per annum. Interest on the Investment Note shall be paid-in-kind (“PIK”) (other than with respect to interest payable (i) on or after the maturity date, (ii) in connection with prepayment, or (iii) upon acceleration of the Investment Note, which shall be payable in cash); provided that all interest shall be payable in cash on or after December 31, 2018. The Investment Notes are the unsecured obligation of the Partnership subordinate in right of payment to any of our secured obligations under the Third A&R Revolving Credit Agreement. The senior unsecured note payable includes
$0.3 million
of PIK interest as of March 31, 2018.
Deferred Financing Costs
Deferred financing costs are capitalized and amortized as interest expense under the effective interest method over the term of the related debt. The unamortized balance of deferred financing costs is included in long-term debt in the balance sheets. Changes in deferred financing costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred financing costs, January 1
|
$
|
8,295
|
|
|
$
|
11,474
|
|
Capitalization of deferred financing costs
|
255
|
|
|
96
|
|
Amortization of deferred financing costs
|
(846
|
)
|
|
(869
|
)
|
Deferred financing costs, March 31
|
$
|
7,704
|
|
|
$
|
10,701
|
|
6. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we are party to certain legal or administrative proceedings that arise in the ordinary course and are incidental to our business. For example, during periods when we are expanding our operations through the development of new pipelines or the construction of new plants, we may become involved in disputes with landowners that are in close proximity to our activities. While we are involved currently in several such proceedings and disputes, our management believes that none of such proceedings or disputes will have a material adverse effect on our results of operations, cash flows or financial condition. However, future events or circumstances, currently unknown to management, will determine whether the resolution of any litigation or claims ultimately will have a material effect on our results of operations, cash flows or financial condition in any future reporting periods.
TPL.
On April 5, 2017, TPL SouthTex Processing Company, LP (“TPL”), an indirect subsidiary of Targa, filed a Demand for Arbitration with the American Arbitration Association, against FL Rich Gas Services, LP, an indirect subsidiary of the Partnership (“FL Rich”), related to the operation of T2 EF Cogeneration Holdings LLC (“T2 Cogen”). T2 Cogen, the owner of a cogeneration facility in South Texas, is operated by FL Rich pursuant to the terms of the Generation Plant Operating Agreement, dated March 4, 2013 (the “Operating Agreement”). TPL alleges that FL Rich (i) breached the Operating Agreement in its alleged failure to receive from the United States Environmental Protection Agency a Prevention of Significant Deterioration permit thereby harming Targa’s investment in T2 Cogen, (ii) breached its fiduciary duties with respect to funds or assets of T2 Cogen as operator of T2 Cogen under the terms of the Operating Agreement, and (iii) breached the Operating Agreement and the Limited Liability Company Agreement of T2 Cogen (the “LLC Agreement”) in installing a third turbine inside its Lone Star plant. TPL is seeking, among other things, (a) unspecified damages related to the alleged breaches under
the Operating Agreement and the LLC Agreement, (b) the return of approximately
$26 million
in capital contributions to T2 Cogen received from TPL under the LLC Agreement and the Operating Agreement, and (c) the dissolution and liquidation of T2 Cogen and its assets, respectively. An arbitration hearing has been scheduled for August 2018 which we have requested to be rescheduled to September or October 2018. We believe this matter is without merit and we intend to defend the arbitration vigorously. Because this matter is in an early stage, we are unable to predict its outcome and the possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on our financial position. Depending on the outcome or resolution of this matter, it could have a material effect on our financial position.
Woodsboro
. Our General Partner has been named as a defendant in a lawsuit filed on April 29, 2016 in Duval County, Texas styled Victor Henneke, Jr., et al. v. Southcross Energy Partners GP, LLC, et al., Cause No. DC-16-139, 229th Judicial District, Duval County, Texas (the “Henneke Case”). The Henneke Case involves claims by two employees of a third party contractor for personal injury and wrongful death resulting from the alleged negligence of the Partnership related to a pipeline construction project located at our Woodsboro processing facility. The Partnership’s insurance carriers are providing coverage to the Partnership under its general liability policy. No trial date has been set for the contractual liability claims in the case. A jury trial for the personal injury claims began in Duval County, Texas on September 18, 2017. On September 22, 2017, two different award amounts were determined by the jury, the first of which was determined prior to the jury being released by the judge and the second was determined after the jury was recalled by the judge. On April 25, 2018, the successor judge entered a judgment against Southcross in the amount of approximately
$7.7 million
. We are evaluating whether or not to appeal this judgment and believe that we have adequate insurance coverage to cover this matter. As a result, during the three months ended March 31, 2018, we recorded a
$7.7 million
liability and receivable from our insurance carrier related to the Woodsboro legal settlement. On April 27, 2018 and April 30, 2018, the plaintiffs filed two new lawsuits against Southcross CCNG Transmission Ltd. that allege the same or similar causes of actions for which we
received judgements on in Duval County. The cases are styled as
Ivy Gonzalez on behalf of M.R. Gonzalez and M.N. Gonzalez Minor Children vs. Southcross CCNG Transmission Ltd.; Gene Henneke as independent administrator of the estate of Dennis Henneke; Galbreath Contracting, Inc. and Severo Sepulveda, Jr. Cause no. DE-18-82 and Amy Gonzalez as co-personal representative of the estate of Jesus Gonzalez, Jr. under the Texas Survival Act and for and on behalf of wrongful death beneficiaries M.R. Gonzalez and M.N. Gonzalez Minor Children and Amy Gonzalez and Jesus Gonzalez, Sr. vs. Southcross CCNG Transmission Ltd.; Gene Henneke as independent administrator of the estate of Dennis Henneke; Galbreath Contracting, Inc. and Severo Sepulveda, Jr. Cause no. DE-18-83.
We intend to defend vigorously these pending matters and believe we have adequate insurance coverage with respect to these matters.
Merger Agreement.
In connection with the Merger, five putative class actions were filed in the United States District Court for the Northern District of Texas. The actions were filed against multiple, different entities and individuals, including by way of example only and among others, the Partnership, our General Partner, Southcross Holdings, Holdings GP, AMID, AMID Merger Sub, and certain former and current members of our executive management and the Board of Directors of our General Partner. As of May 7, 2018, three of such actions have been dismissed. Those cases are:
•
Robinson Iglesias v. Southcross Energy Partners, L.P., Southcross Energy Partners GP, LLC, Southcross Holdings LP, Southcross Holdings GP LLC, Bruce A. Williamson, David W. Biegler, Andrew A. Cameron, Nicholas J. Caruso, Jason H. Downie, Wallace Henderson, Jerry W. Pinkerton, Cherokee Merger Sub LLC, and American Midstream Partners, LP
, Civil Action No. 3:18-cv-00158-N. Dismissed on April 10, 2018.
•
Adrian Marshall v. Southcross Energy Partners, L.P., Southcross Energy Partners GP, LLC, Southcross Holdings LP, Southcross Holdings GP LLC, Bruce A. Williamson, David W. Biegler, Andrew A. Cameron, Nicholas J. Caruso, Jr., Jason H. Downie, Jerry W. Pinkerton, Randall S. Wade, Bret M. Allan, American Midstream Partners, LP, and Cherokee Merger Sub LLC
, Civil Action No. 3:18-cv-00272-D. Dismissed on April 11, 2018.
•
Kristin Doller v. Southcross Energy Partners, L.P., Southcross Energy Partners GP, LLC, Southcross Holdings LP, Southcross Holdings GP LLC, David W. Biegler, Andrew A. Cameron, Nicholas J. Caruso, Jr., Jason H. Downie, Jerry W. Pinkerton, Randall S. Wade, and Bruce A. Williamson
, Civil Action No. 3:18-cv-00291-N. Dismissed on April 10, 2018.
The complaints generally allege, among other things, that the registration statement on Form S-4 (file no. 333-222501) is false and materially misleading and that the defendants have violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. Generally, the complaints seek class certification, injunctive relief, damages, declaratory relief, and attorney’s fees and court costs. The two remaining actions filed in the United States District Court for the Northern District of Texas are captioned as follows:
• Anthony Franchi v. Southcross Energy Partners, L.P., Southcross Energy Partners GP, LLC, Bruce A. Williamson,
David W. Biegler, Andrew A. Cameron, Nicholas J. Caruso, Jr., Jason H. Downie, Jerry W. Pinkerton, Randall S.
Wade, American Midstream Partners, LP, American Midstream Partners GP, LLC, and Cherokee Merger Sub LLC
, Civil Action No. 3:18-cv-00179-D.
• Robert Johnson v. Southcross Energy Partners, L.P., Southcross Energy Partners GP, LLC, Southcross Holdings LP,
Southcross Holdings GP LLC, Bruce A. Williamson, David W. Biegler, Andrew A. Cameron, Nicholas J. Caruso, Jr., Jason H. Downie, Jerry W. Pinkerton, Randall S. Wade
, Civil Action No. 3:18-cv-00289-C
All defendants deny any wrongdoing in connection with the proposed Transaction and plan to defend rigorously against all pending claims.
Corpus Christi Alumina LLC v. Southcross Marketing Co. Ltd. (In re Sherwin Alumina Co., LLC)
, Case No. 18-02024 (Bankr. S.D. Tex.) Corpus Christi Alumina LLC the assignee of Sherwin Alumina Company LLC is seeking to recover from our subsidiary Southcross Marketing Co. Ltd., up to $10 million for natural gas payments made to us prior to Sherwin’s 2016 bankruptcy. We believe this claim to be without merit and intend to defend vigorously this claim. We do not believe this to have a material effect on our financial position.
Regulatory Compliance
In the ordinary course of our business, we are subject to various laws and regulations. In the opinion of our management, compliance with current laws and regulations will not have a material effect on our results of operations, cash flows or financial condition.
Leases
Capital Leases
We have vehicle leases that are classified as capital leases. The termination dates of the lease agreements vary from
2018
to 2019. We recorded amortization expense related to the capital leases of
$0.1 million
each for the
three months ended March 31, 2018
and 2017, respectively. Capital leases entered into during the three months ended March 31, 2018 and 2017, were
$0.3 million
and
$0.4 million
, respectively. The capital lease obligation amounts included in the balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Other current liabilities
|
$
|
463
|
|
|
$
|
410
|
|
Other non-current liabilities
|
578
|
|
|
410
|
|
Total
|
$
|
1,041
|
|
|
$
|
820
|
|
Operating Leases
We maintain operating leases in the ordinary course of our business activities. These leases include those for office and other operating facilities and equipment. The termination dates of the lease agreements vary from
2018
to 2025. Expenses associated with operating leases, recorded in operations and maintenance expenses and general and administrative expenses in our statements of operations, were
$1.2 million
and
$1.6 million
for the three months ended March 31, 2018 and 2017, respectively. A rental reimbursement included in our lease agreement associated with the office space we leased in June 2015 of
$2.0 million
, net of amortization, has been recorded as a deferred liability in our condensed consolidated balance sheets as of March 31, 2018. This amount will continue to be amortized against the lease payments over the length of the lease term.
7. PARTNERS’ CAPITAL
Ownership
Our units outstanding as of
March 31, 2018
are as follows (in units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners’ Capital
|
|
|
|
|
Owned by Parent
|
|
|
Public
|
|
Holdings
|
|
Class B
|
|
|
|
General
|
|
|
Common
|
|
Common
|
|
Convertible
|
|
Subordinated
|
|
Partner
|
Units outstanding as of December 31, 2017
|
|
22,122,113
|
|
|
26,492,074
|
|
|
18,335,181
|
|
|
12,213,713
|
|
|
1,615,573
|
|
Vesting of LTIP units, net
|
|
22,330
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
In-kind distributions and issuances to general partner to maintain 2.0% ownership
|
|
—
|
|
|
—
|
|
|
320,890
|
|
|
—
|
|
|
7,005
|
|
Units outstanding as of March 31, 2018
|
|
22,144,443
|
|
|
26,492,074
|
|
|
18,656,071
|
|
|
12,213,713
|
|
|
1,622,578
|
|
Common Units
Our common units represent limited partner interests in us. The holders of our common units are entitled to participate in our distributions (to the extent distributions are made) and are entitled to exercise the rights and privileges available to limited partners under our Partnership Agreement.
Class B Convertible Units
As of March 31, 2018, the Class B Convertible Units consist of
18,656,071
units, inclusive of any Class B PIK Units issued. The Class B Convertible Units have the same rights, preferences and privileges, and are subject to the same duties and obligations, as our common units, with certain exceptions as noted below.
Our Partnership Agreement does not allow additional Class B Convertible Units (other than Class B PIK Units) to be issued without the prior approval of our General Partner and the holders of a majority of the outstanding Class B Convertible Units. As of
March 31, 2018
, all of our outstanding Class B Convertible Units were indirectly owned by Holdings.
Distribution Rights:
The holders of the Class B Convertible Units receive quarterly distributions in an amount equal to
$0.3257
per unit paid in Class B PIK Units (based on a unit issuance price of
$18.61
) within
45 days
after the end of each quarter. Our General Partner was entitled, and has exercised its right, to retain its
2.0%
general partner interest in us in connection with the original issuance of Class B Convertible Units. In connection with future distributions of Class B PIK Units, the General Partner is entitled to a corresponding distribution to maintain its
2.0%
general partner interest in us.
Conversion Rights:
The Class B Convertible Units are convertible into common units on a one-for-one basis and, once converted, will participate in cash distributions pari passu with all other common units. The conversion of Class B Convertible Units will occur on the date we (i) make a quarterly distribution equal to or greater than
$0.44
per common unit, (ii) generate Class B Distributable Cash Flow (as defined in our Partnership Agreement) in an amount sufficient to pay the declared distribution on all units for the
two
quarters immediately preceding the date of conversion (the “measurement period”) and (iii) forecast paying a distribution equal to or greater than
$0.44
per unit from forecasted Class B Distributable Cash Flow on all outstanding common units for the
two
quarters immediately following the measurement period.
Voting Rights:
The Class B Convertible Units generally have the same voting rights as common units, and have one vote for each common unit into which such units are convertible.
Subordinated Units
Subordinated units represent limited partner interests in us and convert to common units at the end of the Subordination Period (as defined in our Partnership Agreement). The principal difference between our common units and our subordinated units is that in any quarter during the Subordination Period, holders of the subordinated units are not entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units do not accrue arrearages. Beginning with the third quarter of 2014, until such time we have a Distributable Cash Flow Ratio of at least
1.0
, Holdings, the indirect holder of the subordinated units, has waived the right to receive distributions on any subordinated units that would cause the
Distributable Cash Flow Ratio to be less than
1.0
. In addition, the Fifth Amendment imposed additional restrictions on our ability to declare and pay quarterly cash distributions with respect to our subordinated units. See Note 5.
General Partner Interests
As defined by our Partnership Agreement, general partner units are not considered to be units (common or subordinated), but are representative of our General Partner’s
2.0%
ownership interest in us. Our General Partner has received general partner unit PIK distributions in connection with the Class B Convertible Units. In connection with other equity issuances, our General Partner has made capital contributions in exchange for additional general partner units to maintain its
2.0%
ownership interest in us.
8. TRANSACTIONS WITH RELATED PARTIES
Affiliated Directors
The SXE GP Board is comprised of
two
directors designated by EIG (one of which must be independent),
two
directors designated by Tailwater (one of which must be independent),
two
directors designated by the Lenders (one of which must be independent) and
one
director by majority. Our non-employee directors are reimbursed for certain expenses incurred for their services to us. The director services fees and expenses are included in general and administrative expenses in our statements of operations. We incurred fees and expenses related to the services from our affiliated directors as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
EIG
|
36
|
|
|
35
|
|
Tailwater
|
38
|
|
|
36
|
|
Total fees and expenses paid for director services to affiliated entities
|
$
|
74
|
|
|
$
|
71
|
|
Southcross Energy Partners GP, LLC (our General Partner)
Our General Partner does not receive a management fee or other compensation for its management of us. However, our General Partner and its affiliates are entitled to reimbursements for all expenses incurred on our behalf, including, among other items, compensation expense for all employees required to manage and operate our business. We incurred expenses related to these reimbursements as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Reimbursements included in general and administrative expenses
|
$
|
1,673
|
|
|
$
|
4,697
|
|
Reimbursements included in operations and maintenance expenses
|
3,378
|
|
|
3,912
|
|
Total reimbursements to our General Partner and its affiliates
|
$
|
5,051
|
|
|
$
|
8,609
|
|
Other Transactions with Affiliates
We have a gas gathering and processing agreement (the “G&P Agreement”) and an NGL sales agreement (the “NGL Agreement”) with an affiliate of Holdings. Under the terms of these commercial agreements, we transport, process and sell rich natural gas for the affiliate of Holdings in return for agreed-upon fixed fees, and we can sell natural gas liquids that we own to Holdings at agreed-upon fixed prices. The NGL Agreement also permits us to utilize Holdings’ fractionation services at market-based rates. We had purchases of NGLs from Holdings of
$0.1 million
and
$0.2 million
for the
three months ended March 31, 2018
and 2017, respectively.
We recorded revenues from affiliates of
$52.8 million
and
$40.8 million
for the
three months ended March 31, 2018
and 2017, respectively, in accordance with the G&P Agreement, the NGL Agreement and the series of commercial agreements.
We had accounts receivable due from affiliates of
$30.5 million
and
$33.2 million
as of
March 31, 2018
and
December 31, 2017
, respectively, and accounts payable due to affiliates of
$1.0 million
and
$0.4 million
as of
March 31, 2018
and
December 31, 2017
, respectively. The affiliate receivable and payable balances are related primarily to transactions associated with Holdings, noted above, and our joint venture investments (defined in Note 11). The receivable balance due from Holdings is current as of
March 31, 2018
.
In connection with the execution of the Fifth Amendment, on December 29, 2016, the Partnership entered into (i) the Investment Agreement with Holdings and Wells Fargo Bank, N.A., (ii) the Backstop Agreement with Holdings, Wells Fargo Bank, N.A. and the Sponsors and (iii) the Equity Cure Contribution Amendment with Holdings. See Notes 1 and 5 for additional details.
9. INCENTIVE COMPENSATION
Unit Based Compensation
Long-Term Incentive Plan
The 2012 Long-Term Incentive Plan (“LTIP”) provides incentive awards to eligible officers, employees and directors of our General Partner. Awards granted to employees under the LTIP generally vest over a
three
year period in equal annual installments, or in the event of a change in control, in either a common unit or an amount of cash equal to the fair market value of a common unit at the time of vesting, as determined by our management at its discretion. These awards also include distribution equivalent rights that grant the holder the right to receive an amount equal to the cash distributions on common units during the period the award remains outstanding.
On November 9, 2015, the holders of a majority of our limited partner interests approved an amendment to the LTIP which increased the number of common units that may be granted as awards by
4,500,000
units. The term of the LTIP also was extended to a period of 10 years following the amendment's adoption.
The following table summarizes information regarding awards of units granted under the LTIP:
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Fair
Value at Grant Date
|
Unvested - December 31, 2017
|
98,096
|
|
|
$
|
10.95
|
|
Forfeited units
|
(4,468
|
)
|
|
$
|
13.63
|
|
Units recaptured for tax withholdings
(1)
|
(10,128
|
)
|
|
$
|
9.08
|
|
Vested units
(1)
|
(22,330
|
)
|
|
$
|
9.38
|
|
Unvested - March 31, 2018
|
61,170
|
|
|
$
|
7.94
|
|
|
|
(1)
|
The weighted-average fair value price on the date of vesting for our vested units was
$1.79
for the three months ended March 31, 2018. The weighted-average fair value price on the date of vesting for our units recaptured for tax withholdings was
$1.79
for the three months ended March 31, 2018.
|
For the
three months ended March 31, 2018
, we did not grant any equity awards under the LTIP. As of
March 31, 2018
, we had total unamortized compensation expense of
$0.1 million
related to unvested awards. Compensation expense associated with awards is expected to be recognized over the
three
-year vesting period from each equity award’s grant date. As of
March 31, 2018
, we had
5,344,600
units available for issuance under the LTIP.
Unit Based Compensation Expense
The following table summarizes information regarding recognized compensation expense, which is included in general and administrative and operations and maintenance expenses in our statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Unit-based compensation
|
$
|
65
|
|
|
$
|
257
|
|
Employee Savings Plan
We have employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, whereby employees of our General Partner may contribute a portion of their base compensation to the employee savings plan, subject to limits. We provide a matching contribution each payroll period equal to
100%
of each employee’s contribution up to the lesser of
6%
of the employee’s eligible compensation or
$16,500
annually for the period. The following table summarizes information regarding contributions and the expense recognized for the matching contributions, which is included in operating and maintenance expense and general and administrative expense in our statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Matching contributions expensed for employee savings plan
|
$
|
177
|
|
|
$
|
188
|
|
10. REVENUES
Upon adoption of ASC 606, when it is determined that a contract exists, our performance obligation has been met and our transaction price is determinable, we record natural gas and NGL sales revenue in the period when the physical product is delivered to the customer and in an amount based on the pricing terms of an executed contract. Our transportation, gathering, processing, treating, compression and other revenue is recognized in the period when the service is provided and represents our fee-based service revenue that is based upon the pricing terms of an executed contract. In addition, collectability is evaluated on a customer-by-customer basis. New customers are subject to a credit review process, which evaluates the customers' financial position and their ability to pay.
Our sale and purchase arrangements primarily are presented separately in the statements of operations. These transactions are contractual arrangements that establish the terms of the purchase of natural gas or NGLs at a specified location and the sale of natural gas or NGLs at a different location on the same or on another specified date. These transactions require physical delivery and transfer of the risk and reward of ownership are evidenced by title transfer, assumption of environmental risk, transportation scheduling, credit risk and counterparty nonperformance risk.
We derive revenue in our business from the following types of arrangements:
|
|
•
|
Fixed-Fee.
We receive a fixed-fee per unit of natural gas volume that we gather at the wellhead, process, treat, compress and/or transport for our customers, or we receive a fixed-fee per unit of NGL volume that we transport to fractionation. Some of our arrangements also provide for a fixed-fee for guaranteed transportation capacity on our systems.
|
|
|
•
|
Fixed-Spread.
Under these arrangements, we purchase natural gas and NGLs from producers or suppliers at receipt points on our systems at an index-based price plus or minus a fixed price differential and sell these volumes of natural gas and NGLs at delivery points off our systems at the same index-based price, plus or minus a fixed price differential. By entering into such back-to-back purchases and sales, we are able to mitigate our risk associated with changes in the general commodity price levels of natural gas and NGLs. We remain subject to variations in our fixed-spreads to the extent we are unable to precisely match volumes purchased and sold in a given time period or are unable to secure the supply or to produce or market the necessary volume of products at our anticipated differentials to the index price.
|
|
|
•
|
Commodity-Sensitive.
In exchange for our processing services, we may remit to a customer a percentage of the proceeds from our sales, or a percentage of the physical volume, of residue natural gas and/or NGLs that result from our natural gas processing, or we may purchase NGLs from customers at set fixed NGL recoveries and retain the balance of the proceeds or physical commodity for our own account. These arrangements are generally combined with fixed-fee and fixed-spread arrangements for processing services and, therefore, represent only a portion of a processing contract's value. The revenues we receive from these arrangements directly correlate with fluctuating general commodity price levels of natural gas and NGLs and the volume of NGLs recovered relative to the fixed recovery obligations.
|
Our gathering and processing agreements provide for quarterly and annual minimum volume commitments ("MVC"). Under these MVCs, our producers agree to sell us, ship and/or process a minimum volume of production on our gathering systems or to pay a minimum monetary amount over certain periods during the term of the MVC. A customer must make a shortfall payment to us at the end of the contracted measurement period if its actual throughput volumes are less than its MVC for that period.
We recognize customer obligations under their MVCs as revenue when our performance obligation has been met or when it is remote the producer will be able to meet its MVC commitment.
We had revenues consisting of the following categories (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Contract Type
|
|
2018
|
|
2017
|
Sales of natural gas
(1)
|
Fixed Spread
|
|
$
|
96,697
|
|
|
$
|
86,504
|
|
Sales of NGLs and condensate
(1)
|
Fixed Spread
|
|
47,220
|
|
|
41,054
|
|
Transportation, gathering and processing
|
Fixed Fee
|
|
7,673
|
|
|
8,059
|
|
Producer fees
(2)
|
Fixed Fee
|
|
—
|
|
|
15,299
|
|
Treating and compression
|
Fixed Fee
|
|
3,851
|
|
|
3,910
|
|
Other
|
N/A
|
|
1,189
|
|
|
332
|
|
Total revenues
|
|
|
$
|
156,630
|
|
|
$
|
155,158
|
|
|
|
(1)
|
Commodity-sensitive revenues are included in these categories as well.
|
|
|
(2)
|
As a result of the FASB issuance of ASC 606, we identified certain natural gas purchase contracts that contained producer fees which were previously recognized as revenue for services provided to producers. The fee revenue which was previously presented within revenue now is presented within the costs of natural gas and liquids sold line item within the condensed consolidated statement of operations beginning on January 1, 2018. Therefore, beginning on January 1, 2018, the producer fee revenue of
$12.5 million
that were previously recognized as revenue under ASC 605 are recognized as reductions to the costs of natural gas and liquids sold line item within the condensed consolidated statement of operations.
|
11. INVESTMENTS IN JOINT VENTURES
We own equity interests in
three
joint ventures with Targa as our joint venture partner. T2 Eagle Ford Gathering Company LLC (“T2 Eagle Ford”), T2 LaSalle Gathering Company LLC (“T2 LaSalle”) and T2 Cogen operate pipelines and a cogeneration facility located in South Texas. We indirectly own a
50%
interest in T2 Eagle Ford, a
50%
interest in T2 Cogen and a
25%
interest in T2 LaSalle. We pay our proportionate share of the joint ventures’ operating costs, excluding depreciation and amortization, through lease capacity payments. As a result, our share of the joint ventures’ losses is related primarily to the joint ventures’ depreciation and amortization. Our maximum exposure to loss related to these joint ventures includes our equity investment, any additional capital contributions and our share of any operating expenses incurred by the joint ventures.
The joint ventures’ summarized financial data from their statements of operations for the
three months ended March 31, 2018
and
2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Revenue
|
|
|
|
T2 Eagle Ford
|
$
|
1,062
|
|
|
$
|
1,141
|
|
T2 Cogen
|
211
|
|
|
83
|
|
T2 LaSalle
|
385
|
|
|
385
|
|
|
|
|
|
Net loss
|
|
|
|
T2 Eagle Ford
|
$
|
(4,668
|
)
|
|
$
|
(4,906
|
)
|
T2 Cogen
|
(864
|
)
|
|
(992
|
)
|
T2 LaSalle
|
(1,478
|
)
|
|
(1,468
|
)
|
Our equity in losses of joint venture investments is comprised of the following for the
three months ended March 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
T2 Eagle Ford
|
$
|
(2,334
|
)
|
|
$
|
(2,453
|
)
|
T2 Cogen
|
(432
|
)
|
|
(496
|
)
|
T2 LaSalle
|
(370
|
)
|
|
(367
|
)
|
Equity in losses of joint venture investments
|
$
|
(3,136
|
)
|
|
$
|
(3,316
|
)
|
Our investments in joint ventures is comprised of the following as of
March 31, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
T2 Eagle Ford
|
$
|
89,999
|
|
|
$
|
92,248
|
|
T2 Cogen
|
3,992
|
|
|
4,425
|
|
T2 LaSalle
|
14,711
|
|
|
15,074
|
|
Investments in joint ventures
|
$
|
108,702
|
|
|
$
|
111,747
|
|
12. CONCENTRATION OF CREDIT RISK
Our primary markets are in South Texas, Alabama and Mississippi. We have a concentration of revenues and trade accounts receivable due from customers engaged in the production, trading, distribution and marketing of natural gas and NGL products. These concentrations of customers may affect overall credit risk in that these customers may be affected similarly by changes in economic, regulatory or other factors. We analyze our customers’ historical financial and operational information before extending credit.
Our top
ten
customers, excluding affiliates, for the
three months ended March 31, 2018
and
2017
represent the following percentages of consolidated revenue:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Top ten customers
|
50.2
|
%
|
|
56.0
|
%
|
We did not have any customers, excluding affiliates, exceed 10% of total consolidated revenue for the three months ended March 31, 2018 and
2017.
For the
three months ended March 31, 2018
and
2017
, we did not experience significant non-payment for services. We had no allowance for uncollectible accounts receivable at
March 31, 2018
.
13. SUBSEQUENT EVENTS
None.
14. SUPPLEMENTAL INFORMATION
Supplemental Cash Flow Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Supplemental Disclosures:
|
|
|
|
Cash paid for interest
|
$
|
8,809
|
|
|
$
|
8,419
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
Accounts payable related to capital expenditures
|
2,062
|
|
|
3,529
|
|
Capital lease obligations
|
95
|
|
|
138
|
|
Class B Convertible unit in-kind distributions
|
542
|
|
|
404
|
|
Capitalization of Interest Cost
We capitalize interest on projects during their construction period. Once a project is placed in service, capitalized interest, as a component of the total cost of the construction, is depreciated over the estimated useful life of the asset constructed. We incurred the following interest costs (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Total interest costs
|
$
|
10,095
|
|
|
$
|
9,297
|
|
Capitalized interest included in property, plant and equipment, net
|
(85
|
)
|
|
(194
|
)
|
Interest expense
|
$
|
10,010
|
|
|
$
|
9,103
|
|
Southcross Assets Considered Leases to Third Parties
We have pipelines that transport natural gas to
two
power plants in Nueces County, Texas under fixed-fee contracts. The contracts have a primary term through 2029 and an option to extend the agreements by an additional term of up to
ten
years. These contracts are considered operating leases under the applicable accounting guidance.
Future minimum annual demand payment receipts under these agreements as of
March 31, 2018
were as follows:
$1.6 million
for the remainder of 2018;
$2.2 million
in 2019;
$2.2 million
in 2020;
$1.5 million
in 2021;
$1.5 million
in 2022 and
$10.2 million
thereafter. The revenue for the demand payments is recognized on a straight-line basis over the term of the contract. The demand fee revenues under the contracts were each
$0.7 million
for the
three months ended March 31, 2018
and 2017, respectively, and have been included within transportation, gathering and processing fees within Note 10. These amounts do not include variable fees based on the actual gas volumes delivered under the contracts. Variable fees recognized in revenues within transportation, gathering and processing fees within Note 10 were
$0.2 million
and
$0.8 million
for the
three months ended March 31, 2018
and 2017, respectively. Deferred revenue associated with these agreements was
$11.5 million
and
$11.6 million
at March 31, 2018 and December 31, 2017, respectively.