UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
  FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to        
Commission File Number: 001-35257
 
  AMERICAN MIDSTREAM PARTNERS, LP
(Exact name of registrant as specified in its charter)

Delaware
27-0855785
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2103 CityWest Boulevard
 
Building #4, Suite 800
 
Houston, TX 77042
(346) 241-3400
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ý  Yes     ¨   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ý   Yes     ¨   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨  
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨   Yes     ý   No
Securities registered pursuant to section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Units representing Limited Partnership Interests
AMID
New York Stock Exchange





There were 54,451,306 common units, 11,342,197 Series A Units and 9,514,330 Series C Units of American Midstream Partners, LP outstanding as of May 3, 2019 .






Glossary of Terms

The following is a list of terms used throughout this report:

ASC         Accounting Standards Codification.

Bbl         Barrels: 42 U.S. gallons measured at 60 degrees Fahrenheit.

Condensate
Liquid hydrocarbons present in casing head gas that condense within the gathering system and are removed prior to delivery to the natural gas plant. This product is generally sold on terms more closely tied to crude oil pricing.

/d
Per day.

FASB         Financial Accounting Standards Board.

FERC         Federal Energy Regulatory Commission.

GAAP         Accounting principles generally accepted in the United States of America.

Gal         Gallons.

Mgal         Thousand gallons.

Mcf         Thousand cubic feet.

MMcf         Million cubic feet.
    
NGL or NGLs
Natural gas liquid(s): The combination of ethane, propane, normal butane, isobutane and natural gasoline that, when removed from natural gas, become liquid under various levels of higher pressure and lower temperature.

Throughput
The volume transported or passing through a pipeline, plant, terminal or other facility during a particular period.

    


2


TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 5.
Item 6.

3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, In thousands)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
12,273

 
$
9,069

Restricted cash
33,558

 
30,868

Accounts receivable, net of allowance for doubtful accounts of $511 and $591 as of March 31, 2019 and December 31, 2018, respectively
87,355

 
76,632

Inventory
8,924

 
1,186

Other current assets
21,728

 
26,236

Total current assets
163,838

 
143,991

Property, plant and equipment, net
995,755

 
997,708

Goodwill
51,723

 
51,723

Restricted cash-long term
5,281

 
5,083

Intangible assets, net
131,447

 
133,992

Investments in unconsolidated affiliates
321,760

 
337,796

Other assets, net
45,933

 
17,403

Total assets
$
1,715,737

 
$
1,687,696

Liabilities, Equity and Partners’ Capital
 
 
 
Current liabilities
 
 
 
Accounts payable
$
44,789

 
$
36,619

Accrued gas purchases
9,417

 
11,695

Accrued expenses and other current liabilities
68,448

 
78,612

Current portion of long-term debt
542,163

 
522,966

Total current liabilities
664,817

 
649,892

Asset retirement obligations
68,338

 
67,451

Other long-term liabilities
41,876

 
18,491

Long-term debt
501,836

 
500,739

Deferred tax liability
1,421

 
1,421

Total liabilities
1,278,288

 
1,237,994

 


 


Commitments and contingencies (Note 14)


 


 
 
 
 
Convertible preferred units
331,964

 
324,624

Equity and partners’ capital
 
 
 
General Partner interests (981 units issued and outstanding as of March 31, 2019 and December 31, 2018)
(66,528
)
 
(66,591
)
Limited Partner interests (54,212 and 54,017 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively)
158,122

 
177,861

Accumulated other comprehensive income
68

 
32

Total partners’ capital
91,662

 
111,302

Noncontrolling interests
13,823

 
13,776

Total equity and partners’ capital
105,485

 
125,078

Total liabilities, equity and partners’ capital
$
1,715,737


$
1,687,696


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per unit amounts)
 
 
Three months ended March 31,
 
 
2019
 
2018
Revenue:
 
 
 
 
Commodity sales
 
$
137,529

 
$
158,863

Services
 
36,822

 
46,906

     (Loss) gain on commodity derivatives, net
 
(1,521
)
 
60

Total revenue
 
172,830

 
205,829

Operating expenses:
 
 
 
 
Costs of sales
 
128,061

 
150,166

Direct operating expenses
 
17,978

 
23,446

Corporate expenses
 
19,401

 
22,692

Depreciation, amortization and accretion
 
21,180

 
21,997

Loss (gain) on sale of assets, net
 
55

 
(95
)
Impairment of long-lived assets
 
829

 

Total operating expenses
 
187,504

 
218,206

Operating loss
 
(14,674
)
 
(12,377
)
Other income (expense), net
 
 
 
 
     Interest expense, net of capitalized interest
 
(24,363
)
 
(13,876
)
Other income, net
 
8

 
22

Earnings in unconsolidated affiliates
 
26,110

 
12,673

Loss before income taxes
 
(12,919
)
 
(13,558
)
Income tax expense
 
(218
)
 
(280
)
Net loss
 
(13,137
)
 
(13,838
)
Net income attributable to noncontrolling interests
 
(77
)
 
(45
)
Net loss attributable to the Partnership
 
$
(13,214
)
 
$
(13,883
)
 
 
 
 
 
General Partner’s interest in net loss
 
$
(170
)
 
$
(181
)
Limited Partners’ interest in net loss
 
$
(13,044
)
 
$
(13,702
)
 
 
 
 
 
Limited Partners’ net loss per common unit:
Basic and diluted:
 
 
 
 
Net loss per common unit
 
$
(0.38
)
 
$
(0.42
)
 
 
 
 
 
Weighted average number of common units outstanding:
Basic and diluted
 
54,082

 
52,769


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in thousands)
 
 
Three months ended March 31,
 
 
2019
 
2018
Net loss
 
$
(13,137
)
 
$
(13,838
)
Unrealized (loss) gain related to postretirement benefit plan
 
36

 
(16
)
Comprehensive loss
 
(13,101
)
 
(13,854
)
Comprehensive income attributable to noncontrolling interests
 
(77
)
 
(45
)
Comprehensive loss attributable to the Partnership
 
$
(13,178
)
 
$
(13,899
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



6


American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Changes in Equity and Partners’ Capital
(Unaudited, in thousands)

 
General
Partner
Interests
 
Limited
Partner
Interests
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Partners’ Capital
 
Non-
controlling Interests
 
Total Equity and Partners’ Capital
Balances at December 31, 2017
$
(96,552
)
 
$
273,703

 
$
28

 
$
177,179

 
$
13,761

 
$
190,940

Cumulative effect of accounting change (Note 3)
(139
)
 
(10,552
)
 

 
(10,691
)
 

 
(10,691
)
Balances at January 1, 2018
(96,691
)
 
263,151

 
28

 
166,488

 
13,761

 
180,249

Net loss
(181
)
 
(13,702
)
 

 
(13,883
)
 
45

 
(13,838
)
Contributions
9,870

 

 

 
9,870

 

 
9,870

Distributions
(392
)
 
(29,728
)
 

 
(30,120
)
 

 
(30,120
)
Distributions to NCI owners

 

 

 

 
(20
)
 
(20
)
Distribution for acquisition of Trans-Union
(38
)
 

 

 
(38
)
 

 
(38
)
LTIP vesting
(2,328
)
 
2,328

 

 

 

 

Tax netting repurchase

 
(703
)
 

 
(703
)
 

 
(703
)
Equity compensation expense
1,014

 

 

 
1,014

 

 
1,014

Post-retirement benefit plan


 

 
(16
)
 
(16
)
 

 
(16
)
Balances at March 31, 2018
$
(88,746
)
 
$
221,346

 
$
12

 
$
132,612

 
$
13,786

 
$
146,398

 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2018
$
(66,591
)
 
$
177,861

 
$
32

 
$
111,302

 
$
13,776

 
$
125,078

Net loss
(170
)
 
(13,044
)
 

 
(13,214
)
 
77

 
(13,137
)
Distributions
(95
)
 
(7,245
)
 

 
(7,340
)
 

 
(7,340
)
LTIP vesting
(698
)
 
698

 

 

 

 

Tax netting repurchase

 
(148
)
 

 
(148
)
 

 
(148
)
Equity compensation expense
1,026

 

 

 
1,026

 

 
1,026

Post-retirement benefit plan


 

 
36

 
36

 

 
36

Distributions to NCI owners

 

 

 

 
(33
)
 
(33
)
Contributions from NCI owners

 

 

 

 
3

 
3

Balances at March 31, 2019
$
(66,528
)
 
$
158,122

 
$
68

 
$
91,662

 
$
13,823

 
$
105,485


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


7


A merican Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)

 
Three months ended March 31,

 
2019
 
2018
Cash flows from operating activities
 

 

Net loss
 
$
(13,137
)
 
$
(13,838
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 

Depreciation, amortization and accretion
 
21,180

 
21,997

Amortization of operating leases
 
1,407

 

Amortization of debt issuance costs
 
2,549

 
1,316

Amortization of weather derivative premium
 
247

 
278

Unrealized (gain) loss on derivatives contracts, net
 
3,037

 
(5,112
)
Non-cash compensation expense
 
1,026

 
1,014

Loss (gain) on sale of assets
 
55

 
(95
)
Other non-cash items
 
7

 
(15
)
Impairment of long-lived assets
 
829

 

   Earnings in unconsolidated affiliates
 
(26,110
)
 
(12,673
)
Distributions from unconsolidated affiliates
 
29,866

 
12,673

Bad debt (recovery) expense
 
(80
)
 
87

Deferred tax benefit
 

 
151

Changes in operating assets and liabilities:
 
 
 

Accounts receivable
 
(11,918
)
 
7,251

Inventory
 
(7,738
)
 
(3,399
)
Other current assets
 
1,312

 
(4,174
)
Other assets, net
 
(2,546
)
 

Accounts payable
 
8,170

 
11,200

Accrued gas and crude oil purchases
 
(2,278
)
 
(4,431
)
Accrued expenses and other current liabilities
 
(4,096
)
 
2,623

Asset retirement obligations
 
(569
)
 
(6
)
Other liabilities
 
(5,453
)
 

Net cash (used in) provided by operating activities
 
(4,240
)

14,847

 
 
 
 
 
Cash flows from investing activities
 
 
 

Contributions to unconsolidated affiliates
 

 
(987
)
Additions to property, plant and equipment and other
 
(18,761
)
 
(25,946
)
Proceeds from disposals of assets and business
 

 
8

Distributions from unconsolidated affiliates, return of capital
 
12,280

 
11,181

Net cash used in investing activities
 
(6,481
)
 
(15,744
)

8

 
American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited, in thousands)



 
Three months ended March 31,

 
2019
 
2018
Cash flows from financing activities
 
 
 

Contributions
 

 
9,870

Distributions
 

 
(22,035
)
Contribution from noncontrolling interest owners
 
3

 

Distributions to noncontrolling interests owners
 
(33
)
 
(20
)
LTIP tax netting unit repurchase
 
(148
)
 
(703
)
Payments of financing leases
 
(268
)
 

Payment of debt issuance costs
 
(61
)
 
(1,085
)
Payment of long-term debt
 
(559
)
 
(507
)
Payment of 3.97% Senior Notes
 
(451
)
 
(439
)
Payments of other debt
 
(1,576
)
 
(1,893
)
Payments of credit agreement
 
(33,000
)
 
(119,700
)
Borrowings on credit agreement
 
52,500

 
134,400

Other
 
406

 
338

Net cash provided by (used in) financing activities
 
16,813

 
(1,774
)
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
6,092


(2,671
)
Cash, cash equivalents and restricted cash, beginning of period
 
45,020

 
34,179

Cash, cash equivalents and restricted cash, end of period
 
$
51,112

 
$
31,508

 
 
 
 
 
Cash, cash equivalents and restricted cash, beginning of period
 
 
 
 
Cash and cash equivalents
 
$
9,069

 
$
8,782

Restricted cash - current
 
30,868

 
20,352

Restricted cash - non-current
 
5,083

 
5,045

Total cash, cash equivalents and restricted cash, beginning of period
 
$
45,020

 
$
34,179

 
 
 
 
 
Cash, cash equivalents and restricted cash, end of period
 
 
 
 
Cash and cash equivalents
 
$
12,273

 
$
8,191

Restricted cash - current
 
33,558

 
18,269

Restricted cash - non-current
 
5,281

 
5,048

Total cash, cash equivalents and restricted cash, end of period
 
$
51,112

 
$
31,508


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



9

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)




(1) Organization and Basis of Presentation

Organization

American Midstream Partners, LP (together with its consolidated subsidiaries, the “Partnership,” “we,” “us” or “our”) is a Delaware limited partnership that was formed in August 2009 to own, operate, develop and acquire a diversified portfolio of midstream energy assets. The Partnership’s general partner, American Midstream GP, LLC (the “General Partner”), is 86% directly owned by High Point Infrastructure Partners, LLC (“HPIP”) and 14% indirectly owned by Magnolia Infrastructure Holdings, LLC (“Magnolia”), both of which are affiliates of ArcLight Capital Partners, LLC (“ArcLight”). Our capital accounts consist of notional General Partner units and units representing limited partner interests.

We provide critical midstream infrastructure that links producers of natural gas, crude oil, NGLs, condensate and specialty chemicals to numerous intermediate and end-use markets through our four reportable segments, (1) Gas Gathering and Processing Services, (2) Liquid Pipelines and Services, (3) Natural Gas Transportation Services and (4) Offshore Pipelines and Services.

On March 17, 2019, as recommended by the conflicts committee (the “Conflicts Committee”) of the board of directors (the “Board”) of our General Partner, the Partnership and our General Partner entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Anchor Midstream Acquisition, LLC, a Delaware limited liability company (“Proposed Parent”), Anchor Midstream Merger Sub, LLC, a Delaware limited liability company (“Proposed Merger Sub”), and HPIP, pursuant to which Proposed Merger Sub will merge with and into the Partnership, with the Partnership surviving as a direct wholly owned subsidiary of our General Partner and Proposed Parent (the “Pending Merger”). For further information regarding the Merger Agreement, see our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

On June 16, 2018, we entered into a definitive agreement for the sale of our marine liquids terminals (“Marine Products”) which was completed on July 31, 2018. On November 15, 2018, we entered into a definitive agreement for the sale of our refined products terminals (“Refined Products”) which was completed on December 20, 2018. Subsequent to the disposition of Refined Products, we eliminated our Terminalling Services segment. For further discussion of all changes made to our reporting segments in 2018, see our 2018 Form 10-K.

Basis of presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. In the opinion of our management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement have been included. The results of operations for interim periods are not necessarily indicative of results of operations for a full year. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2018 Form 10-K.

Going Concern Assessment and Management’s Plans

Pursuant to FASB ASC 205-40, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern , we are required to assess our ability to continue as a going concern for a period of one year from the date of the issuance of these condensed consolidated financial statements. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Credit Agreement matures on September 5, 2019 and has not been renewed as of the date of the issuance of these condensed consolidated financial statements.

On September 27, 2018, the Board received a non-binding proposal from Magnolia, an affiliate of ArcLight to acquire the common units that it does not already own. On March 17, 2019, we entered into the Merger Agreement and expect the Pending Merger to close by the outside date under the Merger Agreement of July 31, 2019. As the Merger Agreement is subject to customary closing conditions and because the Pending Merger may affect how, or if, the Partnership elects to obtain a maturity extension, management has deferred addressing the Credit Agreement.

While we intend to renew or extend the terms of the Credit Agreement, until such time as we have executed an agreement to refinance or extend the maturity of the Credit Agreement, we cannot conclude that it is probable we will do so, and accordingly, this raises substantial doubt about our ability to continue as a going concern.

10

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)




(2) Recent Accounting Pronouncements and Critical Accounting Policies

Standards Adopted in 2019

Leases (Topic 842) - In February 2016, the FASB issued ASU No. 2016-02 (“Topic 842”) Leases , which supersedes the lease recognition requirements in ASC 840, Leases. Under the new guidance, for leases with a term longer than 12 months, a lessee should recognize a lease liability and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term. Topic 842 retains a classification distinction between finance leases and operating leases, with the classification affecting the pattern of expense recognition in the income statement. This ASU also requires enhanced disclosures.

In 2018, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842 and ASU No. 2018-11, Targeted Improvements. Under these updates, optional transition practical expedients are available (1) whereby existing or expired land easements that were not previously accounted for as leases under ASC 840 are not required to be evaluated under Topic 842 and (2) lease and associated non-lease components are not required to be separated within lessor arrangements if certain criteria are met. The FASB also issued ASUs 2018-10 and 2018-20, Codification Improvements to Topic 842 and Narrow Scope Improvements for Lessors, respectively, to alleviate unintended consequences from applying Topic 842. The amendments do not make substantive changes to the core provisions or principles of Topic 842 and did not significantly impact our implementation process.

We adopted the new standard on its effective date, January 1, 2019 using the modified retrospective approach. We elected the package of practical expedients permitted under the transition guidance within Topic 842 which, among other things, allows us to carry forward the historical lease classification. As such, we did not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment of ROU assets.

Additionally, we elected certain practical expedients on an ongoing basis, including the practical expedient for short-term leases pursuant to which a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a lease liability and ROU asset for leases (1) with a term of 12 months or less and (2) that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, we will recognize the lease payments for short-term leases within profit and loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Substantially all leases where we are a lessee are classified as operating leases under Topic 842. Topic 842 did not have a material effect on our condensed consolidated financial statements from a lessor perspective.

On adoption, we recognized ROU assets and additional lease liabilities of approximately $29.1 million and $33.4 million , respectively.

Standards Not Yet Adopted

Financial Instruments - In June 2016, the FASB issued ASU No. 2016-13,  Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance will become effective for interim and annual periods beginning after December 15, 2019. We expect to adopt ASU 2016-13 on January 1, 2020, and we are currently evaluating the effect that adopting this guidance will have on our consolidated financial position, results of operations and cash flows.

Fair Value Measurement - In August 2018, the FASB issued ASU No. 2018-13,  Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This guidance eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies certain disclosure requirements. The FASB developed the amendments to Topic 820 as part of its broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance will become effective for interim and annual periods beginning after December 15, 2019. We expect to adopt ASU 2018-13 on January 1, 2020, and we are currently evaluating the impact, if any, that adopting this guidance will have on our disclosures.

Cloud Computing Arrangements - In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15"). The ASU aligns the requirements

11

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date. We expect to adopt ASU 2018-15 on January 1, 2020, and we are currently evaluating the effect that adopting this guidance will have on our consolidated financial position, results of operations and cash flows.


(3) Revenue Recognition

Disaggregated Revenue

The following table presents our segment revenues from contracts with customers disaggregated by type of activity (in thousands):
 
Three months ended March 31, 2019
 
Gas Gathering and Processing Services
 
Liquid Pipelines and Services
 
Natural Gas Transportation Services
 
Offshore Pipelines and Services
 
Terminalling Services
 
Total
Commodity sales:
 
 
 
 
 
 
 
 
 
 
 
     Natural gas
$
1,576

 
$

 
$
6,407

 
$
2,286

 
$

 
$
10,269

     NGLs
13,901

 

 

 

 

 
13,901

     Condensate
8,776

 

 

 
131

 

 
8,907

     Crude oil

 
104,322

 

 

 

 
104,322

     Other sales  
83

 

 
1

 
46

 

 
130

 
24,336

 
104,322

 
6,408

 
2,463

 

 
137,529

Services:
 
 
 
 
 
 
 
 
 
 
 
     Gathering and processing
4,059

 

 

 
300

 

 
4,359

     Transportation
332

 
2,311

 
8,714

 
9,042

 

 
20,399

     Terminalling and storage

 
150

 

 

 

 
150

     Other services (1)
744

 
44

 
65

 
5,041

 

 
5,894

 
5,135

 
2,505

 
8,779

 
14,383

 

 
30,802

 
 
 
 
 
 
 
 
 
 
 
 
Revenues from contracts with customers
$
29,471

 
$
106,827

 
$
15,187

 
$
16,846

 
$

 
$
168,331


12

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



 
Three months ended March 31, 2018
 
Gas Gathering and Processing Services
 
Liquid Pipelines and Services
 
Natural Gas Transportation Services
 
Offshore Pipelines and Services
 
Terminalling Services
 
Total
Commodity sales:
 
 
 
 
 
 
 
 
 
 
 
     Natural gas
$
1,906

 
$

 
$
6,637

 
$
2,437

 
$

 
$
10,980

     NGLs
21,150

 

 

 
38

 

 
21,188

     Condensate
5,648

 

 

 
34

 

 
5,682

     Crude oil

 
115,782

 

 

 

 
115,782

     Other sales
184

 

 
4

 
39

 
5,004

 
5,231

 
28,888

 
115,782

 
6,641

 
2,548

 
5,004

 
158,863

Services:
 
 
 
 
 
 
 
 
 
 
 
     Gathering and processing
2,365

 

 

 
866

 

 
3,231

     Transportation
630

 
3,062

 
9,412

 
8,663

 

 
21,767

     Terminalling and storage

 
1,440

 

 

 
10,393

 
11,833

     Other services (1)
434

 
402

 
10

 
4,613

 
562

 
6,021

 
3,429

 
4,904

 
9,422

 
14,142

 
10,955

 
42,852

 
 
 
 
 
 
 
 
 
 
 
 
Revenues from contracts with customers
$
32,317

 
$
120,686

 
$
16,063

 
$
16,690

 
$
15,959

 
$
201,715

_________________________  
(1) Other services in our Offshore Pipelines and Services segment include asset management services.

Other Items in Revenue

The following table presents the reconciliation of our revenues from contracts with customers to segment revenues and total revenues as disclosed in our Condensed Consolidated Statements of Operations (in thousands):
 
Three months ended March 31, 2019
 
Gas Gathering and Processing Services
 
Liquid Pipelines and Services
 
Natural Gas Transportation Services
 
Offshore Pipelines and Services
 
Terminalling Services
 
Total
Revenues from contracts with customers
$
29,471

 
$
106,827

 
$
15,187

 
$
16,846

 
$

 
$
168,331

Revenues generated through operating lease arrangements (1)(2)
5,738

 

 

 
282

 

 
6,020

Loss on commodity derivatives, net

 
(1,521
)
 

 

 

 
(1,521
)
     Total revenues of reportable segments
$
35,209

 
$
105,306

 
$
15,187

 
$
17,128

 
$

 
$
172,830


 
Three months ended March 31, 2018
 
Gas Gathering and Processing Services
 
Liquid Pipelines and Services
 
Natural Gas Transportation Services
 
Offshore Pipelines and Services
 
Terminalling Services
 
Total
Revenues from contracts with customers
$
32,317

 
$
120,686

 
$
16,063

 
$
16,690

 
$
15,959

 
$
201,715

Revenues generated through operating lease arrangements (1)(2)
3,884

 

 

 
170

 

 
4,054

Gain on commodity derivatives, net
2

 
58

 

 

 

 
60

     Total revenues of reportable segments
$
36,203

 
$
120,744

 
$
16,063

 
$
16,860

 
$
15,959

 
$
205,829

_________________________
(1) When providing gathering or processing services to customers, specific facilities where one customer obtains substantially all of the economic benefits from the asset and has the right to direct the use of the asset are considered leased to the customer. Under the transition guidance with Topic 842, we have carried forward the historical classification of these arrangements as operating leases.

13

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



(2) Offshore Pipelines and Services includes approximately $0.2 million in 2019 and $0.1 million in 2018 in leasing revenues related to a platform arrangement with our unconsolidated affiliate, Delta House Oil & Gas Lateral LLC.
    
We may utilize derivative instruments in connection with contracts with customers. We purchase and take title to a portion of the NGLs and crude oil that we sell, which may expose us to changes in the price of these products in our sales markets. We do not take title to the natural gas we transport and therefore have no direct commodity price exposure to natural gas.

Contract Balances

Our contract assets and liabilities primarily relate to contracts where allocations of the transaction prices result in differences to the pattern and timing of revenue recognition as compared to contractual billings. Where payments are received in advance of recognition as revenue, contract liabilities are created. Where we have earned revenue and our right to invoice the customer is conditioned on something other than the passage of time, contract assets are created.

The following table presents the change in the contract assets and liability balances during the three months ended March 31, 2019 (in thousands):
 
Contract Assets
 
Contract Liabilities
Balance at December 31, 2018
$
8,838

 
$
15,614

Amounts recognized as revenue
(109
)
 
(367
)
Additions
2,546

 
883

Balances at March 31, 2019
$
11,275

 
$
16,130

 
 
 
 
Current
$
252

 
$
606

Non-current
11,023

 
15,524

Balances at March 31, 2019
$
11,275

 
$
16,130


Remaining Performance Obligations

The following table as of March 31, 2019 , represents only revenue expected to be recognized from contracts with customers where the price and quantity of the product or service are fixed:

 
Remainder of 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Gathering and processing based on minimum volume commitments
$
9,299

 
$
12,399

 
$
12,399

 
$
12,399

 
$
12,399

 
$
5,928

 
$
64,823

Transportation agreements
16,796

 
22,141

 
21,140

 
20,912

 
20,912

 
181,737

 
283,638

Other
1,225

 
1,560

 

 

 

 

 
2,785

Total
$
27,320

 
$
36,100

 
$
33,539

 
$
33,311

 
$
33,311

 
$
187,665

 
$
351,246


Due to the application of the practical expedients, the table above represents only a portion of the Partnership’s expected future consolidated revenues and it is not necessarily indicative of the expected trend in total revenues for the Partnership. Certain contracts have not been presented in the table above due to the term being one year or less and due to variability in the amount of performance obligation remaining, variability in the timing of recognition or variability in consideration. Acreage dedications do require us to perform future services but do not contain a minimum level of services and are therefore excluded from this presentation. Long-term supply and logistics arrangements contain variable timing, volumes and/or consideration and are excluded from this presentation. The table above also excludes revenue generated through operating lease arrangements.

(4) Lessee Arrangements

We primarily lease real estate including land and buildings, equipment, and vehicles. Leases of real estate generally require us to pay property taxes, insurance, and maintenance. Substantially all of our leases are classified as operating leases. ROU assets and lease liabilities for operating leases are included in Other assets, net, Accrued expenses and other current liabilities , and Other long-term liabilities in our consolidated balance sheets, depending on timing of settlement. For finance leases, the ROU assets

14

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



and lease liabilities are included in Property, plant and equipment, net, Current portion of long-term debt , and Long-term debt in our condensed consolidated balance sheets, depending on timing of settlement.

An ROU asset represents our right to use an underlying asset for the lease term and the corresponding lease liability represents our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU asset also includes any lease prepayments and excludes lease incentives. Our lease contracts may include options to extend or terminate the lease which are included in the measurement of our lease liability when it is reasonably certain that we will exercise the option. Certain vehicle leases provide for guarantees of residual value; therefore, we estimate and include in the determination of lease payments any amount probable of being owed under these residual value guarantees.

We apply a portfolio approach by asset class to apply the provisions of ASC 842. Lease renewal terms vary from 30 days to 5 years for asset classes such as equipment and vehicles, and up to 15 years or more for real estate. Short term leases with an initial term of 12 months or less that do not include a purchase option are not recorded on the balance sheet. Lease expense for short-term leases are recognized on a straight-line basis over the lease term and amounts related to short-term leases are disclosed within our financial statements. We have variable lease payments, including adjustments to lease payments based on an index or rate; such as a consumer price index, fair value adjustments to lease payments, and common area maintenance, real estate taxes, and insurance payments in triple-net real estate leases.

The following table presents the components of lease cost (in thousands):
 
Three months ended March 31, 2019
Finance lease cost
 
Amortization of right-of-use assets
$
206

Interest on lease liabilities
38

      Total finance lease cost
$
244

 
 
Operating lease cost
$
1,780

Short-term and variable lease cost
2

Sublease income
(547
)
      Total operating lease cost
$
1,235


Amounts reported in the Condensed Consolidated Balance Sheets for leases where we are the lessee were as follows (in thousands):

15

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



 
March 31, 2019
Operating leases
 
Other assets, net
$
26,628

 
 
Accrued expenses and other current liabilities
$
6,589

Other long-term liabilities
24,974

      Total operating lease liabilities
$
31,563

 
 
Finance leases
 
Property, plant and equipment, net
$
2,428

 
 
Current portion of long-term debt
$
841

Long-term debt
1,629

      Total finance lease liabilities
$
2,470

 
 
Weighted average remaining lease term
 
Operating leases
13.8 years

Finance leases
9.4 years

 
 
Weighted average discount rate
 
Operating leases
5.0
%
Finance leases
6.7
%

16

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)





Maturity of Lease Liabilities (thousands)
Operating Leases
 
Finance Leases
 
Total
2019
$
6,061

 
$
742

 
$
6,803

2020
6,559

 
844

 
7,403

2021
4,056

 
611

 
4,667

2022
2,451

 
372

 
2,823

2023
1,780

 
163

 
1,943

2024
1,696

 

 
1,696

Thereafter
22,853

 
15

 
22,868

Total lease payments
45,456

 
2,747

 
48,203

Imputed interest (a)
(13,893
)
 
(277
)
 
(14,170
)
Total lease liabilities (b)
$
31,563

 
$
2,470

 
$
34,033

___________________________
 
 
 
 
 
(a) Calculated using the interest rate for each lease.
(b) Includes the current portion of $6.6 million for operating leases and $0.8 million for finance leases

At December 31, 2018, our non-cancelable contractual commitments related to operating lease obligations totaled $36.8 million . Operating lease commitments over the next five years and thereafter were as follows: $7.3 million in 2019, $4.5 million in 2020, $3.0 million in 2021, $1.5 million in 2022, $1.0 million in 2023 and $19.5 million thereafter.
Other Information
 
 
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Cash paid for operating leases, including interest portion of finance leases
$
1,868

Cash paid for principal portion of finance leases
$
268

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
2,206

Finance leases
$
82


(5) Inventory

Inventory consists of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Crude oil
$
8,526

 
$
830

NGLs
278

 
236

Materials, supplies and equipment
120

 
120

   Total inventory
$
8,924

 
$
1,186


(6) Risk Management Activities

We are exposed to certain market risks related to the volatility of commodity prices and changes in interest rates. To monitor and manage these market risks, we have established comprehensive risk management policies and procedures. We do not enter into derivative instruments for any purpose other than hedging commodity price risk, interest rate risk and weather risk. We do not speculate using derivative instruments. For more information regarding our risk management activities, see Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies and Note 8. Risk Management Activities in our 2018 Form 10-K.


17

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



The following table summarizes the net notional volumes of our outstanding commodity-related derivatives, excluding those contracts that qualified for the NPNS exception as of March 31, 2019 and December 31, 2018 , none of which were designated as hedges for accounting purposes.
 
 
March 31, 2019
 
December 31, 2018
Commodity Swaps
 
Volume
 
Maturity
 
Volume
 
Maturity
Crude Oil Basis (barrels)
 
100,000
 
May 2019
 
208,000
 
February 2019


Financial Instruments Measured at Fair Value on a Recurring Basis - The following table summarizes the fair values of our derivative contracts included in the Condensed Consolidated Balance Sheets (in thousands):
 
 
 
Asset Derivatives
 
Liability Derivatives
Type
Balance Sheet Classification
 
March 31,
2019
 
December 31, 2018
 
March 31,
2019
 
December 31, 2018
Commodity derivatives
Accrued expenses and other current liabilities
 

 
 
 
(256
)
 
(2
)
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other current assets
 
3,521

 
4,314

 

 

Interest rate swaps
Other assets, net
 
4,027

 
6,017

 

 

 
 
 
 
 
 
 
 
 
 
Weather derivatives
Other current assets
 
206

 
454

 

 

 
Total
 
$
7,754

 
$
10,785

 
$
(256
)
 
$
(2
)

As of March 31, 2019, and December 31, 2018, we had a combined notional principal amount of $450.0 million and $550.0 million , respectively, of variable-to-fixed interest rate swap agreements. As of March 31, 2019, the maximum length of time over which we have hedged a portion of our exposure due to interest rate risk is through December 31, 2022.

The fair value of our interest rate swaps was estimated based upon forward interest rates and volatility curves as well as other relevant economic measures, if necessary. Discount factors may be utilized to extrapolate a forecast of future cash flows associated with long dated transactions. The inputs, which represent Level 2 inputs in the valuation hierarchy, are obtained from independent pricing services and we have made no adjustments to those prices. The carrying value of our weather derivative represents its fair value due to the short term nature of the underlying contract.

The carrying value of all nonderivative financial instruments included in current assets (including cash and cash equivalents, restricted cash and accounts receivable) and current liabilities (excluding current portion of long-term debt) approximates the applicable fair value due to the short maturity of those instruments.

For the three months ended March 31, 2019 and 2018 , the realized and unrealized gains (losses) associated with our commodity, interest rate and weather derivative instruments were recorded in our Condensed Consolidated Statements of Operations as follows (in thousands):
 
Three months ended March 31,
 
Realized
 
Unrealized
2019
 
 
 
Loss on commodity derivatives, net
$
(1,267
)
 
$
(254
)
Interest expense, net of capitalized interest
807

 
(2,783
)
Direct operating expenses
(248
)
 

Total
$
(708
)
 
$
(3,037
)
2018
 
 
 
Gain (loss) on commodity derivatives, net
$
119

 
$
(59
)
Interest expense, net of capitalized interest
1,350

 
5,171

Direct operating expenses
(278
)
 

Total
$
1,191

 
$
5,112



18

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



(7) Goodwill and Intangible Assets

Goodwill consists of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Liquid Pipelines and Services
$
46,749

 
$
46,749

Offshore Pipelines and Services
4,974

 
4,974

Total
$
51,723

 
$
51,723


Intangible assets, net, consist of the following (in thousands):
 
March 31, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
$
64,744

 
$
(17,775
)
 
$
46,969

Customer contracts
94,692

 
(54,402
)
 
40,290

Dedicated acreage
42,547

 
(7,935
)
 
34,612

Collaborative arrangements
11,884

 
(2,476
)
 
9,408

Other
198

 
(30
)
 
168

Total
$
214,065

 
$
(82,618
)
 
$
131,447

 
 
 
 
 
 
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
$
64,744

 
$
(17,033
)
 
$
47,711

Customer contracts
94,692

 
(53,156
)
 
41,536

Dedicated acreage
42,547

 
(7,592
)
 
34,955

Collaborative arrangements
11,884

 
(2,264
)
 
9,620

Other
198

 
(28
)
 
170

Total
$
214,065

 
$
(80,073
)
 
$
133,992


These intangible assets have definite lives and are subject to amortization on a straight-line basis over their economic lives, currently ranging from approximately 5 years to 30 years .

Amortization expense related to our intangible assets totaled $2.5 million and $2.7 million for the three months ended March 31, 2019 and 2018 , respectively. The estimated aggregate amortization expected to be recognized for the remainder of 2019 and each of the four succeeding fiscal years is $7.6 million , $10.2 million , $10.2 million , $9.3 million and $6.6 million , respectively.

(8) Investments in unconsolidated affiliates

The following table presents the activity in our equity method investments in unconsolidated affiliates (in thousands):
 
Delta House (1)
 
 
 
 
 
 
 
FPS (2,4,5)
 
OGL (2,4,5)
 
Destin (4)
 
Tri-States (3)
 
Okeanos (4)
 
Wilprise (3)
 
Cayenne (3)
 
Total
Ownership %
35.7%
 
35.7%
 
66.7%
 
16.7%
 
66.7%
 
25.3%
 
50.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2019
$
91,466

 
$
41,815

 
$
114,351

 
$
51,329

 
$
20,641

 
$
4,507

 
$
13,687

 
$
337,796

   Earnings in unconsolidated affiliates
10,488

 
4,456

 
5,693

 
1,132

 
2,177

 
200

 
1,964

 
26,110

   Distributions
(15,521
)
 
(6,296
)
 
(10,095
)
 
(2,184
)
 
(5,278
)
 
(272
)
 
(2,500
)
 
(42,146
)
Balances at March 31, 2019
$
86,433

 
$
39,975

 
$
109,949

 
$
50,277

 
$
17,540

 
$
4,435

 
$
13,151

 
$
321,760

___________________________________________________  
(1) Represents direct and indirect ownership interests in Class A units and common units.

19

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



(2) FPS denotes Floating Production System LLC whereas OGL denotes Oil & Gas Lateral LLC.
(3) Included in our Liquid Pipelines and Services segment.
(4) Included in our Offshore Pipelines and Services segment.
(5) Reflects a reclassification of investment of approximately $0.4 million between FPS and OGL as of January 1, 2019.
 
The difference between our carrying value and the underlying equity in the net assets of our equity investments are assigned to the investment's assets and liabilities based on an analysis of the factors giving rise to the basis difference. The amortization of the basis difference is included in Earnings from unconsolidated affiliates in our Consolidated Statements of Operations.

The following table represents the basis difference by unconsolidated affiliate (in thousands):
 
 
Delta House
 
 
 
 
 
 
 
 
FPS
 
OGL
 
Destin
 
Tri-States
 
Okeanos
 
Wilprise
 
Cayenne
 
Total
December 31, 2018
$
41,762

 
$
(8,424
)
 
$
826

 
$
30,587

 
$
(57,039
)
 
$
1,374

 
$
(3,666
)
 
$
5,420

March 31, 2019
$
41,343

 
$
(8,338
)
 
$
812

 
$
30,210

 
$
(56,164
)
 
$
1,346

 
$
(3,599
)
 
$
5,610


The following tables present the summarized combined financial information for our equity investments (amounts represent 100% of investee financial information) (in thousands):
Balance Sheets
 
March 31, 2019
 
December 31, 2018
Current assets
 
$
89,964

 
$
96,116

Non-current assets
 
1,233,777

 
1,239,733

Current liabilities
 
74,139

 
14,700

Non-current liabilities
 
486,320

 
542,047

 
 
Three months ended March 31,
Statements of Operations:
 
2019
 
2018
Revenue
 
$
89,756

 
$
56,898

Operating expenses
 
6,905

 
6,292

Net income
 
67,784

 
32,845


(9) Debt Obligations

Our outstanding debt consists of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Revolving credit facility
$
534,300

 
$
514,800

8.50% Senior unsecured notes, due 2021
425,000

 
425,000

3.77% Senior secured notes, due 2031 (non-recourse)
56,957

 
57,517

3.97% Senior secured notes, due 2032 (non-recourse)
29,819

 
30,270

Other debt
2,952

 
4,127

Finance lease obligations
2,470

 

Total debt obligations
1,051,498

 
1,031,714

Unamortized debt issuance costs
(7,499
)
 
(8,009
)
Total debt
1,043,999

 
1,023,705

Current portion of long-term debt
(541,322
)
 
(522,966
)
Current portion of finance lease obligations
(841
)
 

Long term debt
$
501,836

 
$
500,739


AMID Revolving Credit Agreement

20

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



On March 8, 2017, the Partnership along with other subsidiaries of the Partnership (collectively, the “Borrowers”) entered into the Second Amended and Restated Credit Agreement, with Bank of America N.A., as Administrative Agent, Collateral Agent and L/C Issuer, Wells Fargo Bank, National Association, as Syndication Agent, and other lenders (the “Original Credit Agreement”). As a result of the Amendments, defined below, the borrowing commitment under the Credit Agreement, defined below, was $620.0 million at March 31, 2019 and December 31, 2018.
During 2018, we amended the Original Credit Agreement by entering into the First Amendment to the Original Credit Agreement on June 29, 2018 and by entering into the Second Amendment to the Original Credit Agreement on December 27, 2018 (respectively, the "First Amendment" and "Second Amendment" and, the Original Credit Agreement as amended by the First Amendment and Second Amendment, the "Amended Credit Agreement") with a syndicate of lenders and Bank of America, N.A., as administrative agent.
On April 5, 2019, we amended the Amended Credit Agreement by entering into the Third Amendment to the Original Credit Agreement (the “Third Amendment” and together with the First Amendment and Second Amendment, the "Amendments" and, the Original Credit Agreement as amended by the Amendments, the "Credit Agreement"). See further discussion of the Third Amendment in Note 17 - Subsequent Events .

We entered into a Letter Agreement (the "Waiver"), effective as of March 26, 2019, with a syndicate of lenders and Bank of America, N.A., as administrative agent, to waive certain covenants contained in the Credit Agreement that (i) require us to provide audited financial statements that are not subject to any “going concern” or like qualification or exception, or any qualification or exception as to the scope of such audit and (ii) limit our ability to report the existence of a material weakness in the Partnership's internal control over financial reporting (the “Financial Statements Audit Requirement”). Additionally, the Waiver extended the deadline under the Credit Agreement by which we are required to deliver to the administrative agent certain financial statements (the "Financial Statements Delivery Deadline"). Under the terms and conditions set forth in the Waiver, certain lenders (as required in the Credit Agreement) agreed to extend the Financial Statements Delivery Deadline to April 30, 2019. By filing the 2018 Form 10-K on April 1, 2019, we satisfied the Financial Statements Delivery Deadline.

Prior to our entry into the Waiver, the existence of a going concern qualification in our audited financial statements contained in the 2018 Form 10-K would have constituted an event of default under the Credit Agreement. Pursuant to the Waiver, the administrative agent and certain lenders (as required by the Credit Agreement) waived the Financial Statements Audit Requirement for the fiscal year ended December 31, 2018. Although we entered into the Waiver to address the event of default otherwise arising pursuant to the existence of a going concern note and material weakness exception in our audited financial statements contained in the 2018 Form 10-K, there is no guarantee that our lenders will agree to waive events of default or potential events of default in the future.

The Credit Agreement matures on September 5, 2019, and therefore, is being presented as a current liability in our Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.

The Credit Agreement includes the following financial covenants, as amended by the Amendments and defined in the Credit Agreement, which are tested on a quarterly basis, for the fiscal quarter then ending:
 
Minimum Consolidated Interest Coverage Ratio
 
Maximum Consolidated Total Leverage Ratio
 
Maximum Consolidated Secured Leverage Ratio
December 31, 2018
1.75:1.00
 
6.25:1.00
 
3.75:1.00
March 31, 2019
1.75:1.00
 
6.50:1.00
 
3.75:1.00
June 30, 2019 and thereafter
1.50:1.00
 
5.75:1.00
 
3.50:1.00
As of March 31, 2019 , we were in compliance with the Credit Agreement financial covenants, including those shown below:
Ratio
 
 
 
Actual
Consolidated Interest Coverage Ratio
 
 
 
2.11
Consolidated Total Leverage Ratio
 
 
 
5.84
Consolidated Secured Leverage Ratio
 
 
 
3.25

We also pay a commitment fee ranging from 0.375% to 0.50%  per annum, depending on our total leverage ratio then in effect, on the undrawn portion of the revolving loan under the Credit Agreement.


21

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



Our ability to maintain compliance with the leverage and interest coverage ratios included in the Credit Agreement may be subject to, among other things, the timing and success of initiatives we are pursuing, which may include expansion capital projects, acquisitions or drop down transactions, as well as the associated financing for such initiatives. The terms of the Credit Agreement also include covenants that restrict our ability to make cash distributions and acquisitions in some circumstances.

As of March 31, 2019 , we had $534.3 million of borrowings, $39.3 million of letters of credit outstanding and $46.4 million of remaining borrowing capacity under the Credit Agreement, of which $42.3 million is currently available. For the three months ended March 31, 2019 and 2018, the weighted average interest rate, excluding the impact of interest rate swaps, on borrowings under this facility was 8.17% and 4.96% , respectively.

See Note 14. Debt Obligations in our 2018 Form 10-K for additional information relating to our outstanding debt.

The following table presents the carrying value and estimated fair value of our debt as of March 31, 2019 and December 31, 2018. Short-term and long-term debt are recorded at amortized cost in the Condensed Consolidated Balance Sheets.
 
 
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Debt
 
 
 
 
 
 
 
 
 
 
8.5% Senior Unsecured Notes
 
$
419,914

 
$
409,122

 
$
419,451

 
$
399,789

 
 
3.77% Senior Secured Notes
 
54,854

 
51,942

 
55,370

 
51,567

 
 
3.97% Trans-Union Secured Senior Notes
 
29,509

 
27,632

 
29,956

 
27,822

 
 
Total
 
$
504,277

 
$
488,696

 
$
504,777

 
$
479,178


The fair value of debt instruments are valued using a market approach based on quoted prices for similar instruments traded in active markets and are classified as Level 2 within the fair value hierarchy. All financial instruments in the table above are classified as Level 2. The carrying value of amounts outstanding under the Credit Agreement approximates the related fair value, due to its short-term maturity and as interest charges vary with market rate conditions.



(10) Convertible Preferred Units

 
Series A
 
Series C
 
Total
 
Units
 
$
 
Units
 
$
 
$
December 31, 2018
11,010

 
$
195,781

 
9,242

 
$
128,843

 
$
324,624

Paid in kind unit distributions
332

 
3,867

 
273

 
3,473

 
7,340

March 31, 2019
11,342

 
$
199,648

 
9,515

 
$
132,316

 
$
331,964


The fair value of the PIK distributions was determined using the market and income approaches, requiring significant inputs that are not observable in the market and thus represent a Level 3 measurement. Under the income approach, the fair value estimates for all periods presented were based on (i) present value of estimated future contracted distributions, (ii) option values of $0.01 per unit using a Black-Scholes model, (iii) assumed discount rates ranging from 9.92% to 10.0% , and (iv) assumed growth rates of 1.0% .

Affiliates of our General Partner hold and participate in quarterly distributions on our convertible preferred units, with such distributions being made in cash, paid-in-kind units or a combination thereof at the election of the Board, and subject to the then effective terms of the Partnership Agreement, historically. The convertible preferred unitholders have the right to receive cumulative distributions in the same priority and prior to any other distributions made in respect of any other partnership interests.

(11) Partners’ Capital


22

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



Our capital accounts are comprised of 1.3% notional General Partner interests and 98.7% limited partner interests as of March 31, 2019 .

Outstanding Units

The following table presents unit activity (in thousands):
 
 
General
Partner Units
 
Limited Partner Units
Balances at December 31, 2018
 
981

 
54,017

LTIP units vesting
 

 
195

Balances at March 31, 2019
 
981

 
54,212


Distributions

Distributions of $0.4125 per common unit for the fourth quarter of 2017 were declared and paid fully in cash in the first quarter of 2018. We did not declare a distribution for the fourth quarter of 2018, and we do not plan to pay cash distributions on any of our units through the completion of the Pending Merger.

Limited Partner Units (Common Units)

The minimum quarterly distribution, as defined in our Partnership Agreement, is $0.4125 per common unit per quarter, or $1.65 on an annualized basis. If, in any quarter, we distribute less than the minimum quarterly distribution on each common unit, then our common unitholders accumulate arrearages based on the number of initial public offering ("IPO") common units. At March 31, 2019 , we had accumulated arrearages totaling $3.9 million related to our 3.8 million IPO common units outstanding. At the closing of the Pending Merger, the common units will convert to the right to receive the cash set forth in the Merger Agreement without additional payment for such arrearages.

(12) Net loss per Limited Partner Unit

The calculation of basic and diluted limited partners' net income (loss) per common unit is summarized below (in thousands, except per unit amounts):
 
Three months ended March 31,
 
2019
 
2018
Net loss
$
(13,137
)
 
$
(13,838
)
Net income attributable to noncontrolling interests
(77
)
 
(45
)
Net loss attributable to the Partnership
(13,214
)
 
(13,883
)
 
 
 
 
Distributions on Series A Units
(3,867
)
 
(4,542
)
Distributions on Series C Units
(3,473
)
 
(3,812
)
General Partner's distribution

 
(290
)
General Partner's share in undistributed loss
265

 
583

Net loss attributable to Limited Partners
$
(20,289
)
 
$
(21,944
)
 
 
 
 
Weighted average number of common units outstanding:
 
 
 
Basic and diluted (1) :
54,082

 
52,769

 
 
 
 
Limited Partners' net loss per common unit
 
 
 
Basic and diluted:
 
 
 
 
 
 
 
Net loss
$
(0.38
)
 
$
(0.42
)
_____________________________________

23

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



(1) Potential common unit equivalents were antidilutive for all periods. As a result, 24.3 million and 23.6 million potential common unit equivalents for the three months ended March 31, 2019 and 2018, respectively, have been excluded from the determination of diluted limited partners' net loss per common unit.

(13) Incentive Compensation

All equity-based awards issued under the long-term incentive plan (“LTIP”) consist of either restricted (“RSUs”) or performance-based (“PSUs”) phantom units, or option grants. Future awards may be granted at the discretion of the Compensation Committee of the Board and subject to approval by the Board.

At the time the Pending Merger is completed, each phantom unit that has not vested or been settled at that time will be converted into the right to receive a cash payment in an amount equal to $5.25 for each phantom unit which will be payable on the vesting dates in accordance with the terms of the underlying award agreement.

As of March 31, 2019 , there were 4,451,529 common units available for future grants under the LTIP.

The following table presents the components of equity-based compensation expense for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three months ended March 31,
Grant Type:
2019
 
2018
RSU
$
725

 
$
694

PSU
239

 
313

Options
9

 
15

Total
$
973

 
$
1,022


During the three months ended March 31, 2019 , no RSU’s were granted, 175,617 RSU’s vested at a weighted-average fair value per unit of $3.62 and 16,609 RSU’s were forfeited at a weighted-average fair value per unit of $8.04 . Unrecognized compensation expense related to RSU’s was $6.0 million at March 31, 2019 .

During the three months ended March 31, 2019 , we did not grant any performance-based awards or options under our LTIP. Unrecognized compensation expense related to performance-based awards was $3.5 million at March 31, 2019 . Unrecognized compensation expense related to options was not material at March 31, 2019 .

Cash Retention Plan

On September 2, 2018, the Partnership implemented a long-term cash retention award for all employees holding RSU’s under the Partnership’s LTIP. At each future vesting date of time-based unvested phantom units outstanding on July 28, a cash award in the amount of $6.00 per phantom unit will also be earned. Outstanding PSU’s are not subject to the cash retention award. The expense associated with this award will be recognized over the service period. For the three months ended March 31, 2019 , approximately $1.6 million related to this plan was included in Corporate expenses in the Condensed Consolidated Statements of Operations. At March 31, 2019 , remaining unamortized expense was $3.6 million .

(14) Commitments and Contingencies

Legal Proceedings

While we are not currently party to any pending litigation or governmental proceedings that we believe are likely to materially affect our financial condition or results of operations, we are party to certain routine litigation and other proceedings incidental to the conduct of our business that could impact items required to be presented in our condensed consolidated financial statements in a manner that may nonetheless be deemed quantitatively material for GAAP reporting purposes. Moreover, the outcomes of these litigation matters may vary from management’s estimates or amounts that have previously been accrued or reserved.

We are currently a defendant and counter-claimant in litigation styled Rainbow Energy Marketing, Inc. v. American Midstream (Alabama Intrastate), LLC filed on April 12, 2017 in the  District Court, 157th Judicial District, in Harris County, Texas relating to a gas transportation agreement (the "Rainbow Agreement") between Rainbow Energy Marketing, Inc. (“Rainbow”) and American Midstream (Alabama Intrastate), LLC (“AMID AL”), one of our wholly-owned subsidiaries.  Rainbow filed a

24

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



complaint alleging AMID AL breached the Rainbow Agreement and claiming damages of approximately $6.6 million , together with attorney's fees.  AMID AL filed a counterclaim, seeking to recover approximately $1.3 million in unpaid receivables under this agreement.  We believe the facts in this matter support our defense against Rainbow’s claim and our right to recover our unpaid receivables, and we intend to both vigorously defend and prosecute our rights in this matter. At March 31, 2019, we have not reserved for any portion of our unpaid receivables. 

Environmental Matters
We are subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent in our operations and we could, at times, be subject to environmental cleanup and enforcement actions. We attempt to manage this environmental risk through appropriate environmental policies and practices to minimize any impact our operations may have on the environment.
(15) Supplemental Cash Flow Information

Supplemental cash flows and non-cash transactions consist of the following (in thousands):
 
 
Three months ended March 31,
 
 
2019
 
2018
Supplemental non-cash information
 
 
 
 
Investing
 
 
 
 
(Decrease) increase in accrued property, plant and equipment purchases
 
$
(5,933
)
 
$
10,159

Financing
 
 
 
 
Accrued distributions on convertible preferred units
 
$

 
$
8,354

Paid-in-kind distributions on convertible preferred units
 
$
7,340

 
$



25

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)




(16) Reportable Segments

The following tables set forth our segment information for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three months ended March 31, 2019
 
Gas Gathering and Processing Services
 
Liquid Pipelines and Services
 
Natural Gas Transportation Services
 
Offshore Pipelines and Services
 
Total
Revenue
$
35,209

 
$
106,827

 
$
15,187

 
$
17,128

 
$
174,351

Loss on commodity derivatives, net

 
(1,521
)
 

 

 
(1,521
)
Total revenue
35,209


105,306


15,187


17,128


172,830

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
20,363

 
100,707

 
5,818

 
1,173

 
128,061

Direct operating expenses


 


 


 


 
17,978

Corporate expenses
 
 
 
 
 
 
 
 
19,401

     Depreciation, amortization and accretion expense
 
 
 
 
 
 
 
 
21,180

Loss on sale of assets, net
 
 
 
 
 
 
 
 
55

Impairment of long-lived assets
 
 
 
 
 
 
 
 
829

Total operating expenses

 

 

 

 
187,504

Operating loss

 

 

 

 
(14,674
)
Other income (expense), net
 
 
 
 
 
 
 
 
 
     Interest expense, net of capitalized interest
 
 
 
 
 
 
 
 
(24,363
)
     Other income, net
 
 
 
 
 
 
 
 
8

     Earnings in unconsolidated affiliates

 
3,296

 

 
22,814

 
26,110

Loss before income taxes

 

 

 

 
(12,919
)
Income tax expense
 
 
 
 
 
 
 
 
(218
)
Net loss
 
 
 
 
 
 
 
 
(13,137
)
     Net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
(77
)
Net loss attributable to the Partnership
 
 
 
 
 
 
 
 
$
(13,214
)
 
 
 
 
 
 
 
 
 
 
Segment gross margin
$
14,876

 
$
8,104

 
$
9,428

 
$
38,770

 
 


26

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



 
Three months ended March 31, 2018
 
Gas Gathering and Processing Services
 
Liquid Pipelines and Services
 
Natural Gas Transportation Services
 
Offshore Pipelines and Services
 
Terminalling Services  (1)
 
Total
Revenue
$
36,201

 
$
120,686

 
$
16,063

 
$
16,860

 
$
15,959

 
$
205,769

Gain on commodity derivatives, net
2

 
58

 

 

 

 
60

Total revenue
36,203

 
120,744

 
16,063

 
16,860

 
15,959

 
205,829

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
24,024

 
113,836

 
5,288

 
1,995

 
5,023

 
150,166

Direct operating expenses


 


 


 


 
3,647

 
23,446

Corporate expenses
 
 
 
 
 
 
 
 
 
 
22,692

     Depreciation, amortization and accretion expense
 
 
 
 
 
 
 
 
 
 
21,997

Gain on sale of assets, net
 
 
 
 
 
 
 
 
 
 
(95
)
Total operating expenses

 

 

 

 

 
218,206

Operating loss

 

 

 

 

 
(12,377
)
Other income (expenses), net
 
 
 
 
 
 
 
 
 
 

     Interest expense, net of capitalized interest
 
 
 
 
 
 
 
 
 
 
(13,876
)
     Other income, net
 
 
 
 
 
 
 
 
 
 
22

     Earnings in unconsolidated affiliates

 
2,222

 

 
10,451

 

 
12,673

Loss before income taxes

 

 

 

 

 
(13,558
)
Income tax expense
 
 
 
 
 
 
 
 
 
 
(280
)
Net loss
 
 
 
 
 
 
 
 
 
 
(13,838
)
     Net income attributable to non-controlling interests
 
 
 
 
 
 
 
 
 
 
(45
)
Net loss attributable to the Partnership
 
 
 
 
 
 
 
 
 
 
$
(13,883
)
 
 
 
 
 
 
 
 
 
 
 
 
Segment gross margin
$
12,209

 
$
9,154

 
$
10,687

 
$
25,317

 
$
7,289

 
 

(1) Subsequent to the disposition of Refined Products in December 2018, we eliminated our Terminalling Services segment. For further discussion of all changes made to our reporting segments in 2018, see our 2018 Form 10-K.






    





27

American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)



A reconciliation of total assets by segment to the amounts included in the Condensed Consolidated Balance Sheets follows (in thousands):
 
March 31,
 
December 31,
 
2019
 
2018
Segment assets:
 
 
 
Gas Gathering and Processing Services
$
401,200

 
$
400,052

Liquid Pipelines and Services
447,881

 
426,831

Natural Gas Transportation Services
275,716

 
271,890

Offshore Pipelines and Services
522,368

 
531,400

Other (1)
68,572

 
57,523

Total assets
$
1,715,737

 
$
1,687,696

 
 
 
 
Investment in unconsolidated affiliates:
 
 
 
Liquid Pipelines and Services
$
67,863

 
$
69,523

Offshore Pipelines and Services
253,897

 
268,273

Total investment in unconsolidated affiliates
$
321,760

 
$
337,796

________________________  
(1) Other assets consists primarily of corporate assets not allocable to segments, such as leasehold improvements and other current assets.

(17) Subsequent Events

On April 5, 2019, we entered into the Third Amendment with a syndicate of lenders and Bank of America, N.A., as administrative agent. The Third Amendment revised the Amended Credit Agreement to (i) modify certain defined terms in connection with the completion of the transactions contemplated by the Merger Agreement, including the Pending Merger; (ii) remove certain defined terms, and provisions related to, convertible preferred units; and (iii) modify certain negative covenants in the Amended Credit Agreement that restrict the Partnership’s ability to take certain actions or engage in certain business such that, once the Third Amendment is effective, the occurrence of such actions or business in connection with the Merger Agreement or completion of the transactions contemplated thereby, including the Pending Merger, will not be so restricted. The modifications contemplated by the Third Amendment become effective on the closing date of the Pending Merger; provided that immediately prior to or substantially simultaneously with the closing under the Merger Agreement, the administrative agent under the Credit Agreement shall have received a certificate from an officer of the Partnership attaching certain documents related to the completion of the transactions contemplated by the Merger Agreement, including the Pending Merger.
On April 24, 2019, Lynn L. Bourdon III, Chairman of the Board , President and Chief Executive Officer of our General Partner resigned from all of his positions with the General Partner and its affiliates effective on May 3, 2019. In connection with Mr. Bourdon’s resignation, the General Partner and Mr. Bourdon entered into a Separation and Release Agreement dated April 24, 2019.

On May 2, 2019, the Board appointed John F. Erhard as Chairman of the Board, effective upon Mr. Bourdon’s resignation. Mr. Erhard has served on the Board since 2013.
On May 7, 2019, American Midstream Partners, LP entered into Amendment No. 10 (the “Tenth Amendment”) to its Fifth Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), effective as of May 7, 2019. The Tenth Amendment amends the Partnership Agreement to permit paid-in-kind quarterly distributions on Series C Preferred Units for each quarter beginning after July 1, 2016. Prior to the effect of the Tenth Amendment, the Partnership Agreement required that quarterly distributions on Series C Preferred Units be paid in cash for the quarter ended March 31, 2019 and each quarter thereafter.


28


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations as of, and for the year ended, December 31, 2018 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019 (“2018 Form 10-K”). This discussion contains forward-looking statements that reflect management’s current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including those set forth below.

Forward-Looking Statements

Our reports, filings and other public announcements may from time to time contain statements that do not directly or exclusively relate to historical facts. Such statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the " Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You can typically identify forward-looking statements by the use of words, such as "may," "could," "intend," "will," "would," "project," "believe," "anticipate," "expect," "estimate," "potential," "plan," "forecast" and other similar words.

All statements that are not statements of historical facts, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.

These forward-looking statements reflect our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside our control. Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. These risks and uncertainties, many of which are beyond our control, include, but are not limited to, the risks set forth in Item 1A. Risk Factors of our 2018 Form 10-K as well as the following risks and uncertainties:

our ability to complete the Pending Merger in a timely manner, or at all;
greater than expected operating costs, customer loss, business disruption and employee attrition as a result of the Pending Merger;
diversion of management time on the Pending Merger and changes in management and other personnel before the closing of the Pending Merger;
our ability to refinance our credit facility before its scheduled maturity in September 2019 on terms acceptable to us, or at all, and the associated costs;
our ability to maintain compliance with covenants and ratios in the Credit Agreement and other debt instruments or obtain necessary waivers or amendments from lenders;
the impact of our suspension of distributions and contractual restrictions on our ability to declare and make cash distributions on our common units, including under our Partnership Agreement and Credit Agreement;
our ability to execute on our capital allocation strategy, including sales of non-core assets, receipt of expected proceeds and reduction in leverage;
our ability to timely and successfully identify, consummate and integrate acquisitions and organic growth projects, including the realization of all anticipated benefits of any such transactions;
any adverse impact of our doubt as to our ability to continue as a going concern;
our ability to generate sufficient cash from operations to pay distributions to unitholders and the Board’s discretionary determination as to the level of cash distributions to unitholders;
the demand for natural gas, refined products, condensate or crude oil and NGL products by the petrochemical, refining or other industries;
the performance of certain of our current and future projects and unconsolidated affiliates that we do not control and disruptions to cash flows from our joint ventures due to contractual, operational or other issues;
severe weather and other natural phenomena, including their potential impact on demand for the commodities we sell and the operation of company-owned and third party-owned infrastructure;
security threats such as terrorist attacks and cybersecurity breaches, against, or otherwise impacting, our facilities and systems;
general economic, market and business conditions, including industry changes and the impact of consolidations and changes in competition;
the level of creditworthiness of counterparties to transactions;
the amount of collateral required to be posted from time to time in our transactions;

29



the level and success of natural gas and crude oil drilling around our assets and our success in connecting natural gas and crude oil supplies to our gathering and processing systems;
the timing and extent of changes in natural gas, crude oil, NGLs and other commodity prices, interest rates and demand for our services;
our success in risk management activities, including the use of derivative financial instruments to hedge commodity, interest rate and weather risks;
our dependence on a relatively small number of customers for a significant portion of our gross margin;
our ability to renew our gathering, processing, transportation and terminal contracts;
our ability to successfully balance our purchases and sales of natural gas;
our ability to grow through contributions from affiliates, acquisitions and internal growth projects;
the impact or outcome of any legal proceedings, including any related to the Pending Merger;
adverse actions by third parties beyond our control, including ArcLight and joint venture partners;
costs associated with compliance with environmental, health and safety, and pipeline regulations; and
the cost and effectiveness of our remediation efforts with respect to the material weaknesses discussed in Part II. Item 9A. Controls and Procedures of our 2018 Form 10-K.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in our 2018 Form 10-K will prove to be accurate. Some of these, and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements, are more fully described herein in Item 1A. Risk Factors . Statements in our 2018 Form 10-K speak as of the date of that report. Except as may be required by applicable securities laws, we undertake no obligation to publicly update or advise investors of any change in any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

Please read Part I. Item 1. Business of our 2018 Form 10-K for a description of our assets, operations and segments, including the changes in our segments, as of December 31, 2018.

Recent Developments

Pending Merger

On March 17, 2019, as recommended by the conflicts committee (the “Conflicts Committee”) of the board of directors (the “Board”) of our General Partner, the Partnership and our General Partner entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Anchor Midstream Acquisition, LLC, a Delaware limited liability company (“Proposed Parent”), Anchor Midstream Merger Sub, LLC, a Delaware limited liability company (“Proposed Merger Sub”), and HPIP, pursuant to which Proposed Merger Sub will merge with and into the Partnership, with the Partnership surviving as a direct wholly owned subsidiary of our General Partner and Proposed Parent (the “Pending Merger”). For further information regarding the Merger Agreement, see our 2018 Form 10-K. The Partnership filed a Preliminary Information Statement with the SEC on April 24, 2019.

Credit Agreement
During 2018, we amended the Second Amended and Restated Credit Agreement, with Bank of America N.A., as Administrative Agent, Collateral Agent and L/C Issuer, Wells Fargo Bank, National Association, as Syndication Agent, and other lenders (the “Original Credit Agreement”) by entering into the First Amendment to the Original Credit Agreement on June 29, 2018 and by entering into the Second Amendment to the Original Credit Agreement on December 27, 2018 (respectively, the "First Amendment" and "Second Amendment" and, the Original Credit Agreement as amended by the First Amendment and Second Amendment, the "Amended Credit Agreement") with a syndicate of lenders and Bank of America, N.A., as administrative agent.
On April 5, 2019, we amended the Amended Credit Agreement by entering into the Third Amendment to the Original Credit Agreement (the “Third Amendment” and together with the First Amendment and Second Amendment, the "Amendments" and, the Original Credit Agreement as amended by the Amendments, the "Credit Agreement").

We entered into a Letter Agreement (the "Waiver"), effective as of March 26, 2019, with a syndicate of lenders and Bank of America, N.A., as administrative agent, to waive certain covenants contained in the Credit Agreement that (i) require us to provide audited financial statements that are not subject to any “going concern” or like qualification or exception, or any qualification or exception as to the scope of such audit and (ii) limit our ability to report the existence of a material weakness in the Partnership's internal control over financial reporting (the “Financial Statements Audit Requirement”). Additionally, the Waiver extended the deadline

30



under the Credit Agreement by which we are required to deliver to the administrative agent certain financial statements (the "Financial Statements Delivery Deadline"). Under the terms and conditions set forth in the Waiver, certain lenders (as required in the Credit Agreement) agreed to extend the Financial Statements Delivery Deadline to April 30, 2019. By filing the 2018 Form 10-K on April 1, 2019, we satisfied the Financial Statements Delivery Deadline.

Prior to our entry into the Waiver, the existence of a going concern qualification in our audited financial statements contained in the 2018 Form 10-K would have constituted an event of default under the Credit Agreement. Pursuant to the Waiver, the administrative agent and certain lenders (as required by the Credit Agreement) waived the Financial Statements Audit Requirement for the fiscal year ended December 31, 2018. Although we entered into the Waiver to address the event of default otherwise arising pursuant to the existence of a going concern note and material weakness exception in our audited financial statements contained in the 2018 Form 10-K, there is no guarantee that our lenders will agree to waive events of default or potential events of default in the future.

Financial Highlights

Financial highlights for the three months ended March 31, 2019 include the following:

Net loss attributable to the Partnership was $13.2 million for the three months ended March 31, 2019 as compared to $13.9 million for the same period in 2018 .
Adjusted EBITDA was $54.7 million for the three months ended March 31, 2019 , an increase of 4% compared to the first quarter of 2018 .
Total segment gross margin was $71.2 million for the three months ended March 31, 2019 , an increase of 10% as compared to the first quarter of 2018 .
    
Adjusted EBITDA and total segment gross margin are each non-GAAP measures. Please see Non-GAAP Financial Measures for a definition and reconciliation to the most comparable GAAP measure.

Going Concern Assessment and Management’s Plans

Pursuant to FASB ASC 205-40, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern , we are required to assess our ability to continue as a going concern for a period of one year from the date of the issuance of these condensed consolidated financial statements. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Credit Agreement matures on September 5, 2019 and has not been renewed as of the date of the issuance of these condensed consolidated financial statements.

On September 27, 2018, the Board received a non-binding proposal from Magnolia, an affiliate of ArcLight to acquire the common units that it does not already own. On March 17, 2019, we entered into the Merger Agreement and expect the Pending Merger to close by the outside date under the Merger Agreement of July 31, 2019. As the Merger Agreement is subject to customary closing conditions and because the Pending Merger may affect how, or if, the Partnership elects to obtain a maturity extension, management has deferred addressing the Credit Agreement.

While we intend to renew or extend the terms of the Credit Agreement, until such time as we have executed an agreement to refinance or extend the maturity of the Credit Agreement, we cannot conclude that it is probable we will do so, and accordingly, this raises substantial doubt about our ability to continue as a going concern.

The accompanying financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include adjustments that might result from the outcome of the uncertainty, including any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or other amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

Non-GAAP Financial Measures


31



Total segment gross margin, operating margin and Adjusted EBITDA are performance measures that are non-GAAP financial measures. Each has important limitations as an analytical tool because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. Management compensates for the limitations of these non-GAAP measures as analytical tools by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating these data points into management’s decision-making process.

You should not consider Total segment gross margin, Operating margin or Adjusted EBITDA in isolation or as a substitute for, or more meaningful than, our results as reported under GAAP. Our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their comparability.

Adjusted EBITDA

Adjusted EBITDA is a supplemental non-GAAP financial measure used by our management and external users of our consolidated financial statements, such as investors, commercial banks, research analysts and others, to assess: the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing or capital structure; and the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.

We define Adjusted EBITDA as net income (loss) attributable to the Partnership, plus depreciation, amortization and accretion expense, excluding noncontrolling interest share of depreciation, amortization and accretion, interest expense, net of capitalized interest excluding amortization of deferred financing costs, debt issuance costs paid during the period,  unrealized gains (losses)  on commodity derivatives, non-cash charges such as non-cash equity compensation expense and charges that are unusual such as transaction expenses primarily associated with our acquisitions, income tax expense, distributions from unconsolidated affiliates and General Partner’s contribution, less earnings in unconsolidated affiliates, discontinued operations, gains (losses) that are unusual, such as gain on revaluation of equity interest and gain (loss) on sale of assets, net and other non-recurring items that impact our business, such as construction and operating management agreement income (“COMA”) and other post-employment benefits plan net periodic benefit.

The GAAP measure most directly comparable to our performance measure Adjusted EBITDA is Net loss attributable to the Partnership.

Total Segment Gross Margin and Operating Margin

Total segment gross margin and Operating margin are non-GAAP supplemental measures that we use to evaluate our performance.

For segments other than Terminalling Services, we define segment gross margin as total revenue plus unconsolidated affiliate earnings less unrealized gains (losses) on commodity derivatives, construction and operating management agreement income and the cost of sales. Gross margin for Terminalling Services also deducted direct operating expense which includes direct labor, general materials and supplies, and direct overhead. We define Total segment gross margin as the sum of the segment gross margins for each of our segments. We define Operating margin as Total segment gross margin less other direct operating expenses. The GAAP measure most directly comparable to Total segment gross margin and Operating margin is Net loss attributable to the Partnership. For a reconciliation of Total segment gross margin and Operating margin to Net loss attributable to the Partnership, see Reconciliations below.

Total segment gross margin is useful to investors and the Partnership’s management in understanding our operating performance as it measures the operating results of our segments before certain non-cash items, such as depreciation and amortization, and certain expenses that are generally not controllable by our business segment development managers (who are responsible for revenue generation at the segment level), such as certain operating costs, general and administrative expenses, interest expense and income taxes. Operating margin is useful to investors and the Partnership’s management for similar reasons except that operating margin includes all direct operating expenses, which allows the Partnership’s management to assess the performance of our consolidated operating managers (who are responsible for cost management at the segment level). In addition, because these operating measures exclude interest expense and income taxes, they are useful for investors because they remove potential distortions between periods caused by factors such as financing and capital structures and changes in tax laws and positions.

32



Reconciliations

The following tables reconcile the non-GAAP financial measures of total segment gross margin, operating margin and Adjusted EBITDA to its nearest GAAP measure, Net loss attributable to the Partnership, (in thousands):

 
Three months ended March 31,
Reconciliation of Total Segment Gross Margin and Operating Margin to Net Loss Attributable to the Partnership:
 
2019
 
2018
Gas Gathering and Processing Services segment gross margin
 
$
14,876

 
$
12,209

Liquid Pipelines and Services segment gross margin
 
8,104

 
9,154

Natural Gas Transportation Services segment gross margin
 
9,428

 
10,687

Offshore Pipelines and Services segment gross margin
 
38,770

 
25,317

Terminalling Services segment gross margin (1)
 

 
7,289

Total segment gross margin
 
71,178

 
64,656

Direct operating expenses (2)  
 
(17,978
)
 
(19,799
)
Operating margin
 
53,200

 
44,857


 
 
 
 
(Loss) gain on commodity derivatives, net
 
(1,521
)
 
60

Corporate expenses
 
(19,401
)
 
(22,692
)
Depreciation, amortization and accretion expense
 
(21,180
)
 
(21,997
)
(Loss) gain on sale of assets, net
 
(55
)
 
95

Impairment of long-lived assets
 
(829
)
 

Interest expense, net of capitalized interest
 
(24,363
)
 
(13,876
)
Other income, net
 
1,230

 
(5
)
Income tax expense
 
(218
)
 
(280
)
Net income attributable to noncontrolling interests
 
(77
)
 
(45
)
Net loss attributable to the Partnership
 
$
(13,214
)
 
$
(13,883
)
_______________________
(1) Segment Gross Margin for our Terminalling Services segment for the three months ending March 31, 2018 includes Direct operating expenses. For additional information related to our operating segments, as well as a reconciliation of Segment Gross Margin to Loss before income taxes, see Note 16. Reportable Segments, to our condensed consolidated financial statements.

(2)  
Direct operating expenses exclude amounts related to the Terminalling Services segment for the three months ending March 31, 2018 as those costs are included in segment gross margin for the Terminalling Services segment. Direct operating expenses by segment includes (in thousands):
 
 
Three months ended
March 31,
 
 
2019
 
2018
Gas Gathering and Processing Services
 
$
6,349

 
$
7,170

Liquid Pipelines and Services
 
2,978

 
3,161

Natural Gas Transportation Services
 
2,712

 
1,673

Offshore Pipelines and Services
 
5,939

 
7,795

Total direct operating expenses
 
$
17,978

 
$
19,799



 

33




 
Three months ended March 31,

 
2019
 
2018
Reconciliation of Net loss Attributable to the Partnership to Adjusted EBITDA :
 
 
 
 
Net loss attributable to the Partnership
 
$
(13,214
)
 
$
(13,883
)
Depreciation, amortization and accretion
 
21,180

 
21,997

Interest expense, net of capitalized interest
 
24,363

 
13,876

Amortization of deferred financing costs
 
(2,549
)
 
(1,316
)
Debt issuance costs paid
 
61

 
1,085

Unrealized loss on commodity derivatives, net
 
254

 
59

Non-cash equity compensation expense
 
1,026

 
1,014

Transaction expenses
 
6,370

 
8,877

Impairment of long-lived assets
 
829

 

Income tax expense
 
218

 
280

Distributions from unconsolidated affiliates
 
42,146

 
23,853

General Partner contribution
 

 
9,417

Earnings in unconsolidated affiliates
 
(26,110
)

(12,673
)
COMA
 
46

 
(90
)
Other post-employment benefits plan net periodic benefit
 
(19
)
 
15

Loss (gain) on sale of assets, net
 
55

 
(95
)
Adjusted EBITDA
 
$
54,656

 
$
52,416


General Trends and Outlook

We expect our business to continue to be affected by the Pending Merger and matters discussed elsewhere in this report. Our expectations are based on assumptions made by us and information currently available to us. Following the completion of the Pending Merger, our strategy and outlook may change materially. To the extent our underlying assumptions prove to be incorrect, our actual results may vary materially from our expected results.


34



Results of Operations — Consolidated

The results of operations for the  three months ended March 31, 2019 and 2018 are presented in the tables below (in thousands, except percentages):
 
 
Three months ended March 31,
 
 
2019
 
2018
 
Change
 
%
Revenue
 
$
172,830

 
$
205,829

 
$
(32,999
)
 
(16
)%
Operating expenses:
 
 
 
 
 
 
 
 
Cost of sales
 
128,061

 
150,166

 
(22,105
)
 
(15
)%
Direct operating expenses
 
17,978

 
23,446

 
(5,468
)
 
(23
)%
Corporate expenses
 
19,401

 
22,692

 
(3,291
)
 
(15
)%
Depreciation, amortization and accretion expense
 
21,180

 
21,997

 
(817
)
 
(4
)%
Loss (gain) on sale of assets, net
 
55

 
(95
)
 
150

 
*

Impairment of long-lived assets
 
829

 

 
829

 
*

Total operating expenses
 
187,504

 
218,206

 
(30,702
)
 
(14
)%
Operating loss
 
(14,674
)
 
(12,377
)
 
(2,297
)
 
(19
)%
Other income (expense), net
 
 
 
 
 
 
 
 
Interest expense, net of capitalized interest
 
(24,363
)
 
(13,876
)
 
(10,487
)
 
76
 %
Other income, net
 
8

 
22

 
(14
)
 
*

Earnings in unconsolidated affiliates
 
26,110

 
12,673

 
13,437

 
106
 %
Loss before income taxes
 
(12,919
)
 
(13,558
)
 
639

 
5
 %
Income tax expense
 
(218
)
 
(280
)
 
62

 
*

Net loss
 
(13,137
)
 
(13,838
)
 
701

 
(5
)%
Net income attributable to noncontrolling interests
 
(77
)
 
(45
)
 
(32
)
 
(71
)%
Net loss attributable to the Partnership
 
$
(13,214
)
 
$
(13,883
)
 
$
669

 
(5
)%
 
 
 
 
 
 
 
 

Non-GAAP Financial Measures
 
 
 
 
 
 
 

Total segment gross margin (1)
 
$
71,178

 
$
64,656

 
$
6,522

 
10
 %
Adjusted EBITDA (1)
 
$
54,656

 
$
52,416

 
$
2,240

 
4
 %
____________________________________  
* Not a meaningful percentage
(1) See tables in Non-GAAP Financial Measures for a reconciliation of Total segment gross margin and Adjusted EBITDA to their most comparable GAAP measure.

Please see Results of Operations - Segment Results for a discussion of material changes to revenues, cost of sales, direct operating expenses and earnings in unconsolidated affiliates.

Corporate expenses. Corporate expenses for the three months ended March 31, 2019 were $19.4 million , a decrease of $3.3 million , or 15% , from the same period in the prior year, primarily due to transaction costs incurred in the first quarter of 2018 related to the Panther acquisition, JPE merger, and the Southcross acquisition which was terminated in the third quarter of 2018.
Interest expense, net of capitalized interest . Interest expense for the three months ended March 31, 2019 was $24.4 million , an increase of $10.5 million , or 76% , from the same period in the prior year, primarily due to changes in fair value of our interest rate swaps which negatively impacted interest by approximately $8.5 million between periods and an increase in amortization of debt issuance costs on the Credit Facility due to the Amendments of approximately $1.2 million.


35



Results of Operations — Segment Results

Gas Gathering and Processing Services Segment

The table below contains key segment performance indicators for the three months ended March 31, 2019 and 2018 related to our Gas Gathering and Processing Services segment (in thousands, except operating data).
 
 
Three months ended March 31,
 
 
2019
 
2018
 
Change
 
%
Segment Financial and Operating Data:
 
 
 
 
 
 
 
 
Financial data:
 
 
 
 
 
 
 
 
Commodity sales
 
$
24,336

 
$
28,888

 
$
(4,552
)
 
(16
)%
Services
 
10,873

 
7,313

 
3,560

 
49
 %
Revenue from operations
 
35,209

 
36,201

 
(992
)
 
(3
)%
Gain on commodity derivatives, net
 

 
2

 
(2
)
 
(100
)%
Segment revenue
 
35,209

 
36,203

 
(994
)
 
(3
)%
Cost of sales
 
20,363

 
24,024

 
(3,661
)
 
(15
)%
Direct operating expenses
 
6,349

 
7,170

 
(821
)
 
(11
)%
Other financial data:
 

 
 
 
 
 
 
Segment gross margin (1)
 
$
14,876

 
$
12,209

 
$
2,667

 
22
 %
Operating data:
 
 
 
 
 
 
 
 
Average throughput (MMcf/d)
 
201

 
161

 
40

 
25
 %
Average plant inlet volume (MMcf/d) (2)
 
43

 
42

 
1

 
2
 %
Average gross NGL production (Mgal/d) (2)
 
302

 
262

 
40

 
15
 %
Average gross condensate production (Mgal/d) (2)
 
81

 
69

 
12

 
17
 %
  _______________________
(1) See Note 16. Reportable Segments for a reconciliation of Segment Gross Margin to Loss before income taxes.
(2) Excludes volumes and gross production under our elective processing arrangements.

Commodity sales . Commodity sales for the three months ended March 31, 2019 were $24.3 million , a decrease of $4.6 million , or 16% , from the same period in the prior year, primarily from a $2.9 million decline in sales from a short term contract at Mesquite that expired in 2018 and a $1.8 million decline in NGL and condensate sales at Longview due to lower prices partially offset by higher volumes.

Services . Services for the three months ended March 31, 2019 were $10.9 million , an increase of $3.6 million , or 49% , from the same period in the prior year, primarily due to a $1.6 million increase at our Lavaca facility driven by higher volumes from additional wells, a $1.0 million increase in services at Chatom-Bazor Ridge due to rate increases and incremental fuel volumes and $0.8 million increase at Longview from higher throughput at that facility.

Cost of sales . Cost of sales for the three months ended March 31, 2019 were $20.4 million , a decrease of $3.7 million , or 15% , from the same period in the prior year, primarily due to the decline in commodity sales at our Mesquite and Longview facilities discussed above.

Direct operating expenses. Direct operating expenses for the three months ended March 31, 2019 were $6.3 million , a decrease of $0.8 million , or 11% , from the same period in the prior year, mainly due to lower outside services at East Texas and Lavaca of $0.4 million and lower salaries and wages at East Texas of $0.2 million.



36



Liquid Pipelines and Services Segment

The table below contains key segment performance indicators for the three months ended March 31, 2019 and 2018 related to our Liquid Pipelines and Services segment (in thousands, except operating data).
 
 
Three months ended March 31,
 
 
2019
 
2018
 
Change
 
%
Segment Financial and Operating Data:
 
 
 
 
 
 
 
 
Financial data:
 
 
 
 
 


 


Commodity sales
 
$
104,322

 
$
115,782

 
$
(11,460
)
 
(10
)%
Services
 
2,505

 
4,904

 
(2,399
)
 
(49
)%
Revenue from operations
 
106,827

 
120,686

 
(13,859
)
 
(11
)%
(Loss) gain on commodity derivatives, net
 
(1,521
)
 
58

 
(1,579
)
 
(2,722
)%
Earnings in unconsolidated affiliates
 
3,296

 
2,222

 
1,074

 
48
 %
Segment revenue
 
108,602

 
122,966

 
(14,364
)
 
(12
)%
Cost of sales
 
100,707

 
113,836

 
(13,129
)
 
(12
)%
Direct operating expenses
 
2,978

 
3,161

 
(183
)
 
(6
)%
Other financial data:
 
 
 
 
 


 


Segment gross margin (1)
 
$
8,104

 
$
9,154

 
$
(1,050
)
 
(11
)%
Operating data (2)
:
 
 
 
 
 


 


Average throughput Pipeline (Bbl/d)
 
34,614

 
34,310

 
304

 
1
 %
Average throughput Truck (Bbl/d)
 
3,634

 
2,738

 
896

 
33
 %
_______________________
(1) See Note 16. Reportable Segments for a reconciliation of Segment Gross Margin to Loss before income taxes .
(2) Excludes volumes from our unconsolidated investments.

Commodity sales. Commodity sales for the three months ended March 31, 2019 were $104.3 million , a decrease of $11.5 million , or 10% , from the same period in the prior year.

Cost of sales . Cost of sales for the three months ended March 31, 2019 were $100.7 million , a decrease of $13.1 million , or 12% , from the same period in the prior year.

Total commodity sales and cost of sales for the first quarter of 2018 are overstated by approximately $10.0 million due to an error in gross versus net revenue recognition, which was corrected in the fourth quarter of 2018. The recognition of this contract on a gross basis had no impact on segment gross margin.

Services. Services for the three months ended March 31, 2019 were $2.5 million , a decrease of $2.4 million , or 49% , from the same period in the prior year, primarily due to reduced storage volumes from our Cushing facility.

Earnings in unconsolidated affiliates. Earnings in unconsolidated affiliates for the three months ended March 31, 2019 were $3.3 million , an increase of $1.1 million , or 48% , from the same period in the prior year, primarily due increased throughput from our Cayenne Pipeline in 2019 as compared to the same period in 2018.


37




Natural Gas Transportation Services Segment

The table below contains key segment performance indicators for the three months ended March 31, 2019 and 2018 related to our Natural Gas Transportation Services segment (in thousands, except operating data).
 
Three months ended March 31,
 
2019
 
2018
 
Change
 
%
Segment Financial and Operating Data:
 
 
 
 
 
 
 
Financial data:
 
 
 
 


 


Commodity sales
$
6,408

 
$
6,641

 
$
(233
)
 
(4
)%
Services
8,779

 
9,422

 
(643
)
 
(7
)%
Segment revenue
15,187

 
16,063

 
(876
)
 
(5
)%
Cost of sales
5,818

 
5,288

 
530

 
10
 %
Direct operating expenses
2,712

 
1,673

 
1,039

 
62
 %
Other financial data:
 
 
 
 


 


Segment gross margin (1)
$
9,428

 
$
10,687

 
$
(1,259
)
 
(12
)%
Operating data:
 
 
 
 
 
 
 
Average throughput (MMcf/d)
640

 
810

 
(170
)
 
(21
)%
  _______________________
(1) See Note 16. Reportable Segments for a reconciliation of Segment Gross Margin to Loss before income taxes.

Direct operating expenses . Direct operating expenses for the three months ended March 31, 2019 were $2.7 million , an increase of $1.0 million , or 62% , from the same period in the prior year, primarily due to an increase in litigation costs of $0.6 million and an increase in professional and accounting fees of $0.4 million.

Offshore Pipelines and Services Segment

The table below contains key segment performance indicators for the three months ended March 31, 2019 and 2018 related to our Offshore Pipelines and Services segment (in thousands, except operating data).
 
Three months ended March 31,
 
2019
 
2018
 
Change
 
%
Segment Financial and Operating Data:
 
 
 
 
 
 
 
Financial data:
 
 
 
 
 
 
 
Commodity sales
$
2,463

 
$
2,548

 
$
(85
)
 
(3
)%
Services
14,665

 
14,312

 
353

 
2
 %
Revenue from operations
17,128

 
16,860

 
268

 
2
 %
Earnings in unconsolidated affiliates
22,814

 
10,451

 
12,363

 
118
 %
Segment revenue
39,942

 
27,311

 
12,631

 
46
 %
Cost of sales
1,173

 
1,995

 
(822
)
 
(41
)%
Direct operating expenses
5,939

 
7,795

 
(1,856
)
 
(24
)%
Other financial data:
 
 
 
 


 


Segment gross margin (1)
$
38,770

 
$
25,317

 
$
13,453

 
53
 %
Operating data (2):
 
 
 
 


 


Average throughput (MMcf/d)
385

 
274

 
111

 
41
 %
_______________________
(1) See Note 16. Reportable Segments for a reconciliation of Segment Gross Margin to Loss before income taxes .
(2) Excludes volumes from our unconsolidated investments.

Earnings in unconsolidated affiliates . Earnings in unconsolidated affiliates for the three months ended March 31, 2019 were $22.8 million , an increase of $12.4 million , or 118% , from the same period in the prior year. This increase was primarily due to an $9.0 million increase in earnings from Delta House as a result of both increased production and additional wells in the first

38



quarter of 2019 and a $3.3 million increase in earnings from Destin due to increased production in 2019 as compared to the same period in 2018.

Cost of sales . Cost of sales for the three months ended March 31, 2019 were $1.2 million , a decrease of $0.8 million , or 41% , from the same period in the prior year, due to lower natural gas costs between periods primarily at our Gloria and Chalmette facilities.

Direct operating expenses . Direct operating expenses for the three months ended March 31, 2019 were $5.9 million , a decrease of $1.9 million , or 24% , from the same period in the prior year, primarily due to lower outside services of $0.8 million and lower insurance related to Panther of $0.7 million.


Terminalling Services Segment

During 2018, we entered into definitive agreements for the sale of our marine liquids terminals (“Marine Products”) and our refined products terminals (“Refined Products”), both of which were completed in 2018. Subsequent to the disposition of our Refined Products in December 2018, we eliminated our Terminalling Services segment. Segment gross margin for our Terminalling Services segment for the three months ended March 31, 2018 was $7.3 million.

Liquidity and Capital Resources

Our business is capital intensive and requires significant investment for the maintenance of existing assets and the acquisition and development of new systems and facilities.

Our sources of liquidity are:

cash flows from operating activities;
cash distributions from our unconsolidated affiliates;
borrowings under the Credit Agreement;
proceeds from asset sales;
proceeds from private and public offerings of debt;
issuances of letters of credit in lieu of prepayments; and
issuances of additional common units, preferred units or other securities;

Not all of these sources will be available to us at all times, or on terms acceptable to us. However, we believe cash generated from these sources will be sufficient to meet our short-term working capital requirements and medium-term maintenance capital expenditure requirements. In the event these sources are not sufficient, we would pursue other sources of cash funding, including, but not limited to, additional forms of secured or unsecured debt or preferred equity financing, if available. In addition, we would reduce non-essential capital expenditures, controllable direct operating expenses and corporate expenses, as necessary. We plan to finance our growth capital expenditures primarily from the sale of non-core assets and through additional forms of debt or equity financing, if possible. Availability and terms of any financing or asset sales depend on market and other conditions, many of which are beyond our control. We may not be able to access financing or complete asset sales as, and when, desired.


39



Going Concern Assessment

The Credit Agreement matures on September 5, 2019 and has not been renewed as of the date of the issuance of these condensed consolidated financial statements.  While the Partnership intends to renew or extend the terms of its Credit Agreement, until such time as we have executed an agreement to refinance or extend the maturity of the Credit Agreement, we cannot conclude that it is probable we will do so, and accordingly, this raises substantial doubt about our ability to continue as a going concern. See Going Concern Assessment and Management's Plans above for more information.

AMID Revolving Credit Agreement
On March 8, 2017, the Partnership along with other subsidiaries of the Partnership (collectively, the “Borrowers”) entered into the Second Amended and Restated Credit Agreement, with Bank of America N.A., as Administrative Agent, Collateral Agent and L/C Issuer, Wells Fargo Bank, National Association, as Syndication Agent, and other lenders (the “Original Credit Agreement”). As a result of the Amendments, defined below, the borrowing commitment under the Credit Agreement, defined below, was $620.0 million at March 31, 2019 .
During 2018, we amended the Original Credit Agreement by entering into the First Amendment and the Second Amendment.
On April 5, 2019, we entered into the Third Amendment. The Third Amendment modifies the Amended Credit Agreement to (i) modify certain defined terms in connection with the completion of the transactions contemplated by the Merger Agreement, including the Pending Merger; (ii) remove certain defined terms, and provisions related to, convertible preferred units; and (iii) modify certain negative covenants in the Amended Credit Agreement that restrict the Partnership’s ability to take certain actions or engage in certain business such that, once the Third Amendment is effective, the occurrence of such actions or business in connection with the Merger Agreement or completion of the transactions contemplated thereby, including the Pending Merger, will not be so restricted. The modifications contemplated by the Third Amendment become effective on the closing date of the Pending Merger; provided that immediately prior to or substantially simultaneously with the closing under the Merger Agreement, the administrative agent under the Credit Agreement shall have received a certificate from an officer of the Partnership attaching certain documents related to the completion of the transactions contemplated by the Merger Agreement, including the Pending Merger.

The Credit Agreement matures on September 5, 2019, and therefore, is being presented as a current liability in our Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.

The Credit Agreement includes the following financial covenants, as amended by the Amendments and defined in the Credit Agreement, which financial covenants will be tested on a quarterly basis, for the fiscal quarter then ending:
 
Minimum Consolidated Interest Coverage Ratio
 
Maximum Consolidated Total Leverage Ratio
 
Maximum Consolidated Secured Leverage Ratio
December 31, 2018
1.75:1.00
 
6.25:1.00
 
3.75:1.00
March 31, 2019
1.75:1.00
 
6.50:1.00
 
3.75:1.00
June 30, 2019 and thereafter
1.50:1.00
 
5.75:1.00
 
3.50:1.00
As of March 31, 2019 , we were in compliance with the Credit Agreement financial covenants, including those shown below:
Ratio
 
 
 
Actual
Consolidated Interest Coverage Ratio
 
 
 
2.11
Consolidated Total Leverage Ratio
 
 
 
5.84
Consolidated Secured Leverage Ratio
 
 
 
3.25

We also pay a commitment fee ranging from 0.375% to 0.50% per annum, depending on our total leverage ratio then in effect, on the undrawn portion of the revolving loan under the Credit Agreement.

Our ability to maintain compliance with the leverage and interest coverage ratios included in the Credit Agreement may be subject to, among other things, the timing and success of initiatives we are pursuing, which may include expansion capital projects, acquisitions or drop down transactions, as well as the associated financing for such initiatives. The terms of the Credit Agreement also include covenants that restrict our ability to make cash distributions and acquisitions in some circumstances.

40




As of March 31, 2019 , we had $534.3 million of borrowings, $39.3 million of letters of credit outstanding and $46.4 million of remaining borrowing capacity under the Credit Agreement, of which $42.3 million is currently available. For the three months ended March 31, 2019 and 2018, the weighted average interest rate, excluding the impact of interest rate swaps, on borrowings under this facility was 8.17% and 4.96% , respectively.

Working Capital

Due to the presentation of our revolving credit facility as a short term liability, we had a working capital deficit of $501.0 million and $505.9 million as of March 31, 2019 and December 31, 2108, respectively. As discussed above, our revolving credit facility matures in September 2019, and we expect to execute a new revolving credit facility prior to its maturity. Our revolving credit facility had an outstanding balance of $534.3 million and $514.8 million at March 31, 2019 and December 31, 2018, respectively.

Cash Flows

The following table reflects cash flows for the applicable periods (in thousands):
 
 
Three months ended March 31,
 
 
2019
 
2018
Net cash (used in) provided by:
 
 
 
 
Operating activities
 
$
(4,240
)
 
$
14,847

Investing activities
 
(6,481
)
 
(15,744
)
Financing activities
 
16,813

 
(1,774
)

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Operating Activities. During the three months ended March 31, 2019 , net cash used in operating activities was $4.2 million , a decrease of $19.1 million compared to the same period last year. The decrease in cash flows from operating activities resulted primarily from changes in operating assets and liabilities, specifically changes in accounts receivable, net which reflect an increase for 2019 as compared to a decline in the prior year.
Investing Activities. During the three months ended March 31, 2019 , net cash used in investing activities was $6.5 million , a decrease of $9.3 million compared to the same period last year. The decrease in cash flows used in investing activities was primarily from a decrease in capital expenditures of $7.2 million between periods.
Financing Activities. During the three months ended March 31, 2019 , net cash provided by financing activities was $16.8 million , an increase of $18.6 million compared to the same period last year. The increase in cash provided by financing activities was primarily driven by an $22.0 million reduction in common unitholder distributions between periods.

Distributions to our unitholders

We do not plan to make cash distributions on any of our units through the completion of the Pending Merger.

Critical Accounting Estimates

See Note 2. Recent Accounting Pronouncements to the accompanying condensed consolidated financial statements for a discussion of the potential impact of recent accounting standards.

For a discussion of the impact of our other critical accounting policies and estimates on our consolidated financial statements, refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Form 10-K.

Off-Balance Sheet Arrangements

Except for the impact to our off-balance sheet arrangements due to the adoption of Topic 842 - Leases , there were no material changes to our off-balance sheet arrangements during the three months ended March 31, 2019 . See discussion of our adoption of the new leasing standard in Note 4 - Lessee Arrangements .


41



Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our exposures to market risk which we previously disclosed in our 2018 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file, or submit, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to the management of our General Partner, including our General Partner’s principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision of the principal executive officer and principal financial officer of our General Partner, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on our evaluation, our principal executive officer and principal financial officer concluded that the Partnership’s disclosure controls and procedures were not effective as of March 31, 2019 as a result of the material weaknesses in our internal control over financial reporting that remain outstanding from prior periods.

Despite the material weaknesses, our principal executive officer and principal financial officer have concluded that the condensed consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Material Weakness Remediation
In prior filings, we identified and reported material weaknesses in our internal control over financial reporting which still exist as of March 31, 2019. Since the end of 2016, under the oversight of our Audit Committee, we have been, and continue to be, actively engaged in the design and implementation of remedial measures to address the material weaknesses in our internal control over financial reporting, and management is committed to remediating the material weaknesses.

While plans have been made to enhance our internal control over financial reporting relating to the material weaknesses, management is still in the process of implementing and testing these processes and procedures and additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. Management believes these actions will strengthen our internal control over financial reporting and be effective in remediating the material weaknesses described above. Management is committed to continuous improvement of the Partnership’s internal control processes and will continue to devote significant time and attention to these remediation efforts. However, the material weaknesses cannot be considered remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in internal control over financial reporting

In the ordinary course of business, we routinely review our system of internal control over financial reporting and make changes to our systems and processes that are intended to ensure an effective internal control environment. As disclosed under Material Weakness Remediation , we have continued the process of remediating our material weaknesses. Effective January 1, 2019, we adopted Topic 842. Although the standard is not expected to have a material impact on our condensed consolidated financial statements, changes were made to relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal controls over financial reporting. 

The certifications of our principal executive officer and principal financial officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) are filed with this Quarterly Report on Form 10-Q as Exhibits 31.1 and 31.2. The certifications of our principal executive officer and principal financial officer pursuant to 18 U.S.C. 1350 are furnished with this Quarterly Report on Form 10-Q as Exhibits 32.1 and 32.2.


42


PART II. OTHER INFORMATION

Item 1. Legal Proceedings
While the ultimate impact of any proceedings cannot be predicted with certainty, our management believes that the resolution of any of our pending proceedings will not have a material adverse effect on our financial condition or results of operations. See Note 14. Commitments and Contingencies in the condensed consolidated financial statements included in this report for additional information.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors which we previously disclosed in our 2018 Form 10-K.

Item 5. Other Information
The Partnership discloses the following pursuant to Item 5.03 of Form 8-K:
On May 7, 2019, American Midstream Partners, LP entered into Amendment No. 10 (the “Tenth Amendment”) to its Fifth Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), effective as of May 7, 2019. The Tenth Amendment amends the Partnership Agreement to permit paid-in-kind quarterly distributions on Series C Preferred Units for each quarter beginning after July 1, 2016. Prior to the effect of the Tenth Amendment, the Partnership Agreement required that quarterly distributions on Series C Preferred Units be paid in cash for the quarter ended March 31, 2019 and each quarter thereafter.
The foregoing description of the Tenth Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Tenth Amendment, which is attached hereto as Exhibit 3.15, and is incorporated herein by reference. Any capitalized terms not defined herein are defined in the Partnership Agreement.

43


Item 6. Exhibits
Exhibit
Number
Exhibit
2.1 ***


44


**101.INS
XBRL Instance Document
**101.SCH
XBRL Taxonomy Extension Schema Document
**101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB
XBRL Taxonomy Extension Label Linkbase Document
**101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
*
Filed herewith.
**
Furnished herewith.
***
Certain schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC upon request.

45



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2019
 
AMERICAN MIDSTREAM PARTNERS, LP
 
 
By:
American Midstream GP, LLC, its General Partner
 
 
By:
/s/ Eric T. Kalamaras
 
Eric T. Kalamaras
 
(Acting Principal Executive Officer)
 
 
By:
/s/ Eric T. Kalamaras
 
Eric T. Kalamaras
 
Senior Vice President and Chief Financial Officer
 
(Principal Financial Officer)


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