NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Southcross Energy Partners, L.P. (the "Partnership," "Southcross," "we," "our" or "us") is a Delaware limited partnership. Our common units are listed on the New York Stock Exchange under the symbol “SXE.” We are a master limited partnership, headquartered in Dallas, Texas, that provides natural gas gathering, processing, treating, compression and transportation services and NGL fractionation and transportation services. We also source, purchase, transport and sell natural gas and NGLs. Our assets are located in South Texas, Mississippi and Alabama and include
two
gas processing plants,
one
fractionation facility and gathering and transportation pipelines.
Southcross Holdings LP, a Delaware limited partnership (“Holdings”), indirectly owns
100%
of Southcross Energy Partners GP, LLC, a Delaware limited liability company, our General Partner (“General Partner”) (and therefore controls us), all of our subordinated and Class B convertible units (“Class B Convertible Units”) and
54.6%
of our common units. Our General Partner owns an approximate
2.0%
interest in us and all of our incentive distribution rights.
Following the emergence of Holdings from its Chapter 11 reorganization proceeding on April 13, 2016, EIG Global Energy Partners, LLC (“EIG”) and Tailwater Capital LLC (“Tailwater”) (collectively, the “Sponsors”) each indirectly own approximately one-third of Holdings, and a group of consolidated lenders under Holdings’ term loan (the “Lenders”) own the remaining one-third of Holdings.
Liquidity Consideration
Our future cash flow will be materially adversely affected if the prices for natural gas, NGL and crude oil reduce drilling for oil or natural gas in our primary operating area, the Eagle Ford Shale.
The majority of our revenue is derived from fixed-fee and fixed-spread contracts, which have limited direct exposure to commodity price levels since we are paid based on the volumes of natural gas that we gather, process, treat, compress and transport and the volumes of NGLs we fractionate and transport, rather than being paid based on the value of the underlying natural gas or NGLs. In addition, a portion of our contract portfolio contains minimum volume commitment arrangements. The majority of our volumes are dependent upon the level of producer drilling activity. As a result of the energy price environment and reduction in drilling activity we have experienced, we implemented cost-saving initiatives in 2016 and remain focused on these efforts to improve future liquidity.
On December 29, 2016, we entered into the fifth amendment (the “Fifth Amendment”) to the Third Amended and Restated Revolving Credit Agreement with Wells Fargo, N.A., UBS Securities LLC, Barclays Bank PLC and a syndicate of lenders (the "Third A&R Revolving Credit Agreement"), pursuant to which we received a full waiver for all defaults or events of default arising out of our failure to comply with the financial covenant to maintain a Consolidated Total Leverage Ratio (as defined in the Fifth Amendment) less than
5.00
to 1.00 for the quarter ended September 30, 2016.
Additionally, pursuant to the Fifth Amendment, (i) the total aggregate commitments under the Third A&R Revolving Credit Agreement were reduced from
$200 million
to
$145 million
and the sublimit for letters of credit also was reduced from
$75 million
to
$50 million
(total aggregate commitments will be periodically further reduced through December 31, 2018); (ii) the Consolidated Total Leverage Ratio and Consolidated Senior Secured Leverage Ratio (each as defined in the Fifth Amendment) financial covenants were suspended until the quarter ending March 31, 2019; and (iii) the Consolidated Interest Coverage Ratio (as defined in the Fifth Amendment) financial covenant requirement was reduced from
2.50
to 1.00 to
1.50
to 1.00 for all periods ending on or prior to December 31, 2018 (the “Ratio Compliance Date”). Prior to the Ratio Compliance Date, we will be required to maintain minimum levels of Consolidated EBITDA (as defined in the Fifth Amendment) on a quarterly basis and be subject to certain covenants and restrictions related to liquidity and capital expenditures. See Note 5.
In connection with the execution of the Fifth Amendment, on December 29, 2016, the Partnership entered into (i) an Investment Agreement (the "Investment Agreement") with Holdings and Wells Fargo Bank, N.A., (ii) a Backstop Agreement (the "Backstop Agreement") with Holdings, Wells Fargo Bank, N.A. and the Sponsors and (iii) a First Amendment to the equity cure contribution agreement (the "Equity Cure Contribution Amendment") with Holdings. Pursuant to the Equity Cure Contribution Amendment, on December 29, 2016, Holdings contributed
$17.0 million
to us in exchange for
11,486,486
common units. The proceeds of the
$17.0 million
contribution were used to pay down the outstanding balance under the Third A&R Revolving Credit Agreement and for general corporate purposes. In addition, pursuant to entering into the Investment Agreement, the previous equity cure contribution agreement with Holdings was terminated and Holdings has agreed to
contribute
$15.0 million
to us (the “Committed Amount”) upon the earlier to occur of December 31, 2017 or notification from the Partnership of an event of default under the Third A&R Revolving Credit Agreement. In exchange for the amounts contributed pursuant to the Investment Agreement upon a Partial Investment Trigger or the Full Investment Trigger (each defined in the Investment Agreement), we will issue to Holdings, at Holdings’ election, either (i) a number of common units at an issue price equal to either (a) if the common units are listed on a national stock exchange,
93%
of the volume weighted average price of such common units for the
20-day
period immediately preceding the date of the contribution or (b) if the common units are not listed on a national stock exchange, the fair market value of such common units as reasonably agreed by us and Holdings or (ii) a senior unsecured note of the Partnership in an initial face amount equal to the amount of the contribution by Holdings (an “Investment Note”). If Holdings elects to receive an Investment Note in exchange for a contribution pursuant to the Investment Agreement, such Investment Note will mature on or after November 5, 2019 and bear interest at a rate of
12.5%
per annum payable in-kind prior to December 31, 2018 and in cash on or after December 31, 2018. The Investment Note, if any, will be our unsecured obligation subordinate in right of payment to any of our secured obligations under the Third A&R Revolving Credit Agreement and will contain covenants and events of default no more restrictive than those currently provided in the Third A&R Revolving Credit Agreement.
Pursuant to the Backstop Agreement, if Holdings is unable to satisfy its obligations under the Investment Agreement with cash on hand upon the occurrence of a Partial Investment Trigger or a Full Investment Trigger, the Sponsors have agreed to fund Holdings’ shortfall in providing the Committed Amount by contributing each Sponsor’s respective pro-rata portion of the shortfall to Holdings or, at the election of each Sponsor, directly to us. As consideration for any amounts contributed directly to us by a Sponsor pursuant to the Backstop Agreement, we will issue to such Sponsor the common units or Investment Note that would have otherwise been issued to Holdings under the Investment Agreement with respect to the amount contributed by the Sponsor.
Based upon the Partnership’s financial forecast, the Fifth Amendment, as well as the Committed Amount, we believe management's executed plans provide the Partnership with sufficient liquidity to fund future operations through at least twelve months from the date that these financial statements were issued.
Basis of Presentation
We prepared this report under the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Accordingly, these condensed consolidated financial statements do not include all of the disclosures required by GAAP and should be read in conjunction with our
2016
Annual Report on Form 10-K (“
2016
Annual Report on Form 10-K”). The condensed consolidated financial statements as of
March 31, 2017
and
December 31, 2016
, and for the
three months ended March 31, 2017
and
2016
, are unaudited and have been prepared on the same basis as the audited financial statements included in our
2016
Annual Report on Form 10-K. Adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations and financial position have been included herein. All intercompany accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements were prepared in conformity with GAAP, which requires management to make various estimates and assumptions that may affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results may differ from those estimates. Information for interim periods may not be indicative of our operating results for the entire year.
The disclosures included in this report provide an update to our
2016
Annual Report on Form 10-K.
We evaluate events that occur after the balance sheet date, but before the financial statements are issued, for potential recognition or disclosure. Based on the evaluation, we determined that there were no material subsequent events for recognition or disclosure other than those disclosed in this report. See Note 13.
Segments
Our chief operating decision-maker is the Chief Executive Officer who reviews financial information presented on a consolidated basis in order to assess our performance and make decisions about resource allocations. There are no segment managers who are held accountable by the chief operating decision-maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we have determined that we have
one
reportable segment.
Significant Accounting Policies
During the
first
quarter of
2017
, there were no material changes to our significant accounting policies described in Note 1 of our 2016 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Accounting standard-setting organizations frequently issue new or revised accounting pronouncements. We review and evaluate new pronouncements and existing pronouncements to determine their impact, if any, on our condensed consolidated financial statements. We are evaluating the impact of each pronouncement on our condensed consolidated financial statements.
In 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance under GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers and in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In April 2016, the FASB issued an accounting pronouncement that updates the identifying performance obligations and licensing implementation guidance. We are currently evaluating our contract mix, developing our implementation plan, and assessing the impact to our existing accounting policies and controls that may be impacted by the standard. The standard will become effective beginning in 2018.
2. NET LOSS PER LIMITED PARTNER UNIT AND DISTRIBUTIONS
Net Loss Per Limited Partner Unit
The following is a reconciliation of net loss attributable to limited partners and the limited partner units used in the basic and diluted earnings per unit calculations for the
three months ended March 31, 2017
and
2016
(in thousands, except unit and per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Net loss
|
|
$
|
(15,383
|
)
|
|
$
|
(15,520
|
)
|
General partner unit in-kind distribution
|
|
(8
|
)
|
|
—
|
|
Net loss attributable to Holdings
|
|
—
|
|
|
—
|
|
Net loss attributable to partners
|
|
$
|
(15,391
|
)
|
|
$
|
(15,520
|
)
|
|
|
|
|
|
General partner's interest
(1)
|
|
$
|
(316
|
)
|
|
$
|
(311
|
)
|
Class B Convertible limited partner interest
(1)
|
|
(3,335
|
)
|
|
(4,286
|
)
|
Limited partners' interest
(1)
|
|
|
|
|
Common
|
|
$
|
(9,380
|
)
|
|
$
|
(7,643
|
)
|
Subordinated
|
|
(2,360
|
)
|
|
(3,280
|
)
|
|
|
(1)
|
General Partner's and limited partners’ interests are calculated based on the allocation of net losses for the period, net of the General Partner unit in-kind distributions. The Class B Convertible Unit interest is calculated based on the allocation of only net losses for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Common Units
|
|
2017
|
|
2016
|
Interest in net loss
|
|
$
|
(9,380
|
)
|
|
$
|
(7,643
|
)
|
Effect of dilutive units - numerator
(1)
|
|
—
|
|
|
—
|
|
Dilutive interest in net loss
|
|
$
|
(9,380
|
)
|
|
$
|
(7,643
|
)
|
|
|
|
|
|
Weighted-average units - basic
|
|
48,521,512
|
|
|
28,445,879
|
|
Effect of dilutive units - denominator
(1)
|
|
—
|
|
|
—
|
|
Weighted-average units - dilutive
|
|
48,521,512
|
|
|
28,445,879
|
|
|
|
|
|
|
Basic and diluted net loss per common unit
|
|
$
|
(0.19
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Subordinated Units
|
|
2017
|
|
2016
|
Interest in net loss
|
|
$
|
(2,360
|
)
|
|
$
|
(3,280
|
)
|
Effect of dilutive units - numerator
(1)
|
|
—
|
|
|
—
|
|
Dilutive interest in net loss
|
|
$
|
(2,360
|
)
|
|
$
|
(3,280
|
)
|
|
|
|
|
|
Weighted-average units - basic
|
|
12,213,713
|
|
|
12,213,713
|
|
Effect of dilutive units - denominator
(1)
|
|
—
|
|
|
—
|
|
Weighted-average units - dilutive
|
|
12,213,713
|
|
|
12,213,713
|
|
|
|
|
|
|
Basic and diluted net loss per subordinated unit
|
|
$
|
(0.19
|
)
|
|
$
|
(0.27
|
)
|
|
|
(1)
|
Because we had a net loss for all periods for common units and the subordinated units, the effect of the dilutive units would be anti-dilutive to the per unit calculation. Therefore, the weighted average units outstanding are the same for basic and dilutive net loss per unit for those periods. The weighted average units that were not included in the computation of diluted per unit amounts were
89,089
unvested awards granted under the LTIP for the three months ended March 31, 2017. There were no weighted average units not included in the computation of diluted per units amounts for the three months ended March 31, 2016.
|
Our calculation of the number of weighted-average units outstanding includes the common units that have been awarded to our directors that are deferred under our Non-Employee Director Deferred Compensation Plan.
Cash Distributions
Our agreement of limited partnership (as amended and restated, the “Partnership Agreement”), requires that within
45 days
after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date, as determined by our General Partner. There is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. Beginning with the third quarter of 2014, until such time that we have a distributable cash flow divided by cash distributions ratio (“Distributable Cash Flow Ratio”) of at least
1.0
, Holdings, the indirect holder of all of our subordinated units, waived the right to receive distributions on any subordinated units that would cause the Distributable Cash Flow Ratio to be less than
1.0
. In addition, the First Amendment (as defined in Note 5) imposed additional restrictions on our ability to declare and pay quarterly cash distributions with respect to our subordinated units. Additionally, we are restricted under the Fifth Amendment from paying a distribution with respect to our common units until our Consolidated Total Leverage Ratio is below
5.0
. See Note 5.
The board of directors of our General Partner suspended paying a quarterly distribution with respect to the fourth quarter of 2015, every quarter of 2016 and the first quarter of 2017 to reserve any excess cash for the operation of our business. The board of directors of our General Partner and our management believe this suspension to be in the best interest of our unitholders and will continue to evaluate our ability to reinstate the distribution in future periods.
Paid In-Kind Distributions
Class B Convertible Units.
As of
March 31, 2017
, the Class B Convertible Units consisted of
17,405,250
of such units including the additional Class B Convertible Units issued in-kind as a distribution (“Class B PIK Units”). The Class B Convertible Units are not participating securities for purposes of the earnings per unit calculation. Commencing with the quarter ended September 30, 2014 and until converted, as long as certain requirements are met, the holders of the Class B Convertible Units will receive quarterly distributions in an amount equal to
$0.3257
per unit. These distributions will be paid quarterly in Class B PIK Units within
45 days
after the end of each quarter. Our General Partner was entitled, and has exercised its right, to retain its
2.0%
general partner interest in us in connection with the original issuance of the Class B Convertible Units. In connection with future distributions of Class B PIK Units, the General Partner is entitled to a corresponding distribution to maintain its
2.0%
general partner interest in us. The Class B Convertible Units have the same rights, preferences and privileges, and are subject to the same duties and obligations, as our common units, with certain exceptions. See Note 7.
The following table presents the Class B PIK Units distributions issued on the Class B Convertible Units for the periods ended December 31, 2016 and March 31, 2017 (in thousands, except per unit and in-kind distribution units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Date
|
|
Attributable to the Quarter Ended
|
|
Per Unit Distribution
|
|
In-Kind Class B Convertible Unit
Distributions to Class B Convertible Holders
|
|
In-Kind
Class B Convertible Distributions
Value
(1)
|
|
In-Kind
Unit
Distribution
to General
Partner
|
|
In-Kind General Partner Distribution Value
(1)
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
May 11, 2017
|
|
March 31, 2017
|
|
$
|
0.3257
|
|
|
304,615
|
|
|
$
|
1,060
|
|
|
6,216
|
|
|
$
|
22
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
February 14, 2017
|
|
December 31, 2016
|
|
$
|
0.3257
|
|
|
299,375
|
|
|
$
|
404
|
|
|
6,109
|
|
|
$
|
8
|
|
|
|
(1)
|
The fair value was calculated as required, based on the common unit price at the quarter end date for the period attributable to the distribution, multiplied by the number of units distributed.
|
3. FINANCIAL INSTRUMENTS
Fair Value Measurements
We apply recurring fair value measurements to our financial assets and liabilities. In estimating fair value, we generally use a market approach and incorporate assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. The fair value measurement inputs we use vary from readily observable inputs that represent market data obtained from independent sources to unobservable inputs that reflect our own market assumptions that cannot be validated through external pricing sources. Based on the observability of the inputs used in the valuation techniques, the financial assets and liabilities carried at fair value in the financial statements are classified as follows:
|
|
•
|
Level 1—Represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes our cash and cash equivalents.
|
|
|
•
|
Level 2—Represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category primarily includes variable rate debt, over-the-counter swap contracts based upon natural gas price indices and interest rate derivative transactions.
|
|
|
•
|
Level 3—Represents derivative instruments whose fair value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from market sources. We do not have financial assets and liabilities classified as Level 3.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy must be determined based on the lowest level input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable represent fair values based on the short-term nature of these instruments. The fair value of our Credit Facility (defined in Note 5) approximates its carrying amount due primarily to the variable nature of the interest rate of the instrument and is considered a Level 2 fair value measurement. As of March 31, 2017, the fair value of our term loan was
$389.5 million
, based on recent trading levels and is considered a Level 2 fair value instrument.
Derivative Financial Instruments
Interest Rate Derivative Transactions
We enter into interest rate swap contracts whereby we receive a floating rate and pay a fixed rate to reduce the risk associated with the variability of interest rates for our term loan borrowings. The interest rate swap contract for the
$100.0 million
notional value matured on January 1, 2017. Our interest rate swap position as of the maturity date was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
Notional Amount
|
|
Fixed Rate
|
|
Effective Date
|
|
Maturity Date
|
|
December 31, 2016
|
$
|
100,000
|
|
|
1.195
|
%
|
|
June 30, 2015
|
|
January 1, 2017
|
|
(15
|
)
|
Effectively, we enter into interest rate cap contracts to limit our London Interbank Offered Rate (“LIBOR”) based interest rate risk on the portion of debt hedged at the contracted cap rate. Our interest rate cap position was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
Notional Amount
|
|
Cap Rate
|
|
Effective Date
|
|
Maturity Date
|
|
March 31, 2017
|
$
|
80,000
|
|
|
3.000
|
%
|
|
June 30, 2015
|
|
June 30, 2017
|
|
—
|
|
50,000
|
|
|
3.000
|
%
|
|
December 31, 2015
|
|
December 31, 2017
|
|
—
|
|
50,000
|
|
|
3.000
|
%
|
|
June 30, 2016
|
|
June 30, 2018
|
|
1
|
|
40,000
|
|
|
3.000
|
%
|
|
December 31, 2016
|
|
January 1, 2018
|
|
—
|
|
40,000
|
|
|
3.000
|
%
|
|
December 31, 2016
|
|
July 1, 2018
|
|
1
|
|
40,000
|
|
|
3.000
|
%
|
|
December 31, 2016
|
|
January 1, 2019
|
|
4
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
These interest rate derivatives are not designated as cash flow hedging instruments for accounting purposes and as a result, changes in the fair value are recognized in interest expense immediately.
The fair value of our interest rate derivative transactions is determined based on a discounted cash flow method using contractual terms of the transactions. The floating coupon rate is based on observable rates consistent with the frequency of the interest cash flows. We have elected to present our interest rate derivatives net in the balance sheets. There was no effect of offsetting in the balance sheets as of
March 31, 2017
or
December 31, 2016
.
The fair values of our interest rate derivative transactions were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
Fair Value Measurement as of
|
|
March 31, 2017
|
|
December 31, 2016
|
Current interest rate derivative assets
|
$
|
3
|
|
|
$
|
2
|
|
Non-current interest rate derivative assets
|
3
|
|
|
2
|
|
Current interest rate derivative (liabilities)
|
—
|
|
|
(15
|
)
|
Total interest rate derivatives
|
$
|
6
|
|
|
$
|
(11
|
)
|
The realized and unrealized amounts recognized in interest expense associated with derivatives were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Unrealized loss (gain) on interest rate derivatives
|
$
|
(2
|
)
|
|
$
|
30
|
|
Realized loss (gain) on interest rate derivatives
|
(15
|
)
|
|
99
|
|
4. LONG-LIVED ASSETS
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life (yrs)
|
|
March 31, 2017
|
|
December 31, 2016
|
Pipelines
|
15-30
|
|
$
|
554,223
|
|
|
$
|
552,540
|
|
Gas processing, treating and other plants
|
15
|
|
510,316
|
|
|
509,840
|
|
Compressors
|
5-15
|
|
76,443
|
|
|
72,054
|
|
Rights of way and easements
|
15
|
|
49,998
|
|
|
49,998
|
|
Furniture, fixtures and equipment
|
5
|
|
9,767
|
|
|
9,269
|
|
Capital lease vehicles
|
3-5
|
|
2,123
|
|
|
1,713
|
|
Total property, plant and equipment
|
|
|
1,202,870
|
|
|
1,195,414
|
|
Accumulated depreciation and amortization
|
|
|
(280,627
|
)
|
|
(262,709
|
)
|
Total
|
|
|
922,243
|
|
|
932,705
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
15,788
|
|
|
16,150
|
|
Land and other
|
|
|
22,485
|
|
|
22,431
|
|
Property, plant and equipment, net
|
|
|
$
|
960,516
|
|
|
$
|
971,286
|
|
Depreciation is provided using the straight-line method based on the estimated useful life of each asset.
As part of Partnership-wide cost-saving initiatives, in December 2016 we shut down our Conroe processing plant and converted our Gregory cryogenic processing plant (“Gregory”) into a compressor station. The gas previously processed at Gregory has been re-rerouted to our Woodsboro processing facility beginning in the fourth quarter of 2016.
In an effort to further our cost-saving initiatives, management decided to mothball the Bonnie View fractionation facility (“Bonnie View”) starting in the second quarter of 2017. Bonnie View will remain operational as a swing plant until the scheduled maintenance of Holdings’ Robstown fractionation facility (“Robstown”) is completed in May 2017. Once completed, Robstown will continue to fractionate all Y-grade products and a majority of Bonnie View will be idled in June 2017 until such time as the facility is needed again. We expect to continue the use of NGL storage and truck unloading facilities at Bonnie View in the future.
In January 2015, we shut down Gregory for four weeks due to a fire at the facility. In December 2016, we
reached a settlement related to the Gregory fire with our insurance carriers. We received a payment of
$2.0 million
from our insurance carriers in the first quarter of 2017 and recorded a
$1.5 million
gain related to insurance proceeds received in excess of expenditures incurred to repair Gregory. As stipulated in the Term Loan Agreement (defined in Note 5), we used
$1.0 million
(
$2.0 million
of proceeds, net of the 2015 insurance deductible of
$0.5 million
and additional expenditures to repair Gregory of
$0.5 million
) of the proceeds to make a mandatory prepayment on our term loan.
Intangible Assets
Intangible assets of
$1.4 million
as of
March 31, 2017
and
December 31, 2016
, respectively, represent the unamortized value assigned to long-term supply and gathering contracts. These intangible assets are amortized on a straight-line basis over the
30
-year expected useful lives of the contracts through 2041. Amortization expense over the next
five
years related to intangible assets is not significant.
5. LONG-TERM DEBT
Our outstanding debt and related information at
March 31, 2017
and
December 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Revolving credit facility due 2019
|
$
|
113,055
|
|
|
$
|
122,555
|
|
Term loans (including original issue discount of $1.4 million and $1.5 million as of March 31, 2017 and December 31, 2016, respectively) due 2021
|
435,212
|
|
|
437,291
|
|
Total long-term debt (including current portion)
|
548,267
|
|
|
559,846
|
|
Current portion of long-term debt
|
(4,256
|
)
|
|
(4,500
|
)
|
Deferred financing costs
|
(10,701
|
)
|
|
(11,474
|
)
|
Total long-term debt
|
$
|
533,310
|
|
|
$
|
543,872
|
|
|
|
|
|
|
|
Outstanding letters of credit
|
$
|
16,211
|
|
|
$
|
19,378
|
|
Remaining unused borrowings
|
$
|
15,734
|
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Weighted average interest rate
|
5.80
|
%
|
|
5.20
|
%
|
Average outstanding borrowings
|
$
|
553,699
|
|
|
$
|
626,353
|
|
Maximum borrowings
|
$
|
553,805
|
|
|
$
|
628,055
|
|
Senior Credit Facilities
Our long-term debt arrangements consist of (i) the Third A&R Revolving Credit Agreement and (ii) a Term Loan Credit Agreement with Wilmington Trust, National Association, UBS Securities LLC and Barclays Bank PLC and a syndicate of lenders (the “Term Loan Agreement” and, together with the Third A&R Revolving Credit Agreement, the “Senior Credit Facilities”). Substantially all of our assets are pledged as collateral under the Senior Credit Facilities, with the security interest of the facilities ranking pari passu.
Third A&R Revolving Credit Agreement
The Third A&R Revolving Credit Agreement is a
five
-year
$200 million
revolving credit facility due August 4, 2019 (the “Credit Facility”). Borrowings under our Credit Facility bear interest at LIBOR plus an applicable margin or a base rate as defined in the Third A&R Revolving Credit Agreement. Pursuant to the Third A&R Revolving Credit Agreement, among other things:
|
|
(a)
|
the letters of credit sublimit was set at
$75 million
; and
|
|
|
(b)
|
if we fail to comply with the Consolidated Total Leverage Ratio, Consolidated Senior Secured Leverage Ratio and the Consolidated Interest Coverage Ratio covenants (each as defined in the Third A&R Revolving Credit Agreement, and collectively the “Financial Covenants”) (each such failure, a “Financial Covenant Default”), we have the right (a limited number of times) to cure such Financial Covenant Default by having the Sponsors purchase equity interests in or make capital contributions to us resulting in, among other things, proceeds that, if added to Consolidated EBITDA (as defined in the Third A&R Revolving Credit Agreement) would result in us satisfying the Financial Covenants.
|
Amendments to Third A&R Revolving Credit Agreement
On May 7, 2015, we entered into the first amendment to our Third A&R Revolving Credit Agreement among the Partnership, as the borrower, the lenders and other parties thereto (the “First Amendment”).
The First Amendment, among other things:
(i) revised the maximum Consolidated Total Leverage Ratio set at
5.00
to 1.0 as of the last day of each fiscal quarter after September 30, 2016, without any step-ups in connection with acquisitions;
(ii) increased the applicable margins used in connection with the loans and the commitment fee so that the applicable margin for Eurodollar Loans (as used in the Third A&R Revolving Credit Agreement) ranges from
2.00%
to
4.50%
, the applicable margin for base rate loans ranges from
1.00%
to
3.50%
and the applicable rate for commitment fees ranges from
0.375%
to
0.500%
; and
(iii) allowed us an unlimited number of quarterly equity cures related to our Financial Covenant Default through the fourth quarter of 2016, and no more than two in a twelve month period thereafter for the life of the agreement. Beginning on January 1, 2017, we are limited to no more than four equity cures, with no more than two in a twelve month period.
On July 25, 2016, we determined Holdings’ cash contribution to us for the first quarter 2016 equity cure had not been timely transferred to us, as required under the Third A&R Revolving Credit Agreement, due to an administrative oversight, which resulted in a default. On July 26, 2016, Holdings fully funded the first quarter 2016 equity cure. On August 4, 2016, we entered into the limited waiver and second amendment to the Third A&R Revolving Credit Agreement whereby the lenders waived any default or right to exercise any remedy as a result of this technical event of default to fund timely the first quarter 2016 equity cure.
On November 8, 2016, we entered into the third amendment to the Third A&R Revolving Credit Agreement (the “Third Amendment”) which stipulated, among other things, that i) the equity cure funding deadline for the quarter ended September 30, 2016 (“Q3 2016 Equity Cure”) was extended from November 23, 2016 to December 16, 2016, and ii) the total revolving credit exposure (generally defined as funded borrowings plus letters of credit issued and outstanding) was limited to
$145.2 million
until the Q3 2016 Equity Cure was funded. The Third Amendment stipulated, among other things, that any Excess Cash Balance (generally defined as unrestricted book cash on hand that exceeds
$15 million
) as of the last business day of each week would be used to temporarily reduce funded borrowings under our Credit Facility.
On December 9, 2016, we entered into the fourth amendment to the Third A&R Revolving Credit Agreement which stipulated, among other things, that i) the deadline for funding the Q3 2016 Equity Cure was further extended and ii) that any account into which we deposited funds, securities or commodities will be subject to a lien and control agreement for the benefit of the secured parties under the Third A&R Revolving Credit Agreement.
On December 29, 2016, we entered into the Fifth Amendment which, among other things:
(i) permitted a full waiver for all defaults or events of default arising out of our failure to comply with the financial covenant to maintain a Consolidated Total Leverage Ratio less than
5.00
to
1.00
for the quarter ended September 30, 2016;
(ii) reduced the total aggregate commitments under the Third A&R Revolving Credit Agreement from
$200 million
to
$145 million
and reduced the sublimit for letters of credit from
$75 million
to
$50 million
. Total aggregate commitments will be further reduced to
$140 million
on September 30, 2017,
$135 million
on December 31, 2017,
$125 million
on March 31, 2018,
$120 million
on June 30, 2018 and
$115 million
on December 31, 2018 and will also be reduced in an amount equal to the net proceeds of any Permitted Note Indebtedness we may incur in the future;
(iii) modified the borrowings under the Third A&R Revolving Credit Agreement to bear interest at the LIBOR or a base rate plus an applicable margin that cumulatively increases pursuant to the Fifth Amendment by (a) 125 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
5.00
to
1.00
, plus (b) 100 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
6.00
to
1.00
, plus (c) 100 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
7.00
to
1.00
, plus (d) 100 basis points if our Consolidated Total Leverage Ratio is greater than or equal to
8.00
to
1.00
. At our election, the 100 basis point increase to the applicable margin upon our Consolidated Total Leverage Ratio being greater than or equal to
8.00
to
1.00
may be replaced with a 150 basis point increase that is payable in kind;
(iv) suspended the Consolidated Total Leverage Ratio and Consolidated Senior Secured Leverage Ratio financial covenants and reduced the Consolidated Interest Coverage Ratio financial covenant requirement from
2.50
to
1.00
to
1.50
to
1.00
for all periods ending on or prior to the Ratio Compliance Date;
(v) requires us to generate Consolidated EBITDA in certain minimum amounts beginning with the quarter ending December 31, 2016 and rolling forward thereafter through the quarter ending December 31, 2018;
(vi) requires us to maintain at least
$3 million
of Liquidity (as defined therein) as of the last business day of each calendar week;
(vii) restricts our capital expenditures for growth and maintenance to not exceed certain amounts per fiscal year; and
(viii) beginning with the fiscal quarter ending March 31, 2019, our Consolidated Total Leverage Ratio cannot exceed
5.00
to
1.00
and our Consolidated Senior Secured Leverage Ratio cannot exceed
3.50
to
1.00
. Until such time as our Consolidated Total Leverage Ratio is less than
5.00
to
1.00
, we will also be restricted from making cash distributions to our unitholders and from entering into acquisition or merger agreements with third-party businesses involving a purchase price greater than
$10 million
, unless such acquisition is funded entirely using the proceeds from the issuance of equity. In addition, until such time as our Consolidated Total Leverage Ratio is less than or equal to
5.00
to
1.00
, we will be required to repay any outstanding borrowings under the Credit Facility in an amount equal to
50%
of our Excess Cash Flow (as defined in the Fifth Amendment).
Term Loan Agreement
The Term Loan Agreement is a
$450 million
senior secured term loan facility maturing on August 4, 2021. Borrowings under our Term Loan Agreement bear interest at LIBOR plus
4.25%
or a base rate as defined in the respective credit agreement with a LIBOR floor of
1.00%
. The facility will amortize in equal quarterly installments in an aggregate amount equal to
1%
of the original principal amount, less any mandatory prepayments (as defined in the Term Loan Agreement), (
$1.064 million
), with the remainder due on the maturity date.
Deferred Financing Costs
Deferred financing costs are capitalized and amortized as interest expense under the effective interest method over the term of the related debt. The unamortized balance of deferred financing costs is included in long-term debt on the balance sheets. Changes in deferred financing costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred financing costs, January 1
|
$
|
11,474
|
|
|
$
|
14,141
|
|
Capitalization of deferred financing costs
|
96
|
|
|
86
|
|
Amortization of deferred financing costs
|
(869
|
)
|
|
(762
|
)
|
Deferred financing costs, March 31
|
$
|
10,701
|
|
|
$
|
13,465
|
|
6. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we are party to certain legal or administrative proceedings that arise in the ordinary course and are incidental to our business. For example, during periods when we are expanding our operations through the development of new pipelines or the construction of new plants, we may become involved in disputes with landowners that are in close proximity to our activities. While we are involved currently in several such proceedings and disputes, our management believes that none of such proceedings or disputes will have a material adverse effect on our results of operations, cash flows or financial condition. However, future events or circumstances, currently unknown to management, will determine whether the resolution of any litigation or claims ultimately will have a material effect on our results of operations, cash flows or financial condition in any future reporting periods.
Formosa.
On March 5, 2013, one of our subsidiaries, Southcross Marketing Company Ltd., filed suit in a District Court
of Dallas County against Formosa Hydrocarbons Company, Inc. (“Formosa”). The lawsuit sought recoveries of losses that we
believe our subsidiary experienced as a result of the failure of Formosa to perform certain obligations under the gas processing
and sales contract between the parties. Formosa filed a response generally denying our claims and, later, Formosa filed a
counterclaim against our subsidiary claiming our subsidiary breached the gas processing and sales contract and a related
agreement between the parties for the supply by Formosa of residue gas to a third party on behalf of our subsidiary. On
December 30, 2016, we reached a final settlement with Formosa and the appeals have been dismissed. We were awarded
$3.1 million
, of which we received
$1.6 million
on December 30, 2016. We recorded a receivable of
$1.6 million
in our consolidated
balance sheet as of December 31, 2016 for the remaining balance, which was received in January 2017.
Regulatory Compliance
In the ordinary course of our business, we are subject to various laws and regulations. In the opinion of our management, compliance with current laws and regulations will not have a material effect on our results of operations, cash flows or financial condition.
Leases
Capital Leases
We have vehicle leases that are classified as capital leases. The termination dates of the lease agreements vary from
2017
to 2019. We recorded amortization expense related to the capital leases of
$0.1 million
and
$0.1 million
for the
three months ended March 31, 2017
and 2016, respectively. Capital leases entered into during the
three months ended March 31, 2017
and 2016, were
$0.4 million
and
$0.1 million
, respectively. The capital lease obligation amounts included on the balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Other current liabilities
|
$
|
464
|
|
|
$
|
396
|
|
Other non-current liabilities
|
560
|
|
|
497
|
|
Total
|
$
|
1,024
|
|
|
$
|
893
|
|
Operating Leases
We maintain operating leases in the ordinary course of our business activities. These leases include those for office and other operating facilities and equipment. The termination dates of the lease agreements vary from
2017
to 2025. Expenses associated with operating leases, recorded in operations and maintenance expenses and general and administrative expenses in our statements of operations, were
$1.6 million
and
$0.9 million
for the
three months ended March 31, 2017
and 2016, respectively. A rental reimbursement included in our lease agreement associated with the office space we leased in June 2015 of
$1.9 million
, net of amortization, has been recorded as a deferred liability on our condensed consolidated balance sheets as of March 31, 2017. This amount will continue to be amortized against the lease payments over the length of the lease term.
7. PARTNERS’ CAPITAL
Ownership
Our units outstanding as of
March 31, 2017
are as follows (in units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners’ Capital
|
|
|
|
|
Owned by Parent
|
|
|
Public
|
|
Holdings
|
|
Class B
|
|
|
|
General
|
|
|
Common
|
|
Common
|
|
Convertible
|
|
Subordinated
|
|
Partner
|
Units outstanding as of December 31, 2016
|
|
22,010,016
|
|
|
26,492,074
|
|
|
17,105,875
|
|
|
12,213,713
|
|
|
1,588,198
|
|
Vesting of LTIP units, net
|
|
36,361
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
In-kind distributions and issuances to general partner to maintain 2.0% ownership
|
|
—
|
|
|
—
|
|
|
299,375
|
|
|
—
|
|
|
6,851
|
|
Units outstanding as of March 31, 2017
|
|
22,046,377
|
|
|
26,492,074
|
|
|
17,405,250
|
|
|
12,213,713
|
|
|
1,595,049
|
|
Common Units
Our common units represent limited partner interests in us. The holders of our common units are entitled to participate in our distributions (to the extent distributions are made) and are entitled to exercise the rights and privileges available to limited partners under our Partnership Agreement.
Class B Convertible Units
As of March 31, 2017, the Class B Convertible Units consist of
17,405,250
units, inclusive of any Class B PIK Units issued. The Class B Convertible Units have the same rights, preferences and privileges, and are subject to the same duties and obligations, as our common units, with certain exceptions as noted below.
Our Partnership Agreement does not allow additional Class B Convertible Units (other than Class B PIK Units) to be issued without the prior approval of our General Partner and the holders of a majority of the outstanding Class B Convertible Units. As of
March 31, 2017
, all of our outstanding Class B Convertible Units were indirectly owned by Holdings.
Distribution Rights:
The holders of the Class B Convertible Units receive quarterly distributions in an amount equal to
$0.3257
per unit paid in Class B PIK Units (based on a unit issuance price of
$18.61
) within
45 days
after the end of each quarter. Our General Partner was entitled, and has exercised its right, to retain its
2.0%
general partner interest in us in connection with the original issuance of Class B Convertible Units. In connection with future distributions of Class B PIK Units, the General Partner is entitled to a corresponding distribution to maintain its
2.0%
general partner interest in us.
Conversion Rights:
The Class B Convertible Units are convertible into common units on a one-for-one basis and, once converted, will participate in cash distributions pari passu with all other common units. The conversion of Class B Convertible Units will occur on the date we (i) make a quarterly distribution equal to or greater than
$0.44
per common unit, (ii) generate Class B Distributable Cash Flow (as defined in our Partnership Agreement) in an amount sufficient to pay the declared distribution on all units for the
two
quarters immediately preceding the date of conversion (the “measurement period”) and (iii) forecast paying a distribution equal to or greater than
$0.44
per unit from forecasted Class B Distributable Cash Flow on all outstanding common units for the
two
quarters immediately following the measurement period.
Voting Rights:
The Class B Convertible Units generally have the same voting rights as common units, and have one vote for each common unit into which such units are convertible.
Subordinated Units
Subordinated units represent limited partner interests in us and convert to common units at the end of the Subordination Period (as defined in our Partnership Agreement). The principal difference between our common units and our subordinated units is that in any quarter during the Subordination Period, holders of the subordinated units are not entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units do not accrue arrearages. Beginning with the third quarter of 2014, until such time we have a Distributable Cash Flow Ratio of at least
1.0
, Holdings, the indirect holder of the subordinated units, has waived the right to receive distributions on any subordinated units that would cause the Distributable Cash Flow Ratio to be less than
1.0
. In addition, the Fifth Amendment imposed additional restrictions on our ability to declare and pay quarterly cash distributions with respect to our subordinated units. See Note 5.
General Partner Interests
As defined by our Partnership Agreement, general partner units are not considered to be units (common or subordinated), but are representative of our General Partner’s
2.0%
ownership interest in us. Our General Partner has received general partner unit PIK distributions in connection with the Class B Convertible Units. In connection with other equity issuances, our General Partner has made capital contributions in exchange for additional general partner units to maintain its
2.0%
ownership interest in us.
8. TRANSACTIONS WITH RELATED PARTIES
Affiliated Directors
The board of directors of our General Partner is comprised of
two
directors designated by EIG (one of which must be independent),
two
directors designated by Tailwater (one of which must be independent),
two
directors designated by the Lenders (one of which must be independent) and
one
director by majority. Our non-employee directors are reimbursed for certain expenses incurred for their services to us. The director services fees and expenses are included in general and administrative expenses in our statements of operations. We incurred fees and expenses related to the services from our affiliated directors as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Charlesbank Capital Partners, LLC(1)
|
$
|
—
|
|
|
$
|
66
|
|
EIG
|
35
|
|
|
26
|
|
Tailwater
|
36
|
|
|
29
|
|
Total fees and expenses paid for director services to affiliated entities
|
$
|
71
|
|
|
$
|
121
|
|
|
|
(1)
|
Charlesbank Capital Partners, LLC indirectly owned approximately one-third of Holdings until April 13, 2016.
|
Southcross Energy Partners GP, LLC (our General Partner)
Our General Partner does not receive a management fee or other compensation for its management of us. However, our General Partner and its affiliates are entitled to reimbursements for all expenses incurred on our behalf, including, among other items, compensation expense for all employees required to manage and operate our business. We incurred expenses related to these reimbursements as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Reimbursements included in general and administrative expenses
|
$
|
4,697
|
|
|
$
|
3,496
|
|
Reimbursements included in operations and maintenance expenses
|
3,912
|
|
|
5,298
|
|
Total reimbursements to our General Partner and its affiliates
|
$
|
8,609
|
|
|
$
|
8,794
|
|
Other Transactions with Affiliates
We have a gas gathering and processing agreement (the “G&P Agreement”) and an NGL sales agreement (the “NGL Agreement”) with an affiliate of Holdings. Under the terms of these commercial agreements, we transport, process and sell rich natural gas for the affiliate of Holdings in return for agreed-upon fixed fees, and we can sell natural gas liquids that we own to Holdings at agreed-upon fixed prices. The NGL Agreement also permits us to utilize Holdings’ fractionation services at market-based rates. We had purchases of NGLs from Holdings of
$0.2 million
for the
three months ended March 31, 2017
.
We have a series of commercial agreements with affiliates of Holdings including a gas gathering and treating agreement, a compression services agreement, a repair and maintenance agreement and an NGL transportation agreement. Under the terms of these commercial agreements, we gather, treat, transport, compress and redeliver natural gas for the affiliates of Holdings in return for agreed-upon fixed fees. In addition, under the NGL transportation agreement, we transport a minimum volume of NGLs per day at a fixed rate per gallon. The operational expense associated with such agreements was capped at
$1.7 million
per quarter through December 31, 2016. In the first quarter of 2016, we exceeded this cap by
$1.0 million
.
We recorded revenues from affiliates of
$40.8 million
and
$24.3 million
for the
three months ended March 31, 2017
and 2016, respectively, in accordance with the G&P Agreement, the NGL Agreement and the series of commercial agreements.
We had accounts receivable due from affiliates of
$17.0 million
and
$8.0 million
as of
March 31, 2017
and
December 31, 2016
, respectively, and accounts payable due to affiliates of
$0.5 million
as of
December 31, 2016
. The affiliate receivable and payable balances are related primarily to transactions associated with Holdings, noted above, and our joint venture investments (defined in Note 11). The receivable balance due from Holdings is current as of
March 31, 2017
.
In connection with the execution of the Fifth Amendment, on December 29, 2016, the Partnership entered into (i) the
Investment Agreement with Holdings and Wells Fargo Bank, N.A., (ii) the Backstop Agreement with Holdings, Wells Fargo
Bank, N.A. and the Sponsors and (iii) the Equity Cure Contribution Amendment with Holdings. See Notes 1 and 5 for
additional details.
9. INCENTIVE COMPENSATION
Unit Based Compensation
Long-Term Incentive Plan
The 2012 Long-Term Incentive Plan (“LTIP”) provides incentive awards to eligible officers, employees and directors of our General Partner. Awards granted to employees under the LTIP generally vest over a
three
year period in equal annual installments, or in the event of a change in control, in either a common unit or an amount of cash equal to the fair market value of a common unit at the time of vesting, as determined by our management at its discretion. These awards also include distribution equivalent rights that grant the holder the right to receive an amount equal to the cash distributions on common units during the period the award remains outstanding.
On November 9, 2015, the holders of a majority of our limited partner interests approved an amendment to the LTIP which increased the number of common units that may be granted as awards by
4,500,000
units. The term of the LTIP also was extended to a period of 10 years following the amendment's adoption.
The following table summarizes information regarding awards of units granted under the LTIP:
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Fair
Value at Grant Date
|
|
Unvested - December 31, 2016
|
368,281
|
|
|
$
|
14.91
|
|
|
Forfeited units
|
(124,200
|
)
|
|
$
|
15.75
|
|
|
Units recaptured for tax withholdings
(1)
|
(17,057
|
)
|
|
$
|
10.85
|
|
|
Vested units
(1)
|
(36,361
|
)
|
|
$
|
10.94
|
|
|
Unvested - March 31, 2017
|
190,663
|
|
|
$
|
14.77
|
|
|
(1) The weighted-average fair value price on the date of vesting for our vested units was
$2.66
. The weighted-average fair value price on the date of vesting for our units recaptured for tax withholdings was
$2.64
.
For the
three months ended March 31, 2017
, we did not grant any equity awards under the LTIP. As of
March 31, 2017
, we had total unamortized compensation expense of
$0.9 million
related to unvested awards. Compensation expense associated with awards is expected to be recognized over the
three
-year vesting period from each equity award’s grant date. As of
March 31, 2017
, we had
5,313,173
units available for issuance under the LTIP.
Unit Based Compensation Expense
The following table summarizes information regarding recognized compensation expense, which is included in general and administrative and operations and maintenance expenses on our statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Unit-based compensation
|
$
|
257
|
|
|
$
|
981
|
|
Employee Savings Plan
We have employee savings plans under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, whereby employees of our General Partner may contribute a portion of their base compensation to the employee savings plan, subject to limits. We provide a matching contribution each payroll period equal to
100%
of each employee’s contribution up to the lesser of
6%
of the employee’s eligible compensation or
$16,200
annually for the period. The following table summarizes information regarding contributions and the expense recognized for the matching contributions, which is included in general and administrative expense on our statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Matching contributions expensed for employee savings plan
|
$
|
188
|
|
|
$
|
209
|
|
10. REVENUES
We had revenues consisting of the following categories (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Sales of natural gas
|
$
|
86,504
|
|
|
$
|
62,603
|
|
Sales of NGLs and condensate
|
41,054
|
|
|
26,189
|
|
Transportation, gathering and processing fees
|
27,268
|
|
|
29,135
|
|
Other
|
332
|
|
|
1,799
|
|
Total revenues
|
$
|
155,158
|
|
|
$
|
119,726
|
|
11. INVESTMENTS IN JOINT VENTURES
We own equity interests in
three
joint ventures with Targa Resources Corp. (“Targa”) as our joint venture partner. T2 Eagle Ford Gathering Company LLC (“T2 Eagle Ford”), T2 LaSalle Gathering Company LLC (“T2 LaSalle”) and T2 EF Cogeneration Holdings LLC (“T2 Cogen”) operate pipelines and a cogeneration facility located in South Texas. We indirectly own a
50%
interest in T2 Eagle Ford, a
50%
interest in T2 Cogen and a
25%
interest in T2 LaSalle. We pay our proportionate share of the joint ventures’ operating costs, excluding depreciation and amortization, through lease capacity payments. As a result, our share of the joint ventures’ losses is related primarily to the joint ventures’ depreciation and amortization. Our maximum exposure to loss related to these joint ventures includes our equity investment, any additional capital contributions and our share of any operating expenses incurred by the joint ventures.
The joint ventures’ summarized financial data from their statements of operations for the
three months ended March 31, 2017
and
2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
T2 Eagle Ford
|
$
|
1,141
|
|
|
$
|
1,402
|
|
T2 Cogen
|
83
|
|
|
922
|
|
T2 LaSalle
|
385
|
|
|
380
|
|
|
|
|
|
Net loss
|
|
|
|
T2 Eagle Ford
|
$
|
(4,906
|
)
|
|
$
|
(4,586
|
)
|
T2 Cogen
|
(992
|
)
|
|
(1,542
|
)
|
T2 LaSalle
|
(1,468
|
)
|
|
(1,468
|
)
|
Our equity in losses of joint venture investments is comprised of the following for the
three months ended March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
T2 Eagle Ford
|
$
|
(2,453
|
)
|
|
$
|
(2,291
|
)
|
T2 Cogen
|
(496
|
)
|
|
(771
|
)
|
T2 LaSalle
|
(367
|
)
|
|
(367
|
)
|
Equity in losses of joint venture investments
|
$
|
(3,316
|
)
|
|
$
|
(3,429
|
)
|
Our investments in joint ventures is comprised of the following as of
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
T2 Eagle Ford
|
$
|
99,261
|
|
|
$
|
101,669
|
|
T2 Cogen
|
5,579
|
|
|
6,003
|
|
T2 LaSalle
|
16,108
|
|
|
16,424
|
|
Investments in joint ventures
|
$
|
120,948
|
|
|
$
|
124,096
|
|
12. CONCENTRATION OF CREDIT RISK
Our primary markets are in South Texas, Alabama and Mississippi. We have a concentration of revenues and trade accounts receivable due from customers engaged in the production, trading, distribution and marketing of natural gas and NGL products. These concentrations of customers may affect overall credit risk in that these customers may be affected similarly by changes in economic, regulatory or other factors. We analyze our customers’ historical financial and operational information before extending credit.
Our top
ten
customers for the
three months ended March 31, 2017
and
2016
represent the following percentages of consolidated revenue:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Top ten customers
|
56.0
|
%
|
|
63.3
|
%
|
We did not have any customers exceed 10% of total consolidated revenue for the
three months ended March 31, 2017
and
2016
.
For the
three months ended March 31, 2017
and
2016
, we did not experience significant non-payment for services. We had no allowance for uncollectible accounts receivable at
March 31, 2017
. We recorded an allowance for uncollectible accounts receivable of
$0.1 million
at December 31, 2015, which was written off in 2016.
13. SUBSEQUENT EVENTS
On April 5, 2017, TPL SouthTex Processing Company, LP (“TPL”), an indirect subsidiary of Targa, filed a Demand for Arbitration with the American Arbitration Association, against FL Rich Gas Services, LP, an indirect subsidiary of the Partnership (“FL Rich”) related to the operation of T2 Cogen. T2 Cogen, the owner of a cogeneration facility in South Texas, is operated by FL Rich pursuant to the terms of the Generation Plant Operating Agreement, dated March 4, 2013 (the “Operating Agreement”). TPL alleges that FL Rich (i) breached the Operating Agreement in its alleged failure to receive from the United States Environmental Protection Agency a Prevention of Significant Deterioration permit thereby harming Targa’s investment in T2 Cogen, (ii) breached its fiduciary duties with respect to funds or assets of T2 Cogen as operator of T2 Cogen under the terms of the Operating Agreement, and (iii) breached the Operating Agreement and the Limited Liability Company Agreement of T2 Cogen (the “LLC Agreement”) in installing a third turbine inside its Lone Star plant. TPL is seeking, among other things, (i) unspecified damages related to the alleged breaches under the Operating Agreement and LLC Agreement, (ii) the return of approximately
$26 million
in capital contributions to T2 Cogen received from TPL under the LLC Agreement and Operating Agreement, and (iii) the dissolution and liquidation of T2 Cogen and its assets, respectively. No arbitration hearing has yet been scheduled. We
believe this matter is without merit and we intend to defend the arbitration vigorously. Because this matter is in
an early stage, we are unable to predict its outcome and the possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on our financial position. Depending on the outcome or resolution of this matter, it could have a material effect on our financial position.
14. SUPPLEMENTAL INFORMATION
Supplemental Cash Flow Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Supplemental Disclosures:
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
$
|
8,419
|
|
|
$
|
8,046
|
|
Cash received for tax refunds
|
—
|
|
|
(55
|
)
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
Accounts payable related to capital expenditures
|
3,529
|
|
|
5,477
|
|
Capital lease obligations
|
138
|
|
|
—
|
|
Accrued distribution equivalent rights on LTIP units
|
—
|
|
|
10
|
|
Class B Convertible unit in-kind distributions
|
404
|
|
|
—
|
|
Valley Wells' operating expense cap adjustment
|
—
|
|
|
991
|
|
Capitalization of Interest Cost
We capitalize interest on projects during their construction period. Once a project is placed in service, capitalized interest, as a component of the total cost of the construction, is depreciated over the estimated useful life of the asset constructed. We incurred the following interest costs (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Total interest costs
|
$
|
9,297
|
|
|
$
|
9,528
|
|
Capitalized interest included in property, plant and equipment, net
|
(194
|
)
|
|
(358
|
)
|
Interest expense
|
$
|
9,103
|
|
|
$
|
9,170
|
|
Southcross Assets Considered Leases to Third Parties
We have pipelines that transport natural gas to
two
power plants in Nueces County, Texas under fixed-fee contracts. The contracts have a primary term through 2029 and an option to extend the agreements by an additional term of up to
ten
years. These contracts are considered operating leases under the applicable accounting guidance.
Future minimum annual demand payment receipts under these agreements as of
March 31, 2017
were as follows:
$4.2 million
for the remainder of 2017;
$2.2 million
in 2018;
$2.2 million
in 2019;
$2.2 million
in 2020 and
$13.1 million
thereafter. The revenue for the demand payments is recognized on a straight-line basis over the term of the contract. The demand fee revenues under the contracts were
$0.7 million
for the
three months ended March 31, 2017
and 2016, respectively, and have been included within transportation, gathering and processing fees within Note 10. These amounts do not include variable fees based on the actual gas volumes delivered under the contracts. Variable fees recognized in revenues within transportation, gathering and processing fees within Note 10 were
$0.8 million
for the
three months ended March 31, 2017
and 2016, respectively. Deferred revenue associated with these agreements was
$9.3 million
and
$8.5 million
at March 31, 2017 and December 31, 2016, respectively.