Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 30, 2013 |
Text Block [Abstract] | ' |
Summary of Significant Accounting Policies | ' |
Summary of Significant Accounting Policies |
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Financial Instruments and Price Risk Management |
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The Company utilizes certain derivative financial instruments to (i) manage its exposure to commodity price risk, specifically, the related change in the fair value of inventory, as well as the variability of cash flows related to forecasted transactions; (ii) ensure adequate physical supply of commodity will be available; and (iii) manage its exposure to the interest rate risk associated with fixed and variable rate borrowings. The Company records all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. Changes in the fair value of these derivative financial instruments are recorded either through current earnings or as other comprehensive income, depending on the type of transaction. |
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The Company is periodically party to certain commodity derivative financial instruments that are designated as hedges of selected inventory positions. Certain of these instruments may be designated as fair value hedges for accounting purposes. The Company is also periodically party to certain interest rate swap agreements designed to manage interest rate risk exposure. The Company’s overall objective for entering into hedges is to manage its exposure to fluctuations in commodity prices and changes in the fair market value of its inventories and fixed and variable rate borrowings. The commodity derivatives are recorded at fair value on the balance sheets as price risk management assets or liabilities and the related change in fair value is recorded to earnings in the current period as cost of product/services sold. |
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The Company had no derivatives identified as fair value hedges for accounting purposes in the three-month and nine-month periods ended September 30, 2013 and 2012. |
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The Company also enters into derivative financial instruments that may qualify as cash flow hedges, which hedge the exposure of variability in expected future cash flows predominantly attributable to variable interest payments. These derivatives are recorded on the balance sheet at fair value as other assets or other long-term liabilities. The effective portion of the gain or loss on these cash flow hedges is recorded in other comprehensive income in partner's capital and reclassified into earnings in the same period in which the hedge transaction affects earnings. In certain situations under the rules, the ineffective portion of the gain or loss is recognized as cost of product sold/services sold or interest expense in the current period. The Company did not have any derivatives designated as cash flow hedges in the three-month and nine-month periods ended September 30, 2013 and 2012. |
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The Company’s policy is to offset fair value amounts of derivative instruments and cash collateral paid or received with the same counterparty under a master netting arrangement. |
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The cash flow impact of derivative financial instruments is reflected as cash flows from operating activities in the consolidated statements of cash flows. |
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Revenue Recognition |
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The Company's gathering and processing operations gather, process, treat, compress, transport and sell natural gas pursuant to fixed-fee and percent-of-proceeds contracts. For fixed-fee contracts, the Company recognizes revenues based on the volume of natural gas gathered, processed and treated or compressed. For percent-of-proceeds contracts, the Company recognizes revenues based on the value of products sold to third parties. The Company recognizes revenues for these services and products when all of the following criteria are met: |
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• services have been rendered or products delivered; |
• persuasive evidence of an exchange arrangement exists; |
• the price for services is fixed or determinable; and |
• collectability is reasonably assured. |
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Sales of NGLs and salt are recognized at the time product is shipped or delivered to the customer depending on the sales terms. NGL processing and fractionation fees are recognized upon delivery of the product. Revenues from the COLT Hub are recognized when the contractual services are provided, such as loading of customer rail cars. Revenues from storage and transportation contracts are recognized during the period in which the storage and transportation services are provided, such as providing storage and transportation services during the period a firm service contract is in place. |
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Credit Risk and Concentrations |
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Inherent in the Company's contractual portfolio are certain credit risks. Credit risk is the risk of loss from nonperformance by suppliers, customers or financial counterparties to a contract. The Company takes an active role in managing credit risk and has established control procedures, which are reviewed on an ongoing basis. The Company attempts to minimize credit risk exposure through credit policies and periodic monitoring procedures as well as through customer deposits, letters of credit and entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate. |
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Two customers, Quicksilver Resources Inc. (“Quicksilver”) and Antero Resources Appalachian Corporation (“Antero”), accounted for approximately 44% and 13% of the Company's total revenue for the three months ended September 30, 2012, respectively. No customers accounted for 10% or more of the Company's total revenue in the three months ended September 30, 2013. Quicksilver accounted for approximately 12% and 50% of the Company's total revenue for the nine months ended September 30, 2013 and 2012, respectively. No other customer accounted for 10% or more of the Company's total revenue in those periods. All Quicksilver and Antero revenues are captured in the gathering and processing segment. |
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At December 31, 2012, Quicksilver and Antero accounted for approximately 48% and 14% of the Company's consolidated accounts receivable, respectively. No customer accounted for 10% or more of the Company's consolidated accounts receivable at September 30, 2013. |
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Use of Estimates |
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The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. |
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Inventory |
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Inventory for NGL and crude services operations, which mainly consist of NGLs, are stated at the lower of cost or market and are computed using the average cost method. Inventory for storage and transportation operations are stated at the lower of cost or market and are computed predominantly using the average cost method. Legacy CMLP GP had no inventory at December 31, 2012. |
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Shipping and Handling Costs |
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Shipping and handling costs are recorded as part of cost of product/services sold at the time product is shipped or delivered to the customer. |
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Property, Plant and Equipment |
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Property, plant and equipment is recorded at its original cost of construction or, upon acquisition, at fair value of the assets acquired. For assets the Company constructs, it capitalizes direct costs, such as labor and materials, and indirect costs, such as overhead and interest. The Company capitalizes major units of property replacements or improvements and expenses minor items. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, as follows: |
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| Years | | | | | | | | | | | | | | |
Gathering systems | 20 | | | | | | | | | | | | | | |
Processing plants and compression facilities | 20 – 25 | | | | | | | | | | | | | | |
Buildings, rights-of-way, easements and storage rights | 20 – 70 | | | | | | | | | | | | | | |
Office furniture and equipment | 5 – 10 | | | | | | | | | | | | | | |
Vehicles | 5 | | | | | | | | | | | | | | |
Pipelines | 20 | | | | | | | | | | | | | | |
Base gas | 10 | | | | | | | | | | | | | | |
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Salt deposits are depleted utilizing the unit of production method. |
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Identifiable Intangible Assets |
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The Company has recorded certain identifiable intangible assets, including customer accounts, covenants not to compete, trademarks, deferred financing costs and gas gathering, compression and processing contracts. Customer accounts, covenants not compete and trademarks have arisen from acquisitions. Deferred financing costs represent financing costs incurred in obtaining financing and are being amortized over the term of the related debt using the effective interest method. The Company recognizes acquired intangible asset separately if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so. |
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Customer accounts, covenants not to compete and trademarks are generally amortized on a straight-line basis over their estimated economic lives, typically 10 years, 2 - 9 years and 5 - 10 years, respectively. The customer accounts associated with the NGL and crude services segment and the gas gathering, compression and processing contracts are generally amortized based on the projected cash flows associated with the contracts, typically 5 - 20 years. |
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Goodwill |
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Goodwill is recognized for various acquisitions as the excess of the cost of the acquisitions over the fair value of the related net assets at the date of acquisition. Goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. |
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The Company completed its annual impairment test for each of its reporting units and determined that no impairment existed as of December 31, 2012. During the three months ended September 30, 2013, the Company recorded an impairment of goodwill of approximately $4.1 million on its Haynesville/Bossier Shale system as a result of a decrease in anticipated revenues to be generated from those operations due primarily to the Company's inability to renew and extend a significant revenue contract that expired in mid-2013. |
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Investment in Unconsolidated Affiliate |
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The Company applies the equity method of accounting where it can exert significant influence over, but does not control or direct, the policies, decisions or activities of the entity. The Company uses the cost method of accounting where it is unable to exert significant influence over the entity. The FASB's accounting standards related to equity method investments and joint ventures requires entities to periodically review their equity method investments to determine whether current events or circumstances indicate that the carrying value of the equity method investment may be impaired. The Company evaluates its equity method investment for impairment when there are indicators of impairment. If indicators suggest impairment, the Company will perform an impairment test to assess whether an adjustment is necessary. The impairment test considers whether the fair value of the Company's equity method investment declined and if any such decline is other than temporary. If a decline in fair value is determined to be other than temporary, the investment's carrying value is written down to fair value. |
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Income Taxes |
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The Company is a publicly-traded master limited partnership. Partnerships are generally not subject to federal income tax, although publicly-traded partnerships are treated as corporations for federal income tax purposes and therefore are subject to federal income tax, unless the partnership generates at least 90% of its gross income from qualifying sources. If the qualifying income requirement is satisfied, the publicly-traded partnership will be treated as a partnership for federal income tax purposes. The earnings of the Company and its limited liability subsidiaries are included in the federal and state income tax returns of the individual members or partners. However, legislation in certain states allows for taxation of partnerships, and as such, certain state taxes for the Company have been included in the accompanying financial statements as income taxes due to the nature of the tax in those particular states as discussed below. In addition, federal and state income taxes are provided on the earnings of the subsidiaries incorporated as taxable entities. The Company is required to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using expected rates in effect for the year in which differences are expected to reverse. |
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The Company is responsible for its portion of the Texas Margin tax that is included in Crestwood Holdings' consolidated Texas franchise tax return. The Company's current tax liability will be assessed based on 0.7% of the gross revenue apportioned to Texas. The margin tax qualifies as an income tax under GAAP, which requires the Company to recognize the impact of this tax on the temporary differences between the financial statement assets and liabilities and their tax basis attributable to such tax. |
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Net earnings for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and the financial reporting basis of assets and liabilities and the taxable income allocation requirements under the partnership agreement. |
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Sales Tax |
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The Company accounts for the collection and remittance of sales tax on a net tax basis. As a result, these amounts are not reflected in the consolidated statements of operations. |
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Income Per Unit |
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The Company calculates basic net income per limited partner unit by utilizing the two class method. Diluted net income per limited partner unit is computed by dividing net income attributable to the limited partners by the weighted-average number of units outstanding and the effect of dilutive units granted in the Company's acquisition of Legacy CMLP GP. Net income attributable to the limited partners is determined by first allocating to the Company the earnings from the IDR interests from Crestwood Midstream (or, prior to the Crestwood Merger, the general partner and IDR interests of Inergy Midstream and Legacy CMLP) with the remaining earnings allocated according to the capital accounts. The weighted average number of units outstanding is calculated based on the presumption that the common and subordinated units issued to acquire Legacy CMLP GP (the accounting predecessor) were outstanding for the entire period prior to the June 19, 2013 acquisition. On the date of the acquisition, all of the Company's limited partner units are considered outstanding. |
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Accrued Additions to Property, Plant and Equipment |
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The Company has accrued for property, plant and equipment, including certain construction work in process relating to construction efforts on various growth projects. At September 30, 2013 and December 31, 2012, the Company had accrued $47.4 million and $9.2 million relating to property, plant and equipment classified as accrued expenses on the consolidated balance sheets. |
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Asset Retirement Obligations |
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An asset retirement obligation ("ARO") is an estimated liability for the cost to retire a tangible asset. The Company records a liability for legal or contractual obligations to retire its long-lived assets associated with right-of-way contracts it holds and its facilities whether owned or leased. The Company records a liability in the period the obligation is incurred and estimable. An ARO is initially recorded at its estimated fair value with a corresponding increase to property, plant and equipment. This increase in property, plant and equipment is then depreciated over the useful life of the asset to which that liability relates. An ongoing expense is recognized for changes in the value of the liability as a result of the passage of time, which the Company records as depreciation, amortization and accretion expense on its consolidated statements of operations. The fair value of certain AROs could not be determined as settlement dates (or range of dates) associated with these assets were not estimable. The net AROs were $14.6 million and $14.0 million at September 30, 2013 and December 31, 2012, respectively, and are included in other long-term liabilities on the consolidated balance sheets. |
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Environmental Costs and Other Contingencies |
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The Company recognizes liabilities for environmental and other contingencies when it has an exposure that indicates it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Where the most likely outcome of a contingency can be reasonably estimated, the Company accrues a liability for that amount. Where the most likely outcome cannot be estimated, a range of potential losses is established and if no one amount in that range is more likely than any other, the low end of the range is accrued. |
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The Company records liabilities for environmental contingencies at their undiscounted amounts on its consolidated balance sheets as accrued expenses and other liabilities when environmental assessments indicate that remediation efforts are probable and costs can be reasonably estimated. Estimates of the Company's liabilities are based on currently available facts and presently enacted laws and regulations, taking into consideration the likely effects of other societal and economic factors. These estimates are subject to revision in future periods based on actual costs or new circumstances. The Company capitalizes costs that benefit future periods and recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods. |
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The Company evaluates potential recoveries of amounts from third parties, including insurance coverage, separately from its liability. Recovery is evaluated based on the solvency of the third party, among other factors. When recovery is assured, the Company records and reports an asset separately from the associated liability on its consolidated balance sheet. |
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Accounting for Unit-Based Compensation |
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Unit-based compensation awards are valued at the closing market price of our common units on the date of grant, which reflects the fair value of such awards. For those awards that are settled in cash, the associated liability is remeasured at every balance sheet date through settlement, such that the vested portion of the liability is adjusted to reflect its revised fair value through compensation expense. The Company generally recognizes the expense associated with the award over the vesting period. At the time of issuance of phantom units, management of the General Partner determines whether they will be settled in cash or settled in common units. Unit-based compensation awards at Inergy Midstream and Legacy Crestwood are fully reflected in these financial statements and are accounted for in the manner described above. |
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The amount of compensation expense recorded by the Company was $5.6 million and $0.5 million during the three months ended September 30, 2013 and 2012, respectively, and $7.6 million and $1.5 million during the nine months ended September 30, 2013 and 2012, respectively. |
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Segment Information |
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There are certain accounting requirements that establish standards for reporting information about operating segments, as well as related disclosures about products and services, geographic areas and major customers. Further, they define operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. In determining its operating segments, the Company examined the way it organizes its business internally for making operating decisions and assessing business performance. See Note 10 for disclosures related to the Company’s three operating and reporting segments. |
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Fair Value |
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Cash and Cash Equivalents, Accounts Receivable and Accounts Payable |
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As of September 30, 2013 and December 31, 2012, the carrying amounts of cash and cash equivalents, accounts receivable (net of allowance for doubtful accounts) and accounts payable represent fair value due to their liquid and short-term nature. |
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Credit Facilities |
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The fair value of the Company's credit agreement and all of its credit facilities approximates their carrying amounts as of September 30, 2013 and December 31, 2012 due primarily to the variable nature of the interest rates of the instruments. |
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Senior Notes |
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The Company estimates the fair value of its senior notes primarily based on quoted market prices for the same or similar issuances. This valuation methodology is considered level 2 in the fair value hierarchy. The following table reflects the carrying value and fair value of the senior notes (in millions): |
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| September 30, 2013 | | December 31, 2012 |
| Carrying Amount | | Fair | | Carrying Amount | | Fair |
Value | Value |
CEQP senior unsecured notes | $ | 11.5 | | | $ | 11.5 | | | $ | — | | | $ | — | |
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Legacy CMLP senior unsecured notes | $ | 351.3 | | | $ | 369.3 | | | $ | 351.5 | | | $ | 365.9 | |
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NRGM senior unsecured notes | $ | 500 | | | $ | 497.8 | | | $ | — | | | $ | — | |
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See Note 6 for a discussion of the Company's assets and liabilities recorded at fair value on the balance sheet. |
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Recently Issued Accounting Pronouncements |
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On December 16, 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. The disclosure requirements of this ASU mandate that entities disclose both gross and net information about financial instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an enforceable master netting arrangement or similar agreement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting arrangements or similar arrangements. The scope of this ASU includes derivative contracts, repurchase agreements, and securities borrowing and lending arrangements. Entities are required to apply the amendments of ASU No. 2011-11 for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. All disclosures provided by those amendments are required to be provided retrospectively for all comparative periods presented. The Company adopted the effects of ASU No. 2011-11 on January 1, 2013. |
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On February 5, 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU amends and clarifies the disclosure requirements prescribed in ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2013-02 requires that entities present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. Public entities will also have to provide this information in their interim financial statements. Specifically, entities must present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, entities would instead cross reference to the related footnote for additional information. The Company adopted the requirements of ASU No. 2013-02 on January 1, 2013 and presented the required information in a single note. |