August 2014 MidCon Acquisition, April 2014 MidCon Acquisition and March 2013 Contract Operations Acquisition | 9 Months Ended |
Sep. 30, 2014 |
August 2014 MidCon Acquisition, April 2014 MidCon Acquisition and March 2013 Contract Operations Acquisition | ' |
August 2014 MidCon Acquisition, April 2014 MidCon Acquisition and March 2013 Contract Operations Acquisition | ' |
2. August 2014 MidCon Acquisition, April 2014 MidCon Acquisition and March 2013 Contract Operations Acquisition |
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August 2014 MidCon Acquisition |
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On August 8, 2014, we completed an acquisition of natural gas compression assets, including a fleet of 162 compressor units, comprising approximately 110,000 horsepower from MidCon Compression, L.L.C. (“MidCon”) for $130.1 million (the “August 2014 MidCon Acquisition”). The purchase price was funded with borrowings under our revolving credit facility. The majority of the horsepower acquired is under a five-year contract operations services agreement with BHP Billiton Petroleum (“BHP Billiton”) to provide compression services. In connection with the acquisition, the contract operations services agreement with BHP Billiton was assigned to us effective as of the closing. During the nine months ended September 30, 2014, we incurred transaction costs of approximately $0.9 million related to the August 2014 MidCon Acquisition, which is reflected in other (income) expense, net, in our condensed consolidated statements of operations. |
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In accordance with the terms of the Purchase and Sale Agreement relating to this acquisition, we directed MidCon to sell a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory to a wholly-owned subsidiary of Exterran Holdings that is our indirect parent company for $4.1 million. The purchase price paid by us and the wholly-owned subsidiary of Exterran Holdings is subject to post-closing adjustments in accordance with the terms of the Purchase and Sale Agreement. |
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We accounted for the August 2014 MidCon Acquisition using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The preliminary allocation of the purchase price, which is subject to certain adjustments, was based upon preliminary valuations and our estimates and assumptions are subject to change upon the completion of management’s review of the final valuations. We are in the process of finalizing valuations related to property, plant and equipment, goodwill, identifiable intangible assets and liabilities. Post-closing adjustments to the purchase price could impact future depreciation and amortization expense. The final valuation of net assets acquired is expected to be completed as soon as possible, but no later than one year from the acquisition date, in accordance with GAAP. |
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The following table summarizes the preliminary purchase price allocation based on estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands): |
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| | Preliminary | | | | | | | | | | |
Fair Value | | | | | | | | | |
Property, plant and equipment | | $ | 78,356 | | | | | | | | | | |
Goodwill | | 3,738 | | | | | | | | | | |
Intangible assets | | 48,373 | | | | | | | | | | |
Current liabilities | | (372 | ) | | | | | | | | | |
Preliminary purchase price | | $ | 130,095 | | | | | | | | | | |
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Property, Plant and Equipment, Goodwill and Intangible Assets Acquired |
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The preliminary amount of property, plant and equipment is comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 24 years. |
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The preliminary amount of goodwill of $3.7 million resulting from the acquisition is attributable to the expansion of our services in the region. The preliminary amount of goodwill recorded is considered to have an indefinite life and will be reviewed annually for impairment or more frequently if indicators of impairment exist. |
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The preliminary amount of finite life intangible assets, and their associated average useful lives, was determined based on the period which the assets are expected to contribute directly or indirectly to our future cash flows, consisting of the following: |
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| | Amount | | Average | | | | | | | | |
(In thousands) | Useful Life | | | | | | | |
Customer related | | $ | 21,590 | | 25 years | | | | | | | | |
Contract based | | 26,783 | | 5 years | | | | | | | | |
Total acquired identifiable intangible assets | | $ | 48,373 | | | | | | | | | | |
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The results of operations attributable to the assets acquired in the August 2014 MidCon Acquisition have been included in our condensed consolidated financial statements since the date of acquisition. Revenue attributable to the assets acquired in the August 2014 MidCon Acquisition was $3.4 million from the date of acquisition through September 30, 2014. We are unable to provide earnings attributable to the assets acquired in the August 2014 MidCon Acquisition since the date of acquisition as we do not prepare full stand-alone earnings reports for those assets. |
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April 2014 MidCon Acquisition |
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On April 10, 2014, we completed an acquisition of natural gas compression assets, including a fleet of 337 compressor units, comprising approximately 444,000 horsepower from MidCon for $352.9 million (the “April 2014 MidCon Acquisition”). The purchase price was funded with the net proceeds from the sale, pursuant to a public underwritten offering, of 6.2 million common units and a portion of the net proceeds from the issuance of $350.0 million aggregate principal amount of 6% senior notes due October 2022 (the “2014 Notes”). The compressor units were previously used by MidCon to provide compression services to a subsidiary of Access Midstream Partners LP (“Access”). Effective as of the closing of the acquisition, we and Access entered into a seven-year contract operations services agreement under which we will provide compression services to Access. During the nine months ended September 30, 2014, we incurred transaction costs of approximately $1.5 million related to the April 2014 MidCon Acquisition, which is reflected in other (income) expense, net, in our condensed consolidated statements of operations. |
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In accordance with the terms of the Purchase and Sale Agreement relating to this acquisition, we directed MidCon to sell a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory to a wholly-owned subsidiary of Exterran Holdings that is our indirect parent company for $7.7 million. |
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We accounted for the April 2014 MidCon Acquisition using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The preliminary allocation of the purchase price was based upon preliminary valuations and our estimates and assumptions are subject to change upon the completion of management’s review of the final valuations. We are in the process of finalizing valuations related to property, plant and equipment, identifiable intangible assets and liabilities. Adjustments to the preliminary purchase price allocation could impact future depreciation and amortization expense. The final valuation of net assets acquired is expected to be completed as soon as possible, but no later than one year from the acquisition date, in accordance with GAAP. The following table summarizes the preliminary purchase price allocation based on estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands): |
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| | Preliminary | | | | | | | | | | |
| | Fair Value | | | | | | | | | | |
Property, plant and equipment | | $ | 311,270 | | | | | | | | | | |
Intangible assets | | 42,474 | | | | | | | | | | |
Current liabilities | | (827 | ) | | | | | | | | | |
Purchase price | | $ | 352,917 | | | | | | | | | | |
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Property, Plant and Equipment and Intangible Assets Acquired |
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The preliminary amount of property, plant and equipment is comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 25 years. |
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The preliminary amount of finite life intangible assets, and their associated average useful lives, was determined based on the period which the assets are expected to contribute directly or indirectly to our future cash flows, consisting of the following: |
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| | Amount | | Average | | | | | | | | |
(In thousands) | Useful Life | | | | | | | |
Customer related | | $ | 4,701 | | 25 years | | | | | | | | |
Contract based | | 37,773 | | 7 years | | | | | | | | |
Total acquired identifiable intangible assets | | $ | 42,474 | | | | | | | | | | |
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The results of operations attributable to the assets acquired in the April 2014 MidCon Acquisition have been included in our condensed consolidated financial statements since the date of acquisition. Revenue attributable to the assets acquired in the April 2014 MidCon Acquisition was $42.7 million from the date of acquisition through September 30, 2014. We are unable to provide earnings attributable to the assets acquired in the April 2014 MidCon Acquisition since the date of acquisition as we do not prepare full stand-alone earnings reports for those assets. |
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March 2013 Contract Operations Acquisition |
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In March 2013, we acquired from Exterran Holdings contract operations customer service agreements with 50 customers and a fleet of 363 compressor units used to provide compression services under those agreements, comprising approximately 256,000 horsepower, or 8% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “March 2013 Contract Operations Acquisition”). The acquired assets also included 204 compressor units, comprising approximately 99,000 horsepower, previously leased from Exterran Holdings to us and contracts relating to approximately 6,000 horsepower of compressor units we already owned and previously leased to Exterran Holdings. At the acquisition date, the acquired fleet assets had a net book value of $158.5 million, net of accumulated depreciation of $94.9 million. Total consideration for the transaction was approximately $174.0 million, excluding transaction costs. In connection with this acquisition, we issued approximately 7.1 million common units to Exterran Holdings and approximately 145,000 general partner units to our general partner. |
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In connection with this acquisition, we were allocated $3.1 million finite life intangible assets associated with customer relationships of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. These intangible assets are being amortized through 2024, based on the present value of income expected to be realized from these intangible assets. |
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Because Exterran Holdings and we are considered entities under common control, GAAP requires that we record the assets acquired and liabilities assumed from Exterran Holdings in connection with the March 2013 Contract Operations Acquisition using Exterran Holdings’ historical cost basis in the assets and liabilities. The difference between the historical cost basis of the assets acquired and liabilities assumed and the purchase price is treated as either a capital contribution or distribution. As a result, we recorded a capital distribution of $12.4 million for the March 2013 Contract Operations Acquisition during the nine months ended September 30, 2013. |
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An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the March 2013 Contract Operations Acquisition was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be substantiated. Accordingly, our financial statements include the assets acquired, liabilities assumed, revenue and direct operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP. |
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Pro Forma Financial Information |
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Pro forma financial information for the three and nine months ended September 30, 2014 and 2013 has been included to give effect to the additional assets acquired in the August 2014 MidCon Acquisition, the April 2014 MidCon Acquisition and the March 2013 Contract Operations Acquisition. The August 2014 MidCon Acquisition, the April 2014 MidCon Acquisition and the March 2013 Contract Operations Acquisition are presented in the pro forma financial information as though the transactions occurred as of January 1, 2013. The pro forma financial information reflects the following transactions: |
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As related to the August 2014 MidCon Acquisition: |
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· our acquisition in August 2014 of natural gas compression assets and identifiable intangible assets from MidCon; and |
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· our borrowings under our revolving credit facility to pay $130.1 million to MidCon for the August 2014 MidCon Acquisition. |
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As related to the April 2014 MidCon Acquisition: |
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· our acquisition in April 2014 of natural gas compression assets and identifiable intangible assets from MidCon; |
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· our issuance of 6.2 million common units to the public and approximately 126,000 general partner units to our general partner; |
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· our issuance of $350.0 million aggregate principal amount of the 2014 Notes; and |
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· our use of proceeds from the issuance of common units, general partner units and the 2014 Notes to pay $352.9 million to MidCon for the April 2014 MidCon Acquisition and to pay down $157.5 million on our revolving credit facility. |
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As related to the March 2013 Contract Operations Acquisition: |
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· our acquisition in March 2013 of certain contract operations customer service agreements, compression equipment and identifiable intangible assets from Exterran Holdings; and |
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· our issuance of approximately 7.1 million common units to Exterran Holdings and approximately 145,000 general partner units to our general partner. |
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The pro forma financial information below is presented for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had each transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results. The pro forma financial information below was derived by adjusting our historical financial statements. |
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The following table shows pro forma financial information for the three and nine months ended September 30, 2014 and 2013 (in thousands, except per unit amounts): |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2014 | | 2013 | | 2014 | | 2013 | |
Revenue | | $ | 155,475 | | $ | 144,414 | | $ | 457,710 | | $ | 442,981 | |
Net income | | $ | 17,823 | | $ | 13,448 | | $ | 45,482 | | $ | 65,806 | |
Basic earnings per common unit | | $ | 0.25 | | $ | 0.2 | | $ | 0.65 | | $ | 1.06 | |
Diluted earnings per common unit | | $ | 0.25 | | $ | 0.2 | | $ | 0.65 | | $ | 1.06 | |
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Pro forma net income (loss) per common unit is determined by dividing the pro forma net income (loss) that would have been allocated to our common unitholders by the weighted average number of common units outstanding after the completion of the transactions included in the pro forma financial statements. Pursuant to our partnership agreement, to the extent that the quarterly distributions exceed certain targets, our general partner is entitled to receive certain incentive distributions that will result in more net income (loss) proportionately being allocated to our general partner than to our common unitholders. The pro forma net income per limited partner unit calculations reflect the incentive distributions made to our general partner and a reduction of net income allocable to our limited partners of $0.2 million and $0.6 million for the three and nine months ended September 30, 2013, respectively, which reflects the amount of additional incentive distributions that would have occurred if the pro forma limited partner units had been outstanding as of January 1, 2013. There was no additional pro forma reduction of net income allocable to our limited partners, including the amount of additional incentive distributions that would have occurred, for the three and nine months ended September 30, 2014. |
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