Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies |
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(a) | Basis of Presentation and Principles of Consolidation: | | | | | |
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Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of all subsidiaries after the elimination of all significant intercompany accounts and transactions. Additionally, our financial statements for prior periods include reclassifications that were made to conform to the current period presentation. Those reclassifications did not impact our reported net income or members’ equity. |
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(b) | New Pronouncement Issued But Not Yet Adopted: | | | | | |
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In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), which amends the FASB ASC by adding new FASB ASC Topic 606, Revenue from Contracts with Customers, and superseding the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The standard provides new guidance concerning recognition and measurement of revenue and requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are evaluating the impact of the pending adoption of ASU No. 2014-09 on our financial position and results of operations and have not yet determined the method by which it will adopt the standard in 2017. |
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(c) | Cash Equivalents: | | | | | |
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The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. |
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(d) | Accounts Receivable and Allowance for Doubtful Accounts: | | | | | |
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Accounts receivable are customer obligations due under normal trade terms and are presented on the Consolidated Balance Sheets net of allowances for doubtful accounts. We establish provisions for losses on accounts receivable if we determine that it is likely that we will not collect all or part of the outstanding balance. We regularly review collectibility and establish or adjust our allowance as necessary using the specific identification method. |
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(e) | Inventory: | | | | | |
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Materials, supplies and commodity inventories are valued at the lower of cost or market. The cost is determined using the first-in, first-out method. Inventories are included in other current assets in the accompanying Consolidated Balance Sheets. |
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(f) | Oil and Natural Gas Properties: | | | | | |
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The full cost method of accounting is used to account for oil and natural gas properties. Under the full cost method, substantially all costs incurred in connection with the acquisition, development and exploration of oil, natural gas and natural gas liquids (“NGLs”) reserves are capitalized. These capitalized amounts include the costs of unproved properties, internal costs directly related to acquisitions, development and exploration activities, asset retirement costs and capitalized interest. Under the full cost method, both dry hole costs and geological and geophysical costs are capitalized into the full cost pool, which is subject to amortization and subject to ceiling test limitations as discussed below. |
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Capitalized costs associated with proved reserves are amortized over the life of the reserves using the unit of production method. Conversely, capitalized costs associated with unproved properties are excluded from the amortizable base until these properties are evaluated, which occurs on a quarterly basis. Specifically, costs are transferred to the amortizable base when properties are determined to have proved reserves. In addition, we transfer unproved property costs to the amortizable base when unproved properties are evaluated as being impaired and as exploratory wells are determined to be unsuccessful. Additionally, the amortizable base includes estimated future development costs, dismantlement, restoration and abandonment costs net of estimated salvage values. |
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Capitalized costs are limited to a ceiling based on the present value of estimated future net cash flows from proved reserves, computed using the 12-month unweighted average of first-day-of-the-month commodity prices (the “12-month average price”), discounted at 10%, plus the lower of cost or fair market value of unproved properties. If the ceiling is less than the total capitalized costs, we are required to write down capitalized costs to the ceiling. We perform this ceiling test calculation each quarter. Any required write-downs are included in the Consolidated Statements of Operations as an impairment charge. |
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We recorded a non-cash ceiling test impairment of oil and natural gas properties for the year ended December 31, 2014 of $234.4 million as a result of a decline in realized oil and natural gas prices at the measurement date, December 31, 2014. Such impairment was recognized during the fourth quarter of 2014. The most significant factor affecting the 2014 impairment related to the properties that we acquired in the Piceance Acquisition. The fair value of the properties acquired (determined using forward oil and natural gas price curves at the acquisitions dates) was higher than the discounted estimated future cash flows computed using the 12-month average prices at the impairment test measurement dates. However, the impairment calculations did not consider the positive impact of our commodity derivative positions as generally accepted accounting principles only allow the inclusion of derivatives designated as cash flow hedges. The fourth quarter 2014 impairment was calculated based on prices of $4.36 per MMBtu for natural gas and $94.87 per barrel of crude oil. No ceiling test impairment was required during 2013. |
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During the year ended December 31, 2012, we recorded a non-cash ceiling test impairment of oil and natural gas properties of $247.7 million as a result of a decline in natural gas prices at the measurement dates, September 30, 2012 and December 31, 2012. Such impairment was recognized during the third and fourth quarters of 2012. The most significant factor affecting the 2012 impairment related to the properties that we acquired in the Arkoma Basin Acquisition and Rockies Acquisition (discussed below). The fair values of the properties acquired (determined using forward oil and natural gas price curves at the acquisitions dates) were higher than the discounted estimated future cash flows computed using the 12-month average prices at the impairment test measurement dates. We were able to lock in higher future selling prices for a portion of the estimated natural gas production for the Arkoma Basin Acquisition and the Rockies Acquisition by using commodity derivative contracts. However, our impairment calculations do not consider the positive impact of our commodity derivative positions as generally accepted accounting principles only allow us to consider the expected cash flows from derivatives designated as cash flow hedges. The 2012 third quarter impairment was calculated based on prices of $2.77 per MMBtu for natural gas and $95.26 per barrel of crude oil while the 2012 fourth quarter impairment was calculated based on prices of $2.76 per MMBtu for natural gas and $94.67 per barrel of crude oil. |
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When we sell or convey interests in oil and natural gas properties, we reduce oil and natural gas reserves for the amount attributable to the sold or conveyed interest. We do not recognize a gain or loss on sales of oil and natural gas properties unless those sales would significantly alter the relationship between capitalized costs and proved reserves. Sales proceeds on insignificant sales are treated as an adjustment to the cost of the properties. |
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(g) | Goodwill and Other Intangible Assets: | | | | | |
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We account for goodwill and other intangible assets under the provisions of the Accounting Standards Codification (ASC) Topic 350, “Intangibles-Goodwill and Other.” Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in business combinations. Goodwill is not amortized, but is tested for impairment annually on October 1 or whenever indicators of impairment exist using a two-step process. The goodwill test is performed at the reporting unit level, which represents our oil and natural gas operations in the United States. The first step involves a comparison of the estimated fair value of a reporting unit to its net book value, which is its carrying amount, including goodwill. In performing the first step, we determine the fair value of the reporting unit using the market approach. Determining fair value requires the exercise of significant judgment, including judgments about market prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities, such as a business. If the estimated fair value of the reporting unit exceeds its net book value, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the net book value of the reporting unit exceeds its fair value, the second step of the goodwill impairment test will be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. |
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We performed our annual impairment tests during 2014, 2013 and 2012 and our analyses concluded that there was no impairment of goodwill as of these dates. However, due to the current decline in the prices of oil and natural gas as well as deteriorating market conditions, we performed an interim impairment test at December 31, 2014. Based on our estimates, the fair value of our reporting unit exceeded its carrying value by 8% at December 31, 2014 and therefore the second step of the impairment test was not necessary. We believe this difference between the fair value and the net book value is appropriate (in the context of assessing whether a goodwill impairment may exist) when a market-based control premium is taken into account and in light of the recent volatility in the equity markets. |
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While no goodwill impairment was recognized at December 31, 2014, any further significant decline in the prices of oil and natural gas as well as any continued declines in the quoted market price of the Company’s units could change our estimate of the fair value of the reporting unit and could result in an impairment charge. |
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Intangible assets with definite useful lives are amortized over their estimated useful lives. We evaluate the recoverability of intangible assets with definite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be fully recoverable. An impairment loss exists when the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. |
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We are a party to a contract allowing us to purchase a certain amount of natural gas at a below market price for use as field fuel. As of December 31, 2014, the net carrying value of this contract was $8.3 million. The carrying value is shown as Other assets on the accompanying Consolidated Balance Sheets and is amortized on a straight-line basis over the estimated life of the field. The estimated aggregate amortization expense for each of the next five fiscal years is $0.2 million per year. |
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(h) | Asset Retirement Obligations: | | | | | |
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We record a liability for asset retirement obligations at fair value in the period in which the liability is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method over the asset’s useful life. Our recognized asset retirement obligation exclusively relates to the plugging and abandonment of oil and natural gas wells and decommissioning of our Elk Basin and Fairway gas plants. Management periodically reviews the estimates of the timing of well abandonments as well as the estimated plugging and abandonment costs, which are discounted at the credit adjusted risk free rate. These retirement costs are recorded as a long-term liability on the Consolidated Balance Sheets with an offsetting increase in oil and natural gas properties. An ongoing accretion expense is recognized for changes in the value of the liability as a result of the passage of time, which we record in depreciation, depletion, amortization and accretion expense in the Consolidated Statements of Operations. |
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(i) | Revenue Recognition and Gas Imbalances: | | | | | |
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Sales of oil, natural gas and NGLs are recognized when oil, natural gas and NGLs have been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. We sell oil, natural gas and NGLs on a monthly basis. Virtually all of our contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of the oil, natural gas or NGLs, and prevailing supply and demand conditions, so that the price of the oil, natural gas and NGLs fluctuates to remain competitive with other available oil, natural gas and NGLs supplies. To the extent actual volumes and prices of oil and natural gas are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded as “Trade accounts receivable, net” in the accompanying Consolidated Balance Sheets. |
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The Company has elected the entitlements method to account for gas production imbalances. Gas imbalances occur when we sell more or less than our entitled ownership percentage of total gas production. Any amount received in excess of our share is treated as a liability. If we receive less than our entitled share the underproduction is recorded as a receivable. The amounts of imbalances were not material at December 31, 2014 and 2013. |
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(j) | Concentrations of Credit Risk: | | | | | |
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Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and derivative contracts. We control our exposure to credit risk associated with these instruments by (i) placing our assets and other financial interests with credit-worthy financial institutions, (ii) maintaining policies over credit extension that include the evaluation of customers’ financial condition and monitoring payment history, although we do not have collateral requirements and (iii) netting derivative assets and liabilities for counterparties where we have a legal right of offset. |
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At December 31, 2014 and 2013, the cash and cash equivalents were concentrated in one financial institution. We periodically assess the financial condition of this institution and believe that any possible credit risk is minimal. |
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The following purchasers accounted for 10% or more of the Company’s oil, natural gas and NGLs sales for the years ended December 31: |
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| | 2014 | | 2013 | | 2012 |
Anadarko Petroleum Corporation | | 19% | | 1% | | —% |
Marathon Oil Company | | 12% | | 14% | | 21% |
Plains Marketing L.P. | | 7% | | 10% | | 15% |
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Our customers are in the energy industry and they may be similarly affected by changes in economic or other conditions. |
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(k) | Use of Estimates: | | | | | |
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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil, natural gas and NGLs reserves and related cash flow estimates used in impairment tests of oil and natural gas properties, the fair value of assets and liabilities acquired in business combinations, goodwill, derivative contracts, asset retirement obligations, accrued oil, natural gas and NGLs revenues and expenses, as well as estimates of expenses related to depreciation, depletion, amortization and accretion. Actual results could differ from those estimates. |
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(l) | Price and Interest Rate Risk Management Activities: | | | | | |
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We have entered into derivative contracts primarily with counterparties that are also lenders under our financing arrangements to hedge price risk associated with a portion of our oil, natural gas and NGLs production. While it is never management’s intention to hold or issue derivative instruments for speculative trading purposes, conditions sometimes arise where actual production is less than estimated which has, and could, result in overhedged volumes. Our natural gas production is primarily sold under market sensitive contracts which are typically priced at a differential to the NYMEX or the published natural gas index prices for the producing area due to the natural gas quality and the proximity to major consuming markets. As for oil production, realized pricing is primarily driven by the West Texas Intermediate (“WTI”), Light Louisiana Sweet Crude, Wyoming Imperial and Flint Hills Bow River prices. NGLs pricing is based on the Oil Price Information Service postings as well as market-negotiated ethane spot prices. During 2014, our derivative transactions included the following: |
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• | Fixed-price swaps - where we receive a fixed-price for our production and pay a variable market price to the contract counterparty. | | | | | |
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• | Basis swap contracts - which guarantee a price differential between the NYMEX prices and our physical pricing points. We receive a payment from the counterparty or make a payment to the counterparty for the difference between the settled price differential and amounts stated under the terms of the contract. | | | | | |
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• | Collars - where we pay the counterparty if the market price is above the ceiling price (short call) and the counterparty pays us if the market price is below the floor (long put) on a notional quantity. | | | | | |
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• | Three-way collar contracts - which combine a long put, a short put and a short call. The use of the long put combined with the short put allows us to sell a call at a higher price thus establishing a higher ceiling and limiting our exposure to future settlement payments while also restricting our downside risk to the difference between the long put and the short put if the price drops below the price of the short put. This allows us to settle for market plus the spread between the short put and the long put in a case where the market price has fallen below the short put fixed price. | | | | | |
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• | Swaption agreements - where we provide options to counterparties to extend swap contracts into subsequent years. | | | | | |
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• | Call options sold - a structure that may be combined with an existing swap to raise the strike price, putting us in either a higher asset position, or a lower liability position. In general, selling a call option is used to enhance an existing position or a position that we intend to enter into simultaneously. | | | | | |
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• | Put spread options - created when we purchase a put and sell a put simultaneously. | | | | | |
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• | Put options sold - a structure that may be combined with an existing swap to raise the strike price, putting us in either a higher asset position or a lower liability position. In general, selling a put option is used to enhance an existing position or a position that we intend to enter into simultaneously. | | | | | |
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• | Range bonus accumulators - a structure that allows us to receive a cash payment when the crude oil or natural gas settlement price remains within a predefined range on each expiry date. Depending on the terms of the contract, if the settlement price is below the floor or above the ceiling on any expiry date, we may have to sell at that level. | | | | | |
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We also enter into fixed LIBOR interest rate swap agreements with certain counterparties that are lenders under our financing arrangements, which require exchanges of cash flows that serve to synthetically convert a portion of our variable interest rate obligations to fixed interest rates. |
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Under ASC Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the Consolidated Balance Sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. We net derivative assets and liabilities for counterparties where we have a legal right of offset. Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the change in the fair value of the derivative is deferred in accumulated other comprehensive income (loss) in the equity section of the Consolidated Balance Sheets to the extent the hedge is effective. Gains and losses on cash flow hedges included in accumulated other comprehensive income (loss) are reclassified to gains (losses) on commodity cash flow hedges or gains (losses) on interest rate derivative contracts in the period that the related production is delivered or the contract settles. Gains or losses on derivative contracts that do not qualify for hedge accounting treatment are recorded in net gains (losses) on commodity derivative contracts or net gains (losses) on interest rate derivative contracts in the Consolidated Statements of Operations. |
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We have elected not to designate our current portfolio of derivative contracts as hedges. Therefore, changes in fair value of these derivative instruments are recognized in earnings and included in net gains (losses) on commodity derivative contracts or net gains (losses) on interest rate derivative contracts in the accompanying Consolidated Statements of Operations. |
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Any premiums paid on derivative contracts and the fair value of derivative contracts acquired in connection with our acquisitions are capitalized as part of the derivative assets or derivative liabilities, as appropriate, at the time the premiums are paid or the contracts are assumed. Premium payments are reflected in cash flows from operating activities in our Consolidated Statements of Cash Flows. When the consideration for an acquisition is cash, the fair value of any derivative contracts acquired in the acquisition is reflected in cash flows from investing activities. Over time, as the derivative contracts settle, the differences between the cash received and the premiums paid or fair value of contracts acquired are recognized in net gains or losses on commodity or interest rate derivate contracts, and the cash received is reflected in cash flows from operating activities in our Consolidated Statements of Cash Flows. |
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(m) | Income Taxes: | | | | | |
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The Company is treated as a partnership for federal and state income tax purposes. As such, it is not a taxable entity and does not directly pay federal and state income tax. Its taxable income or loss, which may vary substantially from the net income or net loss reported in the Consolidated Statements of Operations, is included in the federal and state income tax returns of each unitholder. Accordingly, no recognition has been given to federal and state income taxes for the operations of the Company. The aggregate difference in the basis of net assets for financial and tax reporting purposes cannot be readily determined as the Company does not have access to information about each unitholders’ tax attributes in the Company. However, the tax basis of our net assets exceeded the net book basis by $187.0 million at December 31, 2014 while the book basis of our net assets exceeded the net tax basis by $168.5 million at December 31, 2013. |
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Legal entities that conduct business in Texas are subject to the Revised Texas Franchise Tax, including otherwise non-taxable entities such as limited partnerships and limited liability partnerships. The tax is assessed on Texas sourced taxable margin which is defined as the lesser of (i) 70% of total revenue or (ii) total revenue less (a) cost of goods sold or (b) compensation and benefits. Although the Revised Texas Franchise Tax is not an income tax, it has the characteristics of an income tax since it is determined by applying a tax rate to a base that considers both revenues and expenses. The Company recorded a current tax liability of $0.2 million and $0.3 million as of December 31, 2014 and 2013, respectively, and a deferred tax asset of $0.3 million and deferred tax liability of $0.4 million as of December 31, 2014 and 2013, respectively. A benefit of $0.6 million and tax provisions of $0.6 million and $0.2 million are included in our Consolidated Statements of Operations for the years ended December 31, 2014, 2013, and 2012, respectively, as a component of Selling, general and administrative expenses. |