SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
December 2022 acquisitions of Outrigger DJ Midstream and Sterling DJ.
As previously disclosed, on December 1, 2022, Summit Midstream Holdings, LLC (“SMP Holdings”), a wholly owned subsidiary of Summit Midstream Partners, LP (including its subsidiaries, collectively “SMLP” or the “Partnership”), completed the acquisition of Outrigger DJ Midstream LLC (“Outrigger DJ”) from Outrigger Energy II LLC, for cash consideration of $165.0 million, subject to post-closing adjustments and each of Sterling Energy Investments LLC, Grasslands Energy Marketing LLC and Centennial Water Pipelines LLC (collectively, “Sterling DJ”) from Sterling Investment Holdings LLC, for cash consideration of $140.0 million, subject to post-closing adjustments (collectively the “DJ Acquisitions”), each pursuant to definitive agreements, dated October 14, 2022 (collectively the “DJ Purchase Agreements”). The DJ Purchase Agreements contain customary representations and warranties, covenants and indemnification provisions. Outrigger DJ and Sterling DJ own natural gas gathering and processing systems, a crude oil gathering system, freshwater rights and a freshwater delivery system located near the Partnership’s Hereford assets in Weld County, Colorado.
September 2022 disposition of Bison Gathering System.
As previously disclosed on September 19, 2022, the Partnership, completed the sale of Bison Midstream, LLC (“Bison Midstream”) (the “Bison Sale”) to a subsidiary of Steel Reef Infrastructure Corp. (“Steel Reef”) for cash consideration of $36.7 million, which was net of cash disposed of and includes certain working capital adjustments, pursuant to a purchase agreement, dated September 19, 2022, by and between SMP Holdings and Steel Reef US Corp. (the “Purchase Agreement”). Bison Midstream owns a gas gathering system in the Burke and Mountrail counties of North Dakota. The Purchase Agreement contains customary representations and warranties, covenants and indemnification provisions.
June 2022 disposition of Lane G&P System.
As previously disclosed, on June 30, 2022, the Partnership completed the sale of Summit Midstream Permian, LLC (“Summit Permian”) (the “Permian Sale”) to a wholly owned subsidiary of Matador Resources Company (“Matador”) and received cash of approximately $75.1 million, which was net of cash disposed of and included certain working capital adjustments. In connection with the sale, a subsidiary of Matador also assumed the Partnership’s take-or-pay firm capacity on the Partnership’s Double E Pipeline joint venture (“Double E Pipeline”). The Partnership is the operator of the Double E Pipeline joint venture and owns a 70% interest.
Unaudited Pro Forma Condensed Combined Financial Statements
The following unaudited pro forma condensed combined financial statements of the Partnership are presented to illustrate the effect to the Partnership’s historical financial position and operating results of (i) the acquisition of Outrigger DJ, (ii) the acquisition of Sterling DJ, (iii) the Permian Sale, (iv) the Bison Sale (v) the financing activities completed by the Partnership to close the DJ Acquisitions and (vi) the assumption of the Partnership’s take-or-pay firm capacity on the Double E Pipeline by a subsidiary of Matador.
The Bison Sale, the Permian Sale, and each of the DJ Acquisitions constituted significant transactions for purposes of Item 2.01 of Form 8-K. As a result, the Partnership prepared the accompanying unaudited pro forma condensed combined financial statements in accordance with Article 11 of Regulation S-X. Neither of the divestitures qualified as a discontinued operation because neither divestiture represented a strategic shift that will have a major effect on SMLP’s operations or financial results.
Certain historical amounts of Outrigger DJ and Sterling DJ have been reclassified to conform to the Partnership’s financial statement presentation. The accompanying Summit Midstream Partners, LP unaudited pro forma condensed combined balance sheet as of September 30, 2022 has been prepared to give effect to (i) known subsequent event purchase price settlements related to the Bison Sale and (ii) the DJ Acquisitions as if they had occurred on September 30, 2022. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2021 and for the nine months ended September 30, 2022 have been prepared to give effect to the DJ Acquisitions, the Bison Sale, and the Permian Sale as if they had occurred on January 1, 2021.
The unaudited pro forma condensed combined balance sheet and statements of operations included herein are for information purposes only and are not necessarily indicative of the results that might have occurred had the divestiture or acquisition taken place on the respective dates assumed. Actual results may differ significantly from those reflected in the unaudited condensed
combined pro forma financial statements for various reasons, including but not limited to, the anticipated realization of ongoing savings from operating efficiencies, or offsetting unknown or underestimated preacquisition liabilities, and the differences between the assumptions used to prepare the unaudited pro forma condensed combined financial statements and actual results.
The pro forma adjustments in the unaudited pro forma condensed combined balance sheet and the statements of operations included herein include the use of estimates and assumptions as described in the accompanying notes. The pro forma adjustments are based on information available to the Partnership at the time these unaudited pro forma condensed combined financial statements were prepared. The Partnership believes its current estimates provide a reasonable basis of presenting the significant effects of the transaction. However, the estimates and assumptions are subject to change as additional information becomes available. The unaudited pro forma condensed combined financial statements only include adjustments related to the DJ Acquisitions, the Bison Sale, and the Permian Sale.
This pro forma information is based on the historical consolidated financial statements of SMLP and should be read in conjunction with the condensed consolidated financial statements and accompanying footnotes included in the Partnership’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022 and the consolidated financial statements and accompanying footnotes in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities Exchange Commission on November 7, 2022 and February 28, 2022, respectively.
SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
As of September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except unit amounts) | SMLP Historical | | Bison Conforming Adjustments | | Outrigger DJ Historical | | Outrigger DJ Conforming Adjustments (a) | | Sterling DJ Historical | | Sterling DJ Conforming Adjustments (b) | | | | Pro forma
Combined |
| ASSETS | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 10,450 | | | $ | — | | | $ | 2,221 | | | $ | (1,221) | | (a) | $ | 1,939 | | | $ | (1,439) | | (b) | | | $ | 11,950 | |
| Restricted cash | 3,514 | | | — | | | — | | | — | | | — | | | — | | | | | 3,514 | |
| Accounts receivable | 57,593 | | | (1,000) | | (d) | 11,327 | | | (3,802) | | (a) | 14,598 | | | (448) | | (b) | | | 78,268 | |
| Other current assets | 4,834 | | | — | | | 557 | | | 1,256 | | (a) | 3,006 | | | 3,348 | | (b) | | | 13,001 | |
| Total current assets | 76,391 | | | (1,000) | | | 14,105 | | | (3,767) | | | 19,543 | | | 1,461 | | | | | 106,733 | |
| Property, plant and equipment, net | 1,477,051 | | | — | | | 189,724 | | | (46,937) | | (a) | 184,411 | | | (82,130) | | (b) | | | 1,722,119 | |
| Intangible assets, net | 144,002 | | | — | | | — | | | 21,447 | | (a) | 10,354 | | | 28,325 | | (b) | | | 204,128 | |
| Investment in equity method investees | 513,974 | | | — | | | — | | | — | | | — | | | — | | | | | 513,974 | |
| Other noncurrent assets | 28,254 | | | — | | | 55 | | | (55) | | (a) | 1,486 | | | 8,379 | | (b) | | | 38,119 | |
| TOTAL ASSETS | $ | 2,239,672 | | | $ | (1,000) | | | $ | 203,884 | | | $ | (29,312) | | | $ | 215,794 | | | $ | (43,965) | | | | | $ | 2,585,073 | |
| | | | | | | | | | | | | | | |
| LIABILITIES AND CAPITAL | | | | | | | | | | | | | | | |
| Trade accounts payable | $ | 9,448 | | | $ | — | | | $ | 418 | | | $ | 431 | | (a) | $ | 10,167 | | | $ | (2,794) | | (b) | | | $ | 17,670 | |
Accrued expenses (1) | 22,209 | | | — | | | 8,458 | | | (2,366) | | (a) | 3,576 | | | 6,691 | | (b) | | | 38,568 | |
| Deferred revenue | 9,176 | | | — | | | — | | | — | | | — | | | — | | | | | 9,176 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Accrued interest | 34,185 | | | — | | | — | | | — | | | — | | | — | | | | | 34,185 | |
| Accrued environmental remediation | 1,604 | | | — | | | — | | | — | | | — | | | — | | | | | 1,604 | |
| Current portion of long-term debt | 9,009 | | | — | | | — | | | — | | | — | | | — | | | | | 9,009 | |
| Other current liabilities | 11,474 | | | — | | | — | | | — | | | — | | | 2,428 | | (b) | | | 13,902 | |
| Total current liabilities | 97,105 | | | — | | | 8,876 | | | (1,935) | | | 13,743 | | | 6,325 | | | | | 124,114 | |
| Long-term debt, net | 1,165,189 | | | — | | | | | 160,002 | | (c) | — | | | 132,114 | | (c) | | | 1,457,305 | |
| Noncurrent deferred revenue | 38,793 | | | — | | | | | — | | | — | | | — | | | | | 38,793 | |
| Noncurrent accrued environmental remediation | 2,272 | | | — | | | | | — | | | — | | | — | | | | | 2,272 | |
| Other noncurrent liabilities | 29,269 | | | — | | | 3,700 | | | (3,700) | | (a) | 4,745 | | | 8,602 | | (b) | | | 42,616 | |
| Total liabilities | 1,332,628 | | | — | | | 12,576 | | | 154,367 | | | 18,488 | | | 147,041 | | | | | 1,665,100 | |
| Commitments and contingencies | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Mezzanine Capital | | | | | | | | | | | | | | | |
| Subsidiary Series A Preferred Units | 115,223 | | | — | | | | | — | | | — | | | — | | | | | 115,223 | |
| | | | | | | | | | | | | | | |
| Partners’ Capital | | | | | | | | | | | | | | | |
| Series A Preferred Units | 83,252 | | | — | | | | | — | | | — | | | — | | | | | 83,252 | |
| Common limited partner capital | 708,569 | | | (1,000) | | (e) | 191,308 | | | (183,679) | | (e) | 197,306 | | | (191,006) | | (e) | | | 721,498 | |
| Total partners’ capital | 791,821 | | | (1,000) | | | 191,308 | | | (183,679) | | | 197,306 | | | (191,006) | | | | | 804,750 | |
| TOTAL LIABILITIES AND CAPITAL | $ | 2,239,672 | | | $ | (1,000) | | | $ | 203,884 | | | $ | (29,312) | | | $ | 215,794 | | | $ | (43,965) | | | | | $ | 2,585,073 | |
(1) Accrued expenses include, after the effects of conforming adjustments, $8.5 million of ad valorem taxes payable and $9.7 million of accrued compensation and employee benefits.
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per-unit amounts) | SMLP Historical | | Outrigger DJ Historical | | Outrigger DJ Conforming Adjustments | | Sterling DJ Historical | | Sterling DJ Conforming Adjustments | | Permian Disposition
Adjustments | | Bison Disposition Adjustments | | Financing Conforming Adjustments | | Pro forma
Combined |
| Revenues: | | | | | | | | | | | | | | | | | |
| Gathering services and related fees | $ | 187,465 | | | $ | 533 | | | $ | — | | | $ | — | | | $ | — | | | $ | (3,669) | | (f) | $ | (196) | | (f) | $ | — | | | $ | 184,133 | |
| Natural gas, NGLs and condensate sales | 67,364 | | | 83,642 | | | — | | | 104,048 | | | — | | | (30,003) | | (f) (h) | (41,224) | | (f) | — | | | 183,827 | |
| Other revenues | 29,042 | | | — | | | — | | | 7,971 | | | — | | | (531) | | (f) | (9,867) | | (f) | — | | | 26,615 | |
| Total revenues | 283,871 | | | 84,175 | | | — | | | 112,019 | | | — | | | (34,203) | | | (51,287) | | | — | | | 394,575 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | |
| Cost of natural gas and NGLs | 64,162 | | | 63,927 | | | — | | | 76,783 | | | — | | | (19,081) | | (f) (h) | (40,044) | | (f) | — | | | 145,747 | |
| Operation and maintenance | 61,216 | | | 3,692 | | | — | | | 11,597 | | | — | | | (3,082) | | (f) | (4,970) | | (f) | — | | | 68,453 | |
| General and administrative | 31,983 | | | 221 | | | — | | | 3,512 | | | 40 | | (l) | (358) | | (f) | (274) | | (f) | — | | | 35,124 | |
| Depreciation and amortization | 89,397 | | | 7,586 | | | (2,551) | | (l) | 9,597 | | | (46) | | (l) | (2,733) | | (f) | (1,561) | | (f) | — | | | 99,689 | |
| Transaction costs | 1,750 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,750 | |
| (Gain) loss on asset sales, net | (409) | | | (2,151) | | | — | | | — | | | — | | | 13 | | (j) | (13) | | (f) | — | | | (2,560) | |
| Long-lived asset impairments | 91,644 | | | — | | | — | | | — | | | — | | | (84,516) | | (j) | (6,945) | | (j) | — | | | 183 | |
| Total costs and expenses | 339,743 | | | 73,275 | | | (2,551) | | | 101,489 | | | (6) | | | (109,757) | | | (53,807) | | | — | | | 348,386 | |
| Other income (expense), net | (4) | | | 141 | | | — | | | (639) | | | — | | | — | | | — | | | — | | | (502) | |
| Gain on interest rate swaps | 16,491 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 16,491 | |
| Loss on sale of business | (85) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (85) | |
| Interest expense | (73,982) | | | — | | | — | | | 1 | | | — | | | — | | | — | | | (14,970) | | (g) | (88,951) | |
| Income (loss) before income taxes and equity method investment income | (113,452) | | | 11,041 | | | 2,551 | | | 9,892 | | | 6 | | | 75,554 | | | 2,520 | | | (14,970) | | | (26,858) | |
| Income tax expense | (307) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (307) | |
| Income from equity method investees | 14,162 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 14,162 | |
| Net income (loss) | $ | (99,597) | | | $ | 11,041 | | | $ | 2,551 | | | $ | 9,892 | | | $ | 6 | | | $ | 75,554 | | | $ | 2,520 | | | $ | (14,970) | | | $ | (13,003) | |
| Net income attributable to Subsidiary Series A Preferred Units | (12,155) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,155) | |
| Net income (loss) attributable to Summit Midstream Partners, LP | $ | (111,752) | | | $ | 11,041 | | | $ | 2,551 | | | $ | 9,892 | | | $ | 6 | | | $ | 75,554 | | | $ | 2,520 | | | $ | (14,970) | | | $ | (25,158) | |
| Less: net income attributable to Series A Preferred Units | (6,070) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,070) | |
| Add: deemed contribution from Preferred Exchange Offer | 20,974 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 20,974 | |
| Net income attributable to common limited partners | $ | (96,848) | | | $ | 11,041 | | | $ | 2,551 | | | $ | 9,892 | | | $ | 6 | | | $ | 75,554 | | | $ | 2,520 | | | $ | (14,970) | | | $ | (10,254) | |
| Net income per limited partner unit: | | | | | | | | | | | | | | | | | |
| Common unit – basic | $ | (9.68) | | | | | | | | | | | | | | | | | $ | (1.03) | |
| Common unit – diluted | $ | (9.68) | | | | | | | | | | | | | | | | | $ | (1.03) | |
| | | | | | | | | | | | | | | | | |
| Weighted-average limited partner units outstanding: | | | | | | | | | | | | | | | | | |
| Common units – basic | 10,003 | | | | | | | | | | | | | | | | | 10,003 | |
| Common units – diluted | 10,003 | | | | | | | | | | | | | | | | | 10,003 | |
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
For the Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per-unit amounts) | SMLP Historical | | Outrigger DJ Historical | | Outrigger DJ Conforming Adjustments | | Sterling DJ Historical | | Sterling DJ Conforming Adjustments | | Permian Disposition
Adjustments | | Bison Disposition Adjustments | | Financing Conforming Adjustments | | Pro forma
Combined |
| Revenues: | | | | | | | | | | | | | | | | | |
| Gathering services and related fees | $ | 281,705 | | | $ | 933 | | | $ | — | | | $ | — | | | $ | — | | | $ | (8,229) | | (f) | $ | (223) | | (f) | $ | — | | | $ | 274,186 | |
| Natural gas, NGLs and condensate sales | 82,768 | | | 73,525 | | | — | | | 90,404 | | | — | | | (28,767) | | (f) (h) | (47,470) | | (f) | — | | | 170,460 | |
| Other revenues | 36,145 | | | — | | | — | | | 6,241 | | | — | | | (481) | | (f) | (14,764) | | (f) | — | | | 27,141 | |
| Total revenues | 400,618 | | | 74,458 | | | — | | | 96,645 | | | — | | | (37,477) | | | (62,457) | | | — | | | 471,787 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | |
| Cost of natural gas and NGLs | 81,969 | | | 64,250 | | | — | | | 59,958 | | | — | | | (30,163) | | (f) (h) | (47,637) | | (f) | — | | | 128,377 | |
| Operation and maintenance | 74,178 | | | 5,425 | | | — | | | 12,469 | | | 268 | | (l) | (5,585) | | (f) | (7,676) | | (f) | — | | | 79,079 | |
| General and administrative | 58,166 | | | 192 | | | — | | | 6,010 | | | 53 | | (k) | (478) | | (f) | (305) | | (f) | — | | | 63,638 | |
| Depreciation and amortization | 119,076 | | | 9,624 | | | (3,199) | | (l) | 14,006 | | | (51) | | (l) | (5,858) | | (f) | (2,160) | | (f) | — | | | 131,438 | |
| Transaction costs | 1,677 | | | — | | | 2,262 | | (i) | — | | | 2,734 | | (i) | 935 | | (i) | 350 | | (i) | — | | | 7,958 | |
| Gain on asset sales, net | (369) | | | (4,212) | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,581) | |
| Long-lived asset impairments | 10,151 | | | — | | | — | | | — | | | — | | | (595) | | (f) | (41) | | (f) | — | | | 9,515 | |
| Total costs and expenses | 344,848 | | | 75,279 | | | (937) | | | 92,443 | | | 3,004 | | | (41,744) | | | (57,469) | | | — | | | 415,424 | |
| Other expense, net | (613) | | | — | | | — | | | (1,173) | | | — | | | — | | | — | | | — | | | (1,786) | |
| Loss on ECP Warrants | (13,634) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,634) | |
| Interest Expense | (66,156) | | | — | | | — | | | 23 | | | — | | | — | | | — | | | (14,890) | | (g) | (81,023) | |
| Gain/loss on early extinguishment of debt | (3,523) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,523) | |
| Income (loss) before income taxes and equity method investment income | (28,156) | | | (821) | | | 937 | | | 3,052 | | | (3,004) | | | 4,267 | | | (4,988) | | | (14,890) | | | (43,603) | |
| Income tax (expense) benefit | 327 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 327 | |
| Income from equity method investees | 7,880 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,880 | |
| Net income (loss) | $ | (19,949) | | | $ | (821) | | | $ | 937 | | | $ | 3,052 | | | $ | (3,004) | | | $ | 4,267 | | | $ | (4,988) | | | $ | (14,890) | | | $ | (35,396) | |
| Net income attributable to Subsidiary Series A Preferred Units | (16,667) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16,667) | |
| Net income attributable to Summit Midstream Partners, LP | $ | (36,616) | | | $ | (821) | | | $ | 937 | | | $ | 3,052 | | | $ | (3,004) | | | $ | 4,267 | | | $ | (4,988) | | | $ | (14,890) | | | $ | (52,063) | |
| Less: net income attributable to Series A Preferred Units | (15,998) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,998) | |
| Add: deemed contribution from Preferred Exchange Offer | 8,326 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,326 | |
| Net income (loss) attributable to common limited partners | $ | (44,288) | | | $ | (821) | | | $ | 937 | | | $ | 3,052 | | | $ | (3,004) | | | $ | 4,267 | | | $ | (4,988) | | | $ | (14,890) | | | $ | (59,735) | |
| Net loss per limited partner unit: | | | | | | | | | | | | | | | | | |
| Common unit – basic | $ | (6.57) | | | | | | | | | | | | | | | | | $ | (8.86) | |
| Common unit – diluted | $ | (6.57) | | | | | | | | | | | | | | | | | $ | (8.86) | |
| | | | | | | | | | | | | | | | | |
| Weighted-average limited partner units outstanding: | | | | | | | | | | | | | | | | | |
| Common units – basic | 6,741 | | | | | | | | | | | | | | | | | 6,741 | |
| Common units – diluted | 6,741 | | | | | | | | | | | | | | | | | 6,741 | |
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined financial statements (the “Pro Forma Financial Statements”) were prepared in accordance with Article 11 of Regulation S-X and are based on the historical financial information of SMLP, Outrigger DJ, and Sterling DJ. Presented in the Pro Forma Financial Statements are the acquisition impacts of the DJ Acquisitions, including the related impact of financing the DJ Acquisitions, and the disposition impacts of the Permian Sale and the Bison Sale. Neither of the divestitures qualified as a discontinued operation because neither divestiture represented a strategic shift that will have a major effect on SMLP’s operations or financial results.
Certain transaction accounting adjustments have been made in order to show the effects of the DJ Acquisitions in the Pro Forma Financial Statements. These adjustments are preliminary and involve management estimates about fair value, liabilities assumed, and the useful lives of the assets acquired, among others.
The accounting adjustments are described in the accompanying notes and are based on available information and certain assumptions that SMLP believes are reasonable; however, actual results may differ from those reflected in these statements. The Pro Forma Financial Statements do not purport to represent what SMLP’s financial position or results of operations would have been if the DJ Acquisitions, the Permian Sale, and the Bison Sale had occurred on the dates described in the Pro Forma Financial Statements, and they may not be indicative of SMLP’s future financial position or results of operations. Certain information normally included in financial statements and the accompanying notes has been condensed or omitted. The Pro Forma Financial Statements should be read in conjunction with the historical financial statements and related notes of Outrigger DJ and Sterling DJ for the periods presented.
The pro forma condensed combined balance sheet as of September 30, 2022 gives effect to the acquisition of Sterling DJ and Outrigger DJ as if they had been completed on September 30, 2022 and also includes known subsequent event purchase price settlements related to the Bison Sale. The pro forma condensed statement of operations for the nine months ended September 30, 2022 gives effect to the DJ Acquisitions, the Permian Sale, and the Bison Sale as if they had been completed on January 1, 2021. The pro forma condensed combined statement of operations for the year ended December 31, 2021 gives effect to the DJ Acquisitions, the Permian Sale, and the Bison Sale as if they had been completed on January 1, 2021.
The unaudited condensed combined pro forma balance sheet as of September 30, 2022 and the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2022 and the year ended December 31, 2021 have been compiled in a manner consistent with the accounting policies adopted by SMLP. Certain reclassifications and adjustments have also been made to the historical financial information of Outrigger DJ and Sterling DJ presented herein to conform to SMLP’s historical presentation.
The unaudited pro forma condensed combined statements reflect the following adjustments:
Balance Sheet
“Historical” - represents the historical unaudited condensed combined balance sheets of SMLP, Outrigger DJ and Sterling DJ as of September 30, 2022.
Outrigger DJ
(a) Reflects adjustments for cash consideration paid of $167.6 million and preliminary fair value measurements of the assets acquired and liabilities assumed by the Partnership for the acquisition of Outrigger DJ.
The acquisition of Outrigger DJ was accounted for using the acquisition method of accounting for business combinations. The preliminary purchase price was allocated to the net assets acquired based upon their estimated fair values. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. These inputs require significant judgments and estimates, as a result, the provisional measurements are preliminary and subject to change during the measurement period and such changes could be material.
The Partnership estimates the fair value of Outrigger DJ to be approximately $167.6 million, which it considers to be representative of the price paid by a typical market participant. This measurement resulted in no goodwill or bargain purchase price being recognized. The transaction costs are estimated to be $3.9 million and were expensed as incurred.
The following table summarizes the consideration paid for the Outrigger DJ acquisition and the fair value of assets acquired and liabilities assumed:
| | | | | |
| (in thousands) | |
| Cash consideration paid for Outrigger DJ, including adjustments for working capital | $ | 167,631 | |
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| Accounts receivable | 7,525 | |
| Other current assets (including $1.0 million of cash acquired) | 2,813 | |
| Property, plant and equipment | 142,787 | |
| Intangible assets | 21,447 | |
| Trade accounts payable, accrued expenses and other | (6,941) | |
| Net assets acquired | $ | 167,631 | |
Sterling DJ
(b) Reflects adjustments for cash consideration paid of $138.4 million and preliminary fair value measurements of assets acquired and liabilities assumed by the Partnership for the Sterling DJ acquisition, including $9.9 million of lease assets, recognized within other non-current assets, and the corresponding liability, recognized within other current and non-current liabilities, as a result of applying SMLP’s accounting policies to the private company financial statements of Sterling DJ.
The acquisition of Sterling DJ was accounted for using the acquisition method of accounting for business combinations. The preliminary purchase price was allocated to the net assets acquired based upon their estimated fair values. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. These inputs require significant judgments and estimates, as a result, the provisional measurements are preliminary and subject to change during the measurement period and such changes could be material.
The Partnership estimates the fair value of Sterling DJ to be approximately $138.4 million, which it considers to be representative of the price paid by a typical market participant. This measurement resulted in no goodwill or bargain purchase price being recognized. The transaction costs are estimated to be $2.5 million and were expensed as incurred. The Partnership continues to assess the acquired liabilities of Sterling DJ and ongoing assessments primarily relate to outstanding litigation and other legal compliance matters that existed prior to December 1, 2022.
The following table summarizes the consideration paid for the Sterling DJ acquisition and the fair value of assets acquired and liabilities assumed:
| | | | | |
| (in thousands) | |
| Cash consideration paid for Sterling DJ, including adjustments for working capital | $ | 138,414 | |
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| Accounts receivable | 14,150 | |
| Other current assets (includes $0.5 million of cash acquired) | 6,854 | |
| Property, plant and equipment, net | 102,281 | |
| Intangible assets | 38,679 | |
| Other non-current assets | 9,865 | |
| Trade accounts payable, accrued expenses and other | (20,068) | |
| Other non-current liabilities | $ | (13,347) | |
| Net assets acquired | $ | 138,414 | |
(c) The DJ Acquisitions were financed through a combination of borrowings under SMLP’s asset-based lending credit facility governed by the ABL Agreement (the “ABL Facility”) and the issuance of $85.0 million aggregate principal amount of 8.500% Senior Secured Second Lien Notes due 2026 (the “Additional 2026 Secured Notes”). The DJ Acquisitions represent a reinvestment of approximately $115.0 million of the net proceeds received from the previously announced Permian Sale and Bison Sale.
(d) Adjustment related to an updated net working capital calculation in connection with the Bison Sale.
(e) Reflects the elimination of historical equity in accordance with the acquisition method of accounting.
Income Statement
“Historical” - represents the historical consolidated statements of operations SMLP, Outrigger DJ, and Sterling DJ for the nine months ended September 30, 2022 and for the year ended December 31, 2021.
(f) Adjustments are to eliminate revenues and costs from the Partnership’s consolidated results of operations resulting from the Bison Sale and the Permian Sale.
(g) Interest expense is adjusted to include the impact of approximate reductions of $75.0 million and $40.0 million to SMLP’s ABL Facility with proceeds received from the Permian Sale and Bison Sale, respectively, as well as the impact of the incremental borrowings for the DJ Acquisitions under the ABL Facility and issuance of $85.0 million of additional 2026 Secured Notes.
For the nine months ended September 30, 2022, the pro forma adjustment includes a reduction of interest expense of $1.6 million and $1.4 million related to the Permian Sale and Bison Sale, respectively and an increase of $15.4 million related to the DJ Acquisitions, which reflect rates on the ABL Facility applicable to the nine months ended September 30, 2022. For the year ended December 31, 2021, the pro forma adjustment includes a reduction of interest expense of $2.6 million and $1.4 million related to the Permian Sale and Bison Sale, respectively and an increase of $15.4 million related to the DJ acquisitions, which reflect rates on the applicable credit facility for the year ended December 31, 2021.
Additionally, interest expense is adjusted to reflect the impact of the amortization of issuance costs in connection with the $85.0 million of additional borrowings on the 2026 Secured Notes.
(h) Includes the impact of the termination of certain sales agreements as well as the assumption of the Partnership’s take-or-pay firm capacity on the Double E Pipeline, by a subsidiary of Matador Resources Company, resulting from the Permian Sale, for the year ended December 31, 2021 and for the nine months ended September 30, 2022. The Partnership’s Contractual Obligation Table, included in Part II of its Form 10-K for the fiscal year ended December 31, 2021, disclosed Double E Pipeline take-or-pay firm capacity obligations of $2.6 million, $2.6 million, $2.7 million, $3.3 million, and $3.3 million for the fiscal years ended December 31, 2022, 2023, 2024, 2025, and 2026, respectively.
(i) To adjust for unrecognized transaction costs associated with the DJ Acquisitions, the Bison Sale and the Permian Sale.
(j) To adjust for asset impairments and losses recognized as a result of the Permian Sale and the Bison Sale.
(k) To adjust lease expense as a result of applying SMLP’s accounting policies to the private company financial statements of Sterling DJ in accordance with FASB ASC 842.
(l) To reflect adjustments as a result of applying SMLP’s accounting policies for fixed asset useful lives and fixed asset capitalization criteria.
