| Significant Accounting Policies | (2) Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Further, the consolidated financial statements give effect to the Business Combination under the acquisition method of accounting and are treated as a reverse acquisition. Under the acquisition method of accounting, Midstream Holdings was the accounting acquirer in the transactions because its parent company, Devon, obtained control of ENLC through the indirect control of the general partner as a result of the Business Combination. Consequently, Midstream Holdings’ assets and liabilities retained their carrying values. All financial results prior to March 7, 2014 reflect the historical operations of Midstream Holdings and its majority-owned subsidiaries and are reflected as “Predecessor interest in net income” on the statement of operations for the year ended December 31, 2014. Additionally, EMI’s assets acquired and liabilities assumed by ENLC, as well as ENLC’s non-controlling interests in the Partnership, were recorded at their fair values measured as of the acquisition date, March 7, 2014. The excess of the purchase price over the estimated fair values of EMI’s net assets acquired was recorded as goodwill. Financial results subsequent to March 7, 2014 reflect the combined operations of Midstream Holdings and EMI, which give effect to new contracts entered into with Devon and include the legacy Partnership assets. All significant intercompany transactions and balances have been eliminated. Certain assets were not contributed to Midstream Holdings from the Predecessor and the operations of such non-contributed assets have been presented as discontinued operations. In conjunction with the Business Combination, Midstream Holdings became a non-taxable entity which was treated as a reorganization under common control with the removal of historical deferred taxes reflected through equity.
During the fourth quarter of 2014 and the first half of 2015, the Partnership acquired assets from Devon and us through drop down transactions. Due to our ownership and control of the general partner and Devon’s control of us through its ownership of the managing member of ENLC, each acquisition from ENLC and Devon was considered a transfer of net assets between entities under common control. As such, we were required to recast our historical financial statements to include the activities of such assets from the date that these entities were under common control. The consolidated financial statements for periods prior to the Partnership’s acquisition of the assets from Devon and us have been prepared from Devon’s and our historical cost-basis accounts for the acquired assets and may not necessarily be indicative of the actual results of operations that would have occurred if the Partnership had owned the acquired assets during the periods reported. Net income attributable to the assets acquired from Devon and us for periods prior to the Partnership’s acquisition is allocated to the general partner.
In January 2016, we adopted Accounting Standards Updates (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporations and securitization structures, should be consolidated. Due to ENLC’s ownership of the General Partner, the Partnership is considered a variable interest entity as the limited partners lack the ability to exercise kick-out rights over the General Partner and do not have substantive participating rights. Further, ENLC, including the consideration of the Incentive Distribution Rights, is considered the primary beneficiary as it has the power to direct the activities that most significantly impact the Partnership’s economic performance. The adoption of this standard has no impact on our consolidated financial statements as we will continue to consolidate the Partnership
(b) Management’s Use of Estimates
The preparation of financial statements in accordance with US GAAP requires our 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 period. Actual results could differ from these estimates.
(c) Revenue Recognition
The Partnership generates the majority of its revenues from midstream energy services, including gathering, transmission, processing, fractionation, storage, condensate stabilization, brine services and marketing, through various contractual arrangements, which include fee based contract arrangements or arrangements where it purchases and resells commodities in connection with providing the related service and earns a net margin for its fee. While the transactions vary in form, the essential element of each transaction is the use of the Partnership’s assets to transport a product or provide a processed product to an end-user at the tailgate of the plant, barge terminal or pipeline. The Partnership reflects revenue as Product sales and Midstream services revenue on the consolidated statements of operations as follows:
·
Product sales - Product sales represent the sale of natural gas, NGLs, crude oil and condensate where the product is purchased and resold in connection with providing its midstream services as outlined above.
·
Midstream services - Midstream services represents all other revenue generated as a result of performing the Partnership’s midstream services outlined above.
The Partnership recognizes revenue for sales or services at the time the natural gas, NGLs, crude oil or condensate are delivered or at the time the service is performed at a fixed or determinable price. The Partnership generally accrues one month of sales and the related natural gas, NGL, condensate and crude oil purchases and reverses these accruals when the sales and purchases are actually invoiced and recorded in the subsequent month. Actual results could differ from the accrual estimates. Except for fixed-fee based arrangements, the Partnership acts as the principal in these purchase and sale transactions, bearing the risk and reward of ownership as evidenced by title transfer, scheduling the transportation of products and assuming credit risk. The Partnership accounts for taxes collected from customers attributable to revenue transactions and remitted to government authorities on a net basis (excluded from revenues).
Certain gathering and processing agreements in the Partnership’s Texas, Oklahoma and Crude and Condensate segments provide for a quarterly or annual minimum volume commitment ("MVC"). Under these agreements, the Partnership’s customers agree to ship and/or process a minimum volume of production on its systems over an agreed time period. If a customer under such an agreement fails to meet its MVC for a specified period, the customer is obligated to pay a contractually-determined fee based upon the shortfall between actual production volumes and the MVC for that period. Some of these agreements also contain make-up right provisions that allow a customer to utilize gathering or processing fees in excess of the MVC in subsequent periods to offset shortfall amounts in previous periods. We record revenue under MVC contracts during periods of shortfall when it is known that the customer can not, or will not, make up the deficiency in the specific period.
Revenue recorded for the shortfall between actual production volumes and the MVC are as follows (in millions):
Texas
Oklahoma
Crude and Condensate
Total
Year Ended December 31, 2016
Midstream services
$
$
$
—
$
Midstream services - related parties
Total
$
$
$
$
Year Ended December 31, 2015
Midstream services
$
$
—
$
—
$
Midstream services - related parties
Total
$
$
$
$
(d) Gas Imbalance Accounting
Quantities of natural gas and NGLs over-delivered or under-delivered related to imbalance agreements are recorded monthly as receivables or payables using weighted average prices at the time of the imbalance. These imbalances are typically settled with deliveries of natural gas or NGLs. The Partnership had imbalance payables of $7.1 million and $2.6 million at December 31, 2016 and 2015, respectively, which approximate the fair value of these imbalances. The Partnership had imbalance receivables of $3.9 million and $3.6 million at December 31, 2016 and 2015, respectively, which are carried at the lower of cost or market value. Imbalance receivables and imbalance payables are included in the line items “Accrued revenue and other” and “Accrued gas, NGLs, condensate and crude oil purchases,” respectively, on the consolidated balance sheets.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
(f) Income Taxes
We account for deferred income taxes related to the federal and state jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of carryforwards is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event interest or penalties are incurred with respect to income tax matters, our policy will be to include such items in income tax expense.
(g) Natural Gas, Natural Gas Liquids, Crude Oil and Condensate Inventory
The Partnership’s inventories of products consist of natural gas, NGLs, crude oil and condensate. The Partnership reports these assets at the lower of cost or market value which is determined by using the first-in, first-out method.
(h) Property, Plant, and Equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation. Assets acquired in a business combination are recorded at fair value, including the Partnership’s assets acquired by the Predecessor in the Business Combination. Repairs and maintenance are charged against income when incurred. Renewals and betterments, which extend the useful life of the properties, are capitalized. Subsequent to a business combination, interest costs for material projects are capitalized to property, plant and equipment during the period the assets are undergoing preparation for intended use.
The components of property, plant and equipment are as follows (in millions):
Year Ended December 31,
2016
2015
Transmission assets
$
$
Gathering systems
Gas processing plants
Other property and equipment
Construction in process
Property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net
$
$
Change in Depreciation Method. Historically, Midstream Holdings depreciated certain property, plant, and equipment using the units-of-production method. As a result of the Business Combination, the Company is operated as an independent midstream company and thus no longer have access to Devon’s proprietary reserve and production data historically used to compute depreciation under the units-of-production method. Additionally, the existing contracts with Devon were revised to a fee-based arrangement with MVCs. Effective March 7, 2014, the Company changed its method of computing depreciation for these assets to the straight-line method, consistent with the depreciation method applied to its acquired assets. In accordance with ASC 250, Accounting Changes and Error Corrections , the Company determined that the change in depreciation method was a change in accounting estimate effected by a change in accounting principle, and accordingly, the straight-line method was applied on a prospective basis. This change is considered preferable because the straight-line method will more accurately reflect the pattern of usage and the expected benefits of such assets. The effect of this change in estimate resulted in a decrease in depreciation expense of approximately $29.4 million, or $0.18 per unit for the year ended December 31, 2014.
Depreciation is calculated using the straight-line method based on the estimated useful life of each asset, as follows:
Useful Lives
Transmission assets
20 - 25 years
Gathering systems
20 - 25 years
Gas processing plants
20 - 25 years
Other property and equipment
3 - 15 years
Depreciation expense of $386.9 million, $331.3 million and $247.8 million was recorded for the years ended December 31, 2016, 2015 and 2014, respectively.
Gain or Loss on Disposition. Upon the disposition or retirement of property, plant and equipment related to continuing operations, any gain or loss is recognized in operating income in the statement of operations. When a disposition or retirement occurs which qualifies as discontinued operations, any gain or loss is recognized as income or loss from discontinued operations in the statement of operations. For the year ended December 31, 2016, we retired or sold net property, plant and equipment of $106.6 million, which was offset by $0.3 million of nonrefundable cash proceeds collected from our insurance carrier and $93.1 million of proceeds from the sale of property. This resulted in a loss on disposition of assets of $13.2 million, which primarily relates to the sale of the North Texas Pipeline System (“NPTL”), a 140-mile natural gas transportation pipeline. We received net proceeds of $84.6 million and recorded a loss on sale of $13.4 million.
For the year ended December 31, 2015, we retired net property, plant and equipment of $5.1 million, which was offset by $2.9 million of nonrefundable cash proceeds collected from our insurance carrier and $1.0 million of proceeds from the sale of property. This resulted in a loss on disposition of assets of $1.2 million, which primarily relates to the retirement of a compressor due to fire damage. Additionally, we collected $2.4 million of business interruption proceeds from our insurance carrier that was presented in the Midstream services revenue line item in the consolidated statement of operations for the year ended December 31, 2015.
Impairment Review. We evaluate our property, plant and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the undiscounted sum of the future cash flows expected to result from the use and eventual disposition of the asset. Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions. When the carrying amount of a long-lived asset is not recoverable, an impairment loss is recognized equal to the excess of the asset’s carrying value over its fair value. The fair values of long-lived assets are generally determined from estimated discounted future net cash flows. Our estimate of cash flows is based on assumptions, which include: (1) the future fee-based rate of new business or contract renewals; (2) the purchase and resale margins on natural gas, NGLs, condensate and crude oil; (3) the volume of natural gas, NGL, condensate and crude oil available to the asset; (4) markets available to the asset, (5) operating expenses; and (6) future natural gas, crude oil, condensate and NGL product prices. The volume of available natural gas, condensate, NGLs and crude oil to an asset is sometimes based on assumptions regarding future drilling activity, which may be dependent in part on natural gas, NGL, condensate and crude oil prices. Projections of volumes and future commodity prices are inherently subjective and contingent upon a number of variable factors. Any significant variance in any of the above assumptions or factors could materially affect our cash flows, which could require us to record an impairment of an asset. During the year ended December 31, 2015, the Partnership recognized a $12.1 million impairment on property, plant and equipment, primarily related to costs associated with the cancellation of various capital projects in its Texas, Louisiana, and Crude and Condensate segments.
(i) Equity Method of Accounting
The Partnership accounts for investments where it does not control the investment but has the ability to exercise significant influence using the equity method of accounting. Under this method, unconsolidated affiliate investments are initially carried at the acquisition cost, increased by our proportionate share of the investee’s net income and by contributions made, and decreased by our proportionate share of the investee’s net losses and by distributions received.
The Partnership evaluates our unconsolidated affiliate investments for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. The Partnership recognizes impairments of our investments as a loss from unconsolidated affiliates on our consolidated statements of operations. For additional information, see “Note 11—Investments in Unconsolidated Affiliates.”
(j) Goodwill
Goodwill is the cost of an acquisition less the fair value of the net identifiable assets of the acquired business. The Company evaluates goodwill for impairment annually as of October 31, and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company first assesses qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company may elect to perform the two-step goodwill impairment test without completing a qualitative assessment. If a two-step goodwill impairment test is elected or required, the first step involves comparing the fair value of the reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves comparing the implied fair value of goodwill to the carrying value of the goodwill for that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, the excess of the carrying value over the implied fair value is recognized as an impairment loss. During the year ended December 31, 2016, the Company recognized a goodwill impairment loss totaling $873.3 million for our Texas, Crude and Condensate and Corporate segments. During the year ended December 31, 2015, the Company recognized a goodwill impairment of $1,328.2 million related to our Louisiana, Texas and Crude and Condensate segments. See “Note 4—Goodwill and Intangible Assets for further discussion regarding the goodwill impairments.
(k) Intangible Assets
Intangible assets associated with customer relationships are amortized on a straight-line basis over the expected period of benefits of the customer relationships, which range from ten to twenty years.
(l) Asset Retirement Obligations
The Partnership recognizes liabilities for retirement obligations associated with its pipelines and processing and fractionation facilities. Such liabilities are recognized when there is a legal obligation associated with the retirement of the assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property, plant and equipment. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The Partnership’s retirement obligations include estimated environmental remediation costs that arise from normal operations and are associated with the retirement of the long-lived assets. The asset retirement cost is depreciated using the straight-line depreciation method similar to that used for the associated property, plant and equipment.
(m) Other Long-Term Liabilities
Other current and long-term liabilities include a liability related to an onerous performance obligation assumed in the Business Combination of $44.8 million and $62.8 million as of December 31, 2016 and 2015, respectively. The Company has one delivery contract that requires us to deliver a specified volume of gas each month at an indexed base price with a term to 2019. The Company realizes a loss on the delivery of gas under this contract each month based on current prices. The fair value of this onerous performance obligation was recorded as a result of the March 7, 2014 Business Combination and was based on forecasted discounted cash obligations in excess of market under this gas delivery contract. The liability is reduced each month as delivery is made over the remaining life of the contract with an offsetting reduction in purchased gas costs.
(n) Derivatives
The Company uses derivative instruments to hedge against changes in cash flows related to product price only. The Company generally determines the fair value of swap contracts based on the difference between the derivative’s fixed contract price and the underlying market price at the determination date. The asset or liability related to the derivative instruments is recorded on the balance sheet as fair value of derivative assets or liabilities in accordance with ASC 815, Derivatives and Hedging (“ASC 815”). Changes in fair value of derivative instruments are recorded in gain or loss on derivative activity in the period of change.
Realized gains and losses on commodity related derivatives are recorded as gain or loss on derivative activity within revenues in the consolidated statements of operations in the period incurred. Settlements of derivatives are included in cash flows from operating activities.
(o) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade accounts receivable and commodity financial instruments. Management believes the risk is limited, other than our exposure to Devon discussed below, since the Company’s customers represent a broad and diverse group of energy marketers and end users. In addition, the Company continually monitors and reviews credit exposure of its marketing counter-parties and letters of credit or other appropriate security are obtained when considered necessary to limit the risk of loss. The Company records reserves for uncollectible accounts on a specific identification basis since there is not a large volume of late paying customers. The Company had a reserve for uncollectible receivables of $0.1 million and $0.3 million as of December 31, 2016 and 2015, respectively.
During the years ended December 31, 2016, 2015 and 2014, we had only one customer, other than the transactions with Devon, that individually represented greater than 10.0% of our midstream revenues. The customer is located in the Louisiana segment and represented 10.8%, 11.7% and 11.0% of the consolidated revenues for years ended December 31, 2016, 2015 and 2014, respectively. The affiliate transactions with Devon represented 18.5%, 16.6% and 30.6% of the consolidated midstream revenues for the years ended December 31, 2016, 2015 and 2014, respectively. Devon and our Louisiana customer represent a significant percentage of revenues and the loss of either as a customer would have a material adverse impact on our results of operations because the gross operating margin received from transactions with these customers are material to us.
(p) Environmental Costs
Environmental expenditures are expensed or capitalized depending on the nature of the expenditures and the future economic benefit. Expenditures that relate to an existing condition caused by past operations that do not contribute to current or future revenue generation are expensed. Liabilities for these expenditures are recorded on an undiscounted basis (or a discounted basis when the obligation can be settled at fixed and determinable amounts) when environmental assessments or clean-ups are probable and the costs can be reasonably estimated. Environmental expenditures were $3.5 million for the year ended December 31, 2015. For the years ended December 31, 2016 and 2014, such expenditures were not material.
(q) Unit-Based Awards
Prior to the Business Combination, Devon granted certain share-based awards to members of its board of directors and selected employees. The Predecessor did not grant share-based awards because it previously participated in Devon’s share-based award plans since the Predecessor comprised Devon’s U.S. midstream assets. The awards granted under Devon’s plans were measured at fair value on the date of grant and were recognized as expense over the applicable requisite service periods.
The Company recognizes compensation cost related to all unit-based awards in its consolidated financial statements in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). The Company and the Partnership each have similar unit-based payment plans for employees. Unit-based compensation associated with ENLC’s unit-based compensation plans awarded to directors, officers and employees of the general partner of the Partnership are recorded by the Partnership since the Company has no substantial or managed operating activities other than its interests in the Partnership and EnLink Oklahoma T.O.
(r) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.
(s) Discontinued Operations
The Company classifies as discontinued operations its assets that have clearly distinguishable cash flows and are in the process of being sold or have been sold. The Company also include as discontinued operations Predecessor assets that were not contributed in the Business Combination.
(t) Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and recorded as interest expense over the term of the related debt. Gains or losses on debt repurchases, redemptions and debt extinguishments include any associated unamortized debt issue costs. Unamortized debt issuance costs totaling $24.6 million and $23.8 million as of December 31, 2016 and 2015, respectively, are included in “Long-term debt” on the consolidated balance sheets as a direct reduction from the carrying amount of long-term debt. Debt issuance costs are amortized into interest expense using the straight-line method over the term of the related debt issuance.
(u) Legal Costs Expected to be Incurred in Connection with a Loss Contingency
Legal costs incurred in connection with a loss contingency are expensed as incurred.
(v) Redeemable Non-Controlling Interest
Non-controlling interests that contain an option for the non-controlling interest holder to require the Partnership to buy out such interests for cash are considered to be redeemable non-controlling interests because the redemption feature is not deemed to be a freestanding financial instrument and because the redemption is not solely within the control of the Partnership. Redeemable non-controlling interest is not considered to be a component of partners’ equity and is reported as temporary equity in the mezzanine section on the consolidated balance sheets. The amount recorded as redeemable non-controlling interest at each balance sheet date is the greater of the redemption value and the carrying value of the redeemable non-controlling interest (the initial carrying value increased or decreased for the non-controlling interest holder’s share of net income or loss and distributions).
(w) Adopted Accounting Standards
In January 2016, we adopted ASU 2015-03, Interest - Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs . The update requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability and requires retrospective application. The retrospective application of this new accounting guidance resulted in the reclassification of $23.8 million of debt issuance costs from “Other assets, net” to “Long-term debt” in our consolidated balance sheet as of December 31, 2015.
In January 2016, we adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes on a prospective basis. This new standard required that deferred tax assets and liabilities be classified as noncurrent in our consolidated balance sheet.
In January 2016, we adopted ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments , which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The adoption had no impact on our consolidated financial statements or related disclosures.
In January 2016, we adopted ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis . The update provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporations and securitization structures, should be consolidated. The update is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. The adoption had no impact on our consolidated financial statements or related disclosures.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses the classification and presentation of certain cash receipts and cash payments related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investees, and other specific cash flow issues. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods, and should be applied using a retrospective transition method to each period presented. Early application is permitted, including adoption in an interim period. In September 2016, we elected to early adopt ASU 2016-15 effective January 1, 2016. The adoption had no impact on our consolidated financial statements or related disclosures.
(x) Accounting Standards to be Adopted in Future Periods
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation (“ASU 2016-09”). First, ASU 2016-09 will require all of the tax effects related to share-based payments at settlement (or expiration) to be recorded through the income statement, and is required to be applied prospectively. Second, ASU 2016-09 allows entities to withhold taxes of an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award, and is required to be adopted using a modified retrospective approach. Third, under ASU 2016-09, forfeitures can be estimated, as currently required, or recognized when they occur. If elected, the change to recognize forfeitures when they occur must be adopted using a modified retrospective approach. ASU 2016-09 |
