SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 26, 2012
Date of Report (Date of earliest event reported)
INERGY MIDSTREAM, L.P.
(Exact name of Registrant as specified in its charter)
Delaware | 001-35377 | 20-1647837 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification Number) |
Two Brush Creek Boulevard, Suite 200
Kansas City, MO 64112
(Address of principal executive offices)
(816) 842-8181
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01 Other Events.
On November 26, 2012, Inergy Midstream, L.P. (the Company) issued a press release regarding the launch of a private offering of $400,000,000 aggregate principal amount of senior notes to be issued by the Company and NRGM Finance Corp, a direct, wholly-owned subsidiary of the Company. A copy of the press release is attached as Exhibit 99.1 to this Current Report and incorporated by reference herein.
As previously announced, on November 3, 2012, the Company entered into a Securities Purchase Agreement with Rangeland Equity Holdings, LLC whereby the Company will acquire all of the issued and outstanding membership interest of Rangeland Energy, LLC (Rangeland), for a total purchase price of $425 million, subject to certain performance milestones and customary working capital adjustments (the Rangeland Acquisition).
Historical financial information of Rangeland is attached as Exhibits 99.2, 99.3 and 99.4 to this Current Report and incorporated by reference herein. Pro forma financial information of the Company to give effect to the Rangeland Acquisition is attached as Exhibit 99.5 to this Current Report and incorporated by reference herein.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited consolidated financial statements of Rangeland as of and for the fiscal year ended December 31, 2011 and for the period from October 19, 2009 through December 31, 2011, and the related notes thereto, together with the report of Weaver and Tidwell, L.L.P., independent auditors, concerning those statements and related notes, are attached hereto as Exhibit 99.2 and incorporated herein by reference. The audited financial statements of Rangeland as of and for the fiscal year ended December 31, 2010 and for the period from October 19, 2009 through December 31, 2010, and the related notes thereto, together with the report of Weaver and Tidwell, L.L.P., independent auditors, concerning those statements and related notes, are attached hereto as Exhibit 99.3 and incorporated herein by reference. The unaudited consolidated financial statements of Rangeland as of September 30, 2012 and December 31, 2011 and for the nine months ended September 30, 2012 and September 30, 2011, and the related notes thereto, are attached hereto as Exhibit 99.4 and incorporated herein by reference.
(b) Pro Forma Financial Information.
Unaudited pro forma financial information of the Company to give effect to the Rangeland Acquisition is filed as Exhibit 99.5 to this Current Report on Form 8-K and incorporated herein by reference:
| Introduction |
| Unaudited pro forma condensed combined balance sheet as of September 30, 2012 |
| Unaudited pro forma condensed combined statement of operations for the year ended September 30, 2012 |
| Notes to unaudited pro forma condensed combined financial statements |
(c) Exhibits
Exhibit No. |
Description | |
23.1 | Consent of Weaver and Tidwell, L.L.P. | |
99.1 | Press Release dated November 26, 2012 | |
99.2 | Rangeland Energy, LLC Audited Historical Consolidated Financial Statements | |
99.3 | Rangeland Energy, LLC Audited Historical Financial Statements | |
99.4 | Rangeland Energy, LLC Unaudited Historical Consolidated Financial Statements | |
99.5 | Inergy Midstream, L.P. Unaudited Pro Forma Condensed Combined Financial Statements |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
INERGY MIDSTREAM, L.P. | ||||||
By: | NRGM GP, LLC, Its General Partner | |||||
Date: November 26, 2012 | By: | /s/ Laura L. Ozenberger | ||||
Laura L. Ozenberger Senior Vice President General Counsel |
Exhibit 23.1
Consent of Independent Auditors
We hereby consent to the inclusion of our reports in the Form 8-K of Inergy Midstream, L.P., which is expected to be filed with the Securities and Exchange Commission on November 26, 2012. The specific reports subject to this consent are dated as follows:
| November 2, 2012, with respect to the review of the consolidated balance sheet of Rangeland Energy, LLC (the Company) as of September 30, 2012 and the related consolidated statements of operations, changes in members equity and cash flows for the nine-months ended September 30, 2012 and 2011; |
| March 9, 2012, with respect to the audit of the consolidated balance sheet of Rangeland Energy, LLC as of December 31, 2011 and the related consolidated statements of operations, changes in members equity and cash flows for the year then ended and for the period from inception (October 19, 2009) to December 31, 2011. Rangeland Energy, LLC was a development stage enterprise as of December 31, 2011; |
| March 14, 2011, with respect to the audit of the balance sheet of Rangeland Energy, LLC as of December 31, 2010 and the related statements of operations, changes in members equity and cash flows for the year then ended and for the period from inception (October 19, 2009) to December 31, 2010. Rangeland Energy, LLC was a development stage enterprise as of December 31, 2010. |
We also hereby consent to the incorporation by reference of these reports in the Registration Statement (Form S-8 No. 333-1786659) of Inergy Midstream, L.P.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Houston, Texas
November 26, 2012
Exhibit 99.1
FOR IMMEDIATE RELEASE | For more information: Vince Grisell, 816-842-8181 investorrelations@inergyservices.com |
Inergy Announces $400 Million Private Placement of
Senior Notes Due 2020
Kansas City, MO (November 26, 2012) Inergy Midstream, L.P. (NYSE:NRGM) (Inergy Midstream) and its wholly owned subsidiary NRGM Finance Corp. announced today, subject to market conditions, that they intend to sell $400 million in aggregate principal amount of senior unsecured notes due 2020 to eligible purchasers in a private placement under Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and to persons outside of the United States pursuant to Regulation S under the Securities Act (the Notes Offering).
Inergy Midstream intends to use the net proceeds from the Notes Offering to fund a portion of the $425 million purchase price of its pending acquisition of all of the equity interests in Rangeland Energy, LLC (the Rangeland Acquisition) and to repay existing borrowings under its revolving credit facility. If the Rangeland Acquisition does not close concurrently with the Notes Offering, the net proceeds of the Notes Offering will be deposited into an escrow account pending completion of the Rangeland Acquisition. If the Rangeland Acquisition is not closed on or prior to February 1, 2013 or the acquisition agreement is terminated earlier, the notes will be redeemed at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date. The Rangeland Acquisition is expected to close on or about December 7, 2012, subject to customary closing conditions. The Notes Offering is not a condition to the closing of the Rangeland Acquisition.
The securities to be offered have not been registered under the Securities Act or any state securities laws; and unless so registered, the securities may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. This announcement shall not constitute an offer to sell or a solicitation of an offer to buy any of these securities nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
About Inergy Midstream
Inergy Midstream, L.P., with headquarters in Kansas City, Missouri, is a master limited partnership engaged in the development and operation of natural gas and NGL storage and transportation assets. Inergy Midstreams assets are located in the Northeast region of the United States.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements, which are statements that are not historical in nature. Forward-looking statements are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or any underlying assumption proves incorrect, actual results may vary materially from those anticipated, estimated, or projected. Among the key factors that could cause actual results to differ materially from those referred to in the forward-looking statements are: changes in general and local economic conditions; competitive conditions within our industry; the price and availability of debt and equity financing; the effects of existing and future governmental legislation and regulations; and natural disasters, weather-related delays, casualty losses, and other matters beyond our control. These and other risks and assumptions are described in Inergy Midstreams Annual Report on Form 10-K for the year ended September 30, 2012. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect managements view only as of the date made. We undertake no obligation to update any forward-looking statement, except as otherwise required by law.
For more information, contact Vince Grisell in Inergys Investor Relations Department at 816-842-8181 or via e-mail at investorrelations@inergyservices.com.
###
Exhibit 99.2
To the Members of
Rangeland Energy, LLC
Houston, Texas
We have audited the accompanying consolidated balance sheet of Rangeland Energy, LLC (a development stage enterprise) (the Company) as of December 31, 2011, and the related consolidated statements of operations, members equity, and cash flows for the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rangeland Energy, LLC (a development stage enterprise), as of December 31, 2011, and the consolidated results of its operations and cash flows for the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Houston, Texas
March 9, 2012
AN INDEPENDENT MEMBER OF BAKER TILLY INTERNATIONAL |
WEAVER AND TIDWELL LLP CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS WWW.WEAVERLLP.COM |
HOUSTON 24 GREENWAY PLAZA, SUITE 1800, HOUSTON, TX 77046 P: (713) 850 8787 F: (713) 850 1673 |
1
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2011
ASSETS | ||||
CURRENT ASSETS |
||||
Cash and cash equivalents |
$ | 8,563,028 | ||
Prepaid and other current assets |
77,538 | |||
|
|
|||
Total current assets |
8,640,566 | |||
NON-CURRENT ASSETS |
||||
Property and equipment, net |
49,458,357 | |||
Intangible assets |
669,863 | |||
|
|
|||
Total non-current assets |
50,128,220 | |||
|
|
|||
TOTAL ASSETS |
$ | 58,768,786 | ||
|
|
|||
LIABILITIES AND MEMBERS EQUITY | ||||
CURRENT LIABILITIES |
||||
Accounts payable |
$ | 10,226,985 | ||
Accrued liabilities |
2,814,547 | |||
|
|
|||
Total current liabilities |
13,041,532 | |||
MEMBERS EQUITY |
||||
Contributed capital |
49,534,326 | |||
Deficit accumulated during development stage |
(3,807,072 | ) | ||
|
|
|||
Total members equity |
45,727,254 | |||
|
|
|||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 58,768,786 | ||
|
|
The Notes to Financial Statements are an integral part of these statements.
2
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2011 AND PERIOD FROM INCEPTION
(OCTOBER 19, 2009) TO DECEMBER 31, 2011
Year Ended December 31, 2011 |
Period from Inception (October 19, 2009) to December 31, 2011 |
|||||||
REVENUE |
$ | 153,015 | $ | 153,015 | ||||
COST OF SALES |
120,741 | 120,741 | ||||||
Gross profit |
32,274 | 32,274 | ||||||
EXPENSES |
||||||||
Land option cost |
| 12,500 | ||||||
Depreciation expense |
12,368 | 19,561 | ||||||
Payroll expense |
897,296 | 1,670,444 | ||||||
Professional fees |
344,064 | 990,289 | ||||||
General and administrative expenses |
832,665 | 1,175,666 | ||||||
|
|
|
|
|||||
Total expenses |
2,086,393 | 3,868,460 | ||||||
|
|
|
|
|||||
OPERATING LOSS |
(2,054,119 | ) | (3,836,186 | ) | ||||
OTHER INCOME |
||||||||
Interest income |
28,590 | 29,114 | ||||||
|
|
|
|
|||||
NET LOSS |
$ | (2,025,529 | ) | $ | (3,807,072 | ) | ||
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
3
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
PERIOD FROM INCEPTION (OCTOBER 19, 2009) TO DECEMBER 31, 2011
Contributed Capital |
Deficit Accumulated During Development Stage |
Total Members Equity |
||||||||||
BALANCE, October 19, 2009 (inception) |
$ | | $ | | $ | | ||||||
Contributions |
2,000,000 | | 2,000,000 | |||||||||
Distributionsorigination fees |
(16,885 | ) | | (16,885 | ) | |||||||
Net loss |
| (199,181 | ) | (199,181 | ) | |||||||
|
|
|
|
|
|
|||||||
BALANCE, December 31, 2009 |
1,983,115 | (199,181 | ) | 1,783,934 | ||||||||
Contributions |
2,650,000 | | 2,650,000 | |||||||||
Distributionsorigination fees |
(22,372 | ) | | (22,372 | ) | |||||||
Net loss |
| (1,582,362 | ) | (1,582,362 | ) | |||||||
|
|
|
|
|
|
|||||||
BALANCE, December 31, 2010 |
4,610,743 | (1,781,543 | ) | 2,829,200 | ||||||||
Contributions |
45,300,000 | | 45,300,000 | |||||||||
Distributionsorigination fees |
(376,417 | ) | | (376,417 | ) | |||||||
Net loss |
| (2,025,529 | ) | (2,025,529 | ) | |||||||
|
|
|
|
|
|
|||||||
BALANCE, December 31, 2011 |
$ | 49,534,326 | $ | (3,807,072 | ) | $ | 45,727,254 | |||||
|
|
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
4
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2011 AND PERIOD FROM INCEPTION
(OCTOBER 19, 2009) TO DECEMBER 31, 2011
Year Ended December 31, 2011 |
Period from Inception (October 19, 2009) to December 31, 2011 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
$ | (2,025,529 | ) | $ | (3,807,072 | ) | ||
Net loss |
||||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities |
||||||||
Depreciation expense |
12,368 | 19,561 | ||||||
Change in operating assets and liabilities |
||||||||
Prepaid and other current assets |
355 | (77,538 | ) | |||||
Accounts payable and accrued liabilities |
(39,602 | ) | 13,041,532 | |||||
|
|
|
|
|||||
Net cash (used in) provided by operating activities |
(2,052,408 | ) | 9,176,483 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property and equipment |
(36,455,770 | ) | (49,477,918 | ) | ||||
Acquisition of easements and rights of way |
(669,863 | ) | (669,863 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(37,125,633 | ) | (50,147,781 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Capital contributions |
45,300,000 | 49,950,000 | ||||||
Distributionsorigination fees |
(376,417 | ) | (415,674 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
44,923,583 | 49,534,326 | ||||||
|
|
|
|
|||||
Net change in cash |
5,745,542 | 8,563,028 | ||||||
CASH, beginning of period |
2,817,486 | | ||||||
|
|
|
|
|||||
CASH, end of period |
$ | 8,563,028 | $ | 8,563,028 | ||||
|
|
|
|
|||||
NONCASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Capital expenditures accrued in accounts payable and accrued liabilities |
$ | 12,980,089 | ||||||
|
|
The Notes to Financial Statements are an integral part of these statements.
5
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS OPERATIONS
Rangeland Energy, LLC (the Company) is a Delaware limited liability company formed on October 19, 2009 to acquire, build, own and operate midstream assets in the continental United States, in accordance with its formation agreement and unit purchase agreement (collectively, Formation Agreements). On August 2, 2011, these Formation Agreements were amended to include additional investors (affiliate entities of an existing investor, EnCap Energy Infrastructure Fund, L.P.) and increase the commitment amount of the investors. The Company is owned by EnCap Energy Infrastructure Fund, L.P. and affiliates (98.0%) and KVB Energy, LLC (2.0%) (Management Member) (collectively, the Investor Group or Members). Management Member manages the Company on behalf of the other members. A five-member Board of Managers governs the actions of the Company. Under the terms of the amended Formation Agreements, the Investor Group has committed to contribute up to $115,000,000 to the Company. Of this commitment amount, the Investor Group had contributed $49,950,000 through December 31, 2011.
The Company is a development stage enterprise as defined by the Accounting Standards Codification (ASC) Topic 915, Development Stage Entities. The Company has been in the development stage since inception (October 19, 2009). As of December 31, 2011, the Company has received all necessary permits and approvals to build, own and operate its initial project, a 21-mile pipeline, crude oil loading terminal and storage facility located in Williams County, North Dakota. In addition, the Company has put in place three commercial contracts to commercialize the project and has begun constructing the assets with a scheduled completion date of May 2012. As of December 31, 2011, the Company has yet to commence commercial operations or generate significant revenues from planned, principal operations. The Companys primary activities since inception have been devoted to raising capital, obtaining permits, acquiring land, constructing assets and incurring costs related to professional services and administrative functions, which have resulted in cumulative net losses from inception (October 19, 2009) to December 31, 2011 totaling $3,807,072.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Companys two wholly owned subsidiaries: Rangeland Pipeline, LLC and Rangeland Terminals, LLC. All intercompany transactions are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents. At December 31, 2011, the Companys cash balance totaled $8,563,028.
The Company did not pay taxes or interest from the period of inception (October 19, 2009) to December 31, 2011 that would require disclosure as supplemental items to the consolidated statements of cash flows.
Fair Value of Financial Instruments
The carrying value of cash and accounts payable approximates their fair value due to the short maturity of these instruments.
Advertising
The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses. Advertising costs totaled $28,387 and $41,546 for the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011, respectively.
6
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company is organized as a Delaware Limited Liability Company and is treated as a flow-through entity for income tax purposes. As a result, the net taxable income of the Company and any related tax credits, for federal income tax purposes, are deemed to pass to the Members of the Company even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no tax provision has been made in the consolidated financial statements of the Company since the income tax is an obligation of the Members.
On October 19, 2009, the Company implemented the provisions of ASC Topic 740, Income Taxes, relating to accounting for uncertainties in income taxes. ASC Topic 740 requires that the Company recognize in its consolidated financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Management has reviewed the tax positions taken related to the Companys tax classification and filing status, and is of the opinion that material positions taken would more likely than not be sustained upon examination.
In 2006, the State of Texas enacted the Texas Margin Tax Bill effective January 1, 2007 for the tax year ended December 31, 2007. For the year ended December 31, 2011, the Company did not meet the minimum threshold and, therefore, has no Texas Margin Tax liability.
Property and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation. The assets are not depreciated until they are placed into service. The cost basis of constructed assets includes materials, labor and other direct costs, such as engineering and construction management services. Major improvements or betterments are capitalized, while repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation is provided for using the straight-line method until the asset equals estimated salvage value. The useful life used in computing depreciation for furniture and office equipment and leasehold improvements is five years.
Capitalized costs are evaluated for impairment based on an analysis of undiscounted future net cash flows in accordance with ASC Topic 360, Property, Plant and Equipment. If impairment exists, the asset is written down to its estimated fair value based on expected future discounted cash flows. No impairment was recorded for the year ended December 31, 2011 or for the period from inception (October 19, 2009) to December 31, 2011.
Use of Estimates
The preparation of the Companys consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Companys management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond managements control. Actual results could differ from these estimates.
Intangible Assets
Intangible assets are comprised of easements and rights of way obtained for the installation and operation of the pipeline. Intangible assets that have finite useful lives are amortized over their estimated useful lives.
7
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2011, the Company capitalized $669,863 related to the costs of obtaining easements and rights of way for the pipeline. Amortization of these costs will begin when the pipeline is placed in service and will be amortized over the estimated useful life of the pipeline. The estimated aggregate amortization expense is estimated to be $22,329 in 2012 and $33,493 for each of the years 2013 2016.
Accrued Liabilities
Accrued liabilities consist primarily of retained amounts owed to contractors in connection with the construction of the pipeline and terminal assets, which become due and payable upon completion of the construction.
Concentration Risk
All operations and efforts of the Company are focused in the oil and gas industry and are subject to the related risks of the industry. The Companys pipeline and terminal assets and all related operations are located in Williams County, North Dakota. Demand for the Companys products and services may be influenced by various regional and global factors and may impact the value of the projects the Company is developing.
NOTE 3. EQUITY-BASED COMPENSATION
ASC Topic 718, CompensationStock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for: (a) equity instruments of the Company, or (b) liabilities that are based on the fair value of the Companys equity instruments or that may be settled by the issuance of such equity instruments. ASC Topic 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. ASC Topic 718 generally requires that such transactions be accounted for using a fair value based method.
The Company was required to implement the provisions of ASC Topic 718 when the Board of Managers issued to certain key employees of Management Member, certain management incentive units (MIUs), entitling such persons to contractual distributions of profits of the Company if certain targeted investment returns are achieved. The MIUs will be accounted for according to the requirements of ASC Topic 718 due to the payouts being consistent with equity ownership of the Company based on the substantive terms of the instruments. A total of 1,000 MIUs are authorized by the Formation Agreements and do not have an exercise price. Under the terms of the original Formation Agreements, the payout schedule was as follows:
Payout No. 1: | Holders of MIUs have the right to receive 10.0% of distributions from the Company after Investor Payout No. 1 but prior to Investor Payout No. 2; | |
Payout No. 2: | Holders of MIUs have the right to receive 15.0% of distributions from the Company after Investor Payout No. 2 but prior to Investor Payout No. 3; | |
Payout No. 3: | Holders of MIUs have the right to receive 20.0% of distributions from the Company after Investor Payout No. 3 but prior to Investor Payout No. 4; | |
Payout No. 4: | Holders of MIUs have the right to receive 23.0% of distributions from the Company after Investor Payout No. 4. |
On August 2, 2011, the formation agreements were amended as described herein. If Management Member has funded all equity contributions with cash, the payout schedule shall be as stated above under the original
8
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Formation Agreements. However, if Management Member funds any equity contributions by a promissory note from the Company, the payout schedule shall be as follows:
Payout No. 1: | Holders of MIUs have the right to receive 9.0% of distributions from the Company after Investor Payout No. 1 but prior to Investor Payout No. 2; | |
Payout No. 2: | Holders of MIUs have the right to receive 14.0% of distributions from the Company after Investor Payout No. 2 but prior to Investor Payout No. 3; | |
Payout No. 3: | Holders of MIUs have the right to receive 19.0% of distributions from the Company after Investor Payout No. 3 but prior to Investor Payout No. 4; | |
Payout No. 4: | Holders of MIUs have the right to receive 22.0% of distributions from the Company after Investor Payout No. 4. |
MIUs represent non-voting equity interests and do not entitle the holders to voting rights. One thousand MIUs have been issued during the period from inception (October 19, 2009) to December 31, 2011 and remain outstanding at December 31, 2011.
The members equity accounts will be adjusted for distributions paid to the members and additional capital contributions that are made by the members. All revenues, costs and expenses of the Company are allocated to the members in accordance with the Formation Agreements.
Members holding MIUs shall be subject in all respects to the Formation Agreements, including provisions relating to the distribution of such profits, information rights with respect to the Company, and competition and confidentiality.
Based on the relevant terms that define the MIUs, these instruments are treated as an equity ownership interest of the Company, with no value attributed and no expense recognized. Similar instruments that qualify as equity-based compensation instruments (such as stock options and restricted stock) with similar performance metrics are considered performance vested instruments with no expense recognized until the Companys achievement of such metrics are deemed probable, as defined by ASC Topic 718.
Given the aggressive metrics set forth by the Formation Agreements and the short history of the Company as well as the practical scenarios under which similar instruments are typically realized by similar companies (units typically do not have value until a major asset liquidation event occurs, which cannot be deemed probable under ASC Topic 718 until it has occurred), the realization of these units is not probable at inception.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 2011:
2011 | ||||
Furniture and office equipment |
$ | 73,232 | ||
Leasehold improvements |
4,213 | |||
Accumulated depreciation |
(19,561 | ) | ||
|
|
|||
57,884 | ||||
Construction work in progress |
48,151,301 | |||
Land |
1,249,172 | |||
|
|
|||
Property, plant and equipment, net |
$ | 49,458,357 | ||
|
|
9
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation expense totaled $12,368 and $19,561 for the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. ASC Topic 850, Related Party Transactions, requires that transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance.
Related party transactions typically occur within the context of the following relationships:
| Affiliates of the entity; |
| Entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; |
| Trusts for the benefit of employees; |
| Principal owners of the entity and members of their immediate families; Management of the entity and members of their immediate families; |
| Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; |
| Other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. |
EnCap Energy Infrastructure Fund, L.P. and KVB Energy, LLC are considered related parties under ASC Topic 850.
In accordance with the Formation Agreements, the Company pays a 2% origination fee to EnCap Energy Infrastructure Fund, L.P. for each capital contribution received from EnCap Energy Infrastructure Fund, L.P. For the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011, such fees totaled $752,834 and $831,348, respectively, which are recorded 50% as a distribution and 50% as a financing fee as indicated in the Formation Agreements.
The Company employs three members of KVB Energy, LLC in management positions. For the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011, the Company made payments totaling $873,346 and $1,656,902, respectively to these members as compensation for services and reimbursement of expenses, included in payroll and general and administrative expenses on the statement of operations.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases office space under a non-cancelable operating agreement with a third party. At December 31, 2011, future minimum annual rental commitments under this lease are $64,900 for 2012, $64,900 for 2013, $68,342 for 2014, $70,800 for 2015, and $29,500 thereafter for a total commitment of $298,442. Rental
10
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expense under this operating lease for the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011 totaled $30,522 and $59,727, respectively.
Contingencies
In the course of its business affairs and operations, the Company is subject to possible loss contingencies arising from federal, state and local environmental, health and safety laws and regulations and third party litigation. There are no matters which, in the opinion of management, will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
NOTE 7. MEMBERS EQUITY ACCOUNTS
Under the terms of the Formation Agreements, the Board of Managers determines capital contribution requests, which are based on the Members commitment interest during that period of time, as defined by the Formation Agreements. Cash earnings on profits and any items in nature of income or gain will be applied to the Members capital accounts in accordance with their earnings interest, as defined by the Formation Agreements.
The Company has three classes of members equity, including Members Equity, consisting of Class A and Class B units, and MIUs, comprised of Class C units. Members Equity has all the rights, privileges, preferences and obligations provided for in the Formation Agreements, which are consistent with an ordinary equity ownership interest. MIUs do not have voting rights. As of December 31, 2011, there were 499,500 Members Equity units and 1,000 MIUs issued and outstanding, out of a total 1,150,000 Members Equity units and 1,000 MIUs authorized.
MIUs will be entitled to share in distributions and allocations if and to the extent the base return, and to the extent applicable, the Payout No. 1, Payout No. 2, Payout No. 3 and Payout No. 4 thresholds have been met as described further in Note 3.
NOTE 8. RECENTLY ISSUED PRONOUNCEMENTS
In September 2011, the Financial Accounting Standards Board (FASB) issued an update to amend ASC 350, IntangiblesGoodwill and Other, to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company adopted this policy on January 1, 2012 and does not expect a material impact on the consolidated financial statements.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company provides an employer-sponsored defined contribution 401(k) plan for its employees. Under the terms of the plan agreement, the Company makes a Safe Harbor non-elective contribution to each individual employee in an amount equal to three percent of the employees compensation for the plan year. In addition, employer profit-sharing contributions to the plan are discretionary. The Company made Safe Harbor contributions to the plan in the amount of $19,242 for the year ended December 31, 2011 and for the period from inception (October 19, 2009) to December 31, 2011 which are included in payroll expense. Since the Companys inception (October 19, 2009), there have been no additional discretionary employer contributions to the plan.
11
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and/or disclosure through March 9, 2012, the date the consolidated financial statements were available to be issued, and determined that no events warrant disclosure, other than the following:
In January 2012, the Board of Managers executed a capital contribution request in the amount of $20,000,000. In accordance with the Formation Agreements, 98% was funded by EnCap Energy Infrastructure Fund, L.P. and affiliates, and 2% was funded by KVB Energy, LLC.
On January 3, 2012, the Company entered into a credit agreement with Amegy Bank for a $25,000,000 term loan and $5,000,000 letter of credit. On March 7, 2012, the Company drew $10,000,000 on the term loan. The loan matures five years after commencement of commercial operations of the pipeline and terminal.
12
Exhibit 99.3
INDEPENDENT AUDITORS REPORT
To the Members of
Rangeland Energy, LLC
Houston, Texas
We have audited the accompanying balance sheet of Rangeland Energy, LLC (a development stage enterprise) (the Company) as of December 31, 2010, and the related statements of operations, members equity, and cash flows for the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rangeland Energy, LLC (a development stage enterprise), as of December 31, 2010, and the results of its operations and cash flows for the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Houston, Texas
March 14, 2011
AN INDEPENDENT MEMBER OF BAKER TILLY INTERNATIONAL |
WEAVER AND TIDWELL LLP CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS WWW.WEAVERLLP.COM |
HOUSTON 24 GREENWAY PLAZA, SUITE 1800, HOUSTON, TX 77046 P: (713) 850 8787 F: (713) 850 1673 |
1
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 2010
ASSETS | ||||
CURRENT ASSETS |
||||
Cash and cash equivalents |
$ | 2,817,486 | ||
Prepaid and other current assets |
77,893 | |||
|
|
|||
Total current assets |
2,895,379 | |||
NON-CURRENT ASSETS |
||||
Property and equipment, net |
34,866 | |||
|
|
|||
TOTAL ASSETS |
$ | 2,930,245 | ||
|
|
|||
LIABILITIES AND MEMBERS EQUITY | ||||
CURRENT LIABILITIES |
||||
Accounts payable |
$ | 56,300 | ||
Due to affiliate |
44,745 | |||
|
|
|||
Total current liabilities |
101,045 | |||
MEMBERS EQUITY |
||||
Contributed capital |
4,610,743 | |||
Deficit accumulated during development stage |
(1,781,543 | ) | ||
|
|
|||
Total members equity |
2,829,200 | |||
|
|
|||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 2,930,245 | ||
|
|
The Notes to Financial Statements are an integral part of this statement.
2
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2010 AND PERIOD FROM INCEPTION
(OCTOBER 19, 2009) TO DECEMBER 31, 2010
Year Ended December 31, 2010 |
Period from Inception (October 19, 2009) to December 31, 2010 |
|||||||
REVENUE |
$ | | $ | | ||||
EXPENSES |
||||||||
Land option cost |
12,500 | 12,500 | ||||||
Depreciation expense |
6,389 | 7,193 | ||||||
Payroll expense |
693,373 | 773,148 | ||||||
Professional fees |
575,872 | 646,225 | ||||||
General and administrative expenses |
294,752 | 343,001 | ||||||
|
|
|
|
|||||
Total expenses |
1,582,886 | 1,782,067 | ||||||
|
|
|
|
|||||
OPERATING LOSS |
(1,582,886 | ) | (1,782,067 | ) | ||||
OTHER INCOME |
||||||||
Interest income |
524 | 524 | ||||||
|
|
|
|
|||||
NET LOSS |
$ | (1,582,362 | ) | $ | (1,781,543 | ) | ||
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
3
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF MEMBERS EQUITY
PERIOD FROM INCEPTION (OCTOBER 19, 2009) TO DECEMBER 31, 2010
Contributed Capital |
Deficit Accumulated During Development Stage |
Total Members Equity |
||||||||||
BALANCE, October 19, 2009 (inception) |
$ | | $ | | $ | | ||||||
Contributions |
2,000,000 | | 2,000,000 | |||||||||
Distributionsorigination fees |
(16,885 | ) | | (16,885 | ) | |||||||
Net loss |
| (199,181 | ) | (199,181 | ) | |||||||
|
|
|
|
|
|
|||||||
BALANCE, December 31, 2009 |
1,983,115 | (199,181 | ) | 1,783,934 | ||||||||
Contributions |
2,650,000 | | 2,650,000 | |||||||||
Distributionsorigination fees |
(22,372 | ) | | (22,372 | ) | |||||||
Net loss |
| (1,582,362 | ) | (1,582,362 | ) | |||||||
|
|
|
|
|
|
|||||||
BALANCE, December 31, 2010 |
$ | 4,610,743 | $ | (1,781,543 | ) | $ | 2,829,200 | |||||
|
|
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
4
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2010 AND PERIOD FROM INCEPTION
(OCTOBER 19, 2009) TO DECEMBER 31, 2010
Year Ended December 31, 2010 |
Period from Inception (October 19, 2009) to December 31, 2010 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (1,582,362 | ) | $ | (1,781,543 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation expense |
6,389 | 7,193 | ||||||
Change in operating assets and liabilities |
||||||||
Due to affiliate |
44,745 | 44,745 | ||||||
Prepaid and other current assets |
(69,640 | ) | (77,893 | ) | ||||
Accounts payable |
51,471 | 56,300 | ||||||
|
|
|
|
|||||
Net cash used in operating activities |
(1,549,397 | ) | (1,751,198 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property and equipment |
(13,655 | ) | (42,059 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(13,655 | ) | (42,059 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Capital contributions |
2,650,000 | 4,650,000 | ||||||
Distributionsorigination fees |
(22,372 | ) | (39,257 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
2,627,628 | 4,610,743 | ||||||
|
|
|
|
|||||
Net change in cash |
1,064,576 | 2,817,486 | ||||||
CASH, beginning of year |
1,752,910 | | ||||||
|
|
|
|
|||||
CASH, end of year |
$ | 2,817,486 | $ | 2,817,486 | ||||
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
5
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS OPERATIONS
Rangeland Energy, LLC (the Company) is a Delaware limited liability company formed on October 19, 2009 to acquire, develop and operate midstream assets in the continental United States, in accordance with its formation agreement and unit purchase agreement (collectively, Formation Agreements). The Company is owned by EnCap Energy Infrastructure Fund, L.P. (98.0%) and KVB Energy, LLC (2.0%) (Management Member) (collectively, the Investor Group or Members). Management Member manages the Company on behalf of the other members. A five-member Board of Managers governs the actions of the Company. Under the terms of the Formation Agreements, the Investor Group has committed to contribute up to $50 million to the Company. Of this commitment amount, the Investor Group contributed $4.65 million through December 31, 2010.
The Company is a development stage enterprise as defined by the Accounting Standards Codification (ASC) Topic 915, Development Stage Entities. The Company has been in the development stage since inception (October 19, 2009) and as of December 31, 2010, has yet to commence commercial operations or generate revenues. The Companys primary activities since inception have been devoted to raising capital, obtaining permits, acquiring land, and incurring costs related to professional services and administrative functions, which have resulted in cumulative net losses from inception (October 19, 2009) to December 31, 2010 totaling $1,781,543.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents. At December 31, 2010, the Companys cash balance totaled $2,817,486.
The Company did not pay taxes or interest from the period of inception (October 19, 2009) to December 31, 2010 that would require disclosure as supplemental items to the statements of cash flows.
Fair Value of Financial Instruments
The carrying value of cash, accounts payable and due to affiliate approximates their fair value due to the short maturity of these instruments.
Advertising
The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses. Advertising costs totaled $11,494 and $13,159 for the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010, respectively.
Income Taxes
The Company is organized as a Delaware Limited Liability Company and is treated as a flow-through entity for income tax purposes. As a result, the net taxable income of the Company and any related tax credits, for federal income tax purposes, are deemed to pass to the Members of the Company even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no tax provision has been made in the financial statements of the Company since the income tax is an obligation of the Members.
On October 19, 2009, the Company implemented the provisions of ASC Topic 740, Income Taxes, relating to accounting for uncertainties in income taxes. ASC Topic 740 requires that the Company recognize in its
6
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (Continued)
financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Management has reviewed the tax positions taken related to the Companys tax classification and filing status, and is of the opinion that material positions taken would more likely than not be sustained upon examination.
In 2006, the State of Texas enacted the Texas Margin Tax Bill effective January 1, 2007 for the tax year ended December 31, 2007. At December 31, 2010, the Company has no taxable margin and, therefore, has no Texas Margin Tax liability.
Property and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided for using the straight-line method over five years. Depreciation expense totaled $6,389 and $7,193 for the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010, respectively.
Use of Estimates
The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires the Companys management to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond managements control. As a result, actual results could differ from these estimates.
Risks and Uncertainties
The Company is engaged in the development of a business to construct and operate midstream assets in the continental United States. The Companys success is contingent upon securing the necessary permits and approvals from various state and federal governmental entities. In the event that such permits and approvals are not obtained, the Company will be required to pursue other business initiatives or cease operations.
NOTE 3. EQUITY-BASED COMPENSATION
ASC Topic 718, CompensationStock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for: (a) equity instruments of the Company, or (b) liabilities that are based on the fair value of the companys equity instruments or that may be settled by the issuance of such equity instruments. ASC Topic 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. ASC Topic 718 generally requires that such transactions be accounted for using a fair value based method.
The Company was required to implement the provisions of ASC Topic 718 when the Board of Managers issued to certain key employees of Management Member certain management incentive units (MIUs), entitling such persons to contractual distributions of profits of the Company if certain targeted investment returns are achieved. The MIUs will be accounted for according to the requirements of ASC Topic 718 due to the payouts
7
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (Continued)
being consistent with equity ownership of the Company based on the substantive terms of the instruments. A total of 1,000 MIUs are authorized by the Formation Agreement and do not have an exercise price. The payout schedule is as follows:
Payout No. 1: | Holders of MIUs have the right to receive 10.0% of distributions from the Company after Investor Payout No. 1 but prior to Investor Payout No. 2; | |
Payout No. 2: | Holders of MIUs have the right to receive 15.0% of distributions from the Company after Investor Payout No. 2 but prior to Investor Payout No. 3; | |
Payout No. 3: | Holders of MIUs have the right to receive 20.0% of distributions from the Company after Investor Payout No. 3 but prior to Investor Payout No. 4; | |
Payout No. 4: | Holders of MIUs have the right to receive 23.0% of distributions from the Company after Investor Payout No. 4. |
MIUs represent non-voting equity interests and do not entitle the holders to voting rights. One thousand MIUs have been issued during the period from inception (October 19, 2009) to December 31, 2010 and remain outstanding at December 31, 2010.
The members equity accounts will be adjusted for distributions paid to the members and additional capital contributions that are made by the members. All revenues, costs and expenses of the Company are allocated to the members in accordance with the Formation Agreements.
The MIUs represent non-voting equity interests and do not have an exercise price. Members holding MIUs shall be subject in all respects to the Formation Agreements, including provisions relating to the distribution of such profits, information rights with respect to the Company, and competition and confidentiality.
Based on the relevant terms that define the MIUs, these instruments should be treated as an equity ownership interest of the Company, with no value attributed and no expense recognized. Similar instruments that qualify as equity-based compensation instruments (such as stock options and restricted stock) with similar performance metrics are considered performance vested instruments with no expense recognized until the Companys achievement of such metrics are deemed probable, as defined by ASC Topic 718.
Given the aggressive metrics set forth by the Formation Agreements and the short history of the Company (due to its recent inception) as well as the practical scenarios under which similar instruments are typically realized by similar companies (units typically do not have value until a major asset liquidation event occurs, which cannot be deemed probable under ASC Topic 718 until it has occurred), the realization of these units is not probable at inception.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 2010:
2010 | ||||
Furniture and office equipment |
$ | 42,059 | ||
Less: accumulated depreciation |
(7,193 | ) | ||
|
|
|||
$ | 34,866 | |||
|
|
8
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5. RELATED PARTY TRANSACTIONS
Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. ASC Topic 850, Related Party Transactions, requires that transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships:
| Affiliates of the entity; |
| Entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; |
| Trusts for the benefit of employees; |
| Principal owners of the entity and members of their immediate families; |
| Management of the entity and members of their immediate families; |
| Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; |
| Other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. |
EnCap Energy Infrastructure Fund, L.P. and KVB Energy, LLC are considered related parties under ASC Topic 850.
In accordance with the Formation Agreements, the Company pays a 2% origination fee to EnCap Energy Infrastructure Fund, L.P. for each capital contribution received from EnCap Energy Infrastructure Fund, L.P. For the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010, such fees totaled $44,745 and $78,515, respectively, which are recorded 50% as a distribution and 50% as a financing fee as required by the Formation Agreements. At December 31, 2010, origination fees totaling $44,745 have yet to be paid and are recorded as a current liability due to affiliate.
The Company employs three members of KVB Energy, LLC in management positions. For the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010, the Company made payments totaling $708,148 and $783,556, respectively to these members as compensation for services and reimbursement of expenses, included in payroll and general and administrative expenses on the statement of operations.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases office space under a non-cancelable operating agreement with a third party. At December 31, 2010, future minimum annual rental commitments under this lease are $27,836 for 2011, $25,098 for 2012 and zero thereafter for a total commitment of $52,934. Rental expense under this operating lease for the year ended December 31, 2010 and for the period from inception (October 19, 2009) to December 31, 2010 totaled $25,098 and $29,205, respectively.
9
RANGELAND ENERGY, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (Continued)
Contingencies
In the course of its business affairs and operations, the Company is subject to possible loss contingencies arising from federal, state and local environmental, health and safety laws and regulations and third party litigation. There are no matters which, in the opinion of management, will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
NOTE 7. MEMBERS EQUITY ACCOUNTS
Under the terms of the Formation Agreements, the Board of Managers determines capital contribution requests, which are based on the Members commitment interest during that period of time, as defined by the Formation Agreements. Cash earnings on profits and any items in nature of income or gain will be applied to the Members capital accounts in accordance with their earnings interest, as defined by the Formation Agreements.
The Company has two classes of members equity, Members Equity and MIUs. Members Equity has all the rights, privileges, preferences and obligations provided for in the Formation Agreements, which are consistent with an ordinary equity ownership interest. MIUs do not have voting rights.
MIUs will be entitled to share in distributions and allocations if and to the extent the base return, and to the extent applicable, the Payout No. 1, Payout No. 2, Payout No. 3 and Payout No. 4 thresholds have been met. MIUs are discussed further in Note 3, Equity-Based Compensation.
NOTE 8. RECENTLY ISSUED PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued new guidance related to fair value measurements and disclosures, included in ASC Topic 820, Fair Value Measurements and Disclosures. The update requires additional disclosures regarding input sources and valuation techniques and provides clarification of existing disclosures. These disclosures are required to be made for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within the fiscal year. The adoption of this guidance did not have a material impact on the Companys financial statements.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company provides an employer-sponsored defined contribution 401(k) plan for its employees. Under the terms of the plan agreement, the Company makes a Safe Harbor non-elective contribution to each individual employee in an amount equal to three percent of the employees compensation for the plan year. In addition, employer profit-sharing contributions to the plan are discretionary. Since the Companys inception (October 19, 2009), there have been no employer or employee contributions to the plan.
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and/or disclosure through March 14, 2011, the date the financial statements were available to be issued, and determined that no events warrant disclosure, other than the following item:
In January 2011, the board approved a capital contribution request in the amount of $5.3 million which was executed in February 2011. In accordance with the Formation Agreements, 98% was funded by EnCap Energy Infrastructure Fund, L.P., and 2% was funded by KVB Energy, LLC.
10
Exhibit 99.4
INDEPENDENT ACCOUNTANTS REVIEW REPORT
To the Members of
Rangeland Energy, LLC
Houston, Texas
We have reviewed the accompanying consolidated balance sheet of Rangeland Energy, LLC as of September 30, 2012 and the related consolidated statements of operations, changes in members equity and cash flows for the nine months ended September 30, 2012 and 2011. This interim financial information is the responsibility of the Companys management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Rangeland Energy, LLC as of December 31, 2011 and the related consolidated statements of operations, changes in members equity and cash flows for the year then ended (not presented herein); and in our report dated March 9, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Houston, Texas
November 2, 2012
AN INDEPENDENT MEMBER OF BAKER TILLY INTERNATIONAL |
WEAVER AND TIDWELL LLP CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS WWW.WEAVERLLP.COM |
HOUSTON 24 GREENWAY PLAZA, SUITE 1800, HOUSTON, TX 77046 P: (713) 850 8787 F: (713) 850 1673 |
1
RANGELAND ENERGY, LLC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
September 30, 2012 (Unaudited) |
December 31, 2011 (Audited) |
|||||||
ASSETS | ||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 4,555,465 | $ | 8,563,028 | ||||
Accounts receivable |
1,259,912 | | ||||||
Prepaid and other current assets |
330,208 | 77,538 | ||||||
|
|
|
|
|||||
Total current assets |
6,145,585 | 8,640,566 | ||||||
NON-CURRENT ASSETS |
||||||||
Property and equipment, net |
91,491,805 | 49,458,357 | ||||||
Intangible assets, net |
1,260,109 | 669,863 | ||||||
Deferred financing fees, net |
224,375 | | ||||||
Capitalized interest, net |
297,099 | | ||||||
|
|
|
|
|||||
Total non-current assets |
93,273,388 | 50,128,220 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 99,418,973 | $ | 58,768,786 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY | ||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 1,628,262 | $ | 10,226,985 | ||||
Accrued liabilities |
395,371 | 2,814,547 | ||||||
Current portion of long-term debt |
4,090,908 | | ||||||
|
|
|
|
|||||
Total current liabilities |
6,114,541 | 13,041,532 | ||||||
NON-CURRENT LIABILITIES |
||||||||
Long-term debt, net of current maturities |
20,909,092 | | ||||||
|
|
|
|
|||||
Total non-current liabilities |
20,909,092 | | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES |
27,023,633 | 13,041,532 | ||||||
MEMBERS EQUITY |
72,395,340 | 45,727,254 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 99,418,973 | $ | 58,768,786 | ||||
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
See independent accountants review report.
2
RANGELAND ENERGY, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
Nine Months Ended September 30, 2012 |
Nine Months Ended September 30, 2011 |
|||||||
REVENUE |
$ | 3,348,810 | $ | 126,549 | ||||
COST OF SALES |
||||||||
Cost of sales, excluding depreciation |
2,181,311 | 100,323 | ||||||
Depreciation and amortization expense |
1,910,381 | | ||||||
|
|
|
|
|||||
Total cost of sales |
4,091,692 | 100,323 | ||||||
|
|
|
|
|||||
Gross profit (loss) |
(742,882 | ) | 26,226 | |||||
EXPENSES |
||||||||
General and administrative expenses |
2,286,360 | 1,489,387 | ||||||
Depreciation expense |
11,617 | 9,190 | ||||||
|
|
|
|
|||||
Total operating expenses |
2,297,977 | 1,498,577 | ||||||
|
|
|
|
|||||
OPERATING LOSS |
(3,040,859 | ) | (1,472,351 | ) | ||||
OTHER INCOME (EXPENSE) |
||||||||
Interest income |
13,816 | 20,326 | ||||||
Miscellaneous income |
110,779 | | ||||||
Interest expense |
(165,996 | ) | | |||||
|
|
|
|
|||||
Total other income (expense) |
(41,401 | ) | 20,326 | |||||
|
|
|
|
|||||
NET LOSS |
$ | (3,082,260 | ) | $ | (1,452,025 | ) | ||
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
See independent accountants review report.
3
RANGELAND ENERGY, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
YEAR ENDED DECEMBER 31, 2011 AND
PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
BALANCE, January 1, 2011 |
$ | 2,829,200 | ||
Contributions |
30,300,000 | |||
Distributionsorigination fees |
(255,806 | ) | ||
Net loss |
(1,707,831 | ) | ||
|
|
|||
BALANCE, September 30, 2011 (Unaudited) |
$ | 31,165,563 | ||
Contributions |
15,000,000 | |||
Distributionsorigination fees |
(120,611 | ) | ||
Net loss |
(317,698 | ) | ||
|
|
|||
BALANCE, December 31, 2011 (Audited) |
$ | 45,727,254 | ||
Contributions |
30,000,000 | |||
Distributionsorigination fees |
(249,654 | ) | ||
Net loss |
(3,082,260 | ) | ||
|
|
|||
BALANCE, September 30, 2012 (Unaudited) |
$ | 72,395,340 | ||
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
See independent accountants review report.
4
RANGELAND ENERGY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
Nine Months Ended September 30, 2012 |
Nine Months Ended September 30, 2011 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (3,082,260 | ) | $ | (1,452,025 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Amortization expense |
34,502 | | ||||||
Depreciation expense |
1,887,496 | 9,190 | ||||||
Amortization of deferred financing fees |
25,625 | |||||||
Change in operating assets and liabilities |
||||||||
Accounts receivable |
(1,259,912 | ) | | |||||
Prepaid and other current assets |
(252,670 | ) | | |||||
Accounts payable and accrued liabilities |
(12,628,623 | ) | (61,192 | ) | ||||
|
|
|
|
|||||
Net cash used in operating activities |
(15,275,842 | ) | (1,504,027 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property and equipment |
(42,863,640 | ) | (15,597,244 | ) | ||||
Acquisition of easements and rights of way |
(618,427 | ) | | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(43,482,067 | ) | (15,597,244 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from term loan |
25,000,000 | | ||||||
Capital contributions |
30,000,000 | 30,300,000 | ||||||
Distributionsorigination fees |
(249,654 | ) | (255,806 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
54,750,346 | 30,044,194 | ||||||
|
|
|
|
|||||
Net (decrease) increase in cash |
(4,007,563 | ) | 12,942,923 | |||||
CASH, beginning of period |
8,563,028 | 2,817,486 | ||||||
|
|
|
|
|||||
CASH, end of period |
$ | 4,555,465 | $ | 15,760,409 | ||||
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
See independent accountants review report.
5
RANGELAND ENERGY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
(CONTINUED)
NONCASH INVESTING ACTIVITIES |
||||||||
Capital expenditures accrued in accounts payable and accrued liabilities |
$ | 1,360,724 | $ | 2,999,859 | ||||
|
|
|
|
|||||
NONCASH FINANCING ACTIVITIES |
||||||||
Deferred financing costs accrued in accrued liabilities |
$ | 250,000 | $ | | ||||
|
|
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
See independent accountants review report.
6
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS OPERATIONS
Rangeland Energy, LLC (the Company) is a Delaware limited liability company formed on October 19, 2009 to acquire, build, own and operate midstream assets in the continental United States, in accordance with its formation agreement and unit purchase agreement (collectively, Formation Agreements). On August 2, 2011, these Formation Agreements were amended to include additional investors (affiliate entities of an existing investor, EnCap Energy Infrastructure Fund, L.P.) and increase the commitment amount of the investors. The Company is owned by EnCap Energy Infrastructure Fund, L.P. and affiliates (98.0%) and KVB Energy, LLC (2.0%) (Management Member) (collectively, the Investor Group or Members). Management Member manages the Company on behalf of the other members. A five-member Board of Managers governs the actions of the Company. Under the terms of the amended Formation Agreements, the Investor Group has committed to contribute up to $115,000,000 to the Company. Of this commitment amount, the Investor Group had contributed $79,950,000 and $49,950,000 through September 30, 2012 and December 31, 2011, respectively.
The Company was in the development stage at December 31, 2011. During the nine months ended September 30, 2012, the Company exited the development stage due to operating revenues generated by certain agreements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Companys two wholly owned subsidiaries: Rangeland Pipeline, LLC and Rangeland Terminals, LLC. All intercompany transactions are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents. At September 30, 2012 and December 31, 2011, the Companys cash balance totaled $4,555,465 and $8,563,028, respectively.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates their fair value due to the short maturity of these instruments.
Accounts Receivable
Accounts receivable include amounts due from customers for transportation and terminal fees and are carried at the original invoice amount. The Companys allowance for doubtful accounts is determined based upon reviews of individual accounts, historical losses, existing economic conditions and other pertinent factors. The Company did not provide an allowance for doubtful accounts as of September 30, 2012 and December 31, 2011, based on managements expectations that all receivables would be collected. The Company has not realized material bad debt expenses in the past.
Advertising
The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses. Advertising costs totaled $19,807 and $26,640 for the nine months ended September 30, 2012 and 2011, respectively.
See independent accountants review report.
7
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company is organized as a Delaware Limited Liability Company and is treated as a flow-through entity for income tax purposes. As a result, the net taxable income of the Company and any related tax credits, for federal income tax purposes, are deemed to pass to the Members of the Company even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no tax provision has been made in the consolidated financial statements of the Company since the income tax is an obligation of the Members.
On October 19, 2009, the Company implemented the provisions of Accounting Standards Codification (ASC) Topic 740, Income Taxes, related to accounting for uncertainties in income taxes. ASC Topic 740 requires that the Company recognize in its consolidated financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Management has reviewed the tax positions taken related to the Companys tax classification and filing status, and is of the opinion that material positions taken would more likely than not be sustained upon examination.
In 2006, the State of Texas enacted the Texas Margin Tax Bill effective January 1, 2007 for the tax year ended December 31, 2007. For the nine months ended September 30, 2012 and 2011, the Company did not meet the minimum threshold and, therefore, has no Texas Margin Tax liability.
Property and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation. The assets are not depreciated until they are placed into service. The cost basis of constructed assets includes materials, labor and other direct costs, such as engineering and construction management services. Major improvements or betterments are capitalized, while repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation is provided for using the straight-line method until the asset equals estimated salvage value. The useful lives used in computing depreciation are as follows:
Office equipment |
5 years | |||
Leasehold improvements |
5 years | |||
Information systems |
5 years | |||
Furniture and fixtures |
7 years | |||
Pipeline, terminals and related assets |
20 years |
Capitalized costs are evaluated for impairment based on an analysis of undiscounted future net cash flows in accordance with ASC Topic 360, Property, Plant and Equipment. If impairment exists, the asset is written down to its estimated fair value based on expected future discounted cash flows. No impairment was recorded for the nine month periods ended September 30, 2012 and 2011.
Use of Estimates
The preparation of the Companys consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Companys management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond managements control. Actual results could differ from these estimates.
See independent accountants review report.
8
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible Assets
Intangible assets are comprised of easements and rights of way obtained for the installation and operation of the pipeline and terminal assets. Intangible assets that have finite useful lives are amortized over their estimated useful lives.
During the nine months ended September 30, 2012, the Company capitalized $618,427 of additional easements and rights of way. As of September 30, 2012 and December 31, 2011, capitalized intangible assets (net) totaled $1,288,290 and $669,863, respectively. Amortization of these costs began when the respective assets were placed in service during 2012 and are being amortized over the estimated useful life of the assets. Amortization expense totaled $28,181 and $0 for the nine months ended September 30, 2012 and 2011.
Deferred Financing Fees
The Company capitalized certain lender fees in connection with its long-term debt facility in 2012. These costs are being amortized over the term of the debt facility using a method that approximates the interest method. Unamortized deferred financing fees associated with loans paid-off or refinanced with different lenders are charged-off in the period in which such an event occurs. The amortization of deferred financing fees totaled $25,625 and $0 for the nine months ended September 30, 2012 and 2011, respectively, and were recorded as interest expense.
Capitalized Interest
Interest is capitalized on borrowed funds used for the construction of new capital assets that are in progress and qualify for capitalized interest in accordance with ASC Subtopic 835-20, Capitalization of Interest. Capitalized interest is calculated by multiplying the Companys effective interest rate on debt by the amount of qualifying costs. Capitalized interest cannot exceed gross interest expense. Interest capitalized during the nine months ended September 30, 2012 and 2011 totaled $303,420 and $0, respectively. When the asset is completed and costs are transferred to the amortized cost base, any associated capitalized interest is also transferred and amortized over the useful life of the asset. Amortization expense totaled $6,321 for the nine months ended September 30, 2012. See further disclosure regarding capitalized interest at Note 6.
Accrued Liabilities
Accrued liabilities consist primarily of bank loan fees and accrued interest owed to a financial institution in connection with the Companys debt facility. The loan fees are currently due and payable, and the accrued interest is due and payable three months following the August 2012 term loan conversion.
Revenue Recognition
Revenue is recognized when earned, written evidence of an arrangement exists, pricing is fixed and determinable and collectability of the receivable is reasonably assured. The critical terms that embody the Companys sales arrangements are included in executed contracts with third party customers. Predetermined fees are charged to the customer for gathering, transportation, storage, loading and unloading of product at the Companys terminal and interconnection facilities.
With regard to transportation of crude oil along the pipeline, some customer contracts include a Take or Pay provision whereby a customer agrees to throughput or pay for a minimum quantity of oil during a specified
See independent accountants review report.
9
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
period of time. Revenue is recognized, as it pertains to take or pay contracts, based on actual volumes throughput until a measurement date occurs. At the measurement date, management determines whether a volume deficiency exists in accordance with the provisions of the contract. If it is determined that a deficiency does exist, and management intends to bill the customer and collect on the deficit amount, revenue is recognized. One exception is if the contract contains a catch-up provision, in which case deferred revenue will be recognized at this time. Deferred revenue is reduced for the amount of volumes made-up during the catch-up period as defined by the contract. At the end of the catch-up period, the remaining deferred revenue is recognized as income. Factors affecting managements decision to bill and collect on a volume deficiency include consideration of historical practices with the customer.
Revenues related to all other services provided by the Company including gathering, storage, loading and unloading of product are recorded when earned, based on a fee structure defined in executed sales contracts.
Concentration Risk
All operations and efforts of the Company are focused in the oil and gas industry and are subject to the related risks of the industry. The Companys pipeline and terminal assets and all related operations are located in Williams County, North Dakota. Demand for the Companys products and services may be influenced by various regional and global factors and may impact the value of the projects the Company is developing.
NOTE 3. EQUITY-BASED COMPENSATION
ASC Topic 718, CompensationStock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for: (a) equity instruments of the Company, or (b) liabilities that are based on the fair value of the Companys equity instruments or that may be settled by the issuance of such equity instruments. ASC Topic 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. ASC Topic 718 generally requires that such transactions be accounted for using a fair value based method.
The Company was required to implement the provisions of ASC Topic 718 when the Board of Managers issued to certain key employees of Management Member, certain management incentive units (MIUs), entitling such persons to contractual distributions of profits of the Company if certain targeted investment returns are achieved. The MIUs will be accounted for according to the requirements of ASC Topic 718 due to the payouts being consistent with equity ownership of the Company based on the substantive terms of the instruments. A total of 1,000 MIUs are authorized by the Formation Agreements and do not have an exercise price. Under the terms of the original Formation Agreements, the payout schedule was as follows:
Payout No. 1: | Holders of MIUs have the right to receive 10.0% of distributions from the Company after Investor Payout No. 1 but prior to Investor Payout No. 2; | |
Payout No. 2: | Holders of MIUs have the right to receive 15.0% of distributions from the Company after Investor Payout No. 2 but prior to Investor Payout No. 3; | |
Payout No. 3: | Holders of MIUs have the right to receive 20.0% of distributions from the Company after Investor Payout No. 3 but prior to Investor Payout No. 4; | |
Payout No. 4: | Holders of MIUs have the right to receive 23.0% of distributions from the Company after Investor Payout No. 4. |
See independent accountants review report.
10
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 2, 2011, the formation agreements were amended as described herein. If Management Member has funded all equity contributions with cash, the payout schedule shall be as stated above under the original Formation Agreements. However, if Management Member funds any equity contributions by a promissory note from the Company, the payout schedule shall be as follows:
Payout No. 1: | Holders of MIUs have the right to receive 9.0% of distributions from the Company after Investor Payout No. 1 but prior to Investor Payout No. 2; | |
Payout No. 2: | Holders of MIUs have the right to receive 14.0% of distributions from the Company after Investor Payout No. 2 but prior to Investor Payout No. 3; | |
Payout No. 3: | Holders of MIUs have the right to receive 19.0% of distributions from the Company after Investor Payout No. 3 but prior to Investor Payout No. 4; | |
Payout No. 4: | Holders of MIUs have the right to receive 22.0% of distributions from the Company after Investor Payout No. 4. |
MIUs represent non-voting equity interests and do not entitle the holders to voting rights. One thousand MIUs have been issued during the period from inception (October 19, 2009) to September 30, 2012 and remain outstanding at September 30, 2012.
The members equity accounts will be adjusted for distributions paid to the members and additional capital contributions that are made by the members. All revenues, costs and expenses of the Company are allocated to the members in accordance with the Formation Agreements.
Members holding MIUs shall be subject in all respects to the Formation Agreements, including provisions relating to the distribution of such profits, information rights with respect to the Company, and competition and confidentiality.
Based on the relevant terms that define the MIUs, these instruments are treated as an equity ownership interest of the Company, with no value attributed and no expense recognized. Similar instruments that qualify as equity-based compensation instruments (such as stock options and restricted stock) with similar performance metrics are considered performance vested instruments with no expense recognized until the Companys achievement of such metrics are deemed probable, as defined by ASC Topic 718.
Given the aggressive metrics set forth by the Formation Agreements and the short history of the Company as well as the practical scenarios under which similar instruments are typically realized by similar companies (units typically do not have value until a major asset liquidation event occurs, which cannot be deemed probable under ASC Topic 718 until it has occurred), the realization of these units is not probable at inception.
See independent accountants review report.
11
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at September 30, 2012 and December 31, 2011:
September 30, 2012 | December 31, 2011 | |||||||
Pipelines, terminals and related assets |
$ | 84,841,626 | $ | | ||||
Information systems |
1,557,769 | | ||||||
Office equipment |
73,232 | 73,232 | ||||||
Furniture and fixtures |
37,760 | | ||||||
Leasehold improvements |
4,213 | 4,213 | ||||||
Accumulated depreciation |
(1,907,057 | ) | (19,561 | ) | ||||
|
|
|
|
|||||
84,607,543 | 57,884 | |||||||
Construction work in progress |
5,635,090 | 48,151,301 | ||||||
Land |
1,249,172 | 1,249,172 | ||||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 91,491,805 | $ | 49,458,357 | ||||
|
|
|
|
Depreciation expense totaled $1,887,496 and $9,190 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. ASC Topic 850, Related Party Transactions, requires that transactions with related parties that would make a difference in decision-making be disclosed so that users of the financial statements can evaluate their significance.
Related party transactions typically occur within the context of the following relationships:
| Affiliates of the entity; |
| Entities for which investments in their equity securities are typically accounted for under the equity method by the investing entity; |
| Trusts for the benefit of employees; |
| Principal owners of the entity and members of their immediate families; |
| Management of the entity and members of their immediate families; |
| Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; |
| Other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. |
EnCap Energy Infrastructure Fund, L.P. and KVB Energy, LLC are considered related parties under ASC Topic 850.
See independent accountants review report.
12
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with the Formation Agreements, the Company pays a 2% origination fee to EnCap Energy Infrastructure Fund, L.P. for each capital contribution received from EnCap Energy Infrastructure Fund, L.P. For the nine months ended September 30, 2012 and 2011, such fees totaled $499,308 and $511,612, respectively, which are recorded 50% as a distribution and 50% as a financing fee as indicated in the Formation Agreements.
The Company employs three members of KVB Energy, LLC in management positions. For the nine months ended September 30, 2012 and 2011, the Company made payments totaling $764,270 and $677,771, respectively to these members as compensation for services and reimbursement of expenses. These amounts are included in payroll as general and administrative expenses on the consolidated statements of operations.
NOTE 6. LONG-TERM DEBT
On January 3, 2012, the Company executed a $30 million senior secured term loan and letter of credit facility (the Credit Facility) with Amegy Bank. Under the terms of the Credit Facility, the Company had the option to borrow up to $25 million as a construction loan and $5 million as a letter of credit. The loan is secured by substantially all of the Companys assets. The agreement provided for the outstanding loan balance to convert from a construction loan to either a Base Rate or Eurodollar Rate term loan on the earlier of the date the pipeline and terminal assets are fully operational or October 1, 2012, provided that in either case, costs expended on the land acquisition and construction of the assets is at least $72 million. On August 8, 2012 (the Conversion Date), the Company converted the $25 million outstanding construction loan balance to a term loan, which is scheduled to mature on the fifth anniversary of the Conversion Date (August 8, 2017) or on such earlier effective date of the acceleration of any loan under the agreement. Prior to the Conversion Date, the loan accrued interest, at the borrowers option, at either the one-month or three-month Eurodollar rate plus four percent. During this period, the Company capitalized interest in the amount of $303,420 which is included in property and equipment at September 30, 2012 and is being amortized over the useful lives of the related assets, as disclosed in Note 2.
On the Conversion Date, the Company elected to convert the outstanding balance of $25 million to a Eurodollar Rate Loan to accrue interest at the three-month Eurodollar rate plus the Applicable Rate as defined by the credit agreement. The Applicable Rate is determined based on a calculation of the Companys Total Leverage Ratio on the corresponding quarter-end date. Subsequent to the Conversion Date during 2012, the Company accrued interest at a rate of 3.8% based on the three-month Eurodollar rate on the Conversion Date (.43%) plus the Applicable Rate at September 30, 2012 (3.375%). Outstanding principal on the term loan is payable in quarterly installments beginning on January 1, 2013. At September 30, 2012, the term loan had an outstanding balance of $25 million.
Commencing on December 31, 2012 and on each successive fiscal year-end thereafter while any loans remain unpaid, the Company is required to make mandatory prepayments on the loan equal to a designated percentage of excess cash flow, under a sliding scale computation, as defined by the credit agreement based on a calculation of the Companys Total Leverage Ratio,. If the total leverage ratio is less than 3.0 to 1.0, no amounts are due related to the excess cash flow prepayment. If the total leverage ratio is greater than 3.5 to 1.0, 75% of excess cash flow, as defined in the credit agreement, is payable to the lender. All mandatory prepayments are to be paid along with accrued interest within 120 days of the respective fiscal year end.
The terms of the Credit Facility require the Company to maintain certain customary financial and non-financial covenants, including: (i) total leverage ratio, as defined, at the end of the three months ended September 30, 2012 to be less than 4.25 to 1.00; (ii) total debt to capitalization ratio, as defined, at the end of any fiscal quarter-end to be less than 40%; and (iii) fixed charge coverage ratio, as defined, commencing with the fiscal quarter ending December 31, 2012 and on a one-quarter basis thereafter, to be less than 1.25 to 1.00.
See independent accountants review report.
13
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The non-financial covenants for the Credit Facility include furnishing the bank with quarterly (unaudited) and annual (audited) financial statements. Furthermore, the Company may not create additional borrowings against the existing collateral. On February 13, 2012, the Credit Facility was amended to waive the total leverage ratio covenant requirements at June 30, 2012. The Company was not in compliance with the leverage ratio at September 30, 2012, but does expect to be in compliance for the ensuing twelve-month period. The lender has waived their rights with respect to the covenant violation.
In connection with the Credit Facility, the Company capitalized certain lender fees in the amount of $250,000 during the nine months ended September 30, 2012, which are amortized consistent with the interest method over the life of the Credit Facility. The Company recognized amortization expense of $25,625 during the nine months ended September 30, 2012, which is recorded as interest expense.
The following were the maturities of long-term debt as of September 30, 2012:
Twelve months ending September 30, |
||||
2013 |
$ | 6,000,000 | ||
2014 |
6,000,000 | |||
2015 |
5,500,000 | |||
2016 |
5,000,000 | |||
2017 |
2,500,000 | |||
|
|
|||
$ | 25,000,000 | |||
|
|
On October 1, 2012, the Credit Facility was amended to reflect the following maturities of long-term debt with the first payment due on January 1, 2013:
Twelve months ending September 30, |
||||
2013 |
$ | 4,090,908 | ||
2014 |
5,454,544 | |||
2015 |
5,454,544 | |||
2016 |
5,454,544 | |||
2017 |
4,545,460 | |||
|
|
|||
$ | 25,000,000 | |||
|
|
NOTE 7. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases office space under a non-cancelable operating agreement with a third party.
Future minimum lease payments under the non-cancelable operating lease are as follows:
Twelve months ending September 30, |
||||
2013 |
$ | 54,083 | ||
2014 |
66,867 | |||
2015 |
70,800 | |||
2016 |
47,200 | |||
Thereafter |
| |||
|
|
|||
$ | 238,950 | |||
|
|
See independent accountants review report.
14
RANGELAND ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rental expense under this operating lease for the nine months ended September 30, 2012 and 2011 totaled $50,687 and $30,451, respectively.
Contingencies
In the course of its business affairs and operations, the Company is subject to possible loss contingencies arising from federal, state and local environmental, health and safety laws and regulations and third party litigation. There are no matters which, in the opinion of management, will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
NOTE 8. MEMBERS EQUITY ACCOUNTS
Under the terms of the Formation Agreements, the Board of Managers determines capital contribution requests, which are based on the Members commitment interest during that period of time, as defined by the Formation Agreements. Cash earnings on profits and any items in nature of income or gain will be applied to the Members capital accounts in accordance with their earnings interest, as defined by the Formation Agreements.
The Company has three classes of members equity, consisting of Class A and B units and MIUs, comprised of Class C units. Members Equity has all the rights, privileges, preferences and obligations provided for in the Formation Agreements, which are consistent with an ordinary equity ownership interest. MIUs do not have voting rights. As of September 30, 2012 and December 31, 2011, there were 799,500 and 499,500 Member units, respectively and 1,000 MIUs issued and outstanding, out of a total 1,150,000 Members Equity units and 1,000 MIUs authorized.
MIUs will be entitled to share in distributions and allocations if and to the extent the base return, and to the extent applicable, the Payout No. 1, Payout No. 2, Payout No. 3 and Payout No. 4 thresholds have been met, as described in Note 3.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company provides an employer-sponsored defined contribution 401(k) plan for its employees. Under the terms of the plan agreement, the Company makes a Safe Harbor non-elective contribution to each individual employee in an amount equal to three percent of the employees compensation for the plan year. In addition, employer profit-sharing contributions to the plan are discretionary. The Company intends to make a Safe Harbor contribution to the plan in 2013 for the year ending December 31, 2012. Based on managements estimate of the annual contribution, $5,000 has been accrued in payroll expense for the nine months ended September 30, 2012. The Company made a Safe Harbor contribution to the plan in 2012 for the year ended December 31, 2011. The portion relating to the nine months ended September 30, 2011 was $14,432 and is included in payroll expense. Since the Companys inception (October 19, 2009), there have been no additional discretionary employer contributions to the plan.
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and/or disclosure through November 2, 2012, the date the consolidated financial statements were available to be issued, and determined that no events warrant disclosure, other than as previously disclosed, and the following:
| In September 2012, the Companys CEO signed a Letter of Intent to sell 100% of the equity interests in Rangeland Energy, LLC to a third party. The Letter of Intent will expire if the transaction is not consummated by execution of a purchase and sale agreement on or before October 31, 2012. |
See independent accountants review report.
15
Exhibit 99.5
Inergy Midstream, L.P.
Unaudited Pro Forma Condensed Combined Financial Information
September 30, 2012
Throughout this report, when we use the terms we, us, our company, or Inergy Midstream we are referring to Inergy Midstream, L.P., the company itself or to Inergy Midstream, L.P. and its operating subsidiaries collectively as the context requires.
Set forth below are our unaudited pro forma condensed combined financial statements as of September 30, 2012 which reflect the acquisition of Rangeland Energy, LLC (the Rangeland Acquisition) expected to close in December 2012. The pro forma condensed combined balance sheet and the pro forma condensed combined statement of operations for the twelve months ended September 30, 2012 were derived from our audited financial statements as of and for the year ended September 30, 2012 and the unaudited financial statements of Rangeland Energy, LLC.
Our unaudited pro forma condensed combined statement of operations for the year ended September 30, 2012 reflects the Rangeland Acquisition as if it had occurred on October 1, 2011.
Our unaudited pro forma condensed combined balance sheet as of September 30, 2012 reflects the following transactions as if such transactions occurred as of September 30, 2012:
| the closing of the acquisition of 100% of the partnership interests in Rangeland Energy, LLC and related agreements for approximately $415.0 million; |
| the achievement of certain contractual thresholds contemplated by the definitive purchase agreement for the Rangeland Acquisition, whereby the sellers are able to earn an additional $10.0 million if they (or, if applicable, we) contract out certain operationally available capacity at the COLT Terminal by a certain date; |
| the issuance of $400.0 million of new senior unsecured notes by our company to finance a portion of the Rangeland Acquisition; |
| a private placement of approximately $225.0 million of our common units to finance a portion of the Rangeland Acquisition; and |
| the repayment of existing borrowings under our revolving credit facility. |
Descriptions of the adjustments for the Rangeland Acquisition are presented in the notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements and accompanying notes should be read in conjunction with our historical financial statements filed with the Securities and Exchange Commission. The pro forma condensed combined balance sheet and the pro forma condensed combined statement of operations were derived by adjusting historical financial statements based on currently available information and, therefore, the actual adjustments may materially differ from the pro forma adjustments. The acquisition of Rangeland Energy, LLC will be accounted for as an acquisition under the purchase method of accounting in accordance with Financial Accounting Standard Board (FASB) Accounting Standard Codification Subtopic 805-10 (805-10). The assets and liabilities of Rangeland Energy, LLC will be reflected at fair value. A final determination of the purchase accounting adjustments, including the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values, has not been made. Accordingly, the purchase accounting adjustments made in connection with the development of the following unaudited pro forma condensed combined financial statements are preliminary and have been made solely for purposes of developing such unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to present our financial position or the results of operations had the Rangeland Acquisition actually been completed as of the dates indicated. Further, these unaudited pro forma condensed consolidated financial statements do not reflect the effects of any cost savings or other synergies that may be achieved as a result of this transaction, are based on assumptions that Inergy Midstream believes are reasonable under the circumstances, and are intended for informational purposes only. Moreover, the statements do not project our financial position or results of operations for any future date or period.
1
Inergy Midstream, L.P.
Unaudited Pro Forma Condensed Combined Balance Sheet
September 30, 2012
(in millions)
Historical | Purchase Adjustments |
Inergy Midstream, L.P. Pro Forma |
||||||||||||||
Inergy Midstream, L.P. |
Rangeland Energy, LLC |
|||||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | | $ | 4.6 | $ | (430.0 | )(a) | $ | 4.6 | |||||||
625.0 | (b) | |||||||||||||||
(9.0 | )(e) | |||||||||||||||
(186.0 | )(h) | |||||||||||||||
Accounts receivable |
19.3 | 1.2 | | 20.5 | ||||||||||||
Inventories |
5.6 | | | 5.6 | ||||||||||||
Prepaid expenses and other current assets |
5.4 | 0.3 | | 5.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
30.3 | 6.1 | | 36.4 | ||||||||||||
Property, plant and equipment, net |
867.9 | 91.8 | 1.9 | (a) | 961.6 | |||||||||||
Net intangible assets |
29.3 | 1.3 | (1.3 | )(a) | 178.3 | |||||||||||
140.0 | (a) | |||||||||||||||
9.0 | (e) | |||||||||||||||
Goodwill |
96.5 | | 187.2 | (a) | 283.7 | |||||||||||
Other assets |
3.9 | 0.2 | (0.2 | )(a) | 3.9 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 1,027.9 | $ | 99.4 | $ | 336.6 | $ | 1,463.9 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES & PARTNERS CAPITAL |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 3.9 | $ | 1.6 | $ | | $ | 5.5 | ||||||||
Accrued expenses |
51.4 | 0.4 | | 51.8 | ||||||||||||
Current portion of long term debt |
1.5 | 4.1 | (4.1 | )(a) | 1.5 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
56.8 | 6.1 | (4.1 | ) | 58.8 | |||||||||||
Long term debt, less current portion |
415.0 | 20.9 | (20.9 | )(a) | 629.0 | |||||||||||
400.0 | (b) | |||||||||||||||
(186.0 | )(h) | |||||||||||||||
Other long-term liabilities |
0.8 | | | 0.8 | ||||||||||||
Partners capital |
555.3 | 72.4 | (77.4 | )(a) | 775.3 | |||||||||||
225.0 | (b) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total partners capital |
555.3 | 72.4 | 147.6 | 775.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and partners capital |
$ | 1,027.9 | $ | 99.4 | $ | 336.6 | $ | 1,463.9 | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes to pro forma financial statements
2
Inergy Midstream, L.P.
Unaudited Pro Forma Condensed Combined Statement of Operations
September 30, 2012
(in millions)
Historical | Purchase Adjustments |
Inergy Midstream, L.P. Pro Forma |
||||||||||||||
Inergy Midstream, L.P. |
Rangeland Energy, LLC |
|||||||||||||||
Revenue |
$ | 189.8 | $ | 3.4 | $ | | $ | 193.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cost of product sold |
41.4 | 2.2 | | 43.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Expenses (income): |
||||||||||||||||
Operating and administrative |
30.4 | 2.9 | | 33.3 | ||||||||||||
Depreciation and amortization |
50.5 | 1.9 | 33.4 | (c) | 85.8 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
67.5 | (3.6 | ) | (33.4 | ) | 30.5 | ||||||||||
Other income (expense) |
||||||||||||||||
Interest expense |
(1.8 | ) | (0.2 | ) | (21.6 | )(d) | (23.6 | ) | ||||||||
Other |
| 0.1 | | 0.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
65.7 | (3.7 | ) | (55.0 | ) | 7.0 | ||||||||||
Net income attributable to partners |
$ | 65.7 | $ | (3.7 | ) | $ | (55.0 | ) | $ | 7.0 | ||||||
|
|
|
|
|
|
|
|
|||||||||
Less: net income prior to initial public offering of Inergy Midstream, L.P. |
12.9 | 12.9 | ||||||||||||||
Less: net income earned by US Salt, LLC prior to acquisition |
7.8 | 7.8 | ||||||||||||||
|
|
|
|
|||||||||||||
Net income available to partners |
$ | 45.0 | $ | (13.7 | ) | |||||||||||
|
|
|
|
|||||||||||||
Partners interest information: |
||||||||||||||||
Non-managing general partner interest in net income |
$ | 1.9 | $ | 1.9 | ||||||||||||
|
|
|
|
|||||||||||||
Total limited partners interest in net income |
$ | 43.1 | $ | (15.6 | ) | |||||||||||
|
|
|
|
|||||||||||||
Net income per limited partner unit |
||||||||||||||||
Basic |
$ | 0.58 | $ | (0.18 | ) | |||||||||||
Diluted |
$ | 0.58 | $ | (0.18 | ) | |||||||||||
|
|
|
|
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Weighted average limited partners units outstanding (in thousands) |
||||||||||||||||
Basic |
74,768 | 10,714 | (f) | 85,482 | ||||||||||||
|
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|
|
|
|
|||||||||||
Diluted |
74,768 | 10,714 | (g) | 85,482 | ||||||||||||
|
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|
|
|
|
See accompanying notes to pro forma financial statements
3
Inergy Midstream, L.P.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Pro forma adjustments
(a) | Reflects the total purchase price for Inergy Midstream, L.P.s acquisition of 100% of the membership interests in Rangeland Energy, LLC (Rangeland Acquisition) of $430 million, calculated as follows (in millions): |
Aggregate cash purchase price to seller |
$ | 425.0 | ||
Direct acquisition costs |
5.0 | |||
|
|
|||
Total Rangeland Acquisition Purchase Price |
$ | 430.0 | ||
|
|
Our preliminary allocation of the total consideration for the Rangeland Acquisition as follows (in millions):
Historical Net Book Value |
Assets and Liabilities Not Acquired |
Historical Net Book Value of Acquired Assets and Liabilities |
Adjustments | Preliminary Fair Value |
||||||||||||||||
Current assets |
$ | 6.1 | $ | | $ | 6.1 | $ | | $ | 6.1 | ||||||||||
Property, plant and equipment |
91.8 | | 91.8 | 1.9 | 93.7 | |||||||||||||||
Net intangible assets |
1.3 | (1.3 | ) | | 140.0 | 140.0 | ||||||||||||||
Other assets |
0.2 | (0.2 | ) | | | | ||||||||||||||
Goodwill |
| | | 187.2 | 187.2 | |||||||||||||||
Current liabilities |
(6.1 | ) | 4.1 | (2.0 | ) | | (2.0 | ) | ||||||||||||
Long term debt, less current portion |
(20.9 | ) | 20.9 | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Rangeland Acquisition purchase price |
$ | 72.4 | $ | 23.5 | $ | 95.9 | $ | 329.1 | $ | 425.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Adjustments for assets and liabilities not acquired reflect the elimination of certain current and noncurrent balances of $23.5 million pursuant to our purchase agreement. This includes an adjustment for certain intangible assets, other assets, current liabilities, and long term debt that will not be acquired as a condition of the relating purchase and sale agreement between Rangeland Equity Holdings, LLC and Inergy Midstream, L.P.
The Rangeland Acquisition will be accounted for as an acquisition under the acquisition method of accounting in accordance with FASB Accounting Standard Codification Subtopic 805-10. The assets and liabilities of Rangeland Energy, LLC will be reflected at fair value. A final determination of the purchase accounting adjustments, including the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values, has not been made. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma condensed combined financial statements are preliminary and have been made solely for purposes of developing such unaudited pro forma condensed combined financial statements.
(b) | Reflects issuance of $400.0 million in new senior unsecured notes and issuance of $225.0 million of common units in a private placement. In the event the $225.0 million private placement does not close, we would expect to use all of the net proceeds of this offering to fund a portion of the consideration of the Rangeland Acquisition and would anticipate drawing upon either our revolving credit facility or the bridge facility, or a combination of both facilities, to fund any remaining portion of the consideration for the Rangeland Acquisition and related transaction costs and expenses, which would result in the incurrence of additional indebtedness. As a result, total debt (including the current portion) would be $855.5 million (reflecting the issuance of $400.0 million in new unsecured notes and a draw under the revolving credit facility of $39.0 million), total partners capital would be $555.3 million and net loss would be $21.1 million. |
4
(c) | Reflects pro forma adjustment of Rangeland Energy, LLC depreciation, depletion, and amortization expense as follows (in millions): |
Eliminate the historical expense |
$ | (2.0 | ) | |
Pro forma amortization of intangible assets |
33.4 | |||
Pro forma depreciation expense |
2.0 | |||
|
|
|||
Pro forma adjustment to expense |
$ | 33.4 |
(d) | Reflects pro forma adjustment of Rangeland Energy, LLC interest expense as follows (in millions): |
Net proceeds used to reduce the outstanding balance of the credit facility |
$ | (4.5 | ) | |
Senior Notes |
25.0 | |||
Amortization of deferred financing costs |
1.1 | |||
|
|
|||
Pro forma adjustment to interest expense |
$ | 21.6 |
(e) | Reflects estimated non-recurring fees associated with the issuance of the unsecured senior notes. |
(f) | The Companys pro forma basic weighted average number of common units outstanding was calculated as follows (in thousands): |
Basic weighted average number of Inergy Midstream common units outstandingas reported |
74,768 | |||
Inergy Midstream common units issued to finance the Rangeland Acquisition |
10,714 | |||
|
|
|||
Pro Forma basic weighted average number of Inergy Midstream common units outstanding |
85,482 | |||
|
|
(g) | The Companys pro forma diluted weighted average number of common units outstanding was calculated as follows (in thousands): |
Diluted weighted average number of Inergy Midstream common units outstandingas reported |
74,768 | |||
Inergy Midstream common units issued to finance the Rangeland Acquisition |
10,714 | |||
|
|
|||
Pro Forma diluted weighted average number of Inergy Midstream common units outstanding |
85,482 | |||
|
|
(h) | The net proceeds after payment for the purchase price and other acquisition costs are intended to be utilized to pay down our revolving credit facility. |
5
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