Variable Interest Entity Arrangements

9 Months Ended

Sep. 30, 2021

Variable Interest Entity Arrangements [Abstract]

VARIABLE INTEREST ENTITY ARRANGEMENTSOn April 3, 2018 we sold 50% of the ownership interest in Superior. The 50% interest in Superior we sold was acquired by SP Investor, a holding company jointly owned by OPTrust and funds managed and/or advised by Partners Group, a global private markets investment manager. Superior is governed and managed under the Agreement and a Management Services Agreement (MSA). The MSA is between our wholly-owned subsidiary, SPC Midstream Operating, L.L.C. (the Operator) and Superior. As the Operator, we provide services, such as operations and maintenance support, accounting, legal, and human resources to Superior for a monthly service fee of $0.3 million. Superior's creditors have no recourse to our general credit. Unit is not a party to and does not guarantee Superior's credit agreement. The obligations under Superior's credit agreement are secured by, among other things, mortgage liens on certain of Superior’s processing plants and gathering systems.

The Agreement specifies how future distributions are to be allocated among the Members. Future distributions may be from Available Cash or made in conjunction with a Sale Event (both as defined in the Agreement). In certain circumstances, future distributions could result in Unit not receiving cash distributions proportionate to its ownership percentage. Circumstances that could result in Unit receiving less than a proportionate share of future distributions include, but may not be limited to, Unit not fulfilling the drilling commitment before December 31, 2021 as described in Note 15 – Commitments and Contingencies or a cumulative return to SP Investor of less than the 7% Liquidation IRR Hurdle provided for SP Investor in the Agreement. Generally, the 7% Liquidation IRR Hurdle calculation requires cumulative distributions to SP Investor in excess of its original $300.0 million investment sufficient to provide SP Investor a 7% IRR on its capital contributions to Superior before any liquidation distribution is made to Unit. At September 30, 2021, liquidation distributions first paid to SP Investor of $362.6 million would be required for SP Investor to reach its 7% Liquidation IRR Hurdle at which point Unit would then be entitled to receive up to $362.6 million of the remaining liquidation distributions to satisfy Unit's 7% Liquidation IRR Hurdle with any remaining liquidation distributions paid as outlined within the Agreement. After the fifth anniversary of the effective date of the sale, either owner may force a sale of Superior to a third-party or a liquidation of Superior's assets.

Effective at emergence from the Chapter 11 Cases, we allocate Unit's and SP Investor's share of earnings and losses from Superior in our unaudited condensed consolidated statement of operations using the hypothetical liquidation at book value (HLBV) method of accounting which is a balance-sheet approach that calculates the change in the hypothetical amount Unit and SP Investor would be entitled to receive if Superior were liquidated at book value at the end of each period, adjusted for any contributions made and distributions received during the period. On the sale or liquidation of Superior, distributions would occur in the order and priority specified in the relevant agreements.

Under the guidance in ASC 810, Consolidation, we have determined that Superior is a VIE. The two variable interests applicable to Unit include the 50% equity investment in Superior and the MSA. The MSA gives us the power to direct the activities that most significantly affect Superior's operating performance. The MSA is a separate variable interest. Under the MSA, Unit has the power to direct Superior’s most significant activities; reciprocally the equity investors lack the power to direct the activities that most affect the entity’s economic performance. Because of this, Unit is considered the primary beneficiary. There have been no changes to the primary beneficiary during the quarter ended September 30, 2021.

As the primary beneficiary of this VIE, we consolidate in our financial statements the financial position, results of operations, and cash flows of this VIE. All intercompany balances and transactions between us and the VIE are eliminated in our unaudited condensed consolidated financial statements. Cash distributions of income, net of agreed on expenses, and estimated expenses are allocated to the equity owners as specified in the relevant agreements.

On November 1, 2021, Superior acquired gas gathering and processing assets including a cryogenic processing plant and approximately 1,620 miles of low-pressure gathering pipeline along with related compressor stations and meters located in southern Kansas for $13.0 million, subject to customary closing and post-closing adjustments.

Superior paid cash distributions totaling $24.7 million in April 2021 related to cumulative available cash as of March 31, 2021, $7.7 million in July 2021 related to available cash generated during the three months ended June 30, 2021, and $13.9 million in October 2021 related to available cash generated during the three months ended September 30, 2021. Unit and SP Investor each received 50% of these distributions. See Note 15 – Commitments and Contingencies for discussion of the Granite Wash/Buffalo Wallow drilling commitment and the potential impact on future distributions.

The amounts below reflect the eliminations of intercompany transactions and balances consistent with the presentation in the unaudited condensed consolidated balance sheets.


	September 30, 2021		December 31, 2020
	(In thousands)

Current assets:
Cash and cash equivalents	$	12,286	$	11,642
Accounts receivable	36,487		27,427
Prepaid expenses and other	2,540		6,746
Total current assets	51,313		45,815
Property and equipment:
Gas gathering and processing equipment	259,642		251,403
Transportation equipment	2,086		1,748
	261,728		253,151
Less accumulated depreciation, depletion, amortization, and impairment	34,878		10,466
Net property and equipment	226,850		242,685
Right of use asset	3,926		2,823
Other assets	1,961		2,309
Total assets	$	284,050	$	293,632

Current liabilities:
Accounts payable	$	26,921	$	17,045
Accrued liabilities	6,441		3,777
Current operating lease liability	1,570		1,762
Current portion of other long-term liabilities	1,919		5,799
Total current liabilities	36,851		28,383
Long-term debt	3,100		—
Operating lease liability	2,356		1,013
Other long-term liabilities	158		1,589
Total liabilities	$	42,465	$	30,985