Attached files
Exhibit 99.3
UNAUDITED DCP MIDSTREAM PARTNERS, LP PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
References to we, us or our, refer to DCP Midstream Partners, LP and its consolidated subsidiaries. On November 4, 2010, we entered into a transaction (the “Transaction”) which is scheduled to close in January 2011 with DCP Midstream, LLC (“Midstream”), to acquire a 33.33% interest in the Southeast Texas Midstream Business (the “Southeast Texas Business” or, including Ceritas, the “Joint Venture”) for $150 million. Ceritas represents the Liberty Gathering Company, LP and Raywood Gas Plant, LLC purchased from Ceritas Holdings, LP by the Southeast Texas Business on June 29, 2010. The Joint Venture is a fully integrated midstream business which includes: 675 miles of natural gas pipelines; three natural gas processing plants totaling 350 MMcf/d of processing capacity; natural gas storage assets with 9 Bcf of existing storage capacity; and NGL market deliveries direct to Exxon Mobil and to Mont Belvieu via our Black Lake NGL pipeline.
As part of the closing of the Transaction, the assets, liabilities and operations of the Joint Venture, except for any financial derivative instruments and certain working capital and other liabilities, will reside in a new legal entity, DCP Southeast Texas Holdings, GP. We will own a 33.33% interest and Midstream will own a 66.67% interest in DCP Southeast Texas Holdings, GP, and Midstream will continue to direct the Joint Venture’s operations. The Joint Venture does not currently and is not expected to have any employees. Midstream and its affiliates’ employees are responsible for conducting the Joint Venture’s business and operating its assets.
Distributions to us will generally approximate our share of earnings from unconsolidated affiliates of the Joint Venture plus depreciation and amortization expense and other non-cash charges of the Joint Venture. The terms of the joint venture agreement provide that distributions to us from the Joint Venture for the first seven years related to storage and transportation gross margin will be pursuant to a fee-based agreement, based on storage capacity and tailgate volumes. Distributions related to the gathering and processing business, along with reductions for all expenditures, will be pursuant to our and Midstream’s respective ownership interests.
The unaudited pro forma condensed consolidated financial statements present the impact on our financial position and results of operations of our acquisition of a 33.33% interest the Joint Venture. The unaudited pro forma condensed consolidated financial statements as of June 30, 2010, and for the six months ended June 30, 2010 have been prepared based on certain pro forma adjustments to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, and for the years ended December 31, 2009, 2008 and 2007, have been prepared based on certain pro forma adjustments to our historical consolidated financial statements set forth in our Current Report on Form 8-K, filed on May 26, 2010 with the Securities and Exchange Commission, and are qualified in their entirety by reference to such historical consolidated financial statements and related notes contained therein. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the accompanying notes and with the historical consolidated financial statements and related notes thereto.
The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 has been prepared as if the Transaction had occurred on that date. The unaudited pro forma condensed consolidated statements of operations for the six months ended June 30, 2010, and the years ended December 31, 2009, 2008 and 2007, have been prepared as if the Southeast Texas Business transaction had occurred on January 1, 2007 and the Ceritas transaction had occurred on January 1, 2009. Since this is a transaction between entities under common control, the unaudited pro forma condensed consolidated financial statements are combined on an “as if” pooling basis. Accordingly, the historic impact of the acquired assets and liabilities are carried forward.
The pro forma adjustments are based upon currently available information and certain estimates and assumptions; therefore, actual adjustments will differ from the pro forma adjustments. Management believes, however, that the assumptions provide a reasonable basis for presenting the significant effects of the Transaction as contemplated, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements may not be indicative of the results that actually would have occurred if we had owned an interest in the Joint Venture during the periods presented.
1
DCP MIDSTREAM PARTNERS, LP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2010
($ in millions)
| DCP Midstream Partners, LP |
The Southeast Texas Midstream Business |
Pro Forma Adjustments - Elimination |
Pro Forma Adjustments - Other |
DCP Midstream Partners, LP Pro Forma |
||||||||||||||||||
| (b) | ||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||
| Cash and cash equivalents |
$ | 4.8 | $ | — | $ | — | $ | 82.5 | (c) | $ | 4.8 | |||||||||||
| 67.5 | (d) | |||||||||||||||||||||
| (150.0 | ) | (e) | ||||||||||||||||||||
| Accounts receivable |
104.4 | 47.1 | (47.1 | ) | — | 104.4 | ||||||||||||||||
| Other |
25.5 | 36.6 | (36.6 | ) | — | 25.5 | ||||||||||||||||
| Total current assets |
134.7 | 83.7 | (83.7 | ) | — | 134.7 | ||||||||||||||||
| Property, plant and equipment, net |
1,008.5 | 260.6 | (260.6 | ) | — | 1,008.5 | ||||||||||||||||
| Goodwill and intangible assets, net |
151.0 | 46.7 | (46.7 | ) | — | 151.0 | ||||||||||||||||
| Investments in unconsolidated affiliates |
109.8 | — | — | 102.4 | (e) | 212.2 | ||||||||||||||||
| Other non-current assets |
9.2 | 2.3 | (2.3 | ) | — | 9.2 | ||||||||||||||||
| Total assets |
$ | 1,413.2 | $ | 393.3 | $ | (393.3 | ) | $ | 102.4 | $ | 1,515.6 | |||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||
| Accounts payable |
$ | 86.3 | $ | 51.6 | $ | (51.6 | ) | $ | — | $ | 86.3 | |||||||||||
| Other |
54.5 | 27.7 | (27.7 | ) | — | 54.5 | ||||||||||||||||
| Total current liabilities |
140.8 | 79.3 | (79.3 | ) | — | 140.8 | ||||||||||||||||
| Long-term debt |
615.0 | — | — | 67.5 | (d) | 682.5 | ||||||||||||||||
| Other long-term liabilities |
53.6 | 6.7 | (6.7 | ) | — | 53.6 | ||||||||||||||||
| Total liabilities |
809.4 | 86.0 | (86.0 | ) | 67.5 | 876.9 | ||||||||||||||||
| Commitments and contingent liabilities |
||||||||||||||||||||||
| Equity: |
||||||||||||||||||||||
| Predecessor equity |
— | 307.3 | (307.3 | ) | — | — | ||||||||||||||||
| Common unitholders |
419.1 | — | — | 82.5 | (c) | 454.0 | ||||||||||||||||
| (47.6 | ) | (e) | ||||||||||||||||||||
| General partner unitholders |
(5.8 | ) | — | — | — | (5.8 | ) | |||||||||||||||
| Accumulated other comprehensive income |
(33.7 | ) | — | — | — | (33.7 | ) | |||||||||||||||
| Total partners’ equity |
379.6 | 307.3 | (307.3 | ) | 34.9 | 414.5 | ||||||||||||||||
| Noncontrolling interests |
224.2 | — | — | — | 224.2 | |||||||||||||||||
| Total equity |
603.8 | 307.3 | (307.3 | ) | 34.9 | 638.7 | ||||||||||||||||
| Total liabilities and equity |
$ | 1,413.2 | $ | 393.3 | $ | (393.3 | ) | $ | 102.4 | $ | 1,515.6 | |||||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
2
DCP MIDSTREAM PARTNERS, LP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2010
($ in millions, except per unit amounts)
| DCP Midstream Partners, LP |
The Southeast Texas Midstream Business |
Ceritas Holdings, LP |
Pro
Forma Adjustments - Elimination |
Pro
Forma Adjustments - Other |
DCP Midstream Partners, LP Pro Forma |
|||||||||||||||||||||
| (a) | (b) | |||||||||||||||||||||||||
| Total operating revenues |
$ | 681.2 | $ | 401.7 | $ | 1.3 | $ | (403.0 | ) | $ | — | $ | 681.2 | |||||||||||||
| Operating costs and expenses: |
||||||||||||||||||||||||||
| Purchases of natural gas, propane and NGLs |
538.5 | 367.7 | — | (367.7 | ) | — | 538.5 | |||||||||||||||||||
| Operating and maintenance expense |
39.6 | 8.0 | 0.3 | (8.3 | ) | — | 39.6 | |||||||||||||||||||
| Depreciation and amortization expense |
36.5 | 6.2 | 0.1 | (6.3 | ) | — | 36.5 | |||||||||||||||||||
| General and administrative expense |
16.8 | 4.9 | 0.9 | (5.8 | ) | — | 16.8 | |||||||||||||||||||
| Other, net |
(3.5 | ) | — | — | — | (3.5 | ) | |||||||||||||||||||
| Total operating costs and expenses |
627.9 | 386.8 | 1.3 | (388.1 | ) | — | 627.9 | |||||||||||||||||||
| Operating income |
53.3 | 14.9 | — | (14.9 | ) | — | 53.3 | |||||||||||||||||||
| Interest expense, net |
(14.5 | ) | — | — | — | (1.5 | ) | (f) | (16.0 | ) | ||||||||||||||||
| Earnings from unconsolidated affiliates |
14.5 | — | — | — | 7.5 | (g) | 22.3 | |||||||||||||||||||
| 0.7 | (h) | |||||||||||||||||||||||||
| (0.4 | ) | (i) | ||||||||||||||||||||||||
| Income before income taxes |
53.3 | 14.9 | — | (14.9 | ) | 6.3 | 59.6 | |||||||||||||||||||
| Income tax expense |
(0.4 | ) | (0.3 | ) | — | 0.3 | — | (0.4 | ) | |||||||||||||||||
| Net income from continuing operations |
52.9 | 14.6 | — | (14.6 | ) | 6.3 | 59.2 | |||||||||||||||||||
| Net (loss) income from discontinued operations, net of taxes |
— | — | (0.9 | ) | 0.9 | — | — | |||||||||||||||||||
| Net income attributable to noncontrolling interests |
(1.1 | ) | — | — | — | — | (1.1 | ) | ||||||||||||||||||
| Net income attributable to partners |
$ | 51.8 | $ | 14.6 | $ | (0.9 | ) | $ | (13.7 | ) | $ | 6.3 | $ | 58.1 | ||||||||||||
| Less: |
||||||||||||||||||||||||||
| General partner interest in net income |
(8.0 | ) | (8.5 | ) | ||||||||||||||||||||||
| Net income allocable to limited partners |
$ | 43.8 | $ | 49.6 | ||||||||||||||||||||||
| Net income per limited partner unit — basic and diluted |
$ | 1.27 | $ | 1.34 | ||||||||||||||||||||||
| Weighted-average limited partner units outstanding — basic and diluted |
34.6 | 37.1 | ||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
3
DCP MIDSTREAM PARTNERS, LP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2009
($ in millions, except per unit amounts)
| DCP Midstream Partners, LP |
The Southeast Texas Midstream Business |
Ceritas Holdings, LP |
Pro Forma Adjustments - Elimination |
Pro Forma Adjustments - Other |
DCP Midstream Partners, LP Pro Forma |
|||||||||||||||||||||
| (a) | (b) | |||||||||||||||||||||||||
| Total operating revenues |
$ | 942.4 | $ | 535.5 | $ | 2.1 | $ | (537.6 | ) | $ | — | $ | 942.4 | |||||||||||||
| Operating costs and expenses: |
||||||||||||||||||||||||||
| Purchases of natural gas, propane and NGLs |
776.2 | 472.1 | — | (472.1 | ) | — | 776.2 | |||||||||||||||||||
| Operating and maintenance expense |
69.7 | 14.5 | 0.7 | (15.2 | ) | — | 69.7 | |||||||||||||||||||
| Depreciation and amortization expense |
64.9 | 12.0 | 0.7 | (12.7 | ) | — | 64.9 | |||||||||||||||||||
| General and administrative expense |
32.3 | 10.8 | 2.0 | (12.8 | ) | — | 32.3 | |||||||||||||||||||
| Other, net |
— | 0.5 | — | (0.5 | ) | — | — | |||||||||||||||||||
| Total operating costs and expenses |
943.1 | 509.9 | 3.4 | (513.3 | ) | — | 943.1 | |||||||||||||||||||
| Operating (loss) income |
(0.7 | ) | 25.6 | (1.3 | ) | (24.3 | ) | — | (0.7 | ) | ||||||||||||||||
| Interest expense, net |
(28.0 | ) | — | — | — | (3.0 | ) | (f) | (31.0 | ) | ||||||||||||||||
| Earnings from unconsolidated affiliates |
18.5 | — | — | — | 6.0 | (g) | 24.8 | |||||||||||||||||||
| 1.0 | (h) | |||||||||||||||||||||||||
| (0.7 | ) | (i) | ||||||||||||||||||||||||
| (Loss) income before income taxes |
(10.2 | ) | 25.6 | (1.3 | ) | (24.3 | ) | 3.3 | (6.9 | ) | ||||||||||||||||
| Income tax expense |
(0.6 | ) | (0.4 | ) | — | 0.4 | — | (0.6 | ) | |||||||||||||||||
| Net (loss) income from continuing operations |
(10.8 | ) | 25.2 | (1.3 | ) | (23.9 | ) | 3.3 | (7.5 | ) | ||||||||||||||||
| Net (loss) income from discontinued operations, net of taxes |
— | — | (5.8 | ) | 5.8 | — | — | |||||||||||||||||||
| Net income attributable to noncontrolling interests |
(8.3 | ) | — | — | — | — | (8.3 | ) | ||||||||||||||||||
| Net (loss) income attributable to partners |
$ | (19.1 | ) | $ | 25.2 | $ | (7.1 | ) | $ | (18.1 | ) | $ | 3.3 | $ | (15.8 | ) | ||||||||||
| Less: |
||||||||||||||||||||||||||
| Net loss attributable to predecessor operations |
1.0 | 1.0 | ||||||||||||||||||||||||
| General partner interest in net income |
(12.7 | ) | (14.2 | ) | ||||||||||||||||||||||
| Net loss allocable to limited partners |
$ | (30.8 | ) | $ | (29.0 | ) | ||||||||||||||||||||
| Net loss per limited partner unit — basic and diluted |
$ | (0.99 | ) | $ | (0.86 | ) | ||||||||||||||||||||
| Weighted-average limited partner units outstanding — basic and diluted |
31.2 | 33.7 | ||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
4
DCP MIDSTREAM PARTNERS, LP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008
($ in millions, except per unit amounts)
| DCP Midstream Partners, LP |
The Southeast Texas Midstream Business |
Pro Forma Adjustments - Elimination |
Pro Forma Adjustments - Other |
DCP Midstream Partners, LP Pro Forma |
||||||||||||||||||
| (b) | ||||||||||||||||||||||
| Total operating revenues |
$ | 1,830.5 | $ | 1,142.1 | $ | (1,142.1 | ) | $ | — | $ | 1,830.5 | |||||||||||
| Operating costs and expenses: |
||||||||||||||||||||||
| Purchases of natural gas, propane and NGLs |
1,481.0 | 1,065.4 | (1,065.4 | ) | — | 1,481.0 | ||||||||||||||||
| Operating and maintenance expense |
77.4 | 17.6 | (17.6 | ) | — | 77.4 | ||||||||||||||||
| Depreciation and amortization expense |
53.2 | 11.8 | (11.8 | ) | — | 53.2 | ||||||||||||||||
| General and administrative expense |
33.3 | 10.6 | (10.6 | ) | — | 33.3 | ||||||||||||||||
| Other, net |
(1.5 | ) | 1.8 | (1.8 | ) | — | (1.5 | ) | ||||||||||||||
| Total operating costs and expenses |
1,643.4 | 1,107.2 | (1,107.2 | ) | — | 1,643.4 | ||||||||||||||||
| Operating income |
187.1 | 34.9 | (34.9 | ) | — | 187.1 | ||||||||||||||||
| Interest expense, net |
(26.7 | ) | — | — | (3.0 | ) | (f) | (29.7 | ) | |||||||||||||
| Earnings from unconsolidated affiliates |
18.2 | — | — | 7.0 | (g) | 25.2 | ||||||||||||||||
| Income before income taxes |
178.6 | 34.9 | (34.9 | ) | 4.0 | 182.6 | ||||||||||||||||
| Income tax expense |
(0.6 | ) | (0.7 | ) | 0.7 | — | (0.6 | ) | ||||||||||||||
| Net income from continuing operations |
178.0 | 34.2 | (34.2 | ) | 4.0 | 182.0 | ||||||||||||||||
| Net loss attributable to noncontrolling interests |
(36.1 | ) | — | — | — | (36.1 | ) | |||||||||||||||
| Net income attributable to partners |
$ | 141.9 | $ | 34.2 | $ | (34.2 | ) | $ | 4.0 | $ | 145.9 | |||||||||||
| Less: |
||||||||||||||||||||||
| Net income attributable to predecessor operations |
(16.2 | ) | (16.2 | ) | ||||||||||||||||||
| General partner interest in net income |
(13.0 | ) | (13.9 | ) | ||||||||||||||||||
| Net income allocable to limited partners |
$ | 112.7 | $ | 115.8 | ||||||||||||||||||
| Net income per limited partner unit — basic and diluted |
$ | 4.11 | $ | 3.87 | ||||||||||||||||||
| Weighted-average limited partner units outstanding — basic and diluted |
27.4 | 29.9 | ||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
5
DCP MIDSTREAM PARTNERS, LP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
($ in millions, except per unit amounts)
| DCP Midstream Partners, LP |
The Southeast Texas Midstream Business |
Pro Forma Adjustments - Elimination |
Pro Forma Adjustments - Other |
DCP Midstream Partners, LP Pro Forma |
||||||||||||||||||
| (b) | ||||||||||||||||||||||
| Total operating revenues |
$ | 1,346.2 | $ | 917.3 | $ | (917.3 | ) | $ | — | $ | 1,346.2 | |||||||||||
| Operating costs and expenses: |
||||||||||||||||||||||
| Purchases of natural gas, propane and NGLs |
1,185.6 | 845.9 | (845.9 | ) | — | 1,185.6 | ||||||||||||||||
| Operating and maintenance expense |
59.3 | 14.2 | (14.2 | ) | — | 59.3 | ||||||||||||||||
| Depreciation and amortization expense |
40.2 | 11.0 | (11.0 | ) | — | 40.2 | ||||||||||||||||
| General and administrative expense |
36.2 | 12.3 | (12.3 | ) | — | 36.2 | ||||||||||||||||
| Total operating costs and expenses |
1,321.3 | 883.4 | (883.4 | ) | — | 1,321.3 | ||||||||||||||||
| Operating income |
24.9 | 33.9 | (33.9 | ) | — | 24.9 | ||||||||||||||||
| Interest expense, net |
(20.1 | ) | — | — | (3.6 | ) | (f) | (23.7 | ) | |||||||||||||
| Earnings from unconsolidated affiliates |
24.7 | — | — | 8.5 | (g) | 33.2 | ||||||||||||||||
| Income before income taxes |
29.5 | 33.9 | (33.9 | ) | 4.9 | 34.4 | ||||||||||||||||
| Income tax expense |
(0.8 | ) | (0.7 | ) | 0.7 | — | (0.8 | ) | ||||||||||||||
| Net income from continuing operations |
28.7 | 33.2 | (33.2 | ) | 4.9 | 33.6 | ||||||||||||||||
| Net income attributable to noncontrolling interests |
(29.8 | ) | — | — | — | (29.8 | ) | |||||||||||||||
| Net (loss) income attributable to partners |
$ | (1.1 | ) | $ | 33.2 | $ | (33.2 | ) | $ | 4.9 | $ | 3.8 | ||||||||||
| Less: |
||||||||||||||||||||||
| Net income attributable to predecessor operations |
(18.3 | ) | (18.3 | ) | ||||||||||||||||||
| General partner interest in net income |
(3.9 | ) | (4.5 | ) | ||||||||||||||||||
| Net loss allocable to limited partners |
$ | (23.3 | ) | $ | (19.0 | ) | ||||||||||||||||
| Net loss per limited partner unit — basic and diluted |
$ | (1.14 | ) | $ | (0.83 | ) | ||||||||||||||||
| Weighted-average limited partner units outstanding — basic and diluted |
20.5 | 23.0 | ||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
6
NOTES TO UNAUDITED DCP MIDSTREAM PARTNERS, LP
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Note 1. | Basis of Presentation |
The unaudited pro forma condensed consolidated financial statements present the impact on our financial position and results of operations of our acquisition from Midstream of a 33.33% interest in the Southeast Texas Business, including Ceritas which was acquired by the Southeast Texas Business from Ceritas Holdings, LP on June 29, 2010. The pro forma financial statements as of June 30, 2010, and for the six months ended June 30, 2010 have been prepared based on certain pro forma adjustments to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, and for the years ended December 31, 2009, 2008 and 2007, have been prepared based on certain pro forma adjustments to our audited consolidated financial statements set forth in our Current Report on Form 8-K filed on May 26, 2010 with the Securities and Exchange Commission, and are qualified in their entirety by reference to such historical consolidated financial statements and related notes contained in those reports. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the accompanying notes and with the historical consolidated financial statements and related notes thereto.
The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010, has been prepared as if the Transactions had occurred on the balance sheet date. Since the Transaction is a transaction among entities under common control, the pro forma financial statements are combined on an “as if” pooling basis. Accordingly, the historic impact of the acquired assets and liabilities are carried forward. The Southeast Texas Business was under common control for the six months ended June 30, 2010, and the years ended December 31, 2009, 2008 and 2007, while Ceritas was only under common control since June 29, 2010. Therefore, the unaudited pro forma condensed consolidated statements of operations for the six months ended June 30, 2010, and the years ended December 31, 2009, 2008 and 2007 have been prepared as if the Southeast Texas Business transaction had occurred on January 1, 2007 and the Ceritas transaction occurred on January 1, 2009.
The pro forma adjustments are based upon currently available information and certain estimates and assumptions; therefore, actual adjustments will differ from the pro forma adjustments. Management believes, however, that the assumptions provide a reasonable basis for presenting the significant effects of the Transaction as contemplated, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements may not be indicative of the results that actually would have occurred if we had owned an interest in the Joint Venture during the periods presented.
The pro forma condensed consolidated financial statements reflect the Transaction as follows:
| • | the assumed borrowing of $67.5 million under our existing credit facility to finance the acquisition; |
| • | the assumed issuance of 2,500,000 common limited partner units to finance the acquisition; |
| • | the acquisition of a 33.33% interest in the Joint Venture; |
| • | the retention by Midstream of any financial derivative instruments and certain working capital and other liabilities; and |
| • | the aggregate consideration paid to Midstream, consisting of $150.0 million in cash. |
7
| Note 2. | Pro Forma Adjustments and Assumptions |
| (a) | Reflects adjustments to account for Ceritas Holdings, LP activity. For the six months ended June 30, 2010, the Ceritas Holdings, LP amounts for the period January 1, 2010 through June 29, 2010 (the date the Southeast Texas Business purchased Ceritas from Ceritas Holdings, LP) are derived based upon the unaudited historical consolidated statement of operations of Ceritas Holdings, LP for the three months ended March 31, 2010 as attached in Exhibit 99.2. For the year ended December 31, 2009, the Ceritas Holdings, LP amounts are reflective of the audited historical consolidated statement of operations of Ceritas Holdings, LP for the year ended December 31, 2009 as attached in Exhibit 99.2. |
| (b) | Reflects adjustments to eliminate the Joint Venture’s activity and operating assets and liabilities, including elimination of the activity and operating assets of Ceritas Holdings, LP not purchased by the Southeast Texas Business, as our 33.33% interest will be accounted for under the equity method of accounting. |
| (c) | Reflects assumed net proceeds to us of $82.5 million from the sale of 2,500,000 of our common units. Consistent with our overall targeted debt and equity ratio to finance our growth, the proposed financing of the Transaction is assumed to consist of 55% from the sale of common units and 45% from borrowings. Actual debt and equity that will be used to finance the Transaction may be different than the assumed ratio. The assumed common unit price, $35.68, is the closing price of our units for the last trading day in October 2010 less estimated offering costs and underwriting discounts of $6.7 million. The actual common unit price, offering costs and underwriting discounts for the financing of the Transaction may be different than our assumptions. |
| (d) | Reflects assumed proceeds to us from borrowings under our revolving credit facility of $67.5 million. Consistent with our overall targeted debt and equity ratio to finance our growth, the proposed financing of the Transaction is assumed to consist of 45% from borrowings and 55% from the sale of common units. Actual debt and equity that will be used to finance the Transaction may be different than the assumed ratio. |
| (e) | Reflects the Transaction, along with the related distributions to Midstream of the aggregate consideration. This acquisition will be recorded at Midstream’s cost as it is considered to be a transaction among entities under common control. The consideration was allocated as follows ($ in millions): |
| June 30, 2010 |
||||
| Consideration |
$ | 150.0 | ||
| Less: Historical cost of 33.33% interest in the Joint Venture |
102.4 | |||
| Adjustment to net parent equity for excess consideration |
$ | 47.6 | ||
The adjustment to net parent equity was allocated to the common units.
8
| (f) | Reflects the increase in interest expense associated with the incremental debt for the Transaction. The following presents the weighted average interest rates used to calculate the increase in interest expense for the respective periods: |
| Weighted Average Interest Rate |
||||
| Six months ended June 30, 2010 |
4.34 | % | ||
| Year ended December 31, 2009 |
4.41 | % | ||
| Year ended December 31, 2008 |
4.48 | % | ||
| Year ended December 31, 2007 |
5.34 | % | ||
The effect of a 0.125% variance in interest rates on pro forma interest expense would have been approximately $0.1 million annually.
| (g) | Reflects the increase in earnings from unconsolidated affiliates associated with the acquisition of a 33.33% interest in the Southeast Texas Business. |
For the first seven years following the closing of the Transaction, our portion of the earnings and cash attributable to the Southeast Texas Business’ storage and transportation gross margin will be pursuant to a fee-based arrangement, based on storage capacity and tailgate volumes. Earnings related to the gathering and processing business, along with reductions for all expenditures, will be pursuant to our and Midstream’s respective ownership interests.
The following table reflects the historical net income of the Southeast Texas Business, the removal of the historical storage and transportation gross margin, the replacement with the storage and transportation gross margin adjusted for this fee-based arrangement applied to our historical storage capacity and tailgate volumes, and our resulting adjustment to earnings from unconsolidated affiliates:
| Six Months Ended June 30, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
Year Ended December 31, 2007 |
|||||||||||||
| (Millions) | ||||||||||||||||
| The historical Southeast Texas Business net income |
$ | 14.6 | $ | 25.2 | $ | 34.2 | $ | 33.2 | ||||||||
| The historical Southeast Texas Business storage and transportation gross margin |
(1.6 | ) | (24.1 | ) | (30.0 | ) | (24.6 | ) | ||||||||
| The Southeast Texas Business storage and transportation gross margin under the fee-based arrangement |
9.4 | 16.8 | 16.7 | 16.8 | ||||||||||||
| The adjusted Southeast Texas Business net income |
$ | 22.4 | $ | 17.9 | $ | 20.9 | $ | 25.4 | ||||||||
| Our 33.33% interest in the adjusted Southeast Texas Business net income (earnings from unconsolidated affiliates) |
$ | 7.5 | $ | 6.0 | $ | 7.0 | $ | 8.5 | ||||||||
9
| (h) | Reflects the increase in earnings from unconsolidated affiliates associated with the acquisition of a 33.33% interest in Ceritas. |
The following table reflects the historical net income of Ceritas, and our resulting adjustment to earnings from unconsolidated affiliates:
| Six Months Ended June 30, 2010 |
Year Ended December 31, 2009 |
|||||||
| (Millions) | ||||||||
| The historical Ceritas net income |
$ | 2.0 | $ | 2.9 | ||||
| Our 33.33% interest in the historical Ceritas net income (earnings from unconsolidated affiliates) |
$ | 0.7 | $ | 1.0 | ||||
| (i) | Reflects the adjustment for depreciation and amortization of fixed assets and intangibles recognized on the acquisition of Ceritas, acquired by the Southeast Texas Business from Ceritas Holdings, LP on June 29, 2010. The change in expense represents the difference between historical carrying value and the fair value of the tangible and intangible assets acquired, as well as an adjustment to the assets’ lives. The acquisition of Ceritas was accounted for by the Southeast Texas Business under the purchase method of accounting. The following table reflects the calculation of the depreciation and amortization expense adjustment: |
| Six Months Ended June 30, 2010 |
Year Ended December 31, 2009 |
|||||||
| (Millions) | ||||||||
| The historical Ceritas depreciation and amortization expense |
$ | 1.2 | $ | 2.8 | ||||
| The adjusted Ceritas depreciation and amortization expense |
2.3 | 5.0 | ||||||
| The depreciation and amortization expense adjustment |
$ | (1.1 | ) | $ | (2.2 | ) | ||
| Our 33.33% interest in depreciation and amortization expense adjustment (earnings from unconsolidated affiliates) |
$ | (0.4 | ) | $ | (0.7 | ) | ||
| Note 3. | Pro Forma Net Income Per Limited Partner Unit |
Our net income or loss is allocated to the general partner and the limited partners, including the holders of the subordinated units, through the date of subordinated conversion, in accordance with their respective ownership percentages, after allocating Available Cash generated during the period in accordance with our partnership agreement.
Securities that meet the definition of a participating security are required to be considered for inclusion in the computation of basic earnings per unit using the two-class method. Under the two-class method, earnings per unit is calculated as if all of the earnings for the period were distributed under the terms of the partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.
These required disclosures do not impact our overall net income or loss or other financial results; however, in periods in which aggregate net income exceeds our Available Cash it will have the impact of reducing net income per limited partner unit, or LPU.
Basic and diluted net income or loss per LPU is calculated by dividing limited partners’ interest in net income or loss, by the weighted-average number of outstanding LPUs during the period, assuming 2,500,000 common limited partner units were issued in connection with the Transaction on January 1, 2007.
10