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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to              .

(Exact name of registrant as specified in its charter)
Commission file number
State or other jurisdiction of incorporation or organization
(I.R.S. Employer Identification No.)
Crestwood Equity Partners LP
001-34664
Delaware
43-1918951
Crestwood Midstream Partners LP
001-35377
Delaware
20-1647837

811 Main Street, Suite 3400
Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip code)
(832) 519-2200
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Crestwood Equity Partners LP
 
Yes  x  No  o
Crestwood Midstream Partners LP
 
Yes  x  No  o

(Explanatory Note: Crestwood Midstream Partners LP is currently a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934. Although not subject to these filing requirements, Crestwood Midstream Partners LP has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Crestwood Equity Partners LP
 
Yes  x  No  o
Crestwood Midstream Partners LP
 
Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Crestwood Equity Partners LP
Large accelerated filer x
Accelerated filer o

Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
Crestwood Midstream Partners LP
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Emerging growth company o


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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.
Crestwood Equity Partners LP
 
o
Crestwood Midstream Partners LP
 
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Crestwood Equity Partners LP
 
Yes  o    No  x
Crestwood Midstream Partners LP
 
Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (July 31, 2018)
Crestwood Equity Partners LP
 
71,214,368
Crestwood Midstream Partners LP
 
None

Crestwood Midstream Partners LP, as a wholly-owned subsidiary of a reporting company, meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this report with the reduced disclosure format as permitted by such instruction.




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CRESTWOOD EQUITY PARTNERS LP
CRESTWOOD MIDSTREAM PARTNERS LP
INDEX TO FORM 10-Q

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CRESTWOOD EQUITY PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(in millions, except unit information)
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash
$
6.1

 
$
1.3

Accounts receivable, less allowance for doubtful accounts of $0.3 million and $2.4 million at June 30, 2018 and December 31, 2017
326.6

 
442.7

Inventory
73.6

 
68.4

Assets from price risk management activities
6.0

 
7.2

Assets held for sale
54.0

 
3.0

Prepaid expenses and other current assets
8.3

 
7.9

Total current assets
474.6

 
530.5

Property, plant and equipment
2,409.8

 
2,285.2

Less: accumulated depreciation and depletion
518.1

 
464.4

Property, plant and equipment, net
1,891.7

 
1,820.8

Intangible assets
770.3

 
788.8

Less: accumulated amortization
195.7

 
191.6

Intangible assets, net
574.6

 
597.2

Goodwill
138.6

 
147.6

Investments in unconsolidated affiliates
1,156.7

 
1,183.0

Other non-current assets
5.7

 
5.8

Total assets
$
4,241.9

 
$
4,284.9

Liabilities and partners’ capital
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
310.5

 
$
349.4

Accrued expenses and other liabilities
85.2

 
105.9

Liabilities from price risk management activities
23.0

 
48.9

Current portion of long-term debt
0.9

 
0.9

Total current liabilities
419.6

 
505.1

Long-term debt, less current portion
1,561.0

 
1,491.3

Other long-term liabilities
166.2

 
104.7

Deferred income taxes
3.1

 
3.3

Commitments and contingencies (Note 11)


 


Partners’ capital:
 
 
 
Crestwood Equity Partners LP partners’ capital (71,657,106 and 70,721,563 common and subordinated units issued and outstanding at June 30, 2018 and December 31, 2017)
1,300.3

 
1,393.5

Preferred units (71,257,445 units issued and outstanding at both June 30, 2018 and December 31, 2017)
612.0

 
612.0

Total Crestwood Equity Partners LP partners’ capital
1,912.3

 
2,005.5

Interest of non-controlling partner in subsidiary
179.7

 
175.0

Total partners’ capital
2,092.0

 
2,180.5

Total liabilities and partners’ capital
$
4,241.9

 
$
4,284.9

See accompanying notes.

4

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CRESTWOOD EQUITY PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except unit and per unit data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product revenues:
 
 
 
 
 
 
 
Gathering and processing
$
186.9

 
$
325.3

 
$
459.1

 
$
618.4

Marketing, supply and logistics
562.7

 
421.5

 
1,316.1

 
851.7

 
749.6

 
746.8

 
1,775.2

 
1,470.1

Services revenues:
 
 
 
 
 
 
 
Gathering and processing
68.5

 
79.4

 
136.6

 
154.4

Storage and transportation
5.1

 
8.5

 
9.3

 
18.5

Marketing, supply and logistics
17.0

 
15.2

 
33.8

 
34.5

Related party (Note 12)
0.3

 
0.4

 
0.6

 
0.9

 
90.9

 
103.5

 
180.3

 
208.3

Total revenues
840.5

 
850.3

 
1,955.5

 
1,678.4

 
 
 
 
 
 
 
 
Costs of product/services sold (exclusive of items shown separately below):
 
 
 
 
 
 
 
Product costs
681.8

 
713.7

 
1,620.7

 
1,380.4

Product costs - related party (Note 12)
32.2

 
4.0

 
45.3

 
8.1

Service costs
11.4

 
11.9

 
25.2

 
24.6

Total costs of products/services sold
725.4

 
729.6

 
1,691.2

 
1,413.1

 
 
 
 
 
 
 
 
Operating expenses and other:
 
 
 
 
 
 
 
Operations and maintenance
31.9

 
34.2

 
66.4

 
67.9

General and administrative
23.4

 
22.7

 
47.3

 
49.1

Depreciation, amortization and accretion
44.5

 
48.7

 
89.6

 
97.1

Loss on long-lived assets, net
24.4

 

 
24.1

 

 
124.2

 
105.6

 
227.4

 
214.1

Operating income (loss)
(9.1
)
 
15.1

 
36.9

 
51.2


5

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CRESTWOOD EQUITY PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(in millions, except unit and per unit data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Earnings from unconsolidated affiliates, net
12.0

 
9.6

 
24.4

 
17.7

Interest and debt expense, net
(24.3
)
 
(24.1
)
 
(48.7
)
 
(50.6
)
Loss on modification/extinguishment of debt

 
(0.4
)
 

 
(37.7
)
Other income, net
0.1

 
0.1

 
0.2

 
0.2

Income (loss) before income taxes
(21.3
)
 
0.3

 
12.8

 
(19.2
)
(Provision) benefit for income taxes
(0.2
)
 

 
(0.2
)
 
0.1

Net income (loss)
(21.5
)
 
0.3

 
12.6

 
(19.1
)
Net income attributable to non-controlling partner
4.0

 
6.3

 
8.0

 
12.4

Net income (loss) attributable to Crestwood Equity Partners LP
(25.5
)
 
(6.0
)
 
4.6

 
(31.5
)
Net income attributable to preferred units
15.1

 
13.5

 
30.1

 
31.3

Net loss attributable to partners
$
(40.6
)
 
$
(19.5
)
 
$
(25.5
)
 
$
(62.8
)
 
 
 
 
 
 
 
 
Common unitholders’ interest in net loss
$
(40.6
)
 
$
(19.5
)
 
$
(25.5
)
 
$
(62.8
)
Net loss per limited partner unit:
 
 
 
 
 
 
 
Basic
$
(0.57
)
 
$
(0.28
)
 
$
(0.36
)
 
$
(0.90
)
Diluted
$
(0.57
)
 
$
(0.28
)
 
$
(0.36
)
 
$
(0.90
)
Weighted-average limited partners’ units outstanding (in thousands):
 
 
 
 
 
 
Basic
71,225

 
69,655

 
71,195

 
69,676

Dilutive units

 

 

 

Diluted
71,225

 
69,655

 
71,195

 
69,676


See accompanying notes.

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CRESTWOOD EQUITY PARTNERS LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(21.5
)
 
$
0.3

 
$
12.6

 
$
(19.1
)
Change in fair value of Suburban Propane Partners, L.P. units
0.2

 
(0.5
)
 
(0.1
)
 
(0.9
)
Comprehensive income (loss)
(21.3
)
 
(0.2
)
 
12.5

 
(20.0
)
Comprehensive income attributable to non-controlling partner
4.0

 
6.3

 
8.0

 
12.4

Comprehensive income (loss) attributable to Crestwood Equity Partners LP
$
(25.3
)
 
$
(6.5
)
 
$
4.5

 
$
(32.4
)

See accompanying notes.


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CRESTWOOD EQUITY PARTNERS LP
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
(in millions)
(unaudited)
 
Preferred
 
Partners
 
 
 
 
 
Units
 
Capital
 
Common Units
 
Subordinated Units
 
Capital
 
Non-Controlling
Partner
 
Total Partners’
Capital
Balance at December 31, 2017
71.3

 
$
612.0

 
70.3

 
0.4

 
$
1,393.5

 
$
175.0

 
$
2,180.5

Cumulative effect of accounting change (Note 2)

 

 

 

 
7.5

 

 
7.5

Distributions to partners

 
(30.0
)
 

 

 
(85.4
)
 
(3.3
)
 
(118.7
)
Unit-based compensation charges

 

 
1.2

 

 
17.5

 

 
17.5

Taxes paid for unit-based compensation vesting

 

 
(0.2
)
 

 
(6.9
)
 

 
(6.9
)
Change in fair value of Suburban Propane Partners, L.P. units

 

 

 

 
(0.1
)
 

 
(0.1
)
Other

 
(0.1
)
 

 

 
(0.3
)
 

 
(0.4
)
Net income (loss)

 
30.1

 

 

 
(25.5
)
 
8.0

 
12.6

Balance at June 30, 2018
71.3

 
$
612.0

 
71.3

 
0.4

 
$
1,300.3

 
$
179.7

 
$
2,092.0


See accompanying notes.


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CRESTWOOD EQUITY PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
12.6

 
$
(19.1
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
89.6

 
97.1

Amortization of debt-related deferred costs
3.6

 
3.5

Unit-based compensation charges
17.5

 
12.7

Loss on long-lived assets, net
24.1

 

Loss on modification/extinguishment of debt

 
37.7

Earnings from unconsolidated affiliates, net, adjusted for cash distributions received
(0.2
)
 
0.5

Deferred income taxes
(0.2
)
 
(0.7
)
Other
0.2

 
(0.4
)
Changes in operating assets and liabilities
12.8

 
1.6

Net cash provided by operating activities
160.0

 
132.9

Investing activities
 
 
 
Purchases of property, plant and equipment
(118.7
)
 
(88.7
)
Investment in unconsolidated affiliates
(6.9
)
 
(18.5
)
Capital distributions from unconsolidated affiliates
23.9

 
21.1

Net proceeds from sale of assets
6.8

 
1.0

Net cash used in investing activities
(94.9
)
 
(85.1
)
Financing activities
 
 
 
Proceeds from the issuance of long-term debt
847.1

 
1,680.4

Payments on long-term debt
(781.0
)
 
(1,630.3
)
Payments on capital leases
(0.7
)
 
(1.3
)
Payments for debt-related deferred costs

 
(1.0
)
Distributions to partners
(85.4
)
 
(83.6
)
Distributions to non-controlling partner
(3.3
)
 
(7.6
)
Distribution to preferred unit holders
(30.0
)
 

Taxes paid for unit-based compensation vesting
(6.9
)
 
(3.6
)
Other
(0.1
)
 
(0.1
)
Net cash used in financing activities
(60.3
)
 
(47.1
)
Net change in cash
4.8

 
0.7

Cash at beginning of period
1.3

 
1.6

Cash at end of period
$
6.1

 
$
2.3

Supplemental schedule of noncash investing and financing activities
 
 
 
Net change to property, plant and equipment through accounts payable and accrued expenses
$
6.0

 
$
(6.9
)

See accompanying notes.

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CRESTWOOD MIDSTREAM PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(in millions)

 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash
$
5.7

 
$
1.0

Accounts receivable, less allowance for doubtful accounts of $0.3 million and $2.4 million at June 30, 2018 and December 31, 2017
324.3

 
442.6

Inventory
73.6

 
68.4

Assets from price risk management activities
6.0

 
7.2

Assets held for sale
54.0

 
3.0

Prepaid expenses and other current assets
8.3

 
7.9

Total current assets
471.9

 
530.1

Property, plant and equipment
2,739.9

 
2,615.3

Less: accumulated depreciation and depletion
668.6

 
607.8

Property, plant and equipment, net
2,071.3

 
2,007.5

Intangible assets
770.3

 
773.3

Less: accumulated amortization
195.7

 
177.6

Intangible assets, net
574.6

 
595.7

Goodwill
138.6

 
147.6

Investments in unconsolidated affiliates
1,156.7

 
1,183.0

Other non-current assets
2.4

 
2.4

Total assets
$
4,415.5

 
$
4,466.3

Liabilities and partners’ capital
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
307.8

 
$
346.8

Accrued expenses and other liabilities
84.2

 
104.7

Liabilities from price risk management activities
23.0

 
48.9

Current portion of long-term debt
0.9

 
0.9

Total current liabilities
415.9

 
501.3

Long-term debt, less current portion
1,561.0

 
1,491.3

Other long-term liabilities
163.7

 
102.6

Deferred income taxes
0.6

 
0.7

Commitments and contingencies (Note 11)
 
 
 
Partners’ capital
2,094.6

 
2,195.4

Interest of non-controlling partner in subsidiary
179.7

 
175.0

Total partners’ capital
2,274.3

 
2,370.4

Total liabilities and partners’ capital
$
4,415.5

 
$
4,466.3



See accompanying notes.


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Table of Contents


CRESTWOOD MIDSTREAM PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
(unaudited)
  
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product revenues:
 
 
 
 
 
 
 
Gathering and processing
$
186.9

 
$
325.3

 
$
459.1

 
$
618.4

Marketing, supply and logistics
562.7

 
421.5

 
1,316.1

 
851.7

 
749.6

 
746.8

 
1,775.2

 
1,470.1

Service revenues:
 
 
 
 
 
 
 
Gathering and processing
68.5

 
79.4

 
136.6

 
154.4

Storage and transportation
5.1

 
8.5

 
9.3

 
18.5

Marketing, supply and logistics
17.0

 
15.2

 
33.8

 
34.5

Related party (Note 12)
0.3

 
0.4

 
0.6

 
0.9

 
90.9

 
103.5

 
180.3

 
208.3

Total revenues
840.5

 
850.3

 
1,955.5

 
1,678.4

 
 
 
 
 
 
 
 
Costs of product/services sold (exclusive of items shown separately below):
 
 
 
 
 
 
 
Product costs
681.8

 
713.7

 
1,620.7

 
1,380.4

Product costs - related party (Note 12)
32.2

 
4.0

 
45.3

 
8.1

Service costs
11.4

 
11.9

 
25.2

 
24.6

Total costs of product/services sold
725.4

 
729.6

 
1,691.2

 
1,413.1

 
 
 
 
 
 
 
 
Operating expenses and other:
 
 
 
 
 
 
 
Operations and maintenance
31.9

 
34.2

 
66.4

 
67.9

General and administrative
22.5

 
22.1

 
45.3

 
47.6

Depreciation, amortization and accretion
47.4

 
51.4

 
95.2

 
102.6

Loss on long-lived assets, net
24.4

 

 
24.1

 

 
126.2

 
107.7

 
231.0

 
218.1

Operating income (loss)
(11.1
)
 
13.0

 
33.3

 
47.2

Earnings from unconsolidated affiliates, net
12.0

 
9.6

 
24.4

 
17.7

Interest and debt expense, net
(24.3
)
 
(24.1
)
 
(48.7
)
 
(50.6
)
Loss on modification/extinguishment of debt

 
(0.4
)
 

 
(37.7
)
Income (loss) before income taxes
(23.4
)
 
(1.9
)
 
9.0

 
(23.4
)
(Provision) benefit for income taxes
(0.1
)
 

 
(0.1
)
 
0.1

Net income (loss)
(23.5
)
 
(1.9
)
 
8.9

 
(23.3
)
Net income attributable to non-controlling partner
4.0

 
6.3

 
8.0

 
12.4

Net income (loss) attributable to Crestwood Midstream Partners LP
$
(27.5
)
 
$
(8.2
)
 
$
0.9

 
$
(35.7
)

See accompanying notes.


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Table of Contents



CRESTWOOD MIDSTREAM PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in millions)
(unaudited)

 
 
Partners
 
Non-Controlling Partner
 
Total Partners’
Capital
Balance at December 31, 2017
 
$
2,195.4

 
$
175.0

 
$
2,370.4

Cumulative effect of accounting change (Note 2)
 
7.5

 

 
7.5

Distributions to partners
 
(120.0
)
 
(3.3
)
 
(123.3
)
Unit-based compensation charges
 
17.5

 

 
17.5

Taxes paid for unit-based compensation vesting
 
(6.9
)
 

 
(6.9
)
Other
 
0.2

 

 
0.2

Net income
 
0.9

 
8.0

 
8.9

Balance at June 30, 2018
 
$
2,094.6

 
$
179.7

 
$
2,274.3


See accompanying notes.


12

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CRESTWOOD MIDSTREAM PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

 
Six Months Ended
 
June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
8.9

 
$
(23.3
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
95.2

 
102.6

Amortization of debt-related deferred costs
3.6

 
3.5

Unit-based compensation charges
17.5

 
12.7

Loss on long-lived assets
24.1

 

Loss on modification/extinguishment of debt

 
37.7

Earnings from unconsolidated affiliates, net, adjusted for cash distributions received
(0.2
)
 
0.5

Deferred income taxes
(0.1
)
 

Other
0.2

 
(0.4
)
Changes in operating assets and liabilities
15.2

 
2.8

Net cash provided by operating activities
164.4

 
136.1

Investing activities
 
 
 
Purchases of property, plant and equipment
(118.7
)
 
(88.7
)
Investment in unconsolidated affiliates
(6.9
)
 
(18.5
)
Capital distributions from unconsolidated affiliates
23.9

 
21.1

Net proceeds from sale of assets
6.8

 
1.0

Net cash used in investing activities
(94.9
)
 
(85.1
)
Financing activities
 
 
 
Proceeds from the issuance of long-term debt
847.1

 
1,680.4

Payments on long-term debt
(781.0
)
 
(1,630.3
)
Payments on capital leases
(0.7
)
 
(1.3
)
Payments for debt-related deferred costs

 
(1.0
)
Distributions to partners
(123.3
)
 
(94.5
)
Taxes paid for unit-based compensation vesting
(6.9
)
 
(3.6
)
Net cash used in financing activities
(64.8
)
 
(50.3
)
Net change in cash
4.7

 
0.7

Cash at beginning of period
1.0

 
1.3

Cash at end of period
$
5.7

 
$
2.0

Supplemental schedule of non-cash investing and financing activities
 
 
 
Net change to property, plant and equipment through accounts payable and accrued expenses
$
6.0

 
$
(6.9
)


See accompanying notes.

13

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CRESTWOOD EQUITY PARTNERS LP
CRESTWOOD MIDSTREAM PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 – Organization and Business Description

Organization

The accompanying notes to the consolidated financial statements apply to Crestwood Equity Partners LP and Crestwood Midstream Partners LP, unless otherwise indicated. References in this report to “we,” “us,” “our,” “ours,” “our company,” the “partnership,” the “Company,” “Crestwood Equity,” “CEQP,” and similar terms refer to either Crestwood Equity Partners LP itself or Crestwood Equity Partners LP and its consolidated subsidiaries, as the context requires. Unless otherwise indicated, references to “Crestwood Midstream” and “CMLP” refer to Crestwood Midstream Partners LP and its consolidated subsidiaries.

The accompanying consolidated financial statements and related notes should be read in conjunction with our 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 26, 2018. The financial information as of June 30, 2018, and for the three and six months ended June 30, 2018 and 2017, is unaudited. The consolidated balance sheets as of December 31, 2017, were derived from the audited balance sheets filed in our 2017 Annual Report on Form 10-K.

Business Description

Crestwood Equity is a publicly-traded (NYSE: CEQP) Delaware limited partnership that develops, acquires, owns or controls, and operates primarily fee-based assets and operations within the energy midstream sector. We provide broad-ranging infrastructure solutions across the value chain to service premier liquids-rich natural gas and crude oil shale plays across the United States. We own and operate a diversified portfolio of crude oil and natural gas gathering, processing, storage and transportation assets that connect fundamental energy supply with energy demand across North America. Crestwood Equity is a holding company and all of its consolidated operating assets are owned by or through its wholly-owned subsidiary, Crestwood Midstream, a Delaware limited partnership.


Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Our consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and include the accounts of all consolidated subsidiaries after the elimination of all intercompany accounts and transactions. Certain amounts in prior periods have been reclassified to conform to the current year presentation, none of which impacted our previously reported net income, earnings per unit or partners’ capital. In management’s opinion, all necessary adjustments to fairly present our results of operations, financial position and cash flows for the periods presented have been made and all such adjustments are of a normal and recurring nature. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC.

Significant Accounting Policies

Effective January 1, 2018, we adopted the following accounting standards. There were no other material changes in our significant accounting policies from those described in our 2017 Annual Report on Form10-K.

Revenue Recognition

We provide gathering, processing, compression, storage, fractionation, and transportation (consisting of pipelines, truck and rail terminals, truck/trailer units and rail cars) services and we sell commodities (including crude oil, natural gas, NGLs and water) under various contracts. These contracts include:

Fixed-fee contracts. Under these contracts, we do not take title to the underlying crude oil, natural gas or NGLs but charge our customers a fixed-fee for the services we provide, which can be a firm reservation charge and/or a charge

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per volume gathered, processed, compressed, stored, loaded and/or transported (which, in certain contracts, can be subject to a minimum level of volumes);
Percentage-of-proceeds service contracts. Under these contracts, we take title to crude oil, natural gas or NGLs after the commodity leaves our gathering and processing facilities. We often market and sell those commodities to third parties after they leave our facilities and we will remit a portion of the sales proceeds to our producers;
Percentage-of-proceeds product contracts. Under these contracts, we take title to crude oil, natural gas or NGLs before the commodity enters our facilities. We market and sell those commodities to third parties and we will remit a portion of the sales proceeds to our producers; and
Purchase and sale contracts. Under these contracts, we purchase crude oil, natural gas or NGLs before the commodity enters our facilities, and we market and sell those commodities to third parties.

On January 1, 2018, we adopted the provisions of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted the standard using the modified retrospective method for all revenue contracts that involve revenue generating activities that occur after January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while amounts prior to January 1, 2018 continue to be reported in accordance with our historic accounting under Revenue Recognition (Topic 605).

Prior to January 1, 2018, we recognized revenues for services and products when all of the following criteria were met under Topic 605: (i) services had been rendered or products delivered or sold; (ii) persuasive evidence of an exchange arrangement existed; (iii) the price for services was fixed or determinable; and (iv) collectability was reasonably assured. We recorded deferred revenue when we received amounts from our customers but had not yet met the criteria listed above. We recognized deferred revenue in our consolidated statement of operations when the criteria had been met and all services had been rendered. At December 31, 2017, we had deferred revenue of approximately $0.6 million, which is reflected in accrued expenses and other liabilities on our consolidated balance sheet.

Beginning January 1, 2018, we recognize revenues for services and products under revenue contracts as our obligations to perform services or deliver/sell products under the contracts are satisfied. A contract’s transaction price is allocated to each performance obligation in the contract and recognized as revenue when, or as, the performance obligation is satisfied. Our fixed-fee contracts and our percentage-of-proceeds service contracts primarily have a single performance obligation to deliver a series of distinct goods or services that are substantially the same and have the same pattern of transfer to our customers. For performance obligations associated with these contracts, we recognize revenues over time utilizing the output method based on the actual volumes of products delivered/sold or services performed, because the single performance obligation is satisfied over time using the same performance measure of progress toward satisfaction of the performance obligation. The transaction price under certain of our fixed-price contracts and percentage-of-proceeds service contracts includes variable consideration that varies primarily based on actual volumes that are delivered under the contracts. Because the variable consideration specifically relates to our efforts to transfer the services and/or products under the contracts, we allocate the variable consideration entirely to the distinct service utilizing the allocation exception guidance under Topic 606, and accordingly recognize the variable consideration as revenues at the time the good or service is transferred to the customer.

Certain of our fixed-fee contracts contain minimum volume features under which the customers must utilize our services to gather, compress or load a specified quantity of crude oil or natural gas or pay a deficiency fee based on the difference between actual volumes and the contractual minimum volume. We recognize revenues from these contracts when actual volumes are gathered, compressed or loaded and the likelihood of a customer exercising its remaining rights to make up the deficient volumes under minimum volume commitments becomes remote.

We recognize revenues at a point in time for performance obligations associated with our percentage-of proceeds product contracts and purchase and sale contracts, and these revenues are recognized because control of the underlying product is transferred to the customer when the distinct good is provided to the customer.

The evaluation of when performance obligations have been satisfied and the transaction price that is allocated to our performance obligations requires significant judgment and assumptions, including our evaluation of the timing of when control of the underlying good or service has transferred to our customers and the relative standalone selling price of goods and services provided to customers under contracts with multiple performance obligations. Actual results can significantly vary from those judgments and assumptions. We did not have any material contracts with multiple performance obligations or under which we receive material amounts of non-cash consideration during the six months ended June 30, 2018.


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The following table summarizes the transaction price allocated to our remaining performance obligations under certain contracts that have not been recognized as of June 30, 2018 (in millions):
Remainder of 2018
$
32.9

2019
25.4

2020
20.7

2021
8.7

2022
7.3

Thereafter
10.5

Total
$
105.5


Our remaining performance obligations presented in the table above exclude estimates of variable rate escalation clauses in our contracts with customers, and is generally limited to fixed-fee and percentage-of-proceeds service contracts which have fixed pricing and minimum volume terms and conditions. Our remaining performance obligations generally exclude, based on the following practical expedients that we elected to apply, disclosures for (i) variable consideration allocated to a wholly-unsatisfied promise to transfer a distinct service that forms part of the identified single performance obligation; (ii) unsatisfied performance obligations where the contract term is one year or less; and (iii) contracts for which we recognize revenues as amounts are invoiced.

Contract Assets and Contract Liabilities. Amounts due from our customers under our revenue contracts are typically billed as the service is being provided or on a weekly, bi-weekly or monthly basis and are due within 30 days of billing. Under certain of our contracts, we recognize revenues in excess of billings which we present as contract assets on our consolidated balance sheets.

Under certain contracts, we may be entitled to receive payments in advance of satisfying our performance obligations under the contract. We recognize a liability for these payments in excess of revenue recognized and present it as deferred revenue or contract liabilities on our consolidated balance sheets. Our deferred revenue primarily relates to:

Capital Reimbursements. Certain contracts in our G&P segment require that our customers reimburse us for capital expenditures related to the construction of long-lived assets utilized to provide services to them under the revenue contracts. Because we consider these amounts as consideration from customers associated with ongoing services to be provided to customers, we defer these upfront payments in deferred revenue and recognize the amounts in revenue over the life of the associated revenue contract as the performance obligations are satisfied under the contract. On January 1, 2018, we recorded an $87.6 million increase to our property, plant and equipment, net, a $69.1 million increase to our deferred revenue liability and an $18.5 million increase to partners’ capital as a result of applying the cumulative impact of adopting the new standard on these types of contracts.

Contracts with Increasing (Decreasing) Rates per Unit. Certain contracts in our G&P, S&T and MS&L segments have fixed rates per volume that increase and/or decrease over the life of the contract once certain time periods or thresholds are met. We record revenues on these contracts ratably per unit over the life of the contract based on the remaining performance obligations to be performed, which can result in the deferral of revenue for the difference between the consideration received and the ratable revenue recognized. On January 1, 2018, we recorded a $1.5 million increase to our deferred revenue liability and a corresponding decrease to partners’ capital as a result of applying the cumulative impact of adopting the new standard on these types of contracts.

Our contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Our receivables related to our Topic 606 revenue contracts totaled $312.4 million for both CEQP and CMLP at June 30, 2018, and are included in accounts receivable on our consolidated balance sheet. Our contract assets are included in other non-current assets on our consolidated balance sheet. The majority of our deferred revenues are included in other long-term liabilities on our consolidated balance sheet and are classified as non-current, for which the majority of revenue is expected to be recognized as the performance obligations under the related revenue contracts are satisfied over the next 14 years.


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The following table summarizes the opening and closing balances of our contract assets and contract liabilities (in millions):


 
Balance at
January 1, 2018
 
Balance at
June 30, 2018
Contract Assets (Non-current)
 
$
1.1

 
$
1.0

Contract Liabilities (Current)(1)
 
12.2

 
12.4

Contract Liabilities (Non-current)(2)
 
60.6

 
62.9


(1)
Our current contract liabilities primarily consist of current deferred revenues and are included in accrued expenses and other liabilities on our consolidated balance sheets. During the three and six months ended June 30, 2018, we recognized revenues of approximately $3.1 million and $6.2 million that were previously included in deferred revenues (current) at January 1, 2018.
(2)
Our non-current contract liabilities primarily consist of non-current deferred revenues and are included in other long-term liabilities on our consolidated balance sheets.

Impact of financial statement line items. For contracts that were modified prior to January 1, 2018, we have not retrospectively restated the contract for those modifications and instead we have reflected the aggregate effect of those modifications when identifying satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied obligations. The impact of applying this transition practical expedient was not material to our financial statements. The adoption of Topic 606 had the following impact on CEQP’s and CMLP’s consolidated income statements and balance sheets (in millions):

Crestwood Equity
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
As Reported under Topic 606
 
Prior to Adoption of Topic 606
 
Increase (Decrease)
 
As Reported under Topic 606
 
Prior to Adoption of Topic 606
 
Increase (Decrease)
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Product revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Gathering and processing(1)
 
$
186.9

 
$
437.3

 
$
(250.4
)
 
$
459.1

 
$
866.9

 
$
(407.8
)
Service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Gathering and processing(1)(2)
 
68.5

 
78.4

 
(9.9
)
 
136.6

 
157.9

 
(21.3
)
Marketing, supply and logistics(3)
 
17.0

 
16.8

 
0.2

 
33.8

 
33.3

 
0.5

Costs of product/services sold:
 
 
 
 
 
 
 
 
 
 
 
 
Product costs(1)
 
681.8

 
945.0

 
(263.2
)
 
1,620.7

 
2,055.5

 
(434.8
)
Depreciation, amortization and accretion(2)
 
44.5

 
43.3

 
1.2

 
89.6

 
87.1

 
2.5

Earnings from unconsolidated affiliates, net(4)
 
12.0

 
15.0

 
(3.0
)
 
24.4

 
29.4

 
(5.0
)
Net income (loss)
 
(21.5
)
 
(20.4
)
 
(1.1
)
 
12.6

 
13.9

 
(1.3
)

 
June 30, 2018
 
 
As Reported under Topic 606
 
Prior to Adoption of Topic 606
 
Increase (Decrease)
Balance Sheet
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Property, plant and equipment(2)
 
$
2,409.8

 
$
2,300.5

 
$
109.3

Accumulated depreciation and depletion(2)
 
518.1

 
503.4

 
14.7

Investments in unconsolidated affiliates(4)
 
1,156.7

 
1,171.2

 
(14.5
)
Liabilities:
 
 
 
 
 
 
Accrued expenses and other liabilities(2)(3)
 
85.2

 
73.5

 
11.7

Other long-term liabilities(2)(3)
 
166.2

 
104.0

 
62.2

Partners’ capital:
 
 
 
 
 
 
Crestwood Equity Partners LP partners’ capital(2)(3)(4)
 
1,300.3

 
1,294.1

 
6.2




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Table of Contents


Crestwood Midstream
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
As Reported under Topic 606
 
Prior to Adoption of Topic 606
 
Increase (Decrease)
 
As Reported under Topic 606
 
Prior to Adoption of Topic 606
 
Increase (Decrease)
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
Product revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Gathering and processing(1)
 
$
186.9

 
$
437.3

 
$
(250.4
)
 
$
459.1

 
$
866.9

 
$
(407.8
)
Service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Gathering and processing(1)(2)
 
68.5

 
78.4

 
(9.9
)
 
136.6

 
157.9

 
(21.3
)
Marketing, supply and logistics(3)
 
17.0

 
16.8

 
0.2

 
33.8

 
33.3

 
0.5

Costs of product/services sold:
 
 
 
 
 
 
 
 
 
 
 
 
Product costs(1)
 
681.8

 
945.0

 
(263.2
)
 
1,620.7

 
2,055.5

 
(434.8
)
Depreciation, amortization and accretion(2)
 
47.4

 
46.2

 
1.2

 
95.2

 
92.7

 
2.5

Earnings from unconsolidated affiliates, net(4)
 
12.0

 
15.0

 
(3.0
)
 
24.4

 
29.4

 
(5.0
)
Net income (loss)
 
(23.5
)
 
(22.4
)
 
(1.1
)
 
8.9

 
10.2

 
(1.3
)

 
June 30, 2018
 
 
As Reported under Topic 606
 
Prior to Adoption of Topic 606
 
Increase (Decrease)
Balance Sheet
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Property, plant and equipment(2)
 
$
2,739.9

 
$
2,630.6

 
$
109.3

Accumulated depreciation and depletion(2)
 
668.6

 
653.9

 
14.7

Investments in unconsolidated affiliates(4)
 
1,156.7

 
1,171.2

 
(14.5
)
Liabilities:
 
 
 
 
 
 
Accrued expenses and other liabilities(2)(3)
 
84.2

 
72.5

 
11.7

Other long-term liabilities(2)(3)
 
163.7

 
101.5

 
62.2

Partners’ capital(2)(3)(4)
 
2,094.6

 
2,088.4

 
6.2


(1)
On January 1, 2018, we began classifying product and service revenues as a reduction of costs of product sold on certain of our gathering and processing contracts where we do not obtain control of the customers’ product prior to it entering our facilities.
(2)
On January 1, 2018, we began recording proceeds received from customers for reimbursable construction as deferred revenue instead of as reductions of property, plant and equipment.
(3)
For contracts that have fixed rates per volume that increase and/or decrease over the life of the contract once certain time periods or thresholds have been met, on January 1, 2018, we began recording revenues on those contracts ratably per unit over the life of the contract based on the remaining performance obligations to be performed.
(4)
On January 1, 2018, Jackalope Gas Gathering Services, L.L.C. (Jackalope) adopted the provisions of Topic 606, and we recorded a $9.5 million decrease to our equity method investment and a corresponding decrease to our partners’ capital to reflect our proportionate share of the cumulative effect of accounting change recorded by the equity investment related to the new standard. In addition, our earnings from unconsolidated affiliates decreased by approximately $3.0 million and $5.0 million during the three and six months ended June 30, 2018 to reflect our proportionate share of the ongoing impact of the new standard on Jackalope’s revenues. The adoption of Topic 606 was not material to our other equity method investments.

Cash Flows

Effective January 1, 2018, we adopted the provisions of ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.


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Table of Contents


New Accounting Pronouncements Issued But Not Yet Adopted

As of June 30, 2018, the following accounting standard had not yet been adopted by us:

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842), which revises the accounting for leases by requiring certain leases to be recognized as assets and liabilities on the balance sheet, and requiring companies to disclose additional information about their leasing arrangements. Companies are required to adopt the provisions of the standard using the modified retrospective transition method. We expect to adopt the provisions of this standard effective January 1, 2019. We are in the process of implementing appropriate changes to our processes, systems and controls to support the accounting and disclosure requirements of the new standard and are currently evaluating the impact that this standard will have on our consolidated financial statements.


Note 3 – Assets Held for Sale

In June 2018, we entered into an agreement with a third-party to sell our West Coast facilities included in our Marketing, Supply and Logistics segment, which are further described in our 2017 Annual Report on Form 10-K. We recorded a $54.0 million current asset held for sale at June 30, 2018 related to the fair value of the facilities to be sold, which is a Level 3 fair value measurement based on the sales price plus working capital adjustments in the sales agreement. We recorded a loss on long-lived assets of approximately $24.5 million (including the goodwill impairment discussed further below) during the three months ended June 30, 2018 based on the difference between the carrying value of West Coast’s current assets and liabilities, goodwill and its $61.6 million of property, plant and equipment, net and the fair value of the assets held for sale at June 30, 2018. The sale is contingent upon customary approvals and satisfaction of certain other closing conditions, which we believe is probable at June 30, 2018. We expect to close the sale during the third quarter of 2018.

Our Marketing, Supply and Logistics segment had approximately $101.7 million of goodwill associated with it at December 31, 2017. On January 1, 2018, we combined four of the reporting units included in the Marketing, Supply and Logistics segment into one NGL Marketing and Logistics reporting unit for the purpose of evaluating goodwill for impairment on an ongoing basis. We combined these reporting units based on a strategic shift in the way in which we manage, operate and report our NGL operations as an integrated platform instead of as four individual stand-alone operations. As a result, we attributed approximately $9.0 million of the goodwill associated with our NGL Marketing and Logistics reporting unit to our West Coast facilities to be sold as of June 30, 2018, and this goodwill was fully impaired in conjunction with the reclassification of the West Coast net assets to assets held for sale during the three months ended June 30, 2018.


Note 4 – Certain Balance Sheet Information

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in millions):

 
CEQP
 
CMLP
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Accrued expenses
$
35.7

 
$
56.6

 
$
34.7

 
$
55.5

Accrued property taxes
6.0

 
4.8

 
6.0

 
4.8

Income tax payable
0.2

 
0.3

 
0.2

 
0.3

Interest payable
20.5

 
20.3

 
20.5

 
20.3

Accrued additions to property, plant and equipment
9.2

 
22.3

 
9.2

 
22.2

Capital leases
1.2

 
1.0

 
1.2

 
1.0

Deferred revenue
12.4

 
0.6

 
12.4

 
0.6

Total accrued expenses and other liabilities
$
85.2

 
$
105.9

 
$
84.2

 
$
104.7




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Note 5 - Investments in Unconsolidated Affiliates

Variable Interest Entity

Crestwood Permian Basin Holdings LLC (Crestwood Permian) is a joint venture owned by Crestwood Infrastructure Holdings LLC (Crestwood Infrastructure), our wholly-owned subsidiary, and an affiliate of First Reserve Management, L.P. (First Reserve). We manage and account for our 50% ownership interest in Crestwood Permian, which is a variable interest entity, under the equity method of accounting as we exercise significant influence, but do not control Crestwood Permian and we are not its primary beneficiary due to First Reserve’s rights to exercise control over the entity.
 
Net Investments and Earnings

Our net investments in and earnings from our unconsolidated affiliates are as follows (in millions):
 
Investment
 
Earnings (Loss) from Unconsolidated Affiliates
 
June 30,
 
December 31,
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Stagecoach Gas Services LLC(1)
$
840.0

 
$
849.8

 
$
7.0

 
$
6.6

 
$
12.7

 
$
12.6

Jackalope Gas Gathering Services, L.L.C.(2)(6)
174.0

 
184.9

 
3.8

 
2.2

 
6.8

 
4.0

Crestwood Permian Basin Holdings LLC(3)
97.2

 
102.0

 
0.7

 
(0.4
)
 
3.4

 
(0.6
)
Tres Palacios Holdings LLC(4)
36.8

 
37.8

 

 
0.7

 
0.4

 
1.2

Powder River Basin Industrial Complex, LLC(5)
8.7

 
8.5

 
0.5

 
0.5

 
1.1

 
0.5

Total
$
1,156.7

 
$
1,183.0

 
$
12.0

 
$
9.6

 
$
24.4

 
$
17.7

(1)
As of June 30, 2018, our equity in the underlying net assets of Stagecoach Gas exceeded our investment balance by approximately $51.4 million. This excess amount is entirely attributable to goodwill and, as such, is not subject to amortization. Our Stagecoach Gas investment is included in our storage and transportation segment.
(2)
As of June 30, 2018, our equity in the underlying net assets of Jackalope exceeded our investment balance by approximately $0.7 million. We amortize this amount over the life of Jackalope’s gathering agreement with Chesapeake Energy Corporation (Chesapeake), and we reflect the amortization as an increase in our earnings from unconsolidated affiliates. Our Jackalope investment is included in our gathering and processing segment.
(3)
In June 2017, we contributed to Crestwood Permian 100% of the equity interest of Crestwood New Mexico Pipeline LLC (Crestwood New Mexico). This contribution was treated as a transaction between entities under common control (because of our relationship with First Reserve) and the accounting standards related to such transactions required Crestwood Permian to record the assets and liabilities of Crestwood New Mexico at our historical book value. The difference between our equity in Crestwood Permian’s net assets and our investment balance is not subject to amortization. Our Crestwood Permian investment is included in our gathering and processing segment.
(4)
As of June 30, 2018, our equity in the underlying net assets of Tres Palacios Holdings LLC (Tres Holdings) exceeded our investment balance by approximately $25.9 million. We amortize this amount over the life of the Tres Palacios Gas Storage LLC sublease agreement, and we reflect the amortization as an increase in our earnings from unconsolidated affiliates. Our Tres Holdings investment is included in our storage and transportation segment.
(5)
As of June 30, 2018, our equity in the underlying net assets of Powder River Basin Industrial Complex, LLC (PRBIC) exceeded our investment balance by approximately $6.1 million. We amortize this amount over the life of PRBIC’s property, plant and equipment and its agreement with Chesapeake, and we reflect the amortization as an increase in our earnings from unconsolidated affiliates. Our PRBIC investment is included in our storage and transportation segment.
(6)
On January 1, 2018, Jackalope adopted the provisions of Topic 606, and we recorded a $9.5 million decrease to our equity method investment and a corresponding decrease to our partners’ capital to reflect our proportionate share of the cumulative effect of accounting change recorded by the equity investment related to the new standard. In addition, our earnings from unconsolidated affiliates decreased by approximately $3.0 million and $5.0 million during the three and six months ended June 30, 2018 to reflect our proportionate share of Jackalope’s deferred revenues related to the new standard.


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Table of Contents


Summarized Financial Information of Unconsolidated Affiliates

Below is the summarized operating results for our significant unconsolidated affiliates (in millions; amounts represent 100% of unconsolidated affiliate information):
 
Six Months Ended June 30,
 
2018
 
2017
 
Operating Revenues
 
Operating Expenses
 
Net Income
 
Operating Revenues
 
Operating Expenses
 
Net Income
Stagecoach Gas
$
85.5

 
$
39.9

 
$
45.6

 
$
84.0

 
$
38.0

 
$
46.1

Other(1)
92.9

 
76.8

 
18.9

 
76.5

 
63.3

 
13.1

Total
$
178.4

 
$
116.7

 
$
64.5

 
$
160.5

 
$
101.3

 
$
59.2


(1)
Includes our Jackalope, Crestwood Permian, Tres Holdings and PRBIC equity investments. We amortize the excess basis in certain of our equity investments as an increase in our earnings from unconsolidated affiliates. We recorded amortization of the excess basis in our Jackalope equity investment of less than $0.1 million for both the six months ended June 30, 2018 and 2017. We recorded amortization of the excess basis in our Tres Holdings equity investment of approximately $0.6 million for both the six months ended June 30, 2018 and 2017. We recorded amortization of the excess basis in our PRBIC equity investment of approximately $0.3 million for both the six months ended June 30, 2018 and 2017.

Distributions and Contributions

The following table summarizes our distributions and contributions from our unconsolidated affiliates (in millions):
 
 
Distributions(1)
 
Contributions
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Stagecoach Gas
 
$
22.5

 
$
23.7

 
$

 
$

Jackalope
 
15.0

 
12.3

 
6.8

 
1.5

Crestwood Permian(2)
 
8.3

 

 
0.1

 
86.4

Tres Holdings
 
1.4

 
2.7

 

 

PRBIC
 
0.9

 
0.6

 

 

Total
 
$
48.1

 
$
39.3

 
$
6.9

 
$
87.9


(1)
In July 2018, we received cash distributions from Stagecoach Gas, Crestwood Permian, Tres Holdings and PRBIC of approximately $12.2 million, $2.3 million, $2.5 million and $0.5 million, respectively. In July 2018, we made a cash contribution of approximately $2.5 million to Tres Holdings.

(2)
On June 21, 2017, we contributed to Crestwood Permian 100% of the equity interest of Crestwood New Mexico at our historical book value of approximately $69.4 million. This contribution was treated as a non-cash transaction between entities under common control.

Other

Contingent Consideration. Pursuant to the Stagecoach Gas limited liability company agreement, we may be required to make payments of up to $57 million to Con Edison Gas Pipeline and Storage Northeast, LLC after December 31, 2020 if certain criteria are not met by Stagecoach Gas by December 31, 2020, including achieving certain performance targets on growth capital projects. These growth capital projects depend on the construction of other third-party expansion projects, and those third-party projects have experienced regulatory and other delays that have caused Stagecoach Gas to delay its growth capital projects. Although Stagecoach Gas anticipates that these growth capital projects will be constructed in the future, it does not expect that these projects will produce meaningful operating results prior to December 31, 2020. As a result, at June 30, 2018 and December 31, 2017, we have recorded a liability of $57 million for this obligation, which in reflected in other long-term liabilities on our consolidated balance sheets.

Guarantee. Crestwood Permian owns a 50% equity interest in Crestwood Permian Basin LLC (Crestwood Permian Basin) and Shell Midstream Partners L.P. (Shell Midstream), a subsidiary of Royal Dutch Shell plc, owns the remaining 50% equity interest in Crestwood Permian Basin. Crestwood Permian Basin owns the Nautilus gathering system. CEQP issued a guarantee in conjunction with the Crestwood Permian Basin gas gathering agreement with SWEPI LP, a subsidiary of Royal Dutch Shell plc, under which CEQP has agreed to fund 100% of the costs to build the Nautilus gathering system (which is currently estimated to cost $180 million, of which approximately $112.3 million has been spent through June 30, 2018) if Crestwood Permian fails to do so. We do not believe this guarantee is probable of resulting in future losses based on our assessment of the nature of the guarantee, the financial condition of the guaranteed party and the period of time that the guarantee has been

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outstanding, and as a result, we have not recorded a liability on our consolidated balance sheets at June 30, 2018 and December 31, 2017.


Note 6 – Risk Management

We are exposed to certain market risks related to our ongoing business operations. These risks include exposure to changing commodity prices. We utilize derivative instruments to manage our exposure to fluctuations in commodity prices, which is discussed below. Additional information related to our derivatives is discussed in Note 7.

Commodity Derivative Instruments and Price Risk Management

Risk Management Activities

We sell NGLs and crude oil to energy related businesses and may use a variety of financial and other instruments including forward contracts involving physical delivery of NGLs, heating oil and crude oil. We periodically enter into offsetting positions to economically hedge against the exposure our customer contracts create. Certain of these contracts and positions are derivative instruments. We do not designate any of our commodity-based derivatives as hedging instruments for accounting purposes. Our commodity-based derivatives are reflected at fair value in the consolidated balance sheets, and changes in the fair value of these derivatives that impact the consolidated statements of operations are reflected in costs of product/services sold. Our commodity-based derivatives that are settled with physical commodity are reflected as an increase to product revenues, and the commodity inventory that is utilized to satisfy those physical obligations is reflected as an increase to cost of product sold in our consolidated statements of operations. During the three and six months ended June 30, 2018, the impact to our consolidated statements of operations related to our commodity-based derivatives reflected in costs of product/services sold was a loss of $6.4 million and a gain of $1.4 million, and reflected in operating revenues was a $33.0 million and $130.8 million increase in product revenues. During the three and six months ended June 30, 2017, the impact to our consolidated statements of operations related to our commodity-based derivatives reflected in costs of product/services sold was a gain of $6.9 million and $1.5 million, and reflected in operating revenues was a $28.0 million and $73.1 million increase in product revenues. We attempt to balance our contractual portfolio in terms of notional amounts and timing of performance and delivery obligations. This balance in the contractual portfolio significantly reduces the volatility in costs of product/services sold related to these instruments.

Commodity Price and Credit Risk

Notional Amounts and Terms

The notional amounts and terms of our derivative financial instruments include the following:
 
June 30, 2018
 
December 31, 2017
 
Fixed Price
Payor
 
Fixed Price
Receiver
 
Fixed Price
Payor
 
Fixed Price
Receiver
Propane, crude and heating oil (MMBbls)
11.6

 
13.8

 
15.3

 
17.5

Natural gas (MMcf)
870

 
820

 
780

 
660


Notional amounts reflect the volume of transactions, but do not represent the amounts exchanged by the parties to the financial instruments. Accordingly, notional amounts do not reflect our monetary exposure to market or credit risks.

All contracts subject to price risk had a maturity of 36 months or less; however, 91% of the contracted volumes will be delivered or settled within 12 months.


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Credit Risk

Inherent in our contractual portfolio are certain credit risks. Credit risk is the risk of loss from nonperformance by suppliers, customers or financial counterparties to a contract. We take an active role in managing credit risk and have established control procedures, which are reviewed on an ongoing basis. We attempt to minimize credit risk exposure through credit policies and periodic monitoring procedures as well as through customer deposits, letters of credit and entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate. The counterparties associated with our price risk management activities are energy marketers and propane retailers, resellers and dealers.

Certain of our derivative instruments have credit limits that require us to post collateral. The amount of collateral required to be posted is a function of the net liability position of the derivative as well as our established credit limit with the respective counterparty. If our credit rating were to change, the counterparties could require us to post additional collateral. The amount of additional collateral that would be required to be posted would vary depending on the extent of change in our credit rating as well as the requirements of the individual counterparty. The aggregate fair value of all commodity derivative instruments with credit-risk-related contingent features that were in a liability position at June 30, 2018 and December 31, 2017 was $13.5 million and $28.9 million. At both June 30, 2018 and December 31, 2017, we posted less than $0.1 million of collateral for our commodity derivative instruments with credit-risk-related contingent features. In addition, we have margin requirements with a New York Mercantile Exchange (NYMEX) broker related to our net asset or liability position with such broker. At June 30, 2018 and December 31, 2017, we had a NYMEX related net derivative asset position of $24.8 million and $27.2 million, for which we posted $4.9 million and $5.6 million of cash collateral in the normal course of business. At June 30, 2018 and December 31, 2017, we also received collateral of $2.4 million and $3.7 million in the normal course of business. All collateral amounts have been netted against the asset or liability with the respective counterparty and are reflected in our consolidated balance sheets as assets and liabilities from price risk management activities.


Note 7 – Fair Value Measurements

The accounting standard for fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and US government treasury securities.

Level 2—Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as over the counter (OTC) forwards, options and physical exchanges.

Level 3—Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Cash, Accounts Receivable and Accounts Payable

As of June 30, 2018 and December 31, 2017, the carrying amounts of cash, accounts receivable and accounts payable approximate fair value based on the short-term nature of these instruments.


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Credit Facility

The fair value of the amounts outstanding under our CMLP credit facility approximates the carrying amounts as of June 30, 2018 and December 31, 2017, due primarily to the variable nature of the interest rate of the instrument, which is considered a Level 2 fair value measurement.

Senior Notes

We estimate the fair value of our senior notes primarily based on quoted market prices for the same or similar issuances (representing a Level 2 fair value measurement). The following table reflects the carrying amount (reduced for deferred financing costs associated with the respective notes) and fair value of our senior notes (in millions):
 
June 30, 2018
 
December 31, 2017
 
Carrying
 Amount
 
Fair
Value
 
Carrying
 Amount
 
Fair
Value
2023 Senior Notes
$
692.9

 
$
713.8

 
$
692.1

 
$
728.8

2025 Senior Notes
$
492.8

 
$
500.4

 
$
492.3

 
$
517.9


Financial Assets and Liabilities

As of June 30, 2018 and December 31, 2017, we held certain assets and liabilities that are required to be measured at fair value on a recurring basis, which include our derivative instruments related to heating oil, crude oil, and NGLs. Our derivative instruments consist of forwards, swaps, futures, physical exchanges and options.

Our derivative instruments that are traded on the NYMEX have been categorized as Level 1.

Our derivative instruments also include OTC contracts, which are not traded on a public exchange. The fair values of these derivative instruments are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. These instruments have been categorized as Level 2.

Our OTC options are valued based on the Black Scholes option pricing model that considers time value and volatility of the underlying commodity. The inputs utilized in the model are based on publicly available information as well as broker quotes. These options have been categorized as Level 2.

Our financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


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The following tables set forth by level within the fair value hierarchy, our financial instruments that were accounted for at fair value on a recurring basis at June 30, 2018 and December 31, 2017 (in millions):
 
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Gross Fair Value
 
Contract Netting(1)
 
Collateral/Margin Received or Paid
 
Fair Value
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets from price risk management
$
5.1

 
$
71.2

 
$

 
$
76.3

 
$
(50.2
)
 
$
(20.1
)
 
$
6.0

Suburban Propane Partners, L.P. units(2)
3.4

 

 

 
3.4

 

 

 
3.4

Total assets at fair value
$
8.5

 
$
71.2

 
$

 
$
79.7

 
$
(50.2
)
 
$
(20.1
)
 
$
9.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities from price risk management
$
5.8

 
$
65.3

 
$

 
$
71.1

 
$
(50.2
)
 
$
2.1

 
$
23.0

Total liabilities at fair value
$
5.8

 
$
65.3

 
$

 
$