Variable Interest Entities

9 Months Ended

Sep. 30, 2016

Variable Interest Entities

Variable Interest Entities

17.  VARIABLE INTEREST ENTITIES

During the third quarter of 2016, the Partnership adopted ASU 2015-02, “Consolidation—Amendments to the Consolidation Analysis,” which introduces a separate analysis for determining if limited partnerships and similar entities are variable interest entities (“VIEs”) and clarifies the steps a reporting entity would have to take to determine whether the voting rights of stockholders in a corporation or similar entity are substantive.

As noted above in Note 10, “Investments,” the Partnership purchased a 50% membership interest in Carnero Gathering from SN Midstream for an initial payment of approximately $37.0 million and the assumption of remaining capital commitments to Carnero Gathering, estimated at approximately $7.4 million as of the date of the acquisition. The Partnership determined that the Carnero Gathering joint venture is more similar to a limited partnership than a corporation. Under the revised guidance of ASU 2015-02, a limited partnership or similar entity with equity at risk will not be a VIE if they are able to exercise kick-out rights over the general partner(s) or they are able to exercise substantive participating rights. We concluded that the Carnero Gathering joint venture is a VIE under the revised guidance because we cannot remove Targa as operator and we do not have substantive participating rights. In addition, Targa has the discretion to direct activities of the VIE regarding the risks associated with price, operations, and capital investment which have the most significant impact on the VIE’s economic performance.

The Partnership’s investment in Carnero Gathering represents a VIE that could expose the Partnership to losses. The amount of losses the Partnership could be exposed to from the Carnero Gathering joint venture is limited to the capital investment of approximately $49 million.

As of September 30, 2016, the Partnership had invested approximately $40 million in Carnero Gathering and the Partnership had issued a letter of credit for the remaining commitment to invest approximately $7.4 million, which compares to the remaining capital commitments of approximately $4.4 million as of September 30, 2016. As of September 30, 2016, no debt has been incurred by Carnero Gathering. We have included this VIE in the “Other Liabilities” long-term asset line on the balance sheet.

Below is a tabular comparison of the carrying amounts of the assets and liabilities of the VIE and the Partnership’s maximum exposure to loss as of September 30, 2016 and December 31, 2015 (in thousands):

	September 30,		December 31,
	2016		2015
Capital investments	$	40,002	$	—
Earnings in equity investments		1,135		—
Distributions received		(750)		—
Estimated earnout accrued		4,270		—
Equity in equity investments	$	44,657	$	—
	September 30,		December 31,
	2016		2015
Equity in equity investments	$	44,657	$	—
Guarantees of capital investments		4,377		—
Maximum exposure to loss	$	49,034	$	—