Variable Interest Entity Arrangements

9 Months Ended

Sep. 30, 2020

Variable Interest Entity Arrangements [Abstract]

VARIABLE INTEREST ENTITY ARRANGEMENTS

On April 3, 2018 we sold 50% of the ownership interest in Superior. The 50% interest in Superior we sold was acquired by SP Investor Holdings, LLC, a holding company jointly owned by OPTrust and funds managed and/or advised by Partners Group, a global private markets investment manager. Superior will be governed and managed under the Amended and Restated Limited Liability Company Agreement and a Management Services Agreement (MSA). The MSA is between our affiliate, SPC Midstream Operating, L.L.C. (Operator) and Superior. The Operator is a wholly owned subsidiary of Unit. Under the guidance in ASC 810, Consolidation, we have determined that Superior is a VIE. The two variable interests applicable to Unit include the 50% equity investment in Superior and the MSA. The MSA gives us the power to direct the activities that most significantly affect Superior's operating performance. The MSA is a separate variable interest. Under the MSA, Unit has the power to direct Superior’s most significant activities; reciprocally the equity investors lack the power to direct the activities that most affect the entity’s economic performance. Because of this, Unit is considered the primary beneficiary. There have been no changes to the primary beneficiary during the quarter ended September 30, 2020.

As the primary beneficiary of this VIE, we consolidate in our financial statements the financial position, results of operations, and cash flows of this VIE, and all intercompany balances and transactions between us and the VIE are eliminated in our consolidated financial statements. Cash distributions of income, net of agreed on expenses, and estimated expenses are allocated to the equity owners as specified in the relevant agreements. With consolidation of the VIE, the assets and liabilities of Superior were subject to fair value adjustments in accordance with ASC 852, Reorganizations. Therefore, the periods presented below are not comparative as the amounts presented as of September 30, 2020 reflect the adjustments from Note 3 – Fresh Start Accounting.

The Agreement specifies how future distributions are to be allocated among the Members. Future distributions may be from available cash or made in conjunction with a sale event (both as defined in the Agreement). In certain circumstances, future distributions could result in Unit receiving distributions that are disproportionately lower than its ownership percentage. Circumstances that could result in Unit receiving less than a proportionate share of future distributions include, but may not be limited to, Unit does not fulfill the drilling commitment described in Note 16 – Commitments and Contingencies or a cumulative return to SP Investor Holdings, LLC of less than the 7% Liquidation IRR Hurdle provided for SP Investor Holdings, LLC in the Agreement. Generally, 7% Liquidation IRR Hurdle calculation requires cumulative distributions to SP Investor Holdings, LLC in excess of its original $300.0 million investment sufficient to provide SP Investor Holdings, LLC a 7% IRR on its capital contributions to Superior before any liquidation distribution is made to Unit. After the fifth anniversary of the effective date of the sale, either owner may force a sale of Superior to a third-party or a liquidation of Superior's assets.

We now record our share of earnings and losses from Superior using the HLBV method of accounting. The HLBV is a balance-sheet approach that calculates the amount we would have received if Superior were liquidated at book value at the end of each measurement period. The change in our allocated amount during the period is recognized in our condensed consolidated statements of operations. On the sale or liquidation of Superior, distributions would occur in the order and priority specified in the relevant agreements.

As the Operator, we provide services, like operations and maintenance support, accounting, legal, and human resources to Superior for a monthly service fee of $260,560. Superior's creditors have no recourse to our general credit. Superior's credit agreement is not guaranteed by Unit. The obligations under Superior's credit agreement are secured by, among other things, mortgage liens on certain of Superior’s processing plants and gathering systems.

The carrying value of Superior's assets and liabilities, after eliminations of any intercompany transactions and balances, in the consolidated balance sheets is included below. The assets and liabilities of Superior are reflected at estimated fair value at September 30, 2020 as part of the company’s application of fresh start accounting as described in Note 3 - Fresh Start Accounting. The asset and liabilities at December 31, 2019 reflect historical basis prior to any fresh start accounting adjustments.


	September 30, 2020		December 31, 2019
	(In thousands)

Current assets:
Cash and cash equivalents	$	15,320	$	—
Accounts receivable	23,562		21,073
Prepaid expenses and other	7,034		7,686
Total current assets	45,916		28,759
Property and equipment:
Gas gathering and processing equipment	250,608		824,699
Transportation equipment	1,888		3,390
	252,496		828,089
Less accumulated depreciation, depletion, amortization, and impairment	2,658		407,144
Net property and equipment	249,838		420,945
Right of use asset	3,259		3,948
Other assets	3,928		9,442
Total assets	$	302,941	$	463,094

Current liabilities:
Accounts payable	$	11,894	$	18,511
Accrued liabilities	5,849		4,198
Current operating lease liability	1,752		2,407
Current portion of other long-term liabilities	7,051		7,060
Total current liabilities	26,546		32,176
Long-term debt	12,000		16,500
Operating lease liability	1,457		1,404
Other long-term liabilities	2,119		8,126
Total liabilities	$	42,122	$	58,206