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Acquisition of Oiltanking Partners, L.P. | 12 Months Ended
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Dec. 31, 2014
Business Combinations [Abstract] |
Business Combinations | Note 10. Acquisition of Oiltanking Partners, L.P. Step 1 of the Oiltanking acquisition. On October 1, 2014, we acquired Oiltanking GP and the related incentive distribution rights, 15,899,802 common units and 38,899,802 subordinated units of Oiltanking from OTA. We paid total consideration of approximately $4.4 billion to OTA comprised of $2.21 billion in cash and 54,807,352 Enterprise common units for these ownership interests and rights. We also paid $228.3 million to assume the outstanding loans, including related accrued interest, owed by Oiltanking or its subsidiaries to OTA. Collectively, these transactions are referred to as "Step 1" of the Oiltanking acquisition. We funded the cash consideration for the Step 1 transactions using borrowings under our new $1.5 Billion 364-Day Credit Agreement (see Note 12), proceeds from the sale of short-term notes under our commercial paper program and cash on hand. As a result of our acquisition of Oiltanking GP, we began consolidating the financial statements of Oiltanking and its general partner on October 1, 2014. Oiltanking owns marine terminals located on the Houston Ship Channel and at the Port of Beaumont with a total of 12 ship and barge docks and approximately 26 MMBbls of crude oil and petroleum products storage capacity. Oiltanking's marine terminal on the Houston Ship Channel is connected by pipeline to our Mont Belvieu, Texas complex and is integral to our growing LPG export, crude oil storage and octane enhancement and propylene businesses. Our Enterprise Crude Houston, or ECHO, facility is also connected to Oiltanking's system. We have had a strategic relationship and enjoyed mutual growth with Oiltanking and its predecessors since 1983. The combination of our legacy midstream assets and Oiltanking's access to waterborne markets and crude oil and petroleum products storage assets extends and broadens our midstream energy services business. We believe this combination benefits our producing and consuming customers by enhancing their respective access to supplies, domestic and international markets, and storage. In accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, we account for acquisitions by applying the acquisition method of accounting. The acquisition method of accounting requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at their fair values as of the closing date of the acquisition. We engaged an independent third party business valuation expert to assist us in estimating the fair values of the tangible and intangible assets of Oiltanking. With the exception of the fair value assigned to the Liquidity Option Agreement (see Note 18), our purchase price allocation is final. We expect to finalize the fair value of the Liquidity Option Agreement as soon as practicable but no later than one year from the acquisition date. The following table summarizes the consideration paid in Step 1 of the Oiltanking acquisition and the amounts of the assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the noncontrolling interest in Oiltanking at October 1, 2014.
Consideration: |  |  |
Cash |  | $ | 2,438.3 |
Equity instruments (54,807,352 common units of Enterprise) (1) |  |  | 2,171.5 |
Fair value of total consideration transferred in Step 1 |  | $ | 4,609.8 |
Identifiable assets acquired in business combination: |  |  |  |
Current assets, including cash of $21.5 million |  | $ | 68.0 |
Property, plant and equipment |  |  | 1,080.1 |
Identifiable intangible assets: |  |  |  |
Customer relationship intangible assets (2) |  |  | 1,192.4 |
Contract-based intangible assets (2) |  |  | 297.5 |
IDRs |  |  | 1,459.2 |
Total identifiable intangible assets |  |  | 2,949.1 |
Other assets |  |  | 227.6 |
Total assets acquired |  |  | 4,324.8 |
Liabilities assumed in business combination: |  |  |  |
Current liabilities |  |  | (84.8 | )
Long-term debt |  |  | (223.3 | )
Other long-term liabilities (3) |  |  | (129.7 | )
Total liabilities assumed |  |  | (437.8 | )
Noncontrolling interest in Oiltanking (4) |  |  | (1,397.2 | )
Total assets acquired less liabilities assumed and noncontrolling interest |  |  | 2,489.8 |
Total consideration given for ownership interests in Oiltanking in Step 1 |  |  | 4,609.8 |
Goodwill |  | $ | 2,120.0 |
(1) The fair value of the equity-based consideration paid in connection with Step 1 of the Oiltanking acquisition was based on the closing market price of Enterprise's common units of $39.62 per unit on the acquisition date. (2) The weighted-average amortization period for the customer relationship intangible assets is 29 years and for the contract-based intangible assets is six years. (3) Other long-term liabilities includes $119.4 million for the Liquidity Option Agreement. The fair value assigned to the Liquidity Option Agreement is provisional pending completion of certain tax-related computations. See Note 18 for information regarding this agreement. (4) From an accounting perspective, Enterprise acquired control of Oiltanking as a result of completing Step 1. In accordance with ASC 805, Business Combinations, the estimated fair value of Oiltanking's common units held by parties other than Enterprise following Step 1 (i.e., the "noncontrolling interest") is based on 28,328,890 common units held by third parties on October 1, 2014 multiplied by the closing unit price for Oiltanking common units on that date of $49.32 per unit. |
As noted previously, we paid $228.3 million to acquire the outstanding loans, including related accrued interest of $2.5 million, owed by Oiltanking or its subsidiaries to OTA. Of the $228.3 million in notes and interest receivable, $5.0 million is classified as a current asset and $223.3 million as a long-term other asset in the preceding table. The notes and interest receivables from Oiltanking, along with the corresponding notes and interest payables by Oiltanking, are eliminated in the preparation of our consolidated financial statements. We estimated the fair value of the acquired property, plant and equipment using a combination of the cost, market and income approaches, depending on the component. The fair value of property, plant and equipment consisted of real property of $95.4 million and personal property of $984.7 million. For additional information regarding our property, plant and equipment, see Note 8. The fair values of the identifiable intangible assets were estimated using the income approach, specifically, a discounted cash flow analysis. The discounted cash flow analysis consisted of discounting to present value the cash flow projections for the identifiable intangible assets using discount rates ranging from 5.5% to 8.5%. The cash flow projections for the identifiable intangible assets were based on cash flow estimates used to price the Oiltanking acquisition, and the discount rates were based on a benchmarking analysis with reference to the implied rate of return on the Oiltanking acquisition and to a market participant weighted average cost of capital. The customer relationship intangible assets represent the continued expected patronage of Oiltanking's third party storage and terminal customers, and includes our expectation of future storage, throughput and other terminaling services from these customers. We valued the customer relationships using the multi-period excess earnings method under the income approach. This valuation method is based on forecasting revenue for the existing customer base and then adjusting for expected customer attrition rates. The operating cash flows are then reduced by contributory asset charges. The contract-based intangible assets represent specific commercial rights we acquired in connection with third party customer firm contracts for storage capacity at the Houston and Beaumont facilities. We valued the contracts using the multi-period excess earnings method under the income approach. This valuation method is based on future contractual revenues less those costs necessary to fulfill the contracts, including contributory asset charges. If a contract was in its renewal period and had not been cancelled, we assumed the contract was renewed on equivalent terms to the prior contract. We only valued those contracts that specified a minimum monthly fee, excluding contracts with a de minimis fee. The IDRs of Oiltanking are held by its general partner. The IDRs allow the holder to participate in increasing levels of cash distributions after a minimum quarterly distribution exceeds specified target levels. To value the IDRs, we relied on the discounted cash flow method under the income approach. A discount rate of approximately 8.5% was applied to the projected cash flows. With respect to Oiltanking, its IDRs provide that if cash distributions to unitholders exceed approximately $0.1940625 per unit, cash distributions to unitholders and the general partner would be paid according to the following allocations:
|  |  |  |  | Marginal Percentage Interest in Distributions
|  | Total Quarterly Distribution Per Unit Target Amount |  |  | Unitholders |  |  | General Partner
Minimum quarterly distribution |  | $0.16875 |  |  | 98% |  |  | 2%
First target distribution |  | above $0.16875 up to $0.1940625 |  |  | 98% |  |  | 2%
Second target distribution |  | above $0.1940625 up to $0.2109375 |  |  | 85% |  |  | 15%
Third target distribution |  | above $0.2109375 up to $0.253125 |  |  | 75% |  |  | 25%
Thereafter |  | above $0.253125 |  |  | 50% |  |  | 50%
At the acquisition date, Oiltanking's most recent paid quarterly cash distribution was $0.26 per unit, which placed the IDRs in the highest tier at 50% of cash distributions in excess of $0.253125 per unit. In February 2015, Oiltanking paid a quarterly cash distribution of $0.285 per unit with respect to the fourth quarter of 2014. The excess of the purchase price over the estimated fair values of the acquired tangible net assets and identifiable intangible assets was recorded as goodwill. The factors contributing to the recognition of goodwill are based on a variety of strategic and synergistic benefits that are expected to be realized from the Oiltanking acquisition. These benefits include (i) opportunities for new business and repurposing existing assets for "best use" in order to meet anticipated increased demand for export and logistical services for petroleum products related to North American crude oil, condensate and NGL production, (ii) securing ownership and control of assets that are essential to our other midstream assets and (iii) cost savings from integrating Oiltanking into our business system. For additional information regarding our intangible assets and goodwill amounts, see Note 11. Although we are not subject to federal income tax, our partners are individually responsible for paying federal income taxes on their share of our taxable income. In deriving our taxable income, the amount assigned to goodwill in this transaction will be amortized over a period of 15 years. Our consolidated revenues and net income included $57.5 million and $8.1 million, respectively, from Oiltanking for the three months ended December 31, 2014. We incurred $3.8 million of direct transaction costs in connection with Step 1 of the Oiltanking acquisition in the year ended December 31, 2014. These costs are included in general and administrative costs in the accompanying Statements of Consolidated Operations. Since the effective date of Step 1 of the Oiltanking acquisition was October 1, 2014, our Statements of Consolidated Operations do not include earnings from these businesses prior to this date. The following table presents selected unaudited pro forma earnings information for the years ended December 31, 2014 and 2013 as if the acquisition had been completed on January 1, 2013. This pro forma information was prepared using historical financial data for Oiltanking and reflects certain estimates and assumptions made by our management. Our unaudited pro forma financial information is not necessarily indicative of what our consolidated financial results would have been for the years ended December 31, 2014 and 2013 had we acquired Oiltanking on January 1, 2013.
|  | For Year Ended December 31, |
|  | 2014 |  |  | 2013 |
Pro forma earnings data: |  |  |  |  |  |
Revenues |  | $ | 48,087.5 |  |  | $ | 47,875.7 |
Costs and expenses |  |  | 44,509.0 |  |  |  | 44,522.3 |
Operating income |  |  | 3,838.0 |  |  |  | 3,520.7 |
Net income |  |  | 2,877.5 |  |  |  | 2,632.8 |
Net income attributable to noncontrolling interest |  |  | 75.0 |  |  |  | 39.5 |
Net income attributable to limited partners |  |  | 2,802.5 |  |  |  | 2,593.3 |
Basic earnings per unit: |  |  |  |  |  |  |  |
As reported basic units outstanding |  |  | 1,848.7 |  |  |  | 1,788.0 |
Pro forma basic units outstanding |  |  | 1,903.5 |  |  |  | 1,842.8 |
As reported basic earnings per unit |  | $ | 1.51 |  |  | $ | 1.45 |
Pro forma basic earnings per unit |  | $ | 1.47 |  |  | $ | 1.41 |
Diluted earnings per unit: |  |  |  |  |  |  |  |
As reported diluted units outstanding |  |  | 1,895.2 |  |  |  | 1,842.6 |
Pro forma diluted units outstanding |  |  | 1,950.0 |  |  |  | 1,897.4 |
As reported diluted earnings per unit |  | $ | 1.47 |  |  | $ | 1.41 |
Pro forma diluted earnings per unit |  | $ | 1.44 |  |  | $ | 1.37 |
The foregoing supplemental pro forma earnings data for the year ended December 31, 2014 were adjusted to exclude $3.8 million of acquisition-related direct costs incurred in 2014. Pro forma earnings data for the year ended December 31, 2013 was adjusted to include these charges. Automatic conversion of subordinated units. Following Step 1 of the Oiltanking acquisition, but not part of Step 2 of the acquisition, on November 17, 2014, the 38,899,802 Oiltanking subordinated units held by Enterprise automatically converted into an equal number of Oiltanking common units pursuant to the terms of the Oiltanking partnership agreement. Following this conversion, Enterprise owned 54,799,604 Oiltanking common units, or approximately 65.9% of its outstanding common units. Step 2 of the Oiltanking acquisition. As a second step of the Oiltanking acquisition (separately negotiated by the conflicts committee of Oiltanking's general partner on behalf of Oiltanking), we entered into an Agreement and Plan of Merger (the "merger agreement") with Oiltanking on November 11, 2014 that provided for the following:
§ | the merger of a wholly owned subsidiary of Enterprise with and into Oiltanking, with Oiltanking surviving the merger as a wholly owned subsidiary of Enterprise (the "Oiltanking Merger"); and
§ | all outstanding common units of Oiltanking at the effective time of the merger held by Oiltanking's public unitholders (which consist of Oiltanking unitholders other than Enterprise and its subsidiaries) to be cancelled and converted into Enterprise common units based on an exchange ratio of 1.30 Enterprise common units for each Oiltanking common unit.
In accordance with the merger agreement and Oiltanking's partnership agreement, the merger was submitted to a vote of Oiltanking's common unitholders, with the required majority of unitholders (including Enterprise's ownership interests representing approximately 65.9% of Oiltanking's outstanding common units) voting to approve the merger on February 13, 2015. Upon approval of the merger, a total of 36,827,557 Enterprise common units were issued to Oiltanking's former public unitholders. From an accounting perspective, completion of Step 2 of the Oiltanking acquisition will have the following significant impacts on our consolidated financial statements in the first quarter of 2015:
§ | The merger will be accounted for in accordance with ASC Topic 810, Consolidations – Overall – Changes in Parent's Ownership Interest in a Subsidiary. As a result, changes in our ownership interest in Oiltanking, while we retain a controlling financial interest in Oiltanking through our ownership of its general partner and a majority of its common units, will be accounted for as an equity transaction with no gain or loss recognized as a result of the merger. The merger represents our acquisition of the noncontrolling interests in Oiltanking; therefore, noncontrolling interests attributable to Oiltanking as presented on the Consolidated Balance Sheet at the merger date will be extinguished, with a corresponding increase in our partners' equity to reflect the February 2015 issuance of 36,827,557 new common units.
§ | Upon completion of the merger, the IDRs of Oiltanking will be cancelled since we now own 100% of the future cash flows attributable to the Oiltanking businesses. As a result, the $1.46 billion carrying value of the IDR intangible asset was reclassified to goodwill and allocated among our business segments (see Note 11).
FTC Matters. On February 23, 2015, we received a Civil Investigative Demand and a related Subpoena Duces Tecum from the Federal Trade Commission requesting specified information relating to the Oiltanking acquisition. We are in the process of complying with the requests and are cooperating with the investigation. Based on the limited information that Enterprise has at this time, we are unable to predict the outcome of the investigation.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1383-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4922-128472 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4934-128472 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4926-128472 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1392-128463 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1486-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1497-128463 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1490-128463 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4845-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1500-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1524-128463 + Details
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