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Acquisitions and Dispositions

12 Months Ended

Dec. 31, 2011

Note 3—Acquisitions and Dispositions

Pending Acquisition

BP NGL Acquisition. On December 1, 2011, we entered into a definitive agreement to acquire all outstanding shares of BP Canada Energy Company, a wholly owned subsidiary of BP Corporation North America Inc. (“BP North America”). Total consideration for the acquisition, which will be based on an October 1, 2011 effective date, is approximately $1.67 billion, subject to working capital and other adjustments. A cash deposit of $50 million was paid upon signing, and the balance, plus 2% interest from October 1, 2011, is payable in cash upon closing. Subject to Canadian and U.S. regulatory approvals and other customary closing conditions, the acquisition is expected to close in the second quarter of 2012.

Upon completion of this acquisition, we will become the indirect owner of all of BP North America’s Canadian-based NGL business and certain of BP North America’s NGL assets located in the upper-Midwest United States (collectively the “BP NGL Assets”). The BP NGL Assets to be acquired include varying ownership interests, and contractual rights relating to approximately 2,600 miles of NGL pipelines; approximately 20 million barrels of NGL storage capacity; seven fractionation plants with an aggregate net capacity of approximately 232,000 barrels per day; four straddle plants and two field gas processing plants with an aggregate net capacity of approximately six Bcf per day; and long-term and seasonal NGL inventories of approximately 10 million barrels as of October 1, 2011. Certain of these pipelines and storage assets are currently inactive. The acquired business also includes various third-party supply contracts at other field gas processing plants and a supply contract relating to a third-party owned straddle plant with throughput capacity of 2.5 Bcf per day, shipping arrangements on third-party NGL pipelines and long-term leases on 720 rail cars used to move product among various locations. Collectively, these assets and activities provide access to approximately 140,000 to 150,000 barrels per day of NGL supply that are transported through an integrated network to fractionation facilities and markets in Western and Eastern Canada and in the U.S. Subject to closing the transaction, we have also entered into an Integrated Supply and Trading Agreement, pursuant to which an affiliate of BP North America will, for a period of two years following the closing of the acquisition, continue to provide sourcing services for gas supply to feed certain of the straddle plants to be acquired as a result of the acquisition.

The following acquisitions were accounted for using the purchase method of accounting and the purchase price was determined in accordance with such method.

2011 Acquisitions

Southern Pines Acquisition

On February 9, 2011, PNG acquired 100% of the equity interests in SG Resources from SGR Holdings, L.L.C. (the “Southern Pines Acquisition”) for an aggregate purchase price of approximately $765 million in cash (approximately $750 million, net of cash and other working capital acquired). The primary asset of SG Resources is the Southern Pines Energy Center (“Southern Pines”), a FERC-regulated, salt-cavern natural gas storage facility located in Greene County, Mississippi. In connection with this acquisition, PNG obtained financing through a private placement of PNG common units to third-party purchasers and to us. See Note 5 for further discussion.

The preliminary fair value of assets acquired and liabilities assumed is as follows (in millions):

			Average
			Depreciable
Description	Amount		Life (in years)
Inventory	$	14	N/A
Property and equipment, net	341		5 - 70
Base gas	3		N/A
Other working capital (including $13 million of cash)	14		N/A
Intangible assets	92		2 - 10
Goodwill	301		N/A
Total	$	765

The fair value of assets acquired and liabilities assumed is preliminary and subject to change, pending completion of internal valuation procedures primarily related to the valuation of intangible assets and the various components of the property and equipment acquired. The preliminary allocation of fair value to intangible assets above is comprised of a tax abatement valued at approximately $15 million and contracts valued at approximately $77 million, which have lives ranging from 2 to 10 years. Amortization of customer contracts under the declining balance method of amortization was approximately $13 million during the year ended December 31, 2011 and is estimated to be approximately $14 million, $13 million, $11 million and $8 million for the years ending December 31, 2012, 2013, 2014 and 2015, respectively. Goodwill or indefinite lived intangible assets will not be subject to depreciation or amortization, but will be subject to periodic impairment testing and, if necessary, will be written down to fair value should circumstances warrant. We expect to finalize our purchase price allocation during the first quarter of 2012.

Several factors contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired. Such factors included the strategic location of the Southern Pines facility, the limited alternative locations and the extended lead times required to develop and construct such facility, along with its operational flexibility, organic expansion capabilities and synergies anticipated to be obtained from combining Southern Pines with our existing asset base. This acquisition is reflected within our facilities segment.

Also in connection with the Southern Pines Acquisition, PNG became the owner, with the ability to remarket in the future, and ultimate obligor of the $100,000,000 Mississippi Business Finance Corporation Gulf Opportunity Zone Industrial Development Revenue Bonds (SG Resources Mississippi, LLC Project), Series 2009 and the $100,000,000 Mississippi Business Finance Corporation Gulf Opportunity Zone Industrial Development Revenue Bonds (SG Resources Mississippi, LLC Project), Series 2010 (collectively, the “GO Bonds”). These were originally issued to fund the expansion of the Southern Pines facility. PNG remarketed the GO Bonds in August 2011 (see Note 4).

In May 2011, PNG entered into an agreement with the former owners of SG Resources with respect to certain outstanding issues and purchase price adjustments as well as the distribution of the remaining 5% of the purchase price that was escrowed at closing (totaling $37 million). Pursuant to this agreement, PNG received approximately $10 million and the balance was remitted to the former owners. Funds received by PNG have been and will continue to be used to fund anticipated facility development and other related costs identified subsequent to closing. Approximately $3 million of capital expenditures were incurred related to matters covered by the agreement through December 31, 2011. Remaining amounts will be utilized to offset applicable cavern development expenditures as incurred. Any remaining amounts upon completion of applicable cavern development procedures will reduce goodwill. Additionally, the parties executed releases of any existing and future claims, subject to customary carve-outs.

Other 2011 Acquisitions

Western Acquisition. On December 29, 2011, we completed two transactions with Western Refining for a combined purchase price of approximately $220 million in cash. Through the first transaction, we acquired crude oil, refined products and LPG storage and the associated manifold and pumping equipment located at Western’s Yorktown, Virginia refinery site, which we will operate as a terminal, as well as certain intangible assets. The second transaction included an 82-mile, 16-inch segment of pipeline that originates in Chaves County, New Mexico and connects into our Basin Pipeline system at Jal, New Mexico. The transaction includes associated tankage, piping and other related assets at the Lynch and Jal Stations.

Gardendale Gathering System Acquisition. On November 29, 2011, we completed the acquisition of 100% of the member interests in Velocity from Velocity Midstream Partners, LLC for an aggregate purchase price of approximately $349 million in cash. The assets acquired included approximately 120 miles of crude oil and condensate gathering and transportation pipelines (the “Gardendale Gathering System”) in the Eagle Ford Shale. We recognized goodwill of approximately $155 million associated with this acquisition, which was primarily related to the potential incremental income from anticipated growth projects.

Additional 2011 Acquisitions. During 2011, we completed six additional acquisitions for an aggregate consideration of approximately $20 million. These acquisitions included propane storage and terminal facilities included within our facilities segment, a trucking business included in our transportation segment as well as the right to ship on third-party pipelines, the revenues of which are included in our supply and logistics segment.

The preliminary determination of fair value of assets acquired and liabilities assumed for all other acquisitions completed during 2011, including the Western and Gardendale Gathering System acquisitions, is as follows (in millions):

Description	Amount
Linefill	$	2
Property and equipment, net	282
Other working capital	(7		)
Intangible assets	152
Environmental liability	(9		)
Goodwill	169
Total	$	589

2010 Acquisitions

Nexen Acquisition. On December 30, 2010, we acquired from Nexen Holdings U.S.A. Inc. entities that hold crude oil gathering and transportation assets that primarily service Bakken area producers. The purchase price was approximately $229 million, in cash, including approximately $170 million for the business and physical assets and approximately $59 million for approximately 460,000 barrels of inventory and other working capital adjustments. The assets are primarily located in Northwestern North Dakota and Northeastern Montana and include (i) a lease gathering business, (ii) the Robinson Lake pipeline, a FERC-regulated 20-mile, 8-inch pipeline, (iii) eight truck terminals and (iv) various other contractual rights. These assets are included within our transportation and supply and logistics segments. We recognized goodwill of approximately $83 million associated with this acquisition.

Other 2010 Acquisitions. During 2010, we completed five additional acquisitions for aggregate consideration of approximately $178 million. These acquisitions included (i) a 34% interest in White Cliffs that is reflected within our transportation segment, (ii) an additional 11% interest in Capline pipeline that is reflected within our transportation segment and (iii) various other assets reflected within both our transportation and facilities segments. We did not recognize any goodwill for these acquisitions.

2009 Acquisitions

PNGS Acquisition. On September 3, 2009, we acquired the remaining 50% indirect interest in PAA/Vulcan for an aggregate purchase price of $215 million (“PNGS Acquisition”). The $215 million purchase price consisted of $90 million in cash paid at closing, approximately $91 million in equivalent value of PAA common units (1,907,305 PAA common units based on a 20 business-day average closing price per unit) issued to Vulcan Gas Storage LLC at closing, and up to $40 million of deferred/contingent cash consideration. The deferred/contingent consideration is payable in cash in two installments of $20 million each upon the achievement of certain performance milestones and events expected to occur over the next several years. Upon completion of the PNG IPO in May 2010, we paid the first $20 million installment. See Note 5 for additional discussion of the PNG IPO. The fair value of the remaining contingent consideration is approximately $19 million at December 31, 2011.

As a result of the transaction, we owned 100% of PNGS’s natural gas storage business and related operating entities, which were accounted for on a consolidated basis beginning in September 2009. We historically accounted for our 50% indirect interest in PAA/Vulcan under the equity method. We recorded a net gain of approximately $9 million, recorded in other income, in connection with (i) adjusting our previously owned 50% investment in PAA/Vulcan to fair value and (ii) terminating an agreement to supply natural gas to PNGS.

At the time of the PNGS Acquisition, PNGS owned and operated two natural gas storage facilities located in Louisiana and Michigan that had an aggregate working gas storage capacity of 40 Bcf and an aggregate peak injection and withdrawal capacity of 1.7 Bcf per day and 3.2 Bcf per day, respectively. Substantially all of PNGS’s revenues were derived from the provision of firm storage services under multi-year, fee-based contracts. The gas storage operations are reflected in our facilities segment.

The purchase price consisted of the following (in millions):

Cash	$	90
PAA equity	91
Paid at closing	181
Fair value of contingent consideration (1)	34
Total purchase price	$	215

(1) The deferred contingent cash consideration is payable in cash in two installments of $20 million each upon the achievement of certain performance milestones and events expected to occur over the next several years. The fair value of the deferred contingent cash consideration was based on a discounted cash flow model utilizing a discount rate of approximately 9%. Upon completion of the PNG IPO in May 2010, we paid the first $20 million contingent consideration installment.

The determination of fair value of the assets and liabilities related to the PNGS Acquisition was as follows (in millions):

Property, plant and equipment	$	791
Base gas	28
Goodwill	25
Intangible assets	23
Working capital and other long-term assets and liabilities	9
Debt	(446		)
Total	$	430

Other 2009 Acquisitions. During 2009, we completed six additional acquisitions for an aggregate consideration of approximately $178 million. These acquisitions included an additional 21% undivided joint interest in Capline and associated tankage, as well as various crude oil pipelines and pipeline systems that are all included within our transportation segment. We also acquired a natural gas processing business, a refined products terminal and various crude oil storage tanks and other related assets that are all included within our facilities segment. The goodwill associated with such acquisitions was approximately $27 million as of December 31, 2011.

Dispositions

During 2011, 2010 and 2009, we sold various property and equipment for proceeds totaling approximately $12 million, $3 million and $4 million, respectively. A loss of approximately $6 million, a gain of less than $1 million and a loss of less than $1 million were recognized in 2011, 2010 and 2009, respectively, related to these sales.