AMID 2013.06.30 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
    S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to        
Commission File Number: 001-35257
 
 AMERICAN MIDSTREAM PARTNERS, LP
(Exact name of registrant as specified in its charter)
Delaware
27-0855785
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1614 15th Street, Suite 300
 
Denver, CO
80202
(Address of principal executive offices)
(Zip code)
(720) 457-6060
(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.    ý  Yes    ¨  No
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).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
ý (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
There were 4,696,666 common units, 4,526,066 subordinated units and 5,142,857 Series A Convertible Preferred Units of American Midstream Partners, LP outstanding as of July 31, 2013. Our common units trade on the New York Stock Exchange under the ticker symbol “AMID.”


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


Table of Contents

Glossary of Terms
As generally used in the energy industry and in this Quarterly Report on Form 10-Q (the “Quarterly Report”), the identified terms have the following meanings:
 
ASC        Accounting Standards Codification; trademark of the Financial Accounting Standards Board (FASB).

Bbl         Barrels: 42 U.S. gallons measured at 60 degrees Fahrenheit.

Bcf         One billion cubic feet.

Btu
British thermal unit; the approximate amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Condensate
Liquid hydrocarbons present in casinghead gas that condense within the gathering system and are removed prior to delivery to the gas plant. This product is generally sold on terms more closely tied to crude oil pricing.

/d        Per day.

EBITDA
Net income (loss) before net interest expense, income taxes, and depreciation and amortization. EBITDA is a non-GAAP measurement.

FERC         Federal Energy Regulatory Commission.

Fractionation    Process by which natural gas liquids are separated into individual components.

GAAP
General Accepted Accounting Principles: Accounting principles generally accepted in the United States of America.

Gal         Gallons.

MBbl         One thousand barrels.

MMBbl         One million barrels.

MMBtu         One million British thermal units.

Mcf         One thousand cubic feet.

MMcf         One million cubic feet.

NGL or NGLs
Natural gas liquid(s): The combination of ethane, propane, normal butane, isobutane and natural gasoline that, when removed from natural gas, become liquid under various levels of higher pressure and lower temperature.

Throughput
The volume of natural gas transported or passing through a pipeline, plant, terminal or other facility during a particular period.

As used in this Quarterly Report, unless the context otherwise requires, “we,” “us,” “our,” the “Partnership” and similar terms refer to American Midstream Partners, LP, together with its consolidated subsidiaries.

3

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
 
June 30,
2013
 
December 31, 2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
423

 
$
576

Accounts receivable
3,222

 
1,958

Unbilled revenue
25,479

 
21,512

Risk management assets
2,082

 
969

Other current assets
5,530

 
3,226

Total current assets
36,736

 
28,241

Property, plant and equipment, net
282,953

 
223,819

Noncurrent assets held for sale, net
874

 

Other assets, net
6,380

 
4,636

Total assets
$
326,943

 
$
256,696

Liabilities, Equity and Partners’ Capital
 
 
 
Current liabilities
 
 
 
Accounts payable
$
6,183

 
$
5,527

Accrued gas purchases
19,381

 
17,034

Accrued expenses and other current liabilities
12,826

 
9,619

Current portion of long-term debt
1,250

 

Risk management liabilities
290

 

Total current liabilities
39,930

 
32,180

Risk management liabilities
28

 

Asset retirement obligations
34,250

 
8,319

Other liabilities
188

 
309

Long-term debt
123,660

 
128,285

Total liabilities
198,056

 
169,093

Commitments and contingencies (see Note 13)


 


Convertible preferred units
 
 
 
Series A convertible preferred units (5,143 thousand units issued and outstanding as of June 30, 2013)
91,073

 

Equity and partners’ capital
 
 
 
General partner interest (185 thousand units issued and outstanding as of June 30, 2013 and December 31, 2012)
(129
)
 
548

Limited partner interest (9,209 and 9,165 thousand units issued and outstanding as of June 30, 2013 and December 31, 2012, respectively)
30,310

 
79,266

Accumulated other comprehensive income
295

 
351

Total partners’ capital
30,476

 
80,165

Noncontrolling interests
7,338

 
7,438

Total equity and partners' capital
37,814

 
87,603

Total liabilities, equity and partners' capital
$
326,943

 
$
256,696

The accompanying notes are an integral part of these condensed consolidated financial statements.

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American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except for per unit amounts)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
73,828

 
$
39,487

 
$
133,613

 
$
84,077

Gain on commodity derivatives, net
914

 
3,835

 
609

 
4,103

Total revenue
74,742

 
43,322

 
134,222

 
88,180

Operating expenses:
 
 
 
 
 
 
 
Purchases of natural gas, NGLs and condensate
57,396

 
27,942

 
104,698

 
58,711

Direct operating expenses
7,121

 
3,194

 
11,923

 
6,079

Selling, general and administrative expenses
4,588

 
3,668

 
8,013

 
6,997

Equity compensation expense
1,097

 
467

 
1,485

 
798

Depreciation and accretion expense
6,698

 
5,092

 
12,344

 
10,218

Total operating expenses
76,900

 
40,363

 
138,463

 
82,803

Gain on involuntary conversion of property, plant and equipment

 

 
343

 

Gain on sale of assets, net

 
117

 

 
122

Loss on impairment of property, plant and equipment
(15,232
)
 

 
(15,232
)
 
 
Operating (loss) income
(17,390
)
 
3,076

 
(19,130
)
 
5,499

Other expense:
 
 
 
 
 
 
 
Interest expense
(2,190
)
 
(825
)
 
(3,921
)
 
(1,582
)
Net (loss) income from continuing operations
$
(19,580
)
 
$
2,251

 
$
(23,051
)
 
$
3,917

Discontinued operations
 
 
 
 
 
 
 
(Loss) gain from operations of disposal groups
$
(1,869
)
 
$
76

 
$
(1,796
)
 
$
101

Net (loss) income
$
(21,449
)
 
$
2,327

 
$
(24,847
)
 
$
4,018

Net income attributable to noncontrolling interests
$
188

 
$

 
$
343

 
$

Net (loss) income attributable to the Partnership
$
(21,637
)
 
$
2,327

 
$
(25,190
)
 
$
4,018

General partners' interest in net (loss) income
$
(428
)
 
$
46

 
$
(497
)
 
$
80

Limited partners’ interest in net (loss) income
$
(21,209
)
 
$
2,281

 
$
(24,693
)
 
$
3,938

Limited partners’ net (loss) income from continuing operations per unit (basic) (See Note 10)
$
(4.00
)
 
$
0.24

 
$
(4.39
)
 
$
0.42

Limited partners’ net (loss) income per unit (basic) (See Note 10)
$
(4.20
)
 
$
0.25

 
$
(4.58
)
 
$
0.43

Weighted average number of units used in computation of limited partners’ net (loss) income per unit (basic)
9,198

 
9,107

 
9,183

 
9,100

Limited partners’ net (loss) income from continuing operations per unit (diluted) (See Note 10)
$
(4.00
)
 
$
0.24

 
$
(4.39
)
 
$
0.41

Limited partners’ net (loss) income per unit (diluted) (See Note 10)
$
(4.20
)
 
$
0.25

 
$
(4.58
)
 
$
0.43

Weighted average number of units used in computation of limited partners’ net (loss) income per unit (diluted) (See Note 10)
9,198

 
9,276

 
9,183

 
9,263

The accompanying notes are an integral part of these condensed consolidated financial statements.

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American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income
$
(21,449
)
 
$
2,327

 
$
(24,847
)
 
$
4,018

Unrealized gain (loss) on post retirement benefit plan assets and liabilities
(43
)
 
14

 
(56
)
 
17

Comprehensive (loss) income
(21,492
)
 
2,341

 
(24,903
)
 
4,035

Less: Comprehensive income attributable to noncontrolling interests
188

 

 
343

 

Comprehensive (loss) income attributable to Partnership
$
(21,680
)
 
$
2,341

 
$
(25,246
)
 
$
4,035

The accompanying notes are an integral part of these condensed consolidated financial statements.

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American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Changes in Partners’ Capital
and Noncontrolling Interest
(Unaudited, in thousands)
 
 
 
Limited
Partner
Interest
 
General
Partner
Interest
 
Accumulated
Other
Comprehensive
Income
 
Total Partners' Capital
 
Noncontrolling Interest
Balances at December 31, 2011
 
$
99,890

 
$
1,091

 
$
415

 
$
101,396

 

Net income
 
3,938

 
80

 

 
4,018

 

Unitholder contributions
 

 
13

 

 
13

 

Unitholder distributions
 
(7,870
)
 
(161
)
 

 
(8,031
)
 

LTIP vesting
 
364

 
(364
)
 

 

 

Tax netting repurchase
 
(88
)
 

 

 
(88
)
 

Unit based compensation
 
97

 
701

 

 
798

 

Other comprehensive income
 

 

 
17

 
17

 

Balances at June 30, 2012
 
$
96,331

 
$
1,360

 
$
432

 
$
98,123

 

 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2012
 
$
79,266

 
$
548

 
$
351

 
$
80,165

 
$
7,438

Net (loss) income
 
(24,693
)
 
(497
)
 

 
(25,190
)
 
343

Unitholder distributions
 
(9,749
)
 
(203
)
 

 
(9,952
)
 

Fair value of Series A Units in excess of net assets received
 
(15,300
)
 
(312
)
 

 
(15,612
)
 

Net distributions to noncontrolling interest owners
 

 

 

 

 
(443
)
LTIP vesting
 
1,125

 
(1,125
)
 

 

 

Tax netting repurchase
 
(339
)
 

 

 
(339
)
 

Unit based compensation
 

 
1,460

 

 
1,460

 

Other comprehensive loss
 

 

 
(56
)
 
(56
)
 

Balances at June 30, 2013
 
$
30,310

 
$
(129
)
 
$
295

 
$
30,476

 
$
7,338

The accompanying notes are an integral part of these condensed consolidated financial statements.

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American Midstream Partners, LP and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 
Six Months Ended June 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net (loss) income
$
(24,847
)
 
$
4,018

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

Depreciation and accretion expense
12,344

 
10,283

Amortization of deferred financing costs
614

 
284

Amortization of weather derivative premium
95

 

Unrealized loss (gain) on commodity derivatives
245

 
(3,494
)
Unit based compensation
1,460

 
798

OPEB plan net periodic cost (benefit)
(37
)
 
(41
)
Gain on involuntary conversion of property, plant and equipment
(343
)
 

Gain on sale of assets, net

 
(122
)
Loss on impairment of property, plant and equipment
15,232

 

Loss on impairment of noncurrent assets held for sale
1,807

 

Changes in operating assets and liabilities, net:
 

Accounts receivable
2,365

 
(55
)
Unbilled revenue
(2,522
)
 
5,656

Risk management assets
(1,134
)
 

Other current assets
(255
)
 
1,013

Other assets, net
(62
)
 
(41
)
Accounts payable
3,639

 
(160
)
Accrued gas purchases
2,347

 
(5,264
)
Accrued expenses and other current liabilities
832

 
(1,769
)
Other liabilities
(121
)
 
(135
)
Net cash provided by operating activities
11,659

 
10,971

Cash flows from investing activities
 
 
 
Additions to property, plant and equipment
(12,516
)
 
(2,384
)
Proceeds from disposals of property, plant and equipment

 
122

Insurance proceeds from involuntary conversion of property, plant and equipment
482

 

Funds held in escrow

 
(5,500
)
Net cash used in investing activities
(12,034
)
 
(7,762
)
Cash flows from financing activities
 
 
 
Unit holder contributions

 
13

Unit holder distributions
(7,805
)
 
(8,031
)
Issuance of Series A convertible preferred units, net
14,393

 

Net distributions to noncontrolling interest owners
(443
)
 

LTIP tax netting unit repurchase
(339
)
 
(88
)
Payments for deferred debt issuance costs
(1,315
)
 
(926
)
Payments on other debt
(1,139
)
 

Borrowings on other debt
1,495

 

Payments on long-term debt
(56,546
)
 
(25,350
)
Borrowings on long-term debt
51,921

 
31,340

Net cash used in financing activities
222

 
(3,042
)

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Net (decrease) increase in cash and cash equivalents
(153
)
 
167

Cash and cash equivalents
 
 
 
Beginning of period
576

 
871

End of period
$
423

 
$
1,038

Supplemental cash flow information
 
 
 
Interest payments
$
3,017

 
$
1,043

Supplemental non-cash information
 
 
 
(Decrease) increase in accrued property, plant and equipment
$
(5,769
)
 
$
66

Receivable for reimbursable construction in progress projects
$

 
$
610

Net assets contributed in exchange for the issuance of Series A convertible preferred units (see Note 3)
$
59,994

 
$

Fair value of Series A Units in excess of net assets received
$
15,612

 
$

Accrued unitholder distribution for Series A Units
$
2,146

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

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American Midstream Partners, LP and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Nature of business
American Midstream Partners, LP (the “Partnership”) was formed on August 20, 2009 as a Delaware limited partnership for the purpose of acquiring and operating certain natural gas pipeline and processing businesses. We provide natural gas gathering, treating, processing, fractionating, marketing and transportation services primarily in the Gulf Coast and Southeast regions of the United States. We hold our assets in a series of wholly owned limited liability companies as well as a limited partnership. Our capital accounts consist of general partner interests and limited partner interests.
Our interstate natural gas pipeline assets transport natural gas through the FERC regulated interstate natural gas pipelines in Louisiana, Mississippi, Alabama and Tennessee. Our interstate pipelines include:
American Midstream (Midla), LLC, which owns and operates approximately 370 miles of interstate pipeline that runs from the Monroe gas field in northern Louisiana south through Mississippi to Baton Rouge, Louisiana; and
American Midstream (AlaTenn), LLC, which owns and operates approximately 295 miles of interstate pipeline that runs through the Tennessee River Valley from Selmer, Tennessee to Huntsville, Alabama and serves an eight-county area in Alabama, Mississippi and Tennessee.
ArcLight Transactions
On April 15, 2013, the Partnership, our general partner and AIM Midstream Holdings, LLC ("AIM"), an affiliate of American Infrastructure MLP Fund, entered into agreements (the "ArcLight Transactions") with High Point Infrastructure Partners, LLC ("HPIP"), an affiliate of ArcLight Capital Partners, LLC, pursuant to which HPIP (i) acquired 90% of our general partner and all of our subordinated units from AIM and (ii) contributed certain midstream assets and $15.0 million in cash to us in exchange for 5,142,857 newly issued convertible preferred units (the “Series A Units”) issued by the Partnership.  Of the $15.0 million cash consideration paid by High Point, approximately $2.5 million was used to pay certain transaction expenses of High Point, and the remaining approximately $12.5 million was used to repay borrowings outstanding under the Partnership's credit facility in connection with the Fourth Amendment. As a result of these transactions, which were also consummated on April 15, 2013, HPIP acquired both control of our general partner and a majority of our outstanding limited partner interests.  The midstream assets contributed by HPIP consist of approximately 600 miles of natural gas and liquids pipeline assets located in southeast Louisiana and the shallow water and deep shelf Gulf of Mexico (commonly referred to as the "High Point system"). The High Point system gathers natural gas from both onshore and offshore producing regions around southeast Louisiana. The onshore footprint is in Plaquemines and St. Bernard's Parishes, LA. The offshore footprint consists of the following federal Gulf of Mexico zones: Mississippi Canyon, Viosca Knoll, West Delta, Main Pass, South Pass and Breton Sound. Natural gas is collected at more than 75 receipt points that connect to hundreds of wells targeting various geological zones in water depths up to 1,000 feet, with an emphasis on oil and liquids-rich reservoirs. The High Point system is comprised of FERC-regulated transmission assets and non-jurisdictional assets, both of which accept natural gas from well production and interconnected pipeline systems. Natural gas is delivered to the Toca Gas Processing Plant, operated by Enterprise, where the products are processed and the residue gas sent to an unaffiliated interstate system owned by Kinder Morgan. See Note 3 "Acquisitions and Divestitures" for further information.

The Partnership believes that the consummation of the ArcLight Transactions will allow it to comply with the Consolidated Total Leverage to EBTIDA ratio in the Fourth Amendment to our June 2012 amended credit agreement ("Fourth Amendment"). However, no assurances can be given that the Partnership's results of operations following the ArcLight Transactions will allow us to comply with financial covenants of the Fourth Amendment. If we are not able to generate sufficient cash flows from operations to comply with the financial covenants in the Fourth Amendment and we are not able enter into an agreement to refinance or obtain covenant default waivers, then the outstanding balance under our credit facility could become due and payable upon acceleration by the lenders in our banking group and other agreements with cross-default provisions, if any, could become due. In addition, failure to comply with any of the covenants under our Fourth Amendment could adversely affect our ability to fund ongoing operations and growth capital requirements as well as our ability to pay distributions to our unitholders. See Note 17 "Liquidity" for further information.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end balance sheet data was derived from audited financial statements but does not include disclosures required by GAAP for annual periods. We have made reclassifications to amounts reported in prior period condensed consolidated financial

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statements to conform to our current year presentation. These reclassifications did not have an impact on net income for the period previously reported. The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of financial position as of June 30, 2013, and December 31, 2012, condensed consolidated statement of operations for the three and six months ended June 30, 2013 and 2012, statement of comprehensive income for the three and six months ended June 30, 2013 and 2012, statement of changes in partners’ capital and noncontrolling interest for the six months ended June 30, 2013 and 2012, and statements of cash flows for the six months ended June 30, 2013 and 2012.
Our financial results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Annual Report”) filed on April 16, 2013.
Consolidation Policy
Our consolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling interest. We hold an undivided interest in the Burns Point gas processing facility in which we are responsible for our proportionate share of the costs and expenses of the facility. Our consolidated financial statements reflect our proportionate share of the revenues, expenses, assets and liabilities of this undivided interest. In July 2012, the Partnership acquired a 87.4% undivided interest in the Chatom Processing and Fractionation facility (the "Chatom system"). Our consolidated financial statements reflect the accounts of the Chatom system since acquisition, and the interests in the Chatom system held by non-affiliated working interest owners are reflected as noncontrolling interests in the Partnership's consolidated financial statements.
Use of Estimates
When preparing financial statements in conformity with GAAP, management must make estimates and assumptions based on information available at the time. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates and judgments are based on information available at the time such estimates and judgments are made. Adjustments made with respect to the use of these estimates and judgments often relate to information not previously available. Uncertainties with respect to such estimates and judgments are inherent in the preparation of financial statements. Estimates and judgments are used in, among other things (1) estimating unbilled revenues, product purchases and operating and general and administrative costs, (2) developing fair value assumptions, including estimates of future cash flows and discount rates, (3) analyzing long-lived assets for possible impairment, (4) estimating the useful lives of assets and (5) determining amounts to accrue for contingencies, guarantees and indemnifications. Actual results, therefore, could differ materially from estimated amounts.
2. Summary of Significant Accounting Policies

Transactions Between Entities Under Common Control
 
We may enter into transactions with our general partner whereby we receive a contribution of midstream assets or subsidiaries in exchange for consideration by the Partnership.  We account for the net assets received using the historical book value of the asset or subsidiary being contributed or transferred as these are transaction between entities under common control.  Our historical financial statements may be revised to include the results attributable to the assets contributed from our general partner as if we owned such assets for all period presented by the Partnership since the change in control of our general partner, effective April 15, 2013.

Recent Accounting Pronouncements

In January 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies that ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, applies to financial instruments or derivative transactions accounted for under ASC 815. The amendments require disclosures to present both gross and net amounts of derivative assets and liabilities that are subject to master netting arrangements with counterparties. We currently present our derivative assets and liabilities net on our statement of financial position. We have provided additional disclosures regarding the gross amounts of derivative assets and liabilities in Note 5 "Derivatives" in accordance with these new standards updates.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI"), which requires entities to present either in a single note or parenthetically on the face of the financial statements (i) the amount of significant items reclassified from each component of AOCI and (ii) the income statement

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line items affected by the reclassifications. We adopted this guidance during the first quarter of 2013; it did not have a material impact on our condensed consolidated financial statements as there are currently no items reclassified from AOCI.
3. Acquisitions and Divestitures
High Point System
Effective April 15, 2013, our general partner contributed 100% of the limited liability company interests in High Point Gas Transmission, LLC and High Point Gas Gathering, LLC, (the “High Point System”). The High Point System entities own midstream assets consisting of approximately 700 miles of natural gas and liquids pipeline assets located in southeast Louisiana, in the Plaquemines and St. Bernard's Parishes, and the shallow water and deep shelf Gulf of Mexico, including the Mississippi Canyon, Viosca Knoll, West Delta, Main Pass, South Pass and Breton Sound zones. Natural gas is collected at more than 75 receipt points that connect hundreds of wells with an emphasis on oil and liquids-rich reservoirs.

The High Point System, along with $15.0 million in cash, was contributed to us by HPIP in exchange for 5,142,857 Series A Units. Of the $15.0 million cash consideration paid by High Point, approximately $2.5 million was used to pay certain transaction expenses of High Point, and the remaining approximately $12.5 million was used to repay borrowings outstanding under the Partnership's credit facility in connection with the Fourth Amendment. The contribution of the High Point System occurred concurrently with HPIP's acquisition of 90% of our general partner and all of our subordinated units, which resulted in HPIP gaining control of the our general partner and a majority of our outstanding limited partner interests.

The fair value of the Series A Units on April 15, 2013 was $17.50 per unit, or $90.0 million and was issued by the Partnership in exchange for cash of approximately $12.5 million and net assets of $61.9 million contributed to the Partnership by our general partner.  The contribution of net assets of the High Point system was accounted for as a transaction between entities under common control whereby the High Point system was recorded at historical book value.  As such, the value of the Series A Units in excess of the net asset contributed by our general partner amounted to $15.6 million and was allocated pro-rata to the general partner and existing limited partners interest based on their ownership interests.

The contribution is being treated as a transaction between entities under common control, under which the net assets received are recorded at their carrying value as of date of transfer. The following table presents the carrying value of the identified assets received and liabilities assumed at the acquisition date (in thousands):
Cash and cash equivalents
$
1,935

Accounts receivable
3,629

Unbilled revenue
1,445

Other current assets
2,049

Property, plant and equipment, net
82,615

Other assets
1,000

Accounts payable
(11
)
Accrued expenses and other current liabilities
(4,077
)
Current portion of long-term debt
(893
)
Asset retirement obligation liability
(25,763
)
Total identifiable net assets
$
61,929


Subsequent to the contribution, the High Point System contributed $5.2 million of revenue and $2.0 million of net income attributable to the Partnership's Transmission segment, which are included in the condensed consolidated statement of operations for the three and six months ended June 30, 2013.

Chatom Gathering, Processing and Fractionation Plant
Effective July 1, 2012, we acquired an 87.4% undivided interest in the Chatom system from affiliates of Quantum Resources Management, LLC. The acquisition fair value consideration of $51.4 million includes a credit associated with the cash flow the Chatom system generated between January 1, 2012 and the effective date of July 1, 2012.  The consideration paid by the Partnership consisted of cash, which was funded by borrowings under our revolving credit facility.

The Chatom system is located in Washington County, Alabama, approximately 15 miles from our Bazor Ridge processing plant in Wayne County, Mississippi, and consists of a 25 MMcf/d refrigeration processing plant, a 1,900 Bbl/d fractionation unit, a 160 long-ton per day sulfur recovery unit, and a 29 mile gas gathering system. We believe the fractionating services provide flexibility to the Partnership's product and service offerings.

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The following table presents the fair value of consideration transferred to acquire the Chatom system and the amounts of identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the 12.6% noncontrolling interest in the Chatom system at the acquisition date (in thousands):
Cash
 
 
$
51,377

Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Unbilled revenue
 
 
$
4,535

Property, plant and equipment
58,279

Asset retirement cost
452

Accounts payable
 
 
(399
)
Accrued gas purchases
(3,631
)
Asset retirement obligations
(452
)
Noncontrolling interest
(7,407
)
Total identifiable net assets
$
51,377


The fair value of the property, plant and equipment and noncontrolling interests were estimated by applying a combination of the market and income approaches. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimates are based on i) an assumed cost of capital of 9.25%, ii) an assumed terminal value based on the present value of estimated EBITDA, iii) an inflationary cost increase of 2.5%, iv) forward market prices as of July 2012 for natural gas and crude oil, v) a Federal tax rate of 35% and a state tax rate of 6.5%, and vi) an increase in processed and fractionated volumes in 2013, declining thereafter. Working capital was estimated using net realizable value. Accrued revenue was deemed to be fully collectible at July 1, 2012.

Our 87.4% undivided interest in the Chatom system contributed $13.6 million and $27.3 million of revenue and $1.3 million and $2.4 million of net income attributable to the Partnership for the three and six months ended June 30, 2013, respectively which are included in the condensed consolidated statement of operations.

Other non-strategic midstream assets

We classify long-lived assets to be disposed of through sales that meet specific criteria as held for sale. We cease depreciating those assets effective on the date the asset is classified as held for sale. We record those assets at the lower of their carrying value or the estimated fair value less the cost to sell. Until the assets are disposed of, an estimate of the fair value is re-determined when related events or circumstances change.

During the second quarter of 2013, management was approved to commit to a plan to sell certain non-strategic gathering and processing assets which meet specific criteria as held for sale. As of June 30, 2013, certain gathering and processing assets were written down by $1.8 million to the estimated fair value less cost to sell. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimates are based on i) present value of estimated EBITDA, ii) an assumed discount rate of 10.0%, and iii) a decline in throughput volumes of 2.5% in 2013 and thereafter.

The net book value of the gathering and processing assets of $0.9 million are presented as Noncurrent assets held for sale, net on the condensed consolidated balance sheet. The following table presents the identifiable assets and liabilities of the assets classified as held for sale as of June 30, 2013 in the condensed consolidated balance sheet (in thousands):

Unbilled revenue
$
1,358

Property, plant and equipment, net
874

Accrued gas purchases
(1,222
)

As a result of the plan divestiture of these non-strategic midstream assets, we have accounted for these disposal groups as discontinued operations within our Gathering and Processing Segment. Accordingly, we reclassified and excluded the disposal group's results of operations from our results of continuing operations and reported the disposal group's results of operations as

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(Loss) gain from operations of disposal groups in our accompanying condensed consolidated statement of operations for all periods presented. We did not, however, elect to present separately the operating, investing and financing cash flows related to the disposal groups in our accompanying condensed consolidated statement of cash flows as this activity was immaterial for all periods presented. The following table presents the revenue, expense and (loss) gain from operations of disposal groups associated with the assets classified as held for sale for the three and six months ended June 30, 2013 and 2012 (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
3,921

 
$
2,738

 
$
7,559

 
$
5,592

Expense
3,983

 
2,662

 
7,548

 
5,491

Impairment
1,807

 

 
1,807

 

(Loss) gain from operations of disposal groups
(1,869
)
 
76

 
(1,796
)
 
101

Limited partners' net loss per unit from discontinued operations (basic and diluted)
$
(0.20
)
 
$
0.01

 
$
(0.19
)
 
$
0.01

4. Concentration of Credit Risk and Trade Accounts Receivable
Our primary market areas are located in the United States along the Gulf Coast and in the Southeast. We have a concentration of trade receivable balances due from companies engaged in the production, trading, distribution and marketing of natural gas, NGL and condensate products. This concentration of customers may affect our overall credit risk in that the customers may be similarly affected by changes in economic, regulatory or other factors. Generally, our customers’ historical financial and operating information is analyzed prior to extending credit. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions, we may request letters of credit, prepayments or guarantees. We maintain allowances for potentially uncollectible accounts receivable; however, for the six months ended June 30, 2013 and 2012, no allowances on or write-offs of accounts receivable were recorded.
The following table summarizes the percentage of revenue earned from those customers that exceed 10% or greater of the Partnership's consolidated revenue in the consolidated statement of operations for the each of the periods presented below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Customer A
25
%
 
29
%
 
27
%
 
31
%
Customer B
12
%
 
%
 
14
%
 
%
Customer C
12
%
 
12
%
 
12
%
 
13
%
Customer D
%
 
17
%
 
10
%
 
18
%
Other
51
%
 
42
%
 
37
%
 
38
%
Total
100
%
 
100
%
 
100
%
 
100
%
5. Derivatives
Commodity Derivatives
To minimize the effect of commodity prices and maintain our cash flow and the economics of our development plans, we enter into commodity hedge contracts from time to time. The terms of the contracts depend on various factors, including management’s view of future commodity prices, acquisition economics on purchased assets and future financial commitments. This hedging program is designed to mitigate the effect of commodity price downturns while allowing us to participate in some commodity price upside. Management regularly monitors the commodity markets and financial commitments to determine if, when, and at what level commodity hedging is appropriate in accordance with policies that are established by the board of directors of our general partner. Currently, the commodity derivatives are in the form of swaps, puts and collars. As of June 30, 2013, the aggregate notional volume of our commodity derivatives was 7.1 million gallons.
We enter into commodity contracts with multiple counterparties. We may be required to post collateral with our counterparties in connection with our derivative positions. As of June 30, 2013, we have not posted collateral with our counterparties. The

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counterparties are not required to post collateral with us in connection with their derivative positions. Netting agreements are in place with our counterparties that permit us to offset our commodity derivative asset and liability positions.

Interest Rate Swap

We entered into an interest rate swap to manage the impact of the interest rate risk associated with our credit facility, effectively converting a portion of the cash flows related to our long-term variable rate debt into fixed rate cash flows. As of June 30, 2013, the notional amount of our interest rate swap was $100 million. The interest rate swap was entered into with a single counterparty and we were not required to post collateral.

Weather Derivative

In the second quarter of 2013, we entered into a weather derivative to mitigate the impact of potential unfavorable weather to our operations under which we could receive payments totaling up to $10 million in the event that a hurricane or hurricanes of certain strength pass through the area as identified in the derivative agreement. The weather derivative is being accounted for using the intrinsic value method, under which the fair value of the contract is zero and any amounts received are recognized as gains during the period received. The weather derivative was entered into with a single counterparty and we were not required to post collateral. We paid a premium of approximately $1.1 million which is recorded in Risk management assets on the condensed consolidated balance sheet and is being amortized to Direct operating expense on a straight-line basis over the 12 month term of the contract. As of June 30, 2013, the unamortized amount of the risk management asset was approximately $1.0 million.
As of June 30, 2013 and December 31, 2012, the value associated with our commodity derivatives, interest rate swap instrument and weather derivative were recorded in our condensed consolidated balance sheets, under the captions as follows (in thousands):
 
 
Gross Risk Management Assets
 
Gross Risk Management Liabilities
 
Net Risk Management Assets (Liabilities)
Balance Sheet Classification
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
 
June 30, 2013
 
December 31, 2012
Current
 
$
2,153

 
$
1,889

 
$
(71
)
 
$
(920
)
 
$
2,082

 
$
969

Noncurrent
 

 

 

 

 

 

Total assets
 
$
2,153

 
$
1,889

 
$
(71
)
 
$
(920
)
 
$
2,082

 
$
969

 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
$

 
$

 
$
(290
)
 
$

 
$
(290
)
 
$

Noncurrent
 

 

 
(28
)
 

 
(28
)
 

Total liabilities
 
$

 
$

 
$
(318
)
 
$

 
$
(318
)
 
$

For the three and six months ended June 30, 2013 and 2012, respectively, the realized and unrealized gains (losses) associated with our commodity derivatives, interest rate swap instrument and weather derivative were recorded in our condensed consolidated statements of operations, under the captions as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,

Gain (loss) on derivatives
 
Gain (loss) on derivatives
Statement of Operations Classification
Realized
 
Unrealized
 
Realized
 
Unrealized
2013
 
 
 
 
 
 
 
Gain on commodity derivatives, net
$
360

 
$
554

 
$
536

 
$
73

Interest expense

 
(318
)
 

 
(318
)
Direct operating expenses
(95
)
 

 
(95
)
 

Total
$
265

 
$
236

 
$
441

 
$
(245
)
2012
 
 
 
 
 
 
 
Gain on commodity derivatives, net
$
664

 
$
3,171

 
$
609

 
$
3,494


6. Fair Value Measurement
The authoritative guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:

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Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets that are either directly or indirectly observable; and
Level 3 – Inputs are unobservable and considered significant to fair value measurement.
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy.
We believe the carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments would be classified as Level 1 under the fair value hierarchy.
The recorded value of the amounts outstanding under the credit facility approximates its fair value, as interest rates are variable, based on prevailing market rates and the short-term nature of borrowings and repayments under the credit facility. Our existing revolving credit facility would be classified as Level 1 under the fair value hierarchy.
The fair value of all derivatives instruments is estimated using a market valuation methodology based upon forward commodity price curves, volatility curves as well as other relevant economic measures, if necessary. Discount factors may be utilized to extrapolate a forecast of future cash flows associated with long dated transactions or illiquid market points. The inputs are obtained from independent pricing services, and we have made no adjustments to the obtained prices.
We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivatives contracts held. We will recognize transfers between levels at the end of the reporting period for which the transfer has occurred. We recognized transfers out of Level 3 into Level 2 as a result of changes in tenure and market points of certain contracts in the amount of $1.0 million for the year ended December 31, 2012. There were no such transfers for the three and six months ended June 30, 2013 and 2012.
Fair Value of Financial Instruments
The following table sets forth by level within the fair value hierarchy, our commodity derivative instruments and interest rate swap, included as part of Risk management assets and liabilities within the balance sheet, that were measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):
 
Carrying
Amount
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Commodity derivative instruments, net
 
 
 
 
 
 
 
 
 
June 30, 2013
$
1,042

 
$

 
$
1,042

 
$

 
$
1,042

December 31, 2012
$
969

 
$

 
$
969

 
$

 
$
969

Interest rate swap
 
 
 
 
 
 
 
 
 
June 30, 2013
$
(318
)
 
$

 
$
(318
)
 
$

 
$
(318
)
December 31, 2012
$

 
$

 
$

 
$

 
$


The premium paid to enter the weather derivative described in Note 5 "Derivatives", is included within Risk management assets within the balance sheet but is not included as part of the above table as it is recorded at amortized carrying cost, not fair value.
7. Property, Plant and Equipment
Property, plant and equipment, net, as of June 30, 2013 and December 31, 2012 were as follows (in thousands):
 
 
Useful Life
(in years)
 
June 30,
2013
 
December 31, 2012
Land
N/A
 
$
2,254

 
$
2,254

Construction in progress
N/A
 
2,531

 
5,053

Base gas
N/A
 
1,108

 

Buildings and improvements
4 to 40
 
1,664

 
1,432

Processing and treating plants
8 to 40
 
97,787

 
98,106

Pipelines
5 to 40
 
236,272

 
163,447

Compressors
4 to 20
 
9,485

 
8,957

Equipment
8 to 20
 
5,237

 
4,785

Computer software
5
 
2,539

 
1,950

Total property, plant and equipment
 
 
358,877

 
285,984

Accumulated depreciation
 
 
(75,924
)
 
(62,165
)
Property, plant and equipment, net
 
 
$
282,953

 
$
223,819

Of the gross property, plant and equipment balances at June 30, 2013 and December 31, 2012, $98.1 million and $26.1 million, respectively, were related to AlaTenn, Midla and HPGT, our FERC regulated interstate assets.

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Capitalized interest was less than $0.1 million for the three and six months ended June 30, 2013.
Depreciation expense was $6.7 million and $12.3 million for the three and six months ended June 30, 2013, respectively.
Asset Impairments
During the second quarter of 2013, management determined to change its commercial approach towards certain non-strategic gathering and processing assets. As a result, an asset impairment charge of $15.2 million was recorded in the three months ended June 30, 2013. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimates are based on i) present value of estimated EBITDA, ii) an assumed discount rate of 10.0%, and iii) an decline in throughput volumes of 2.5% in 2013 and thereafter.
During the second quarter of 2013, management was approved to commit to a plan to sell certain non-strategic gathering and processing assets which meet specific criteria as held for sale. As of June 30, 2013, certain gathering and processing assets were written down by $1.8 million to the estimated fair value less cost to sell. See Note 3 "Acquisitions and Divestitures".
Insurance proceeds
Involuntary conversions result from the loss of an asset because of some unforeseen event (e.g., destruction due to hurricanes). Some of these events are insurable, thus resulting in a property damage insurance recovery. Amounts we receive from insurance carriers are net of any deductibles related to the covered event. During the three and six months ended June 30, 2013, we collected $0.5 million and $1.1 million, respectively, of nonrefundable cash proceeds from our insurance carrier. During the first quarter of 2013, $0.5 million of nonrefundable cash proceeds were recognized as an offset to property, plant and equipment write-downs of $0.1 million and presented as $0.4 million under the caption Gain (loss) on involuntary conversion of property, plant and equipment. During the second quarter of 2013, $0.6 million of nonrefundable cash proceeds were associated with business interruption and recorded to Revenue in the condensed consolidated statement of operations.

8. Asset Retirement Obligations
We record a liability for the fair value of asset retirement obligations and conditional asset retirement obligations that we can reasonably estimate, on a discounted basis, in the period in which the liability is incurred. We collectively refer to asset retirement obligations and conditional asset retirement obligations as ARO.
Certain assets related to our transmission segment have regulatory obligations to perform remediation and, in some instances, dismantlement and removal activities when the assets are abandoned. These asset retirement obligations include varying levels of activity including disconnecting inactive assets from active assets, cleaning and purging assets, and in some cases, completely removing the assets and returning the land to its original state. These assets have been in existence for many years and with regular maintenance will continue to be in service for many years to come. It is not possible to predict when demand for these transmission services will cease, and we do not believe that such demand will cease for the foreseeable future. A portion of our regulatory obligations is related to assets that we plan to take out of service.


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The following table is a reconciliation of the asset retirement obligations (in thousands):
Asset retirement obligation at December 31, 2012
$
8,319

Obligations assumed
25,764

Accretion expense
167

Asset retirement obligation at June 30, 2013
$
34,250

We recorded accretion expense, which is included in Depreciation and accretion expense, of approximately $0.1 million and approximately $0.2 million in our consolidated statements of operations for each of the three and six months ended June 30, 2013, respectively and less than $0.1 million for the three and six months ended June 30, 2012.
We are required to establish security against any potential secondary obligations relating to the abandonment of the certain transmission assets that may be imposed on the previous owner by applicable regulatory authorities. As such, we have a restricted cash account that is established, held, and maintained by a third party that amounts to $1.0 million and is presented in Other assets, net in our condensed consolidated balance sheet as of June 30, 2013.
9. Debt Obligations
Credit facility
As of December 31, 2012, the total leverage ratio test, one of the primary financial covenants that we were required to maintain under our credit facility, was limited to a maximum of 4.50 times. At December 31, 2012, our total indebtedness was approximately $130.9 million, which caused our total leverage to EBITDA ratio to be approximately 5.70-to-1. As a result, on December 26, 2012, the Partnership entered into the Third Amendment and Waiver to Credit Agreement, dated as of December 26, 2012 (the “Third Amendment”). The Third Amendment provided for a waiver of the Partnership's compliance with the Consolidated Total Leverage Ratio with respect to the quarter ending December 31, 2012 and for one month thereafter. The Third Amendment also required the Partnership to provide certain financial and operating information of the Partnership on a monthly basis for 2013 and for any month after 2013 in which the Consolidated Total Leverage Ratio of the Partnership is in excess of 4.00 to 1.00. The remaining material terms and conditions of the senior secured revolving credit facility, including pricing, maturity and covenants, remained unchanged by the Third Amendment.
On January 24, 2013, the Partnership entered into the second waiver to the credit facility that extended the waiver period with respect to the Consolidated Total Leverage Ratio to March 31, 2013 (and subsequently extended to April 16, 2013). Additional covenants during the waiver period included i) total outstanding borrowings under the credit facility shall not exceed $150.0 million; ii) restrictions on certain acquisitions; iii) an increase to the Eurodollar Rate by 0.50%; iv) additional fees of 0.125% of the principal amount on each of February 28, 2013 and March 31, 2013; and v) execution of a compliance certificate.
We were in compliance with the Consolidated Total Leverage Covenant Ratio test, which was 4.62, under our credit facility as of June 30, 2013, in accordance with the leverage covenants as modified in the Fourth Amendment to the credit facility executed on April 15, 2013. As of June 30, 2013, we had approximately $126.3 million of outstanding borrowings and approximately $34.6 million of available borrowing capacity as a result of the reduction of our borrowing capacity to a total of $175 million as described herein.
See Note 17 "Liquidity" for further updates to our liquidity and long-term debt.
Other debt
Other debt represents insurance premium financing in the original amounts of $3.3 million bearing interest at between 3.22% and 4.00% per annum, which is repayable in equal monthly installments of approximately $0.4 million through the fourth quarter of 2013.
Our outstanding borrowings under debt at June 30, 2013 and December 31, 2012, respectively, were (in thousands):
 

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June 30,
2013
 
December 31, 2012
Revolving loan facility
$
123,660

 
$
128,285

Other debt
1,250

 


124,910

 
128,285

Less: current portion
1,250

 


$
123,660

 
$
128,285

At June 30, 2013 and December 31, 2012, letters of credit outstanding under the credit facility were $2.6 million.
In connection with our credit facility and amendments thereto, we incurred $5.7 million in debt issuance costs that are being amortized on a straight-line basis over the term of the credit facility.
10. Partners’ Capital and Convertible Preferred Units
Our capital accounts are comprised of approximately 2% general partner interest and 98% limited partner interests. Our limited partners have limited rights of ownership as provided for under our partnership agreement and the right to participate in our distributions. Our general partner manages our operations and participates in our distributions, including certain incentive distributions pursuant to the incentive distribution rights that are non-voting limited partner interests held by our general partner.
Series A Convertible Preferred Units
On April 15, 2013, the Partnership, our general partner and AIM Midstream Holdings, LLC entered in the ArcLight Transactions with High Point, pursuant to which High Point (i) acquired 90% of our general partner and all of our subordinated units from AIM Midstream Holdings and (ii) contributed certain midstream assets and $15.0 million in cash to us in exchange for 5,142,857 Series A Units issued by the Partnership.  Of the $15.0 million cash consideration paid by High Point, approximately $2.5 million was used to pay certain transaction expenses of High Point, and the remaining approximately $12.5 million was used to repay borrowings outstanding under the Partnership's credit facility in connection with the Fourth Amendment. As a result of these transactions, which were also consummated on April 15, 2013, High Point acquired both control of our general partner and a majority of our outstanding limited partnership interests. On April 15, 2013, our general partner entered into the Third Amended & Restated
Agreement of Limited Partnership (the “Amended Partnership Agreement”) of the Partnership providing for the creation and designation of the rights, preferences, terms and conditions of the Series A Units.
The Series A Units receive dividends prior to distributions to Partnership common unitholders. Through October 1, 2014, the dividends distributed to the Series A Unitholders are equal to $0.25 per unit and additional Series A Units in an amount equal to the cash portion of the distribution. Subsequent to that date, the distribution will be the greater of the distribution to be made to common unitholders or approximately $0.50 per unit. The Series A Units may be converted into common units on a one-to-one basis, subject to customary anti-dilutive adjustments, at the option of the unitholders on or any time after January 14, 2014.
Upon any liquidation and winding up of the Partnership or the sale of substantially all of the assets of the Partnership, the holders of Series A Preferred Units generally will be entitled to receive, in preference to the holders of any of the Partnership's other securities, an amount equal to the sum of the $17.50 multiplied by the number of Series A Units owned by such holders, plus all accrued but unpaid distributions on such Series A Preferred Units.
Prior to the consummation of any recapitalization, reorganization, consolidation, merger, spin-off or other business combination in which the holders of common units are to receive securities, cash or other assets (a “Partnership Event”), we are obligated to make an irrevocable written offer, subject to consummation of the Partnership Event, to each holder of Series A Preferred Units to redeem all (but not less than all) of such holder's Series A Preferred Units for a price per Series A Preferred Unit payable in cash equal to the greater of:
the sum of $17.50 and all accrued and accumulated but unpaid distributions for each Series A Preferred Unit; and
an amount equal to the product of:
(i) the number of common units into which each Series A Preferred Unit is convertible; and
(ii) the sum of:
(A) the cash consideration per common unit to be paid to the holders of common units pursuant to the Partnership Event, plus
(B) the fair market value per common unit of the securities or other assets to be distributed to the holders of the common units pursuant to the Partnership Event.
Upon receipt of such a redemption offer from us, each holder of Series A Preferred Units may elect to receive such cash amount or a preferred security issued by the person surviving or resulting from such Partnership Event and containing provisions substantially equivalent to the provisions set forth in the Amended Partnership Agreement with respect to the Series A Preferred Units without material abridgement.
The Series A Preferred Units have voting rights that are identical to the voting rights of the common units and will vote with the common units as a single class, with each Series A Preferred Unit entitled to one vote for each common unit into which such Series A Preferred Unit is convertible.
The fair value of the Series A Units on April 15, 2013 was $17.50 per unit, or $90.0 million and was issued by the Partnership in exchange for cash of approximately $12.5 million and net assets of $61.9 million contributed to the Partnership by our general partner.  The contribution of net assets of the High Point system was accounted for as a transaction between entities under common control whereby the High Point system was recorded at historical book value.  As such, the value of the Series A Units in excess of the net asset contributed by our general partner amounted to $15.6 million and was allocated pro-rata to the general partner and existing limited partners interest based on their ownership interests. The fair value measurement was based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined by ASC 820. Primarily using the income approach, the fair value estimate was based on i) present value of estimated future contracted distributions, ii) an assumed discount rate of 18.0%, and iii) an assumed distribution growth rate of 1.0% in 2014 and thereafter.
The numbers of units outstanding as of June 30, 2013 and December 31, 2012, respectively, were as follows (in thousands):
 
June 30,
2013
 
December 31, 2012
Limited partner common units
4,683

 
4,639

Limited partner subordinated units
4,526

 
4,526

Preferred units
5,143

 

General partner units
185

 
185


Net Income (Loss) attributable to Limited Common and General Partner Units
Net income (loss) attributable to the general partner and the limited partners (common and subordinated unit holders) is allocated in accordance with their respective ownership percentages, after giving effect to incentive distributions paid to the general partner. Basic net income per limited partner unit is computed based on the weighted average number of units outstanding during the

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period. Diluted net income per limited partner unit is computed based on the weighted average number of units plus the effect of dilutive potential units outstanding during the period. Unvested share-based payment awards that contain non-forfeitable rights to distributions (whether paid or unpaid) are classified as participating securities and are included in our computation of diluted net income per limited partner unit. There was no dilutive effect of unit based awards for the three and six months ended June 30, 2013. The dilutive effect of unit based awards was 172,552 equivalent units during the three and six months ended June 30, 2012.
We compute earnings per unit using the two-class method. The two-class method requires that securities that meet the definition of a participating security be considered for inclusion in the computation of basic earnings per unit. Under the two-class method, earnings per unit is calculated as if all of the earnings for the period were distributed under the terms of our Partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.
The two-class method does not impact our overall net income or other financial results; however, in periods in which aggregate net income exceeds our aggregate distributions for such period, it will have the impact of reducing net income per limited partner unit. This result occurs as a larger portion of our aggregate earnings, as if distributed, is allocated to the incentive distribution rights of the general partner, even though we make distributions on the basis of available cash and not earnings.
The following table is the calculation of net income (loss) per limited partner unit for the three and six months ended June 30, 2013 and 2012, respectively (in thousands, with the exception of per unit amounts):

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income from continuing operations
$
(19,768
)
 
$
2,251

 
$
(23,394
)
 
$
3,917

Less:
 
 
 
 
 
 
 
Declared cash distribution on Series A Preferred Units
1,074

 

 
1,074

 

Declared PIK distribution on Series A Preferred Units
1,074

 

 
1,074

 

Fair value of Series A Preferred Units in excess of value of contributed High Point System
15,612

 

 
15,612

 

General partners' distribution
80

 
81

 
160

 
161

General partners' share in undistributed loss
(820
)
 
(35
)
 
(970
)
 
(82
)
Net (loss) income from continuing operations available to limited partners
$
(36,788
)
 
$
2,205

 
$
(40,344
)
 
$
3,838

 
 
 
 
 
 
 
 
Net (loss) income attributable to the Partnership
$
(21,637
)
 
$
2,327

 
$
(25,190
)
 
$
4,018

Less:
 
 
 
 
 
 
 
Declared cash distribution on Series A Preferred Units
1,074

 

 
1,074

 

Declared PIK distribution on Series A Preferred Units
1,074

 

 
1,074

 

Fair value of Series A Preferred Units in excess of value of contributed High Point System
15,612

 

 
15,612

 

General partners' distribution
80

 
81

 
160

 
161

General partners' share in undistributed loss
(861
)
 
(34
)
 
(1,013
)
 
(80
)
Net (loss) income available to limited partners
$
(38,616
)
 
$
2,280

 
$
(42,097
)
 
$
3,937

 
 
 
 
 
 
 
 
Weighted average number of units used in computation of limited partners’ net (loss) income per unit (basic)
9,198

 
9,107

 
9,183

 
9,100

 
 
 
 
 
 
 
 
Limited partners’ net (loss) income from continuing operations per unit (basic)
$
(4.00
)
 
$
0.24

 
$
(4.39
)
 
$
0.42

Limited partners’ net (loss) income per unit (basic)
$
(4.20
)
 
$
0.25

 
$
(4.58
)
 
$
0.43

 
 
 
 
 
 
 
 
Weighted average number of units used in computation of limited partners’ net (loss) income per unit (diluted)
9,198

 
9,276

 
9,183

 
9,263

 
 
 
 
 
 
 
 
Limited partners’ net (loss) income from continuing operations per unit (diluted)
$
(4.00
)
 
$
0.24

 
$
(4.39
)
 
$
0.41

Limited partners’ net (loss) income per unit (diluted)
$
(4.20
)
 
$
0.25

 
$
(4.58
)
 
$
0.43

Distributions
We made distributions of $7.8 million and $8.0 million in the six months ended June 30, 2013 and 2012, respectively. We made no distributions in respect of our general partner’s incentive distribution rights during 2013 or 2012. We depend on our credit facility for future capital needs and may use it to fund a portion of cash distributions to unitholders, as necessary, depending on the level of our operating cashflow.
As a result of the issuance of the Series A Units, we have accrued $1.1 million equal to the cash portion of the distribution and $1.1 million equal to the additional Series A Units in an amount equal to the cash portion of the distribution payable in the third quarter of 2013.
11. Long-Term Incentive Plan
Our general partner manages our operations and activities and employs the personnel who provide support to our operations. On November 2, 2009, the board of directors of our general partner adopted a long-term incentive plan (“LTIP”) for its employees, consultants and directors who perform services for it or its affiliates. On May 25, 2010, the board of directors of our general partner adopted an amended and restated LTIP. On July 11, 2012, the board of directors of our general partner adopted a second amended and restated LTIP that effectively increased available awards by 871,750 units. At June 30, 2013 and December 31, 2012, 870,555 and 920,193 units, respectively, were available for future grant under the LTIP, giving retroactive treatment to the reverse unit split in connection with our recapitalization described in our Annual Report.
Ownership in the awards is subject to forfeiture until the vesting date. The LTIP is administered by the board of directors of our general partner. The board of directors of our general partner, at its discretion, may elect to settle such vested phantom units with a number of units equivalent to the fair market value at the date of vesting in lieu of cash. Although, our general partner has the option to settle in cash upon the vesting of phantom units, our general partner does not currently intend to settle these awards in cash. Although other types of awards are contemplated under the LTIP, all currently outstanding awards are phantom units without distribution equivalent rights ("DERs"). Generally, grants issued under the LTIP vest in increments of 25% on each of the first four anniversary dates of the date of the grant and do not contain any other restrictive conditions related to vesting other than continued employment.
The following table summarizes our unit-based awards for each of the periods indicated, in units:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Outstanding at beginning of period
101,950

 
142,552

 
90,938

 
162,860

Granted
56,467

 
34,560

 
80,388

 
34,560

Forfeited
(10,000
)
 

 
(12,426
)
 

Vested
(51,684
)
 
(4,560
)
 
(62,167
)
 
(24,868
)
Outstanding at end of period
96,733

 
172,552

 
96,733

 
172,552

Fair value per unit
$13.36 to $21.89
 
$14.70 to  $21.40
 
$13.36 to $21.89
 
$14.70 to  $21.40
The fair value of our phantom units, which are subject to equity classification, is based on the fair value of our units at the grant date. Compensation costs related to these awards, including amortization, for the three months ended June 30, 2013 and 2012 was $1.1 million and $0.5 million, respectively, and for the six months ended June 30, 2013 and 2012 was $1.5 million and $0.8 million, respectively, which is classified as equity compensation expense in the condensed consolidated statements of operations and the non-cash portion in partners’ capital on the condensed consolidated balance sheets.
The total fair value of vested units at the time of vesting was $1.1 million and $0.5 million for the six months ended June 30, 2013 and 2012, respectively.
The total compensation cost related to unvested awards not yet recognized at June 30, 2013 and 2012 was $1.1 million and $2.6 million, respectively, and the weighted average period over which this cost is expected to be recognized as of June 30, 2013 is approximately 1.2 years.
12. Post-Employment Benefits
We sponsor a contributory post-retirement plan that provides medical, dental and life insurance benefits for qualifying U.S. retired employees (referred to as the “OPEB Plan”).
The following table summarizes the components of net periodic benefit recognized in the condensed consolidated statements of operations (in thousands):

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Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
1

 
$
1

 
$
2

 
2

Interest cost
4

 
4

 
8

 
8

Expected return on plan assets
(17
)
 
(16
)
 
(35
)
 
(33
)
Amortization of net gain
(6
)
 
(9
)
 
(12
)
 
(18
)
Net periodic benefit
$
(18
)
 
$
(20
)
 
$
(37
)
 
$
(41
)
Future contributions to the Plans
We expect to make contributions to the OPEB Plan for the year ending December 31, 2013 of $0.1 million.
13. Commitments and Contingencies
Environmental matters
We are subject to federal and state laws and regulations relating to the protection of the environment. Environmental risk is inherent to natural gas pipeline and processing operations and we could, at times, be subject to environmental cleanup and enforcement actions. We attempt to manage this environmental risk through appropriate environmental policies and practices to minimize any impact our operations may have on the environment.
Commitments and contractual obligations
Future non-cancellable commitments related to certain contractual obligations as of June 30, 2013 are presented below (in thousands):
 
 
Payments Due by Period
 
Total
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
Operating leases and service contracts (a)
$
3,605

 
$
338

 
$
692

 
$
677

 
$
408

 
$
353

 
$
1,137

Asset retirement obligations
34,250

 

 

 

 
7,867

 

 
26,383

Total
$
37,855

 
$
338

 
$
692

 
$
677

 
$
8,275

 
$
353

 
$
27,520

(a) - Operating leases and service contracts have been reduced by total minimum sublease rentals of $52 due in the future under noncancelable subleases.
Total expenses related to operating leases, asset retirement obligations, land site leases and right-of-way agreements were (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Operating leases
$
265

 
$
225

 
$
484

 
$
439

Asset retirement obligation
157

 
7

 
167

 
13

 
$
422

 
$
232

 
$
651

 
$
452


14. Related-Party Transactions
Employees of our general partner are assigned to work for us. Where directly attributable, the costs of all compensation, benefits expenses and employer expenses for these employees are charged directly by our general partner to American Midstream, LLC, which, in turn, charges the appropriate subsidiary. Our general partner does not record any profit or margin for the administrative and operational services charged to us. During the three and six months ended June 30, 2013, administrative and operational services expenses of $3.8 million and $6.3 million, respectively, were charged to us by our general partner. During the three and six months ended June 30, 2012, administrative and operational services expenses of $2.5 million and $6.2 million, respectively, were charged to us by our general partner. For the three and six months ended June 30, 2013, our general partner incurred approximately $0.2 million and $0.5 million, respectively, of costs associated with certain business development activities.  If the

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business development activities result in a project that will be pursued and funded by the Partnership, we will reimburse our general partner for the business development costs related to that project.
15. Reporting Segments
Our operations are located in the United States and are organized into two reporting segments: (1) Gathering and Processing and (2) Transmission.
Gathering and Processing
Our Gathering and Processing segment provides “wellhead-to-market” services, which include transporting raw natural gas from the wellhead through gathering systems, treating the raw natural gas, processing raw natural gas to separate the NGLs from the natural gas, performing fractionation and selling or delivering pipeline-quality natural gas and NGLs to various markets and pipeline systems, to producers of natural gas and oil.
Transmission
Our Transmission segment transports and delivers natural gas from producing wells, receipt points or pipeline interconnects for shippers and other customers, including local distribution companies, or LDCs, utilities and industrial, and commercial and power generation customers.
These segments are monitored separately by management for performance and are consistent with internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. Gross margin is a performance measure utilized by management to monitor the business of each segment.
The contribution of the High Point system, which occurred concurrently with HPIP's acquisition of 90% of our general partner, is presented within our Transmission segment. The following tables set forth our segment information for the three and six months ended June 30, 2013 and 2012 (in thousands):
 
 
Three Months Ended
 
June 30,
 
2013
 
2012
 
Gathering
and
Processing
 
Transmission
 
Total
 
Gathering
and
Processing
 
Transmission
 
Total
Revenue
$
49,175

 
$
24,653

 
$
73,828

 
$
28,218

 
$
11,269

 
$
39,487

Segment gross margin (a)
9,340

 
7,583

 
16,923

 
8,468

 
2,786

 
11,254

Gain on commodity derivatives, net
914

 

 
914

 
3,835

 

 
3,835

Direct operating expenses
3,565

 
3,556

 
7,121

 
2,069

 
1,125

 
3,194

Selling, general and administrative expenses
 
 
 
 
4,588

 
 
 
 
 
3,668

Equity compensation expense
 
 
 
 
1,097

 
 
 
 
 
467

Depreciation and accretion expense
 
 
 
 
6,698

 
 
 
 
 
5,092

Gain on sale of assets, net
 
 
 
 

 
 
 
 
 
117

Loss on impairment of property, plant and equipment
 
 
 
 
(15,232
)
 
 
 
 
 

Interest and other expense
 
 
 
 
(2,190
)
 
 
 
 
 
(825
)
(Loss) gain on discontinued operations
 
 
 
 
(1,869
)
 
 
 
 
 
76

Net (loss) income
 
 
 
 
(21,449
)
 
 
 
 
 
2,327

Less: Net income attributable to noncontrolling interests
 
 
 
 
188

 
 
 
 
 

Net (loss) income attributable to the Partnership
 
 
 
 
$
(21,637
)
 
 
 
 
 
$
2,327

 

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Six Months Ended
 
June 30,
 
2013
 
2012
 
Gathering
and
Processing
 
Transmission
 
Total
 
Gathering
and
Processing
 
Transmission
 
Total
Revenue
$
94,297

 
$
39,316

 
$
133,613

 
$
59,670

 
$
24,407

 
$
84,077

Segment gross margin (a)
18,340

 
11,581

 
29,921

 
17,012

 
6,803

 
23,815

Gain on commodity derivatives, net
609

 

 
609

 
4,103

 

 
4,103

Direct operating expenses
6,982

 
4,941

 
11,923

 
3,871

 
2,208

 
6,079

Selling, general and administrative expenses
 
 
 
 
8,013

 
 
 
 
 
6,997

Equity compensation expense
 
 
 
 
1,485

 
 
 
 
 
798

Depreciation and accretion expense
 
 
 
 
12,344

 
 
 
 
 
10,218

Gain on involuntary conversion of property, plant and equipment
 
 
 
 
343

 
 
 
 
 

Gain on sale of assets, net
 
 
 
 

 
 
 
 
 
122

Loss on impairment of property, plant and equipment
 
 
 
 
(15,232
)
 
 
 
 
 

Interest and other expense
 
 
 
 
(3,921
)
 
 
 
 
 
(1,582
)
(Loss) gain on discontinued operations (b)
 
 
 
 
(1,796
)
 
 
 
 
 
101

Net (loss) income
 
 
 
 
(24,847
)
 
 
 
 
 
4,018

Less: Net income attributable to noncontrolling interests
 
 
 
 
343

 
 
 
 
 

Net (loss) income attributable to the Partnership
 
 
 
 
$
(25,190
)
 
 
 
 
 
$
4,018


(a)
Segment gross margin for our Gathering and Processing segment consists of revenue, realized gain (loss) on commodity derivatives less construction, operating and maintenance agreement (“COMA”) income, less purchases of natural gas, NGLs and condensate (inclusive, of gross margin from discontinued operations). Segment gross margin for our Transmission segment consists of revenue, less COMA income, less purchases of natural gas. Gross margin consists of the sum of the segment gross margin amounts for each of these segments. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income or cash flow from operations as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate gross margin in the same manner. Effective October 1, 2012, we changed our segment gross margin measure to exclude COMA income. For the three months ended June 30, 2013 and 2012, $0.1 million and $0.1 million in COMA income was excluded from our Gathering and Processing segment gross margin, respectively and less than $0.1 million and $0.8 million in COMA income was excluded from our Transmission segment gross margin, respectively. For the six months ended June 30, 2013 and 2012, $0.1 million and $0.6 million in COMA income was excluded from our Gathering and Processing segment gross margin, respectively and less than $0.1 million and $1.6 million in COMA income was excluded from our Transmission segment gross margin, respectively.
(b)
(Loss) gain on discontinued operations impacts our Gathering and Processing segment.

Asset information, including capital expenditures, by segment is not included in reports used by our management in their monitoring of performance and therefore is not disclosed.

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16. Subsidiary Guarantors

The Partnership has filed a registration statement on Form S-3 with the SEC to register, among other securities, debt securities. The subsidiaries of the Partnership (the "Subsidiaries") will be co-registrants with the Partnership, and the registration statement will register guarantees of debt securities by one or more of the Subsidiaries (other than American Midstream Finance Corporation, a 100% owned subsidiary of the Partnership whose sole purpose is to act as co-issuer of such debt securities). The financial position and operations of the co-issuer are minor and therefore have been included with the Parent's financial information. As of June 30, 2012, the Subsidiaries were 100% owned by the Partnership and any guarantees by the Subsidiaries will be full and unconditional. Beginning July 1, 2012, the Subsidiaries have had an investment in the non-guarantor subsidiaries equal to a 87.4% undivided interest in its Chatom system. The Partnership has no assets or operations independent of the Subsidiaries, and there are no significant restrictions upon the ability of the Subsidiaries to distribute funds to the Partnership. In the event that more than one of the Subsidiaries provide guarantees of any debt securities issued by the Partnership, such guarantees will constitute joint and several obligations. None of the assets of the Partnership or the Subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act of 1933, as amended. For purposes of the following unaudited condensed consolidating financial information, the Partnership's investments in its Subsidiaries and the guarantor subsidiaries' investment in its 87.4% undivided interest in the Chatom system are presented in accordance with the equity method of accounting. The financial information may not necessarily be indicative of the financial position, results of operations, or cash flows had the subsidiary guarantors operated as independent entities. Condensed consolidating financial information for the Partnership, its combined guarantor subsidiaries and non-guarantor subsidiary as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 is as follows (in thousands):

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 Condensed Consolidating Balance Sheet
 
June 30, 2013
 
 Parent
 Guarantor Subsidiaries
 Non-Guarantor Subsidiaries
 Consolidating Adjustments
 Consolidated
Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
1

$
422

$

$

$
423

Accounts receivable

2,114

1,108


3,222

Unbilled revenue

21,585

3,894


25,479

Risk management assets

2,082



2,082

Other current assets

5,096

434


5,530

Total current assets
1

31,299

5,436


36,736

Property, plant and equipment, net

223,947

59,006


282,953

Noncurrent assets held for sale, net

874



874

Investment in subsidiaries
122,621

47,587


(170,208
)

Other assets, net

6,380



6,380

Total assets
$
122,622

$
310,087

$
64,442

$
(170,208
)
$
326,943

 
 
 
 
 
 
Liabilities, Equity and Partners’ Capital
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$

$
(47
)
$
6,230

$

$
6,183

Accrued gas purchases

16,632

2,749


19,381

Accrued expenses and other current liabilities
1,073

11,681

72


12,826

Current portion of long-term debt

1,250



1,250

Risk management liabilities

290



290

Total current liabilities
1,073

29,806

9,051


39,930

Risk management liabilities

28



28

Assets retirement obligations

34,250