their credit or commercial obligations. Where possible, we have obtained additional collateral agreements,
letters of credit from highly rated banks, or have managed credit lines, to mitigate a portion of these risks.
Impact of Inflation
Inflation has been relatively low in the United States in recent years. However, the inflation rates
impacting our business fluctuate throughout the broad economic and energy business cycles. Consequently, our
costs for chemicals, utilities, materials and supplies, labor and major equipment purchases may increase during
periods of general business inflation or periods of relatively high energy commodity prices.
Other
The above factors, including sustained deterioration in commodity prices, volumes or other market
declines, including a decline in our unit price, may negatively impact our results of operations, and may
increase the likelihood of a non-cash impairment charge or non-cash lower of cost or market inventory
adjustments.
Recent Events
On January 3, 2012, we entered into a 2-year Term Loan Agreement with Wells Fargo Bank, National
Association, SunTrust Bank and The Bank of Tokyo-Mitsubishi UFJ, Ltd. as lenders. We borrowed $135.0
million under the term loan on January 3, 2012, which was used to fund the acquisition of the remaining 49.9%
interest in East Texas.
On January 3, 2012, we completed the acquisition of the remaining 49.9% interest in East Texas from DCP
Midstream for aggregate consideration of $165.0 million, subject to certain working capital and other
customary purchase price adjustments. The transaction was financed at closing through the execution of a term
loan and the issuance of 727,520 common units to DCP Midstream, LLC. Prior to the contribution of the
additional interest in East Texas, we owned a 50.1% interest which we accounted for as a consolidated
subsidiary. The contribution of the remaining 49.9% interest in East Texas represents a transaction between
entities under common control, but does not represent a change in reporting entity. Accordingly, we will
include the results of the remaining 49.9% interest in East Texas prospectively from the date of contribution.
On January 18, 2012, we, along with Williams Partners L.P., announced a planned expansion of the
Discovery natural gas gathering pipeline system in the deepwater Gulf of Mexico. Discovery intends to
construct the Keathley Canyon Connector, a 20-inch diameter, 215-mile subsea natural gas gathering pipeline
for production from the Keathley Canyon, Walker Ridge and Green Canyon areas in the central deepwater Gulf
of Mexico. The Keathley Canyon Connector will originate in the southeast portion of the Keathley Canyon area
and terminate into Discovery’s 30-inch diameter mainline near South Timbalier Block 283. The pipeline will be
capable of gathering more than 400 MMcf/d of natural gas. Discovery has signed long-term fee-based
agreements with the Lucius and Hadrian South owners for natural gas gathering and processing for production
from those fields. Construction on the project is expected to begin in 2013, with a mid-2014 expected in-service
date. Total capital expenditures for the Keathley Canyon Connector are estimated to be approximately $600.0
million, of which our portion is approximately $240.0 million.
On January 26, 2012, the board of directors of the general partner declared a quarterly distribution of $0.65
per unit, payable on February 14, 2012 to unitholders of record on February 7, 2012.
On February 27, 2012, we entered into agreements with DCP Midstream, LLC, to acquire the remaining
66.67% interest in Southeast Texas, and natural gas commodity derivatives associated with the storage
business, for aggregate consideration of $240.0 million, subject to certain working capital and other customary
purchase price adjustments. DCP Midstream, LLC also provided fixed price NGL commodity hedges for the
three year period subsequent to closing the newly acquired interest. Prior to the acquisition of the additional
interest in Southeast Texas, we owned a 33.33% interest which we account for as an unconsolidated affiliate
using the equity method. The acquisition of the remaining 66.67% interest in Southeast Texas represents a
transaction between entities under common control and a change in reporting entity. Accordingly, we will
include the results of the remaining 66.67% interest in Southeast Texas retrospectively similar to the pooling
method. This acquisition is expected to close by the second quarter of 2012.
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