Add
KGS to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| KGS > SEC Filings for KGS > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
• our ability to compete with other midstream companies for volumes from successful new wells; and
• our pursuit of new opportunities where a limited number of midstream companies conduct business.
We routinely monitor producer activity in the areas served by our operation
to pursue new supply opportunities.
Adjusted Gross Margin - Adjusted gross margin information is presented as a
supplemental disclosure because it is a primary performance measure used by
management to evaluate the relationship between our gathering and processing
revenues and our cost of operating our facilities and our general and
administrative overhead. Adjusted gross margin is not a measure calculated in
accordance with GAAP as it does not include deductions for cash payments such as
interest and capital expenditures which are necessary to maintain our business.
As an indicator of our operating performance, adjusted gross margin should not
be considered an alternative to, or more meaningful than, net income or
operating cash flow determined in accordance with GAAP. Our adjusted gross
margin may not be comparable to a similarly titled measure of other companies
because other entities may not calculate adjusted gross margin in the same
manner. A reconciliation of adjusted gross margin to amounts reported under GAAP
is presented in "Results of Operations" below.
Operating Expenses - Operating expenses are a separate measure that we use to
evaluate performance of field operations. These expenses are comprised primarily
of direct labor, insurance, property taxes, repair and maintenance expense,
utilities and contract services, and are largely independent of the volumes
through our systems, but may fluctuate depending on the scale of our operations
during a specific period.
EBITDA - We believe that EBITDA is a widely accepted financial indicator of a
company's operational performance and its ability to incur and service debt,
fund capital expenditures and make distributions. EBITDA is not a measure
calculated in accordance with GAAP, as it does not include deductions for items
such as interest and capital expenditures which are necessary to maintain our
business. EBITDA should not be considered as an alternative to net income,
operating cash flow or any other measure of financial performance presented in
accordance with GAAP. EBITDA calculations may vary among entities, so our
computation of EBITDA may not be comparable to EBITDA or similar measures of
other
entities. In evaluating EBITDA, we believe that investors should consider, among
other things, the amount by which EBITDA exceeds interest costs, how EBITDA
compares to principal payments on debt and how EBITDA compares to capital
expenditures for each period. A reconciliation of EBITDA to amounts reported
under GAAP is presented in "Results of Operations" below.
EBITDA is also used as a supplemental performance measure by our management
and by external users of our financial statements such as investors, commercial
banks, research analysts and others, to assess:
• financial performance of our assets without regard to financing methods,
capital structure or historical cost basis;
• our operating performance as compared to those of other midstream companies without regard to financing methods, capital structure or historical cost basis; and
• the viability of acquisitions and capital expenditures and the rates of return on investment opportunities.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 Compared with Three Months Ended
September 30, 2007
The following table and discussion relates to our unaudited condensed
consolidated results of operations for the three month periods ended
September 30, 2008 and 2007:
Three Months Ended September 30,
2008 2007
(In thousands, except volume data)
Total revenues $ 19,304 $ 10,282
Operations and maintenance expense 4,772 3,072
General and administrative expense 1,473 1,217
Adjusted gross margin 13,059 5,993
Other income 4 114
EBITDA 13,063 6,107
Depreciation and accretion expense 3,866 2,188
Interest expense 2,703 1,728
Income tax provision 106 92
Net income $ 6,388 $ 2,099
Volume Data:
Volumes gathered (MMcf) 19,591 9,554
Volumes processed (MMcf) 14,122 9,032
|
The following table summarizes our volumes for the three months ended September 30, 2008 and 2007:
Gathering Processing
2008 2007 2008 2007
(MMcf)
Cowtown Pipeline 15,130 9,415 14,122 9,032
Lake Arlington Dry System 3,174 - - -
Hill County Dry System 1,287 139 - -
Total 19,591 9,554 14,122 9,032
|
The following table summarizes the changes in our revenues:
Gathering Processing Other Total
(In thousands)
Revenue for the quarter ended
September 30, 2007 $ 4,602 $ 5,413 $ 267 $ 10,282
Volume changes 5,239 3,191 - 8,430
Price changes 386 248 (42 ) 592
Revenue for the quarter ended
September 30, 2008 $ 10,227 $ 8,852 $ 225 $ 19,304
|
Total Revenues and Volumes - Approximately $8.4 million of the increase was
due to the increases in volumes that we gathered and processed in the Fort Worth
Basin. This volume increase is due to increased well connections related to the
continued development of the Fort Worth Basin, particularly in the Hood County
and Lake Arlington areas. During September 2008, pipelines downstream of the
Cowtown plant experienced disruptions related to Hurricane Ike which curtailed
our gathering and processing. We estimate that average quarterly gathered and
processed volumes were impacted by 10 MMcfd during the third quarter, resulting
in an estimated $1.1 million in lost revenue for KGS.
Operations and Maintenance Expense - The increase in operating expense is
primarily due to the additional operating costs related to the continued
expansion of our natural gas gathering systems, particularly in the Hood County
and Lake Arlington areas. However, the increases in our operating and
maintenance expense has been less significant than the increases in our
throughput volumes and revenues. Operating expenses will likely increase in the
future based on facility expansion and inflation, although we expect these costs
to grow less than volume increases.
General and Administrative Expense - The increase in general and
administrative expense was primarily the result of the expansion of our
operations and the resulting increase in administrative and managerial personnel
and related expenses to support that growth, as well as costs recognized in 2008
in connection with being a publicly traded partnership for the entire reporting
period. General and administrative expense includes equity-based compensation
for the quarters ended September 30, 2008 and September 30, 2007 of $0.3 million
and $0.1 million, respectively.
Adjusted Gross Margin and EBITDA - Adjusted gross margin increased primarily
as a result of the increase in revenues described above. As a percentage of
revenues, adjusted gross margin has increased from 58% in the prior year quarter
to approximately 68% in the current quarter, primarily due to the increase in
revenues, which were partially offset by operations and maintenance expense
associated with our current scale of operations and higher general and
administrative expense.
Depreciation and Accretion Expense - Depreciation and accretion expense
increased primarily as a result of the higher gross cost of property, plant and
equipment as a result of capital expenditures made subsequent to September 30,
2007 to expand our gathering network.
Interest Expense - Interest expense increased primarily due to the increases
in the repurchase obligation to Parent and borrowings under the revolving credit
facility. Capitalized interest in 2008 reflects the construction of the Corvette
plant.
The following table summarizes the details of interest expense for the three
months ended September 30, 2008 and 2007:
Three Months Ended September 30,
2008 2007
(In thousands)
Interest cost:
Repurchase obligation $ 1,736 $ 1,016
Subordinated note to Parent 672 626
Revolving credit facility 847 86
Total cost 3,255 1,728
Less interest capitalized 552 -
Interest expense $ 2,703 $ 1,728
|
Nine Months Ended September 30, 2008 Compared with Nine Months Ended
September 30, 2007
The following table and discussion relates to our unaudited condensed
consolidated results of operations for the nine month periods ended
September 30, 2008 and 2007:
Nine Months Ended September 30,
2008 2007
(In thousands, except volume data)
Total revenues $ 52,694 $ 22,771
Operations and maintenance expense 15,034 8,063
General and administrative expense 4,712 2,353
Adjusted gross margin 32,948 12,355
Other income 10 149
EBITDA 32,958 12,504
Depreciation and accretion expense 10,429 5,307
Interest expense 7,542 1,939
Income tax provision 109 189
Net income $ 14,878 $ 5,069
Volume Data:
Volumes gathered (MMcf) 51,269 21,685
Volumes processed (MMcf) 40,870 20,015
|
The following table summarizes our volumes for the nine months ended September 30, 2008 and 2007:
Gathering Processing
2008 2007 2008 2007
(MMcf)
Cowtown Pipeline 42,459 21,546 40,870 20,015
Lake Arlington Dry System 6,198 - - -
Hill County Dry System 2,612 139 - -
Total 51,269 21,685 40,870 20,015
|
The following table summarizes the changes in our revenues:
Gathering Processing Other Total
(In thousands)
Revenue for the nine months ended
September 30, 2007 $ 10,450 $ 12,021 $ 300 $ 22,771
Volume changes 15,208 13,095 - 28,303
Price changes 698 547 375 1,620
Revenue for the nine months ended
September 30, 2008 $ 26,356 $ 25,663 $ 675 $ 52,694
|
Total Revenues and Volumes - Approximately $28.3 million of the increase was
due to the increase in volumes that we gathered and processed in the Fort Worth
Basin. This volume increase is due to increased well connections during the nine
months ended September 30, 2008. Revenues are expected to increase as more of
the Fort Worth Basin is developed and more reserves are produced. Further, our
expanded facilities, including the additional processing facility to be placed
into service in 2009, will likely result in more throughput and revenues for us.
During September 2008, pipelines downstream of the Cowtown plant experienced
disruptions related to Hurricane Ike which curtailed our gathering and
processing. We estimate that average quarterly gathered and processed volumes
were impacted by 10 MMcfd during the third quarter, resulting in an estimated
$1.1 million in lost revenue for KGS.
Operations and Maintenance Expense - The increase in operating expense is
mainly due to the continued expansion of our natural gas gathering system and
additional operating costs related to the natural gas processing facility placed
in service in March 2007. However, the increases in our operating and
maintenance expenses has been less significant than the increases in our
throughput volumes and revenues. Operating expenses will likely increase in the
future based on facility expansion and inflation, although we expect these costs
to grow less than volume increases.
General and Administrative Expense - The increase in general and
administrative expense was primarily the result of the expansion of our
operations and the resulting increase in administrative and managerial personnel
and related expenses to support that growth, as well as costs recognized in 2008
in connection with being a publicly traded partnership. General and
administrative expense includes equity-based compensation for the nine months
ended September 30, 2008 and 2007 of $1.0 million and $0.1 million,
respectively.
Adjusted Gross Margin and EBITDA - Adjusted gross margin increased primarily
as a result of the increase in revenues described above. As a percentage of
revenues, adjusted gross margin has increased from 54% in the prior year
nine-month period to approximately 63% in the current year nine-month period,
primarily due to the increase in revenues, which were partially offset by
operations and maintenance expense associated with our current scale of
operations and higher general and administrative expense.
Depreciation and Accretion Expense - Depreciation and accretion expense
increased primarily as a result of the higher gross cost of property, plant and
equipment due to capital expenditures made subsequent to September 30, 2007 to
expand our gathering network.
Interest Expense - Interest expense increased primarily due to the increases
in the repurchase obligation to Parent, the subordinated note payable to Parent
and the borrowings under the revolving credit facility. Capitalized interest in
2008 reflects the construction of the Corvette plant.
The following table summarizes the details of interest expense for the nine
months ended September 30, 2008 and 2007:
Nine Months Ended September 30,
2008 2007
(In thousands)
Interest cost:
Repurchase obligation $ 4,663 $ 1,227
Subordinated note to Parent 2,161 626
Revolving credit facility 1,691 86
Total cost 8,515 1,939
Less interest capitalized 973 -
Interest expense $ 7,542 $ 1,939
|
Liquidity and Capital Resources
The volumes of natural gas gathered and processed through our systems is
dependent upon the natural gas volumes produced by our customers, which may be
affected by natural gas price levels, the availability and cost of capital, the
level of successful drilling activity and other factors beyond their control.
Although our primary customer, Quicksilver, has
mitigated their near-term exposure to price declines through the use of
derivative financial instruments covering substantial portions of their expected
near-term production, we cannot predict whether or when natural gas prices will
increase or decrease. In addition, the turmoil in the credit and financial
markets appears to have deepened significantly in recent weeks, and Quicksilver
as well as other of our customers have announced reductions in their planned
levels of capital expenditures and drilling activity for the remainder of 2008
and 2009. If these conditions were to persist or worsen over a prolonged period
of time, we could experience a reduction in volumes through our system and
therefore a reduction of revenues and cash flows.
Prior to our IPO, our sources of liquidity were cash generated from
operations and equity investments by our owners.
Our sources of liquidity after our IPO include:
• cash generated from operations;
• borrowings under our credit agreement; and
• future debt and equity offerings.
We believe that the cash generated from these sources will be sufficient to
meet our expected $0.35 per unit quarterly cash distributions and our
requirements for short-term working capital and our long-term capital
expenditures for the next 12 months.
Cash Flows
For the Nine Months Ended
September 30,
2008 2007
(In thousands)
Net cash provided by operating activities $ 36,365 $ 11,179
Net cash used in investing activities (112,200 ) (55,184 )
Net cash provided by financing activities 75,052 59,307
|
KGS' cash flows are significantly influenced by production growth in the Fort
Worth Basin. As Quicksilver's total production in the Fort Worth Basin has
grown, we have expanded our gathering and processing capabilities to serve the
increased production.
Cash Flows Provided by Operating Activities - The increase in cash flows
provided by operations resulted primarily from increased revenues and higher
profitability associated with the services we provided to the customers whose
wells are connected to our system.
Cash Flows Used in Investing Activities - The increase in cash flows used in
investing activities resulted from the higher capital expenditures used to
expand our gathering system and processing capabilities. We have expended
$85.3 million in 2008 on processing facilities and $26.9 million on gathering
assets. We believe that these expenditures will be accretive to future operating
results.
Cash Flows Provided by Financing Activities - Cash flows provided by
financing activities in 2008 consisted primarily of the proceeds from borrowings
under our credit agreement of $99.3 million used to expand our gathering system
and processing facilities, partially offset by distributions of $23.4 million to
our unitholders.
Information regarding cash distributions for 2008 and 2007 is included in
Note 3 to our condensed consolidated interim financial statements included in
Item 1 of Part I of this quarterly report.
Working Capital (Deficit) - Working capital is a measure of our ability to
pay our liabilities as they become due. Our working capital (deficit) was
($24.8) million at September 30, 2008, and ($23.9) million at December 31, 2007.
However, excluding liabilities associated with capital expenditures, our working
capital (deficit) was ($2.3) million and ($0.3) million at these two dates,
respectively.
The change in working capital of ($0.9) million from December 31, 2007 to
September 30, 2008, resulted primarily from a decrease in cash and cash
equivalents and an increase in accounts payable and other. The net decrease was
partially
offset by a decrease in liabilities associated with capital expenditures. The
net working capital deficit is expected to be funded by cash generated from
operations and, to a lesser extent, available borrowings under the credit
agreement.
Capital Expenditures
The midstream energy business can be capital intensive, requiring significant
investment for the acquisition or development of new facilities, particularly in
emerging production areas such as the Fort Worth Basin. We categorize our
capital expenditures as either:
• expansion capital expenditures, which are made to construct additional
assets, expand and upgrade existing systems, including compression, and
facilities or acquire additional assets; or
• maintenance capital expenditures, which are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and extend their useful lives, or to maintain existing system volumes and related cash flows.
During 2008, we have increased gross property, plant and equipment by
$174.2 million, including expansion capital expenditures of approximately
$107.8 million, $1.4 million in maintenance capital expenditures and
$65.0 million in capital expenditures related to assets subject to repurchase
obligations. We expect remaining capital expenditures for 2008 to be
approximately $38 million, excluding any expenditure to reacquire or develop
assets subject to repurchase obligations. We expect these expenditures to be
funded through a combination of borrowings under our revolving credit facility
and operating cash flow.
Debt
Revolving Credit Facility - Our revolving credit agreement required us to
maintain, as of September 30, 2008, a ratio of our consolidated trailing
12-month EBITDA (as defined in our credit agreement) to our net interest
expense, of not less than 2.5 to 1.0; and a ratio of total indebtedness to
consolidated trailing 12-month EBITDA of not more than 4.75 to 1.0 for the
quarter ending on September 30, 2008. Furthermore, this credit agreement
contains various covenants that limit, among other things, our ability to:
• incur further indebtedness;
• grant liens;
• pay distributions; and
• engage in transactions with affiliates.
Our repurchase obligations to Quicksilver, our obligations to Quicksilver
under the subordinated note described below, and the capitalized or non-cash
interest thereon, are excluded as indebtedness or interest expense for purposes
of determining our covenant compliance.
At September 30, 2008, KGS' borrowing capacity under the credit agreement was
$150.0 million, which resulted in available capacity of $45.7 million. As of
September 30, 2008, KGS was in compliance with all of the covenants related to
the credit agreement. Should our EBITDA continue to grow, we expect the
borrowing capacity under the credit agreement to grow as well.
On October 10, 2008, the lenders' commitments under the credit agreement
increased $85 million to $235 million. With this increase in commitments, KGS'
borrowing capacity was $168.8 million, as limited by the agreement's leverage
ratio test. The increase of the commitments was the result of the exercise of an
accordion option in the facility. The lenders approved the reinstatement of the
accordion at $115 million, to allow for the future expansion of the facility to
$350 million, with appropriate lender consent. The facility, which matures
August 10, 2012, can be extended up to two additional years with requisite
lender consent.
Subordinated Note - During the nine months ended September 30, 2008 we made
three quarterly payments at the end of each quarter of $0.3 million in
. . .
|
|