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| ATLS > SEC Filings for ATLS > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
The discussion and analysis presented below provides information to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with "Item 6: - Selected Financial Data" and "Item 8: Financial Statements and Supplemental Data", which contains our consolidated combined financial statements.
The following discussion may contain forward-looking statements that reflect our or our subsidiaries' plans, estimates and beliefs. Forward-looking statements speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in "Item 1A: Risk Factors". We believe the assumptions underlying the consolidated combined financial statements are reasonable.
BUSINESS OVERVIEW
We are a publicly-traded Delaware master limited partnership, whose common units are listed on the New York Stock Exchange under the symbol "ATLS".
At December 31, 2012, our operations primarily consisted of our ownership interests in the following entities:
• Atlas Resource Partners, L.P. ("ARP"), a publicly-traded Delaware master limited partnership (NYSE: ARP), and an independent developer and producer of natural gas, crude oil and natural gas liquids ("NGL"), with operations in basins across the United States. ARP sponsors and manages tax-advantaged investment partnerships, in which it coinvests, to finance a portion of its natural gas and oil production activities. At December 31, 2012, we owned 100% of the general partner Class A units and incentive distribution rights, and common units representing an approximate 43.0% limited partner ownership interest in ARP;
• Atlas Pipeline Partners, L.P. ("APL"), a publicly traded Delaware master limited partnership (NYSE: APL) and midstream energy service provider engaged in the natural gas gathering, processing and treating services in the Anadarko, Arkoma and Permian Basins located in the southwestern and mid-continent regions of the United States; natural gas gathering services in the Appalachian Basin in the northeastern region of the United States; and NGL transportation services throughout the southwestern region of the United States. At December 31, 2012, we owned a 2.0% general partner interest, all of the incentive distribution rights, and an approximate 8.7% common limited partner interest; and
• Lightfoot Capital Partners, LP ("Lightfoot LP") and Lightfoot Capital Partners GP, LLC ("Lightfoot GP"), the general partner of Lightfoot L.P. (collectively, "Lightfoot"), entities which incubate new master limited partnerships ("MLPs") and invest in existing MLPs. At December 31, 2012, we had an approximate 16% general partner interest and 12% limited partner interest in Lightfoot.
In February 2012, the board of directors of our General Partner ("the Board") approved the formation of ARP as a newly created exploration and production master limited partnership and the related transfer of substantially all of our natural gas and oil development and production assets and the partnership management business to ARP on March 5, 2012. The Board also approved the distribution of approximately 5.24 million ARP common units to our unitholders, which were distributed on March 13, 2012 using a ratio of 0.1021 ARP limited partner units for each of our common units owned on the record date of February 28, 2012. The distribution of ARP limited partner units represented approximately 20% of the common limited partner units outstanding at March 13, 2012.
On February 17, 2011, we acquired certain assets and liabilities (the "Transferred Business") from Atlas Energy, Inc. ("AEI"), the former owner of our general partner, including the following exploration and production assets that were transferred to ARP on March 5, 2012:
• AEI's investment management business which sponsors tax-advantaged direct investment natural gas and oil partnerships, through which ARP funds a portion of its natural gas and oil well drilling;
• proved reserves located in the Appalachian Basin, the Niobrara formation in Colorado, the New Albany Shale of west central Indiana, the Antrim Shale of northern Michigan and the Chattanooga Shale of northeastern Tennessee; and
In addition to the exploration and production assets, the Transferred Business also included all of the ownership interests in Atlas Energy GP, LLC, our general partner, and a direct and indirect ownership interest in Lightfoot.
FINANCIAL PRESENTATION
Our consolidated combined financial statements contain our accounts and those of our consolidated subsidiaries, all of which are wholly-owned at December 31, 2012, except for ARP and APL, which we control. Due to the structure of our ownership interests in ARP and APL, in accordance with generally accepted accounting principles, we consolidate the financial statements of ARP and APL into our financial statements rather than present our ownership interests as equity investments. As such, the non-controlling interests in ARP and APL are reflected as income attributable to non-controlling interests in our consolidated combined statements of operations and as a component of partners' capital on our consolidated balance sheets. Throughout this section, when we refer to "our" consolidated combined financial statements, we are referring to the consolidated combined results for us, our wholly-owned subsidiaries and the consolidated results of ARP and APL, adjusted for non-controlling interests in ARP and APL. All significant intercompany transactions and balances have been eliminated in the consolidation of our financial statements.
On February 17, 2011, we acquired certain producing natural gas and oil properties, a partnership management business which sponsors tax-advantaged direct investment natural gas and oil partnerships, and other assets (the "Transferred Business") from Atlas Energy, Inc. ("AEI"), the former owner of our general partner. Our management determined that the acquisition of the Transferred Business constituted a transaction between entities under common control. In comparison to the acquisition method of accounting, whereby the purchase price for the asset acquisition would have been allocated to identifiable assets and liabilities of the Transferred Business based upon their fair values with any excess treated as goodwill, transfers between entities under common control require that assets and liabilities be recognized by the acquirer at historical carrying value at the date of transfer, with any difference between the purchase price and the net book value of the assets recognized as an adjustment to partners' capital on our consolidated balance sheet. Also, in comparison to the acquisition method of accounting, whereby the results of operations and the financial position of the Transferred Business would have been included in our consolidated combined financial statements from the date of acquisition, transfers between entities under common control require the acquirer to reflect the effect of the assets acquired and liabilities assumed and the related results of operations at the beginning of the period during which it was acquired and retrospectively adjust its prior year financial statements to furnish comparative information. As such, we reflected the impact of the acquisition of the Transferred Business on our consolidated combined financial statements in the following manner:
• Recognized the assets acquired and liabilities assumed from the Transferred Business at their historical carrying value at the date of transfer, with any difference between the purchase price and the net book value of the assets recognized as an adjustment to partners' capital;
• Retrospectively adjusted our consolidated combined financial statements for any date prior to February 17, 2011, the date of acquisition, to reflect our results on a consolidated combined basis with the results of the Transferred Business as of or at the beginning of the respective period; and
• Adjusted the presentation of our consolidated combined statements of operations for the years ended December 31, 2011 and 2010 to reflect the results of operations attributable to the Transferred Business prior to the date of acquisition as a reduction of net income to determine income attributable to common limited partners. However, the Transferred Business' historical financial statements prior to the date of acquisition do not reflect general and administrative expenses and interest expense. The Transferred Business was not managed by AEI as a separate business segment and did not have identifiable labor and other ancillary costs. The general and administrative and interest expenses of AEI prior to the date of acquisition, including the exploration and production business segment, related primarily to business activities associated with the business sold to Chevron Corporation in February 2011 and not activities related to the Transferred Business.
SUBSEQUENT EVENTS
Cash Distribution. On January 24, 2013, we declared a cash distribution of $0.30 per unit on our outstanding common limited partner units, representing the cash distribution for the quarter ended December 31, 2012. The $15.4 million distribution was paid on February 19, 2013 to unitholders of record at the close of business on February 6, 2013.
Atlas Pipeline
Senior Notes. On February 11, 2013, APL issued $650.0 million of 5.875% unsecured senior notes due 2023 ("5.875% APL Senior Notes") in a private placement transaction. The 5.875% APL Senior Notes were issued at par. APL received net proceeds of $637.8 million and plans to utilize the proceeds to redeem any or all of its outstanding 8.75% senior unsecured notes due on June 15, 2018 ("8.75% APL Senior Notes") and repay a portion of its outstanding indebtedness under its revolving credit facility. APL has agreed to file a registration statement with respect to the 5.875% Senior Notes. On January 28, 2013, APL commenced a cash tender offer for any and all of its outstanding $365.8 million 8.75% APL Senior Notes and a solicitation of consents to eliminate most of the restrictive covenants and certain of the events of default contained in the indenture governing the 8.75% APL Senior Notes ("8.75% Senior Notes Indenture"). Approximately $268.4 million aggregate principal amount of the 8.75% Senior Notes, (representing approximately 73.4% of the outstanding 8.75% Senior Notes) were validly tendered as of the expiration date of the consent solicitation. On February 11, 2013, APL accepted for purchase all 8.75% Senior Notes validly tendered as of the expiration of the consent solicitation and entered into a supplemental indenture amending and supplementing the 8.75% Senior Notes Indenture. APL also issued a notice to redeem all the 8.75% APL Senior Notes not purchased in connection with the tender offer. APL plans to fund the redemption with a portion of the net proceeds from the issuance of the 5.875% APL Senior Notes.
Cash Distribution. On January 23, 2013, APL declared a cash distribution of $0.58 per unit on its outstanding common limited partner units, representing the cash distribution for the quarter ended December 31, 2012. The $40.6 million distribution, including $3.1 million to us, as general partner, was paid on February 14, 2013 to unitholders of record at the close of business on February 7, 2013.
Acquisition of Gas Gathering Systems and Related Assets. On January 7, 2013, APL paid $6.0 million for the first of two payments related to the acquisition of a gas gathering system and related assets in February 2012. APL agreed to pay up to an additional $12.0 million, payable in two equal amounts ("Trigger Payments"), if certain volumes were achieved on the acquired gathering system within specified periods of time. Sufficient volumes were achieved in December 2012 to meet the required volumes for the first Trigger Payment (see "Recent Developments").
Atlas Resource
Cash Distribution. On January 24, 2013, ARP declared a cash distribution of $0.48 per unit on its outstanding common limited partner units, representing the cash distribution for the quarter ended December 31, 2012. The $23.6 million distribution, including $0.6 million to us, as general partner, and $1.8 million to its preferred limited partners, was paid on February 14, 2013 to unitholders of record at the close of business on February 6, 2013.
Senior Notes. On January 23, 2013, ARP issued $275.0 million of 7.75% senior unsecured notes due on January 15, 2021 ("7.75% ARP Senior Notes"). ARP used the net proceeds of approximately $268.3 million, net of underwriting fees and other offering costs of $6.7 million, to repay all of the indebtedness and accrued interest outstanding under its term loan credit facility and a portion of that outstanding under its revolving credit facility (see "Credit Facilities"). Under the terms of ARP's revolving credit facility, the borrowing base was reduced by 15% of the 7.75% ARP Senior Notes to $368.8 million. In connection with the retirement of ARP's term loan credit facility and the reduction in its revolving credit facility borrowing base, ARP accelerated $2.2 million of amortization expense related to deferred financing costs in January 2013. The indenture governing the 7.75% ARP Senior Notes contains covenants, including limitations of ARP's ability to incur certain liens, incur additional indebtedness; declare or pay distributions if an event of default has occurred; redeem, repurchase, or retire equity interests or subordinated indebtedness; make certain investments; or merge, consolidate or sell substantially all of ARP's assets.
RECENT DEVELOPMENTS
New Credit Facility. In May 2012, we entered into a new credit facility with a syndicate of banks that matures in May 2016. The credit facility has maximum lender commitments of $50.0 million, and up to $5.0 million of the credit facility may be in the form of standby letters of credit. Our obligations under the credit facility are secured by substantially all of our assets, including our ownership interests in APL and ARP. Additionally, our obligations under the credit facility may be guaranteed by future subsidiaries. The credit agreement contains customary covenants that limit our ability to incur additional indebtedness, grant liens, make loans or investments, make distributions if a commitment deficiency exists or a default under the credit agreement exists or would result from the distribution, merge into or consolidate with other persons, enter into commodity or interest rate swap agreements that do not conform to specified terms or that exceed specified amounts, or engage in certain asset dispositions including a sale of all or substantially all of our assets. The credit agreement also contains covenants that require us to maintain a ratio of Total Funded Debt (as defined in the credit agreement) to EBITDA (as defined in the credit agreement) not greater than 3.25 to 1.0 as of the last day of any fiscal quarter and a ratio of EBITDA to Consolidated Interest Expense (as defined in the credit agreement) not less than 2.75 to 1.0 as of the last day of any fiscal quarter (see "Credit Facilities").
Atlas Pipeline
Acquisition of Cardinal Midstream. In December 2012, APL acquired 100% of the equity interests held by Cardinal Midstream, LLC ("Cardinal") in three wholly-owned subsidiaries for $598.5 million in cash, including preliminary purchase price adjustments (the "Cardinal Acquisition"). The assets of these companies include gas gathering, processing and treating facilities in Arkansas, Louisiana, Oklahoma and Texas as follows:
• the Tupelo plant, which is a 120 MMcfd cryogenic processing facility;
• approximately 60 miles of gathering pipeline;
• the East Rockpile treating facility, a 250 GPM amine treating plant;
• a fixed fee contract gas treating business that includes fifteen amine treating plants and two propane refrigeration plants; and
• a 60% interest in the Centrahoma Processing, LLC joint venture ("Centrahoma"). The remaining 40% interest is owned by MarkWest Oklahoma Gas Company, LLC, ("MarkWest") a wholly-owned subsidiary of MarkWest Energy Partners, L.P. (NYSE: MWE). Centrahoma owns the following assets:
• the Coalgate and Atoka plants, which are cryogenic processing facilities with a combined current processing capacity of approximately 100 MMcfd;
• the prospective Stonewall plant, for which construction has been approved, with anticipated processing capacity of 120 MMcfd; and
• 15 miles of NGL pipeline.
Equity Offering. In December 2012, in connection with the Cardinal Acquisition, APL completed the sale of 10,507,033 APL common units in a public offering at an offering price of $31.00 per unit and received net proceeds of $319.3 million, including $6.7 million contributed by us to maintain our 2.0% general partner interest in APL. APL used the net proceeds from this offering to fund a portion of the Cardinal Acquisition. In November 2012, APL entered into an agreement to issue $200.0 million of newly created Class D convertible preferred units in a private placement in order to finance a portion of the Cardinal Acquisition. Under the terms of the agreement, the private placement of the Class D convertible preferred units was nullified upon APL's issuance of common units in excess of $150.0 million prior to the closing date of the Cardinal Acquisition. As a result of APL's December 2012 issuance of $319.3 million common units, the private placement agreement terminated without the issuance of the Class D preferred units, and APL paid a commitment fee equal to 2.0% of the $200.0 million offering amount, or $4.0 million (see "Issuance of Units").
Equity Distribution Program. In November 2012, APL entered into an equity distribution program with Citigroup Global Markets, Inc. ("Citigroup"). Pursuant to this program, APL is authorized to, at its discretion, issue common units to investors through Citigroup at prevailing market prices, up to an aggregate value of $150.0 million. Citigroup is not required to sell any specific number or dollar amount of the common units, but will use its reasonable efforts, consistent with its normal trading and sales practices, to sell such units. APL intends to use the net proceeds from any such offering for general partnership purposes (see "Issuance of Units").
Senior Notes. In September 2012, APL issued $325.0 million of 6.625% senior unsecured notes due on October 1, 2020 ("6.625% APL Senior Notes") in a private placement transaction. The 6.625% APL Senior Notes were issued at par. APL received net proceeds of $318.9 million and utilized the proceeds to reduce the outstanding balance on its revolving credit facility. APL has agreed to file a registration statement with respect to these 6.625% APL Senior Notes. In December 2012, APL issued $175.0 million of 6.625% APL Senior Notes in a private placement transaction. The 6.625% APL Senior Notes were issued at a premium of 103.0% of the principal amount for a yield of approximately 6.0%. APL received net proceeds of $176.5 million and utilized the proceeds to fund a portion of the purchase price of the Cardinal Acquisition.
Expansion Projects. In September 2012, APL completed construction of, and started processing through, a 200 MMcfd cryogenic processing plant, referred to as the Waynoka II plant, on APL's WestOK gathering and processing system. This expansion brings the total name-plate processing capacity on the WestOK system to 458 MMcfd. In June 2012, APL completed construction of, and started processing through, a 60 MMcfd cryogenic facility at its Velma gas plant, increasing capacity at Velma to 160 MMcfd. This expansion supports APL's long-term fee-based agreement with XTO Energy, Inc., a
subsidiary of ExxonMobil, to provide natural gas gathering and processing services for up to an incremental 60 MMcfd from the Woodford Shale.
Acquisition of Gas Gathering Systems and Related Assets. In June 2012, APL acquired a gas gathering system and related assets in the Barnett Shale in Tarrant County, Texas for an initial net purchase price of $18.0 million. The system is used to facilitate gathering of newly acquired natural gas production of ARP. In February 2012, APL acquired a gas gathering system and related assets, at their WestOK system, for an initial net purchase price of $19.0 million. APL agreed to pay up to an additional $12.0 million, payable in two equal amounts, subject to delivery of certain minimum volumes of natural gas from a specified area and within certain specified time periods ("Trigger Payments"). In connection with this acquisition, APL received assignment of gas purchase agreements for gas currently gathered on the acquired system.
Amended Credit Facility. In May 2012, APL entered into an amendment to its revolving credit facility agreement, which among other changes, increased the revolving credit facility from $450.0 million to $600.0 million and extended the maturity date from December 22, 2015 to May 31, 2017 (see "Credit Facilities").
Atlas Resource
DTE Acquisition. On December 20, 2012, ARP completed the acquisition of DTE Gas Resources, LLC from DTE Energy Company (NYSE: DTE; "DTE") for $257.4 million, subject to certain post-closing adjustments (the "DTE Acquisition"). The cash paid at closing was funded through $179.8 million of borrowings under ARP's revolving credit facility and $77.6 million through borrowings under its term loan credit facility.
Amendment to revolving credit facility and new term loan credit facility. On
December 20, 2012, in connection with the completion of the DTE Acquisition, ARP
entered into an amendment to its revolving credit facility and a new term loan
credit facility, which (i) increased the borrowing base from $310.0 million to
$410.0 million, (ii) stated that borrowings under the revolving credit facility
bear interest, at ARP's election, are at either LIBOR plus an applicable margin
between 2.00% and 3.25% per annum or the base rate (which is the higher of the
bank's prime rate, the Federal funds rate plus 0.5% or one-month LIBOR plus
1.00%) plus an applicable margin between 1.00% and 2.25% per annum,
(iii) revised the maturity date to be the earlier of March 22, 2016 or
February 19, 2014 (the date that is 91 days before the May 19, 2014 maturity
date of ARP's term loan credit facility) if any portion of the term loan debt is
outstanding on that date, and (iv) amended the financial covenants to require
that ARP's ratio of Total Funded Debt (as defined in the credit agreement) to
four quarters of EBITDA (as defined in the credit agreement) not be greater than
4.25 to 1.0 as of the last day of fiscal quarters ending on or before June 30,
2013, 4.00 to 1.0 as of September 30, 2013 and December 31, 2013, and 3.75 to
1.0 as of the last day of fiscal quarters ending after that date. The new $77.6
million term loan credit facility matures May 19, 2014, and contains terms
substantially similar to its revolving credit facility except (i) borrowings
bear interest, at ARP's option, at either the prime rate plus 6.5% or LIBOR plus
7.5%, (ii) ARP will be required to prepay borrowings with 100% of the net
proceeds of any senior notes offering and 33% of the net proceeds from any
equity offering, and (iii) requires ARP to maintain a ratio of Total Funded Debt
to EBITDA 0.50 higher than that required under its revolving credit facility, a
ratio of EBITDA to Consolidated Interest Expense (as defined in the credit
agreement) of not less than 2.25 to 1.0 as of the last day of any fiscal
quarter, and a minimum asset coverage ratio (as defined in the credit agreement)
of at least 1.5 to 1.0 (see "Subsequent Events - ARP Senior Notes" for further
information).
Equity Offering. In November and December 2012, in connection with entering into a purchase agreement to acquire certain producing wells and net acreage from DTE, ARP sold an aggregate 7,898,210 of its common limited partner units in a public offering at a price of $23.01 per unit, yielding net proceeds of approximately $174.5 million. ARP utilized the net proceeds from the sale to repay a portion of the outstanding balance under its revolving credit facility and $2.2 million under its term loan credit facility.
Acquisition of Titan Operating, L.L.C. In July 2012, ARP completed the
acquisition of Titan Operating, L.L.C. ("Titan") in exchange for 3.8 million ARP
common units and 3.8 million newly-created convertible Class B preferred units
(which had an estimated collective value of $193.2 million, based upon the
closing price of ARP's publicly traded units as of the acquisition closing
date), as well as $15.4 million in cash for closing adjustments (see "Issuance
of Units"). The cash paid at closing was funded through borrowings under ARP's
credit facility (see "Credit Facilities"). The common units and preferred units
were issued and sold in a private transaction exempt from registration under
Section 4(2) of the Securities Act (see "Issuance of Units").
Acquisition of Assets from Carrizo Oil & Gas, Inc. In April 2012, ARP acquired certain oil and natural gas assets from Carrizo Oil & Gas, Inc. (NASDAQ: CRZO; "Carrizo") for approximately $187.0 million in cash. The purchase price was funded through borrowing under ARP's credit facility and $119.5 million of net proceeds from the sale of 6.0 million of ARP's common units at a negotiated purchase price per unit of $20.00, of which $5.0 million was purchased by certain of
ARP's executives. The common units were issued in a private transaction exempt from registration under Section 4(2) of the Securities Act (see "Issuance of Units").
Equal Acquisition. In April 2012, ARP acquired a 50% interest in approximately 14,500 net undeveloped acres in the oil and NGL area of the Mississippi Lime play in northwestern Oklahoma for $18.0 million from subsidiaries of Equal Energy, Ltd. (NYSE: EQU; TSX: EQU; "Equal"). The transaction was funded through borrowings under ARP's revolving credit facility (see "Credit Facilities"). Concurrent with the purchase of acreage, ARP and Equal entered into a participation and development agreement for future drilling in the Mississippi Lime play. ARP served as the drilling and completion operator, while Equal undertook production operations, including water disposal. In September 2012, ARP acquired Equal's remaining 50% interest in the undeveloped acres, as well as approximately 8 MMcfed of net production in the Mississippi Lime region and salt water disposal infrastructure for $41.3 million, including $1.3 million related to certain post-closing adjustments. Both transactions were funded through borrowings under ARP revolving credit facility (see "Credit Facilities"). As a result of ARP's acquisition of Equal's remaining interest in the undeveloped acres, the existing joint venture agreement between ARP and Equal in the Mississippi Lime position was terminated and all infrastructure associated with the assets, principally the salt water disposal system is operated by ARP.
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