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PVR > SEC Filings for PVR > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for PVR PARTNERS, L. P.


3-May-2013

Quarterly Report


Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations of PVR Partners, L.P. and its subsidiaries (the "Partnership," "PVR," "we," "us" or "our") should be read in conjunction with our Consolidated Financial Statements and Notes thereto in Item 1. All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated.

Overview of Business

We are a publicly traded Delaware limited partnership that is principally engaged in the gathering, transportation and processing of natural gas and the management of coal and natural resource properties in the United States.

We manage our business in three operating segments: (i) Eastern Midstream,
(ii) Midcontinent Midstream and (iii) Coal and Natural Resource Management.

Eastern Midstream - Our Eastern Midstream segment is engaged in providing natural gas gathering, transportation and other related services in Pennsylvania and West Virginia. In addition, we own member interests in a joint venture that transports fresh water to natural gas producers.


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Midcontinent Midstream - Our Midcontinent Midstream segment is engaged in providing natural gas gathering, processing, and other related services. In addition, we own member interests in joint ventures that gather and transport natural gas. These processing and gathering systems are located primarily in Oklahoma and Texas.

Coal and Natural Resource Management - Our Coal and Natural Resource Management segment primarily involves the management and leasing of coal properties and the subsequent collection of royalties. We also earn revenues from other land management activities, such as selling standing timber, leasing coal-related infrastructure facilities and collecting oil and gas royalties.

Key Developments

During the three months ended March 31, 2013, the following general business developments and corporate actions had an impact, or will have an impact, on our results of operations. A discussion of these key developments follows:

Eastern Midstream

Construction continues on the acquired assets and existing systems. We spent approximately $72.7 million in the first three months of 2013 constructing gathering systems, trunklines and compressor stations. As a result of the construction and our producers adding well connects, our average system volumes (including both gathering and trunkline volumes) increased from 967 MMcfd in the fourth quarter of 2012 to 1,228 MMcfd in the first quarter of 2013. We expect significant development activities to continue through 2013.

Midcontinent Midstream

Construction efforts were primarily concentrated in the Panhandle and Crescent systems. We spent approximately $17.4 million in the first three months of 2013 constructing gathering systems and compressor stations. Our average system volumes decreased from 442 MMcfd in the first quarter of 2012 to 391 MMcfd in the first quarter of 2013 primarily due to the sale of the Crossroads plant at the beginning of July 2012. The Crossroads plant processed approximately 57 MMcfd in the first quarter of 2012. Also contributing to the decrease were natural production declines and weather-related shut-in of wells, partially offset by increases related to recently completed construction and our producers adding well connects. We expect development activities on the Panhandle and Crescent systems to continue through 2013.

2013 Commodity Prices

Revenues, profitability and the future rate of growth of our Midcontinent Midstream segment is highly dependent on market demand and prevailing NGL and natural gas prices. NGL and natural gas prices have been subject to significant volatility in recent years in response to changes in the supply and demand for NGL products and natural gas. As a result, we may use derivative financial instruments to hedge commodity prices. Our current derivative financial instruments include swaps for crude oil (to hedge condensate volumes) and natural gas. We currently have three commodity derivatives, all of which expire at the end of 2013.

Revolver

On February 21, 2013, we entered into the third amendment of our credit agreement modifying the Revolver's Maximum Leverage Ratio covenant to allow us to maintain a ratio of Consolidated Total Indebtedness (as defined in the Revolver amendment), calculated as of the end of each fiscal quarter for the four quarters than ended, of not more than (i) 5.75 to 1.0 commencing with fiscal period ended March 31, 2013 through the fiscal period ending June 30, 2013; (ii) 5.50 to 1.0 commencing with the fiscal period ending September 30, 2013 through the fiscal period ending December 31, 2013; and (iii) 5.25 to 1.0 commencing with the fiscal period ending March 31, 2014, and for each fiscal period thereafter.


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Results of Operations

Consolidated Review

The following table presents summary consolidated results for the periods
presented:



                                         Three Months Ended March 31,
                                            2013                2012
             Revenues                  $      263,411        $   246,417
             Expenses                        (232,149 )         (342,109 )

             Operating income (loss)           31,262            (95,692 )
             Other income (expense)           (24,025 )          (14,652 )

             Net income (loss)         $        7,237        $  (110,344 )

Eastern Midstream Segment

Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012

The following table sets forth a summary of certain financial and other data for our Eastern Midstream segment and the percentage change for the periods presented:

                                                                                                         % Change
                                        Three Months Ended March 31,              Favorable              Favorable
                                         2013                  2012             (Unfavorable)          (Unfavorable)
Financial Highlights
Revenues
Gathering fees                      $       22,138        $        4,919       $        17,219                    350 %
Trunkline fees                              21,101                 6,392                14,709                    230 %
Other                                          658                   162                   496                    306 %

Total revenues                              43,897                11,473                32,424                    283 %


Expenses
Operating                                    1,980                   898                (1,082 )                 (120 %)
General and administrative                   4,226                   614                (3,612 )                 (588 %)
Depreciation and amortization               22,644                 2,061               (20,583 )                 (999 %)

Total operating expenses                    28,850                 3,573               (25,277 )                 (707 %)


Operating income                    $       15,047        $        7,900       $         7,147                     90 %


Operating Statistics
Gathered volumes (MMcfd)                       584                   210                   374                    178 %
Trunkline volumes (MMcfd)                      644                    92                   552                    600 %

Revenues

Gathering and trunkline fees have increased due to the significant increase in volumes. The development and completion of our expansion projects and the major acquisition in May 2012 have added significant volumes to the system.

Other revenue primarily represented operations from our investment in a joint venture and related management fees. The main reason for the increase in the first quarter of 2013 related to a gain associated with the assignment of right-of-way contracts.

Expenses

Operating expenses increased due to prior and current years' expansion projects and the major acquisition in May 2012. The related costs of these facilities included increased field salaries, supplies, chemicals and lubricants.

General and administrative expenses increased due to the addition of personnel in our Williamsport, Pennsylvania, office, increased equity compensation and corporate overhead.

Depreciation and amortization expenses increased as a result of capital expended on acquisitions and internal growth projects.


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Midcontinent Midstream Segment

Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012

The following table sets forth a summary of certain financial and other data for our Midcontinent Midstream segment and the percentage change for the periods presented:

                                         Three Months Ended March 31,                Favorable              % Change
                                          2013                  2012               (Unfavorable)          (Unfavorable)
Financial Highlights
Revenues
Natural gas                          $       87,714        $        74,627        $        13,087                     18 %
Natural gas liquids                         100,508                117,794                (17,286 )                  (15 %)
Gathering fees                                  778                  2,544                 (1,766 )                  (69 %)
Other                                         1,143                    617                    526                     85 %

Total revenues                              190,143                195,582                 (5,439 )                   (3 %)


Expenses
Cost of gas purchased                       158,208                165,464                  7,256                      4 %
Operating                                    10,354                 11,227                    873                      8 %
General and administrative                    5,877                  6,568                    691                     11 %
Impairments                                     -                  124,845                124,845                    N/A
Depreciation and amortization                14,906                 13,606                 (1,300 )                  (10 %)

Total operating expenses                    189,345                321,710                132,365                     41 %


Operating income (loss)              $          798        $      (126,128 )      $       126,926                    101 %


Operating Statistics
Daily throughput volumes (MMcfd)                391                    442                    (51 )                  (12 %)

Revenues

Revenues primarily included residue gas sold from processing plants after natural gas liquids ("NGLs") were removed, NGLs sold after being removed from system throughput volumes received, gathering and transportation fees.

Natural gas revenues increased primarily due to higher natural gas prices. The average New York Mercantile Exchange (NYMEX) natural gas spot price increased 22%, from $2.74 in the first quarter of 2012 to $3.34 in the comparable period of 2013. We have been in ethane rejection mode during the first quarter of 2013, which caused the value of ethane in the natural gas stream to be more valuable than extracting it as an NGL. Partially offsetting the increase in higher natural gas prices was a decrease in throughput volumes primarily due to the sale of the Crossroads plant at the beginning of July 2012. The Crossroads plant processed approximately 57 MMcfd in the first quarter of 2012.

NGL and condensate revenues decreased primarily due to the prices received and being in ethane rejection mode. Our average realized price received for a Conway NGL barrel in the first quarter of 2013 was $37.34 compared to $41.89 for the same period of 2012. NGL and condensate prices can fluctuate significantly based on market conditions in certain areas. In order to obtain favorable pricing, we sell our NGLs and condensate to several customers in multiple markets.

Gathering and processing fees decreased due to the sale of the Crossroads plant. Gathering and processing fees for Crossroads in the first quarter of 2012 were $1.4 million.

Other revenues included earnings from a natural gas gathering joint venture in Wyoming and gain on sale of assets. During the first quarter of 2013, we sold assets held for sale and recognized a gain of $0.5 million.

Expenses

Cost of gas purchased consisted of amounts payable to third-party producers for natural gas purchased under percentage-of-proceeds and gas purchase/keep-whole contracts. The amounts we pay producers fluctuate each period due to the volumes related to each type of processing contract and plant recoveries. We continue to enter into more fee based contracts to reduce our commodity exposure. Cost of gas purchased decreased primarily due to the sale of the Crossroads plant at the beginning of July 2012, partially offset by an increase in natural gas prices. The average NYMEX natural gas spot price increased $0.60, or 22%, from $2.74 in the first quarter of 2012 to $3.34 in the same period of 2013.

Operating expenses decreased primarily due to the sale of the Crossroads plant at the beginning of July 2012.


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General and administrative expenses decreased due to lower employee costs and corporate overhead.

During the first quarter of 2012, we recognized a $124.8 million impairment charge related to our tangible and intangible natural gas gathering assets located in the southern portion of the Fort Worth Basin of north Texas (the "North Texas Gathering System"). This impairment was triggered by continuing market declines of natural gas prices and lack of drilling in the area.

Depreciation and amortization expenses increased as a result of capital expended on internal growth projects.

Coal and Natural Resource Management Segment

Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012

The following table sets forth a summary of certain financial and other data for our Coal and Natural Resource Management segment and the percentage change for the periods presented:

                                                                                                        % Change
                                       Three Months Ended March 31,              Favorable              Favorable
                                        2013                  2012             (Unfavorable)          (Unfavorable)
Financial Highlights
Revenues
Coal royalties                     $       22,951        $       33,159       $       (10,208 )                  (31 %)
Other                                       6,420                 6,203                   217                      3 %

Total revenues                             29,371                39,362                (9,991 )                  (25 %)


Expenses
Operating                                   3,036                 3,778                   742                     20 %
General and administrative                  3,682                 4,862                 1,180                     24 %
Depreciation, depletion and
amortization                                7,236                 8,186                   950                     12 %

Total expenses                             13,954                16,826                 2,872                     17 %


Operating income                   $       15,417        $       22,536       $        (7,119 )                  (32 %)


Other data

Coal royalty tons                           6,446                 8,105                (1,659 )                  (20 %)

Average coal royalties per ton     $         3.56        $         4.09       $         (0.53 )                  (13 %)

Revenues

Coal royalties, which accounted for 78% of the Coal and Natural Resource Management segment revenues for the three months ended March 31, 2013 and 84% for the three months ended 2012, were lower in 2013 as compared to 2012. The decrease was a result of less coal being produced by our lessees and lower coal prices. The reduced demand for coal from our lessees' customers was primarily due to domestic electrical generation switching from coal to natural gas and lower metallurgical coal pricing. Coal royalties per ton decreased because customers cannot utilize all of the coal producers have mined. The surplus has caused lower demand, decreased production and reduced prices.

Expenses

Operating expenses decreased primarily due to lower production on subleased properties. Mining activity on our subleased property fluctuates between periods due to the proximity of our property boundaries and other mineral owners.

General and administrative expenses decreased due to lower corporate overhead and employee costs.

DD&A expenses decreased for the comparative periods as a result of the decrease in coal production and the related depletion expense.


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Other

Our other results primarily consist of interest expense and net derivative gains
(losses). The following table sets forth a summary of certain financial data for
our other results for the periods presented:



                                         Three Months Ended March 31,
                                         2013                  2012
           Operating income (loss)   $      31,262        $       (95,692 )
           Other income (expense)
           Interest expense                (23,678 )               (9,817 )
           Derivatives                        (441 )               (4,951 )
           Other                                94                    116

           Net income (loss)         $       7,237        $      (110,344 )

Interest Expense. Our consolidated interest expense for the periods presented is comprised of the following:

                                               Three Months Ended March 31,
      Source                                    2013                  2012
      Interest on Revolver and bank fees   $       (5,914 )       $      (4,824 )
      Interest on Senior Notes                    (18,750 )              (6,188 )
      Debt issuance costs and other                (1,652 )              (1,049 )
      Capitalized interest                          2,638                 2,244

      Total interest expense               $      (23,678 )       $      (9,817 )

Interest expense for the three months ended March 31, 2013 increased compared to the same period in 2012. The increase was primarily due to the new Senior Notes issued in May 2012 for $600.0 million. Also, there was an increase in Revolver interest expense related to increased amounts outstanding under the Revolver and the related margins paid on outstanding debt. Revolver amendments have increased our margins that we pay and are based upon our periodic debt covenant calculations. Debt issuance costs amortization increased in the comparable first quarters due to fees paid for a Revolver amendment and issuance of the new Senior Notes. These increases were partially offset by interest we have capitalized related to construction efforts in the Eastern Midstream and Midcontinent Midstream segments.

Derivatives. Our results of operations and operating cash flows were impacted by changes in market prices for crude oil and natural gas prices, as well as interest rates.

Commodity markets are volatile, and as a result, our hedging activity results can vary significantly. Our results of operations are affected by the volatility of changes in fair value, which fluctuate with changes in crude oil and natural gas prices. We determine the fair values of our commodity derivative agreements using discounted cash flows using quoted forward prices for the respective commodities. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties for derivatives in an asset position and our own credit risk for derivatives in a liability position. The fair value of our derivatives at March 31, 2013 was a current liability of $0.4 million.

Our derivative activity for the periods presented is summarized below:

                                                           Three Months Ended March 31,
                                                          2013                    2012
Interest Rate Swap realized derivative loss            $        -            $          (391 )
Interest Rate Swap unrealized derivative gain                   -                        222
Interest Rate Swap other comprehensive income
reclass                                                         -                        147
Natural gas midstream commodity realized
derivative loss                                                 (7 )                  (3,250 )
Natural gas midstream commodity unrealized
derivative loss                                               (434 )                  (1,679 )

Total derivative loss                                  $      (441 )         $        (4,951 )


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Liquidity and Capital Resources

Cash Flows

On an ongoing basis, we generally satisfy our working capital requirements and fund our capital expenditures using cash generated from our operations, borrowings under the Revolver and proceeds from debt and equity offerings. However, our ability to meet these requirements in the future will depend upon our future operating performance, which will be affected by prevailing economic conditions in the natural gas midstream market and coal industry, most of which are beyond our control. In March 2013, Standard and Poors decided to move our corporate rating down from BB- to B+.

The following table summarizes our statements of cash flow for the periods presented:

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