UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number:
001-33631
QUICKSILVER GAS SERVICES
LP
(Exact name of registrant as
specified in its charter)
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Delaware
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56-2639586
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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777 West Rosedale St., Fort Worth, Texas
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76104
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(Address of principal executive offices)
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(Zip Code)
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817-665-8620
(Registrants
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes [ ] No [X]
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. Yes [X] 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). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. [X]
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. (Check one):
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Large
accelerated filer [ ]
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Accelerated
filer [X]
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Non-accelerated filer [ ]
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Smaller
Reporting company [ ]
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(Do
not check if a 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 [ ] No [X]
As of June 30, 2009, the aggregate market value of the
registrants common units held by non-affiliates of the
registrant was approximately $90,979,611 based on the closing
sale price of $13.75 as reported on the NYSE.
As of February 15, 2010, the registrant has 16,988,429
common units outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
DEFINITIONS
As used in this annual report unless the context requires
otherwise:
Alliance Midstream Assets means
gathering and treating assets purchased from Quicksilver
Resources Inc. in January 2010 in the Alliance area of Tarrant
and Denton Counties, Texas
Bbl or Bbls
means barrel or barrels
Bbld means barrel or barrels per day
Btu means British Thermal units, a
measure of heating value
CERCLA means the Comprehensive
Environmental Response, Compensation and Liability Act
DOT means the U.S. Department of
Transportation
EBITDA means earnings before interest,
taxes, depreciation and accretion
EPA means the U.S. Environmental
Protection Agency
Exchange Act means the Securities
Exchange Act of 1934, as amended
FASB means the Financial Accounting
Standards Board
FASC means the FASB Accounting
Standards Codification
FERC means the Federal Energy
Regulatory Commission
GAAP means Generally Accepted
Accounting Principles in the United States
General Partner means Quicksilver Gas
Services GP LLC
HCDS means Hill County Dry System
IPO means our initial public offering
completed on August 10, 2007
KGS Predecessor means prior to the
IPO, collectively Cowtown Pipeline L.P., Cowtown Pipeline
Partners L.P., Cowtown Gas Processing L.P. and Cowtown Gas
Processing Partners L.P.
LADS means Lake Arlington Dry System
Management means management of
Quicksilver Gas Services LPs General Partner
MMBtu means million Btu
Mcf means thousand cubic feet
MMcf means million cubic feet
MMcfd means million cubic feet per day
NGL or NGLs
means natural gas liquids
NYSE means the New York Stock Exchange
Oil includes crude oil and condensate
OSHA means Occupational Safety and
Health Administration
Quicksilver means Quicksilver
Resources Inc. and its subsidiaries
Quicksilver Counties means Hood,
Somervell, Johnson, Tarrant, Hill, Parker, Bosque and Erath
Counties in Texas where Quicksilver conducts the majority of its
U.S. operations
Partnership Agreement means the Second
Amended and Restated Agreement of Limited Partnership of
Quicksilver Gas Services LP, dated February 19, 2008
SEC means the U.S. Securities and
Exchange Commission
Tcfe means trillion cubic feet of
natural gas equivalents
TRRC means Texas Railroad Commission
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INDEX TO
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2009
Except as otherwise specified and unless the context otherwise
requires, references to the Company,
KGS, we, us, and
our refer to Quicksilver Gas Services LP and its
subsidiaries.
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EXPLANATORY
NOTE
In 2007, we completed our IPO of 5,000,000 common units
representing limited partnership interests plus an additional
750,000 common units upon the exercise of the over-allotment
option by the IPOs underwriters.
Upon the completion of the IPO, we succeeded to the assets and
operations of KGS Predecessor and our common units began trading
on the NYSE Arca exchange and currently trade on the NYSE under
the ticker symbol KGS. Prior to the completion of
the IPO, KGS Predecessor was owned principally by Quicksilver
Resources Inc., which we refer to as Quicksilver and by two
private investors.
The information contained in this report includes the activity
of KGS Predecessor prior to the completion of the IPO and the
activity of Quicksilver Gas Services LP subsequent to the IPO.
Consequently, the consolidated financial statements and related
discussion of financial condition and results of operations
contained in this report reflect the activity for the period
after the change in ownership resulting from the IPO and the
period prior to the IPO.
FORWARD-LOOKING
INFORMATION
Certain statements contained in this report and other materials
we file with the SEC, or in other written or oral statements
made or to be made by us, other than statements of historical
fact, are forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995.
Forward-looking statements reflect our current expectations or
forecasts of future events. Words such as may,
assume, forecast, position,
predict, strategy, expect,
intend, plan, aim,
estimate, anticipate,
believe, project, budget,
potential, or continue, and similar
expressions are used to identify forward-looking statements.
Forward-looking statements can be affected by assumptions used
or by known or unknown risks or uncertainties. Consequently, no
forward-looking statements can be guaranteed. Actual results
may vary materially. You are cautioned not to place undue
reliance on any forward-looking statements and should also
understand that it is not possible to predict or identify all
such factors and should not consider the following list to be a
complete statement of all potential risks and uncertainties.
Factors that could cause our actual results to differ materially
from the results contemplated by such forward-looking statements
include:
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changes in general economic conditions;
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fluctuations in natural gas prices;
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failure or delays in Quicksilver and third parties achieving
expected production from natural gas projects;
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competitive conditions in our industry;
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actions taken or non-performance by third parties, including
suppliers, contractors, operators, processors, transporters and
customers;
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fluctuations in the value of certain of our assets and
liabilities;
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changes in the availability and cost of capital;
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operating hazards, natural disasters, weather-related delays,
casualty losses and other matters beyond our control;
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construction costs or capital expenditures exceeding estimated
or budgeted amounts;
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the effects of existing and future laws and governmental
regulations, including environmental and climate change
requirements;
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the effects of existing or future litigation; and
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certain factors discussed elsewhere in this annual report.
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This list of factors is not exhaustive and new factors may
emerge or changes to these factors may occur that would impact
our business. Additional information regarding these and other
factors may be contained in our filings with the SEC, especially
on
Forms 10-Q
and 8-K.
All such risk factors are difficult to predict and are subject
to material uncertainties that may affect actual results and may
be beyond our control. The forward-looking statements included
in this report are made only as of the date of this report, and
we undertake no obligation to update any of these
forward-looking statements to reflect subsequent events or
circumstances except to the extent required by applicable law.
All forward-looking statements contained in this annual report
are expressly qualified in their entirety by the foregoing
cautionary statements.
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PART I
General
We are a Delaware master limited partnership engaged in the
business of gathering and processing natural gas and NGLs. Our
current portfolio includes assets in the Fort Worth Basin
located in North Texas which consist of a gathering pipeline
system, referred to as the Cowtown Pipeline, and two natural gas
processing facilities in Hood County, Texas, referred to as the
Cowtown Plant and the Corvette Plant. KGS also owns a gathering
system and a gas compression facility in eastern Tarrant County,
Texas, referred to as the Lake Arlington Dry System. In January
2010, we completed the purchase of a gathering system and
treating facility in northern Tarrant and southern Denton
counties in Texas, referred to as the Alliance Midstream Assets,
which had previously been owned by Quicksilver. We provide
gathering, processing and treating services to Quicksilver and
other natural gas producers. These services are provided under
fee-based contracts, whereby we receive fees for performing the
gathering, processing and treating services. We do not take
title to the natural gas or associated NGLs that we gather and
process and thus avoid direct commodity price exposure.
Our common units initially began trading publicly on
August 7, 2007 on the NYSE Arca exchange and are now
trading on the NYSE under the ticker symbol KGS.
Formation
and Development of Business
We began operations in 2004 and we organized as a Delaware
limited partnership in January 2007.
Initial Public Offering In 2007, we undertook
the initial public offering of 5,000,000 common units at a price
to the public of $21.00 per common unit. Shortly thereafter,
the underwriters exercised their option to purchase an
additional 750,000 common units on the same terms as the IPO.
The total net proceeds that we received from the IPO, before
expenses, were $109.1 million. We used these net proceeds
together with cash on hand of $25.1 million to:
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(1)
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distribute $162.1 million (consisting of
$112.1 million in cash and a $50.0 million convertible
subordinated note payable) to Quicksilver and $7.7 million
in cash to private investors as a return of their investment
capital and reimbursement for their advances for capital
expenditures;
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(2)
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pay $4.3 million of expenses associated with the IPO, the
Credit Agreement and certain other formative
transactions; and
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(3)
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make expenditures for general partnership purposes, including
post-IPO capital expenditures.
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Additionally, at or near the time of the IPO:
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KGS issued 5,696,752 common units and 11,513,625 subordinated
units to Quicksilver;
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KGS issued 816,873 common units to private investors; and
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KGS issued to our general partner
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a 2% general partner interest, and
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all of KGS incentive distribution rights, which entitle
the general partner to increasing percentages of any KGS
distributions in excess of $0.3450 per unit per quarter.
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Secondary Offering In December 2009, we
completed a secondary offering for 4,000,000 of our common units
at a price to the public of $21.10. In January 2010, the
underwriters of this offering exercised their option to purchase
an additional 549,200 common units. The net proceeds from the
secondary offering of approximately $92 million were used
to repay borrowings from our Credit Agreement. Subsequently in
January 2010, we purchased the Alliance Midstream Assets from
Quicksilver for a preliminary adjusted purchase price of
approximately $95 million, which was funded by borrowings
from our Credit Agreement.
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The ownership of KGS is as follows:
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Ownership
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December 31,
2009
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January 2010
(1)
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Common unitholders:
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Public
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37.5%
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39.0%
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Quicksilver
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20.1%
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19.7%
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Subordinated unitholders:
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Quicksilver
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40.7%
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39.7%
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Total limited partner interest
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98.3%
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98.4%
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General Partner interest:
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Quicksilver
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1.7%
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1.6%
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Total
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100.0%
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100.0%
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Reflects the effects of the underwriters exercise of the
over-allotment and the vesting of phantom units that occurred in
January 2010. |
Our general partner is a wholly-owned subsidiary of Quicksilver,
which indirectly owns all of the entities that own our general
partner.
Our
Relationship with Quicksilver
Quicksilver is an independent oil and natural gas company based
in Fort Worth, Texas with a considerable presence in the
Fort Worth Basin. As Quicksilver continues to develop its
resources in the Quicksilver Counties, we have the right to
gather and process Quicksilvers production and to
construct additional midstream assets to provide most of their
midstream services in the Fort Worth Basin through 2017.
We believe that our relationship with Quicksilver provides us
with a competitive advantage due to the following:
Access to management expertise and
insight. Our relationship with Quicksilver provides us
with access to a pool of management talent and insight that
might not otherwise be available to us, specifically as it
relates to its development and production plans in the
Fort Worth Basin. We also have the benefit of
Quicksilvers broad operational, commercial, technical,
risk management and administrative infrastructure.
Reserve base. Quicksilver
estimates that it has substantial proved reserves in the
Fort Worth Basin with a significant remaining life.
Acreage position. As of
December 31, 2009, Quicksilver held approximately
162,000 net acres in the Fort Worth Basin, of which
approximately 40% is currently developed, with more than 1,000
remaining potential drilling locations.
Proven track record. As of
December 31, 2009, Quicksilver had drilled a total of
874 gross wells in the Fort Worth Basin, including
156 gross wells drilled during 2009.
Active development program in the
Fort Worth Basin. Quicksilver has allocated
approximately $340 million of its 2010 capital program to
the development of its Fort Worth Basin assets.
Business
Strategies
Our primary business objective is to increase our
unitholders value by increasing our distributable cash
flow and distributions per unit. We intend to achieve this
objective by executing the following business strategies:
Organically growing our capacity to meet
our customers gathering, processing and treating
needs. We expect that the primary growth in our
gathering, processing and treating volumes will be from wells
operated by Quicksilver. Quicksilvers announced capital
plans for 2010 indicate continued investment in the
Fort Worth Basin that is expected to result in their
increased midstream needs.
Attracting volumes from third parties to
our facilities. We believe that the Fort Worth
Basin will continue to be an area of significant capital
investment by energy companies. Our agreements with Quicksilver
do not restrict our ability to provide services to other natural
gas producers. We aim to attract increased gathering,
processing and treating volumes from third parties by
marketing our midstream services, expanding our gathering system
and providing superior customer service to these natural gas
producers. Further, we believe
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that the high cost of entry into the midstream business serves
as a barrier to competitors entering the market and heightens
our ability to compete for third parties volumes.
Minimizing commodity price exposure and
maintaining a disciplined financial policy. All of our
service agreements are based on fees per gathered and processed
volumes which allow us to avoid direct commodity price
exposure. We also intend to continue pursuing a disciplined
financial policy by maintaining a prudent cash distribution
policy and capital structure, being mindful of market conditions
such as petroleum prices and credit availability.
Improving operating efficiency and
increasing throughput while prudently managing our
growth. As we expand our operations, we expect to
increase throughput, which improves operational efficiencies and
enhances overall asset utilization. We have total processing
capacity from our Cowtown and Corvette processing plants of
approximately 325 MMcfd. For 2009, we processed an average
of approximately 150 MMcfd at the Cowtown Plant and
Corvette Plant.
Pursuing midstream
acquisitions. We may pursue strategic midstream
acquisition opportunities that will complement and expand the
volumes from Quicksilver and from third parties. We will seek
acquisition opportunities that are likely to yield operational
efficiencies or the potential for higher capacity utilization or
expansion. To a lesser extent, we may also consider
acquisitions in areas where we currently have no operations but
which may benefit from our midstream offerings. Because we have
organic growth opportunities related to the Quicksilver assets,
we will consider the economic characteristics of any
acquisition, such as return on capital and cash flow generation,
the region in which the assets are located and the availability
and sources of capital to finance any potential acquisition.
Business
Strengths
We believe that we are well positioned to successfully execute
our primary business objective and business strategies due to
the following competitive strengths:
Quicksilver has a significant equity
ownership in us. Quicksilver owns 61% of us including
all of our general partner interest. We believe Quicksilver has
a vested interest in our growth and overall success, viewing us
as its principal midstream service provider.
Our relationship with Quicksilver reduces
the uncertainty of financial returns associated with our
capacity additions. Our relationship with Quicksilver
improves our ability to anticipate future volumes and the need
and timing for capacity additions. Consequently, we believe
there is less risk associated with our capital expenditures,
because we can coordinate our capacity additions with
Quicksilvers planned production growth and associated
gathering, processing and treating needs.
Quicksilver is a significant operator and
producer in the Fort Worth
Basin. Quicksilvers annual natural gas production
from the Fort Worth Basin increased approximately
46 MMcfd in 2009. Quicksilver continues to develop its
acreage in the Fort Worth Basin to grow reserves and
production. We expect Quicksilvers continued development
in the Fort Worth Basin to increase the throughput of our
gathering, processing and treating systems.
Our assets are strategically located in the
Fort Worth Basin. We believe that the
Fort Worth Basin, particularly the counties in which we
operate, remains one of the most important natural gas producing
areas in the United States. We believe that our established
position in this area, together with its anticipated growth in
production, gives us an opportunity to expand our gathering
system footprint and increase our throughput volumes and plant
utilization, ultimately increasing cash flows.
We provide an integrated package of midstream
services. We provide a broad range of bundled midstream
services to natural gas producers, including gathering,
compressing, treating and processing natural gas and delivering
NGLs.
We have the financial flexibility to pursue
growth opportunities. At December 31, 2009, the
lenders commitments under our Credit Agreement were
$320 million and could be further increased to as much as
$350 million with additional commitment increases and
lender consent. Based on our results through December 31,
2009, our total borrowing capacity was $297 million and our
borrowings were $209.4 million following the Alliance
Midstream Asset purchase in January 2010. Our Credit Agreement,
which matures August 10, 2012, may be extended up to two
additional years with lender approval. We believe that the
current and future capacity under the Credit Agreement, combined
with internally generated funds and our ability to access the
capital markets, will enable us to complete all of our near-term
growth projects.
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We have an experienced, knowledgeable
management team with a proven record of
performance. Our management team has a proven record of
enhancing value through the development and operation of
midstream assets in our industry. We believe that this team and
the skills offered through Quicksilver provide us with a strong
foundation for developing additional natural gas gathering and
processing assets and pursuing strategic acquisition
opportunities.
Financial
Information about Segment and Geographical Areas
We conduct all of our operations in the midstream sector of the
energy industry, encompassing gathering, processing and
treating, with all of our operations conducted in the
Fort Worth Basin in Texas.
Properties -
Our Assets and Operations
KGS assets include or formerly included:
Cowtown System
The Cowtown System, located principally in Hood and Somervell
counties in the southern portion of the Fort Worth Basin,
which includes:
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the Cowtown Pipeline, consisting of a gathering system and gas
compression facilities. This system gathers natural gas
produced by our customers and delivers it to the Cowtown and
Corvette Plants for processing;
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the Cowtown Plant, consisting of two natural gas processing
units with a total capacity of 200 MMcfd that extract NGLs
from the natural gas stream and deliver customers residue
gas and extracted NGLs to unaffiliated pipelines for further
transport and sale downstream; and
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the Corvette Plant, placed in service during 2009, consisting of
a 125 MMcfd natural gas processing unit that extracts NGLs
from the natural gas stream and delivers customers residue
gas and extracted NGLs to unaffiliated pipelines for further
transport and sale downstream.
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Lake Arlington Dry System
The LADS, located in Tarrant County, which consists of a gas
gathering system and a gas compression facility with capacity of
120 MMcfd. This system gathers natural gas produced by our
customers and delivers it to unaffiliated pipelines for further
transport and sale downstream.
Hill County Dry System
As more fully described in Note 2 to our financial
statements, KGS financial information through November
2009 also includes the operations of a gathering system in Hill
County, Texas, HCDS, which gathers natural gas and delivers it
to unaffiliated pipelines for further transport and sale
downstream. As of November 2009, the assets, liabilities,
revenues and expenses directly attributable to the HCDS for the
periods prior to November 2009 have been retrospectively
reported as discontinued operations based upon our decision not
to purchase the system from Quicksilver.
Alliance Midstream Assets
During January 2010, we completed the purchase of the Alliance
Midstream Assets, located in Tarrant and Denton counties of
Texas, from Quicksilver for $95.2 million. The acquired
assets consist of gathering systems and a compression facility
with a total capacity of 115 MMcfd, an amine treating
facility with capacity of 180 MMcfd and a dehydration
treating facility with capacity of 200 MMcfd. This system
gathers natural gas produced by our customers and delivers it to
unaffiliated pipelines for further transport downstream.
At the Cowtown and Corvette plants, our customers residue
gas is delivered to several large unaffiliated parties for
further transport downstream and their extracted NGLs are
delivered to two large unaffiliated pipelines through our NGL
pipeline. For the fourth quarter of 2009, the Cowtown and
Corvette plants had a total average throughput of 135 MMcfd
of natural gas, resulting in average NGL recovery of
17,682 Bbld.
Since our inception, we have made substantial capital
expenditures to increase our asset base in the Fort Worth
Basin. We anticipate that we will continue to make capital
expenditures as Quicksilver continues to develop its assets in
the Fort Worth Basin.
During the quarter ended September 30, 2009, KGS
independent directors voted to acquire certain of the Cowtown
Pipeline assets subject to the repurchase obligation that had an
original cost of approximately $5.6 million. KGS paid
$5.6 million for these assets in September 2009.
Furthermore, the independent directors elected not to acquire
certain Cowtown Pipeline assets that had been previously
included in the repurchase
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obligation. In doing so, KGS derecognized assets with a
carrying value of $56.8 million and also derecognized
liabilities associated with the repurchase of
$68.6 million. The difference of $11.8 million
between the assets carrying values and their repurchase
obligation was reflected as an increase in partners
capital effective upon the decision not to purchase. KGS also
entered into an agreement with Quicksilver to permit KGS to
gather third party gas for a fee across the laterals retained by
Quicksilver.
The decision not to purchase certain Cowtown Pipeline assets had
no effect on KGS gathering and processing revenues as the
natural gas stream from these laterals continues to flow into
the Cowtown Pipeline gathering and processing facilities owned
by KGS.
Substantially all of our pipelines are constructed on
rights-of-way
granted by the owners of the property. We have obtained, where
necessary, license or permit agreements from public authorities
and railroad companies to cross over or under, or to lay
facilities in or along, waterways, roads, railroad properties
and state highways, as applicable. In some cases, property on
which our pipeline was built was purchased in fee.
We believe that, subject to any encumbrances, we have
satisfactory title to our assets. We do not believe that any of
these encumbrances will materially reduce the value of our
properties or our interest in these properties or interfere with
their use in the operation of our business.
Overview
of the Fort Worth Basin
The Fort Worth Basin, which includes the Barnett Shale
formation, is a proven crude oil and natural gas producing basin
located in North Texas. Drilling in the Fort Worth Basin
first began in 1912 with the discovery of crude oil. A new
fracturing technique introduced in the 1990s, combined
with other advances in drilling and completion techniques,
contributed to a significant increase in investment in and
production from the basin over the past decade. We believe that
these improved drilling and production techniques have made it
one of the most important natural gas producing areas in the
United States.
Marketing
We gather and process natural gas and NGLs for a variety of
customers, including major energy companies or their
affiliates. Because our services are concentrated in the
Fort Worth Basin, we are highly dependent upon the
producers in that area. Accordingly, the loss of any of our
customers could potentially adversely affect our results of
operations if their throughput is not replaced. During 2009,
Quicksilver accounted for more than 90% of our revenues, making
it the largest user of our service offerings. No other customer
contributed in excess of 10% of our revenues.
Competition
During 2009, more than 90% of our total natural gas gathering
and processing volumes were comprised of gas owned or controlled
by Quicksilver. We have a dedication from Quicksilver for all
of its natural gas production for all the areas served by our
Cowtown System and our LADS through 2017 and for the areas
served by the Alliance Midstream Assets through 2019. Therefore,
there is little likelihood that a competitor could effectively
compete for Quicksilvers gathering and processing business
within the Quicksilver Counties.
If we expand our business in the future, either through organic
growth or acquisitions, we could face increased competition. We
anticipate that our primary competitors for unaffiliated volumes
in the Fort Worth Basin are Crosstex Energy LP, DCP
Midstream LLC and Energy Transfer Partners, L.P. We believe
that we are able to compete with these companies based on
processing efficiencies, operational costs, commercial terms
offered to producers and capital expenditures requirements,
along with the location and available capacity of our gathering
systems and processing plants.
Governmental
Regulation
Regulation of our business may affect certain aspects of our
operations and the market for our products and services. State
regulation of gathering facilities generally includes various
safety, environmental and, in some circumstances,
nondiscriminatory requirements, complaint-based rate regulation
or general utility regulation.
We are subject to rate regulation, as implemented by the TRRC,
and have tariffs on file with them. Generally, the TRRC has the
authority to ensure that utility rates are just and reasonable
and not discriminatory. The rates we charge for intrastate
services are deemed just and reasonable unless otherwise
challenged. We cannot predict whether such a challenge will be
filed against us or whether the TRRC will change its regulation
of these rates.
9
Failure to comply with the utilities regulations can result in
the imposition of administrative, civil and criminal remedies.
To date, there has been no adverse effect to our system due to
this regulation.
The TRRC also generally requires gatherers to perform services
without discrimination as to source of supply or producer. This
may restrict our ability to decide whose natural gas we gather.
Our assets include an intrastate common carrier NGL pipeline
subject to the regulation of the TRRC, which requires that our
NGL pipelines file tariff publications that contain all the
rules and regulations governing the rates and charges for
services we perform. NGL pipeline rates may be limited to
provide no more than a fair return on the aggregate value of the
pipeline property used to render services.
Safety
and Maintenance Regulation
We are subject to regulation by the DOT and state agencies,
related to the design, installation, testing, construction,
operation, replacement and management of pipeline facilities.
All entities that own or operate pipeline facilities must comply
with such regulations, permit access to and copying of records
and file certain reports and provide information as required by
the DOT. The DOT may assess fines and penalties for violations
of these and other requirements imposed by its regulations.
We are subject to the Natural Gas Pipeline Safety Act of 1968,
referred to as NGPSA, and the Pipeline Safety Improvement Act of
2002. The NGPSA regulates safety requirements in the design,
construction, operation and maintenance of gas pipeline
facilities while the Pipeline Safety Improvement Act of 2002
establishes mandatory inspections for all U.S. oil and
natural gas transportation pipelines and some gathering lines in
high consequence areas. DOT regulations require pipeline
operators to conduct integrity management programs, which
involve frequent inspections and other measures to ensure
pipeline safety in high consequence areas, such as
high population areas, areas that are sources of drinking water,
ecological resource areas that are unusually sensitive to
environmental damage from a pipeline release and commercially
navigable waterways. We currently estimate that we will incur
future costs of approximately $1.8 million through 2014 to
complete the testing required by existing DOT regulations. This
estimate does not include the costs, if any, for repair,
remediation, preventative or mitigating actions that may be
determined to be necessary as a result of the testing program.
Individual states are largely preempted by federal law from
regulating pipeline safety but may assume responsibility for
enforcement of federal intrastate pipeline regulations and
inspection of intrastate pipelines. In practice, states vary
considerably in their authority and capacity to address pipeline
safety.
In addition, we are subject to a number of other federal and
state laws and regulations, whose purpose is to protect the
health and safety of workers, both generally and within our
industry. Regulations overseen by OSHA, the EPA and state
agencies require that we maintain information concerning
hazardous materials used or produced in our operations and that
we provide this information to employees, state and local
government authorities and citizens. We are also subject to
OSHA regulations that are designed to prevent or minimize the
consequences of catastrophic releases of toxic, reactive,
flammable or explosive chemicals. We have an internal program of
inspection designed to monitor and enforce compliance with
worker safety requirements. We have continuous inspection and
compliance programs designed to maintain compliance with all
regulatory requirements for our natural gas and NGL pipelines.
Environmental
Matters
We are subject to stringent and complex federal, state and local
environmental laws, regulations and permits, including those
relating to the generation, storage, handling, use, disposal,
delivery and remediation of natural gas, NGLs, crude oil and
other hazardous materials; the emission and discharge of such
materials to the ground, air and water; and wildlife protection.
These requirements are a significant consideration for us as our
operations involve the generation, storage, handling, use and
delivery of natural gas, NGLs, oil and other hazardous or
regulated materials and the emission and discharge of such
materials to the environment. If we violate these requirements,
or fail to obtain and maintain the necessary permits, we could
be fined or otherwise sanctioned, which sanctions could include
the imposition of fines and penalties and orders enjoining
future operations. Pursuant to such laws, regulations and
permits, we have made and expect to continue to make capital and
other compliance expenditures.
We could be liable for any environmental contamination at our or
our predecessors currently or formerly owned or operated
properties or third party waste disposal sites. Certain
environmental laws, including CERCLA, or more commonly known as
Superfund, impose joint and several strict liability for
releases of hazardous substances at such properties and sites,
without regard to fault or the legality of the original
conduct. In addition to potentially significant investigation
and remediation costs, environmental contamination can give rise
to claims from
10
governmental authorities and other third parties for fines or
penalties, natural resource damages, personal injury and
property damage. We currently own or lease, and may have in the
past owned or leased, properties utilized for the measurement,
gathering, field compression and processing of natural gas.
Some of the properties may have been operated by third parties
or previous owners whose operations were not under our control.
Although we typically used operating and disposal practices that
were standard in the industry at the time, petroleum
hydrocarbons or wastes may have been disposed of or released on
or under the properties or on or under other locations where
such substances have been taken for disposal.
Environmental laws, regulations and permits, and the enforcement
and interpretation thereof, change frequently and generally have
become more stringent over time. For example, various federal
and state initiatives are underway to regulate, or further
investigate the environmental impacts of, hydraulic fracturing.
To the extent these initiatives reduce the volume of natural gas
or associated NGLs that we gather and process, they could
adversely affect our business. In addition, state regulators in
Texas are becoming increasingly focused on air emissions from
the oil and gas industry, including volatile organic compound
emissions. This increased scrutiny could lead to stricter
enforcement of existing regulations as well as the imposition of
new measures to control our emissions or curtail our operations.
Greenhouse gas (GHG) emission regulation is also
becoming more stringent. We are currently required to report
annual GHG emissions from some of our operations, and additional
GHG emission related requirements are in various stages of
development. For example, the U.S. Congress is considering
legislation that would establish a nationwide
cap-and-trade
system for GHGs, and the EPA has proposed regulating GHG
emissions from stationary sources pursuant to the Prevention of
Significant Deterioration and Title V provisions of the
federal Clean Air Act which might require us to modify existing
or obtain new air permits or install emission control
technology. Any regulation of GHG emissions, including through
a
cap-and-trade
system, technology mandate, emissions tax, reporting requirement
or other program, could restrict our operations and subject us
to significant costs, including those relating to emission
credits, pollution control equipment, monitoring and reporting.
Although there is still significant uncertainty surrounding the
scope, timing and effect of future GHG regulation, any such
regulation could have a material adverse impact on our business,
financial condition, reputation and operating performance.
In addition, to the extent climate change results in warmer
temperatures or more severe weather, our or our customers
operations may be disrupted. For example, storms in the Gulf of
Mexico could damage our customers pipeline infrastructure
causing a decrease in product demand.
Employees
Neither KGS nor our general partner has any employees. All of
the employees required to conduct and support our operations are
employed by Quicksilver and are subject to a secondment
agreement between our general partner and Quicksilver. The
seconded employees, including field operations personnel,
general and administrative personnel and a vice president,
operate KGS pipeline systems and processing facilities.
None of these employees are covered by collective bargaining
agreements. We reimburse Quicksilver for all expenses that it
incurs as a result of providing additional services to us.
Available
Information and Corporate Governance Documents
We make available, free of charge, on our internet website at
http://www.kgslp.com,
our annual report, quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
Additionally, charters for the committees of our Board of
Directors and our Corporate Governance Guidelines and Code of
Business Conduct and Ethics can be found on our internet website
at
http://www.kgslp.com
under the heading Corporate Governance. Our website
and the information contained therein or connected thereto shall
not be deemed to be incorporated into this Annual Report.
You should carefully consider the following risk factors
together with all of the other information included in this
annual report, when deciding to invest in us. Limited partner
interests are inherently different from capital stock of a
corporation, although many of the business risks to which we are
subject are similar to those that would be faced by a
corporation engaged in a similar business. You should be aware
that the occurrence of any of the events described in this
annual report could have a material adverse effect on our
business, financial position, results
11
of operations and cash flows. In such event, we may be unable
to make distributions to our unitholders and the trading price
of our common units could decline.
We are
dependent on a limited number of natural gas producers,
including Quicksilver, for our volumes. The loss of such a
customer would result in a material decline in our volumes,
revenue and cash available for distribution.
We rely on a limited number of customers for our natural gas
throughput. During 2009, Quicksilver accounted for more than
90% of our natural gas throughput. Accordingly, we are
indirectly subject, to a significant degree, to the various
risks to which Quicksilver is subject.
We may be unable to negotiate on favorable terms, if at all, any
extension or replacement of our contract with Quicksilver to
gather and process its production after the initial
10-year term
of the contract is completed. Furthermore, during the term of
the contract and thereafter, even if we are able to renew this
contract, Quicksilver may decrease its production volumes in the
Quicksilver Counties. The loss of a significant portion of the
natural gas volumes supplied by Quicksilver would result in a
material decline in our revenue and cash available for
distribution.
Quicksilver has no contractual obligation to develop its
properties in the areas covered by their dedication to us and it
may determine that it is strategically more attractive to direct
its capital spending to other areas. A shift in
Quicksilvers focus away from the areas covered by their
dedication to us could result in reduced volumes gathered and
processed by us and a material decline in our revenue and cash
available for distribution.
We may
not have sufficient available cash to enable us to make cash
distributions to holders of our common units and subordinated
units at the current distribution rate under our cash
distribution policy.
In order to maintain our current cash distributions of $0.39 per
unit per quarter, or $1.56 per unit per year, we will require
available cash of approximately $11.6 million per quarter,
or $46.3 million per year. The amount of cash we can
distribute depends principally upon the amount of cash we
generate from our operations, which may fluctuate. Factors that
could cause our cash from operations or available cash to
fluctuate include:
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the fees we charge and the margins we realize for our services;
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the level of production, and the price of natural gas, NGLs, and
condensate;
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the volume of natural gas and NGLs we gather and process;
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the level of competition from other midstream energy companies;
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the level of our operating cost structure;
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prevailing economic conditions;
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the level of capital expenditures we make;
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our ability to make borrowings under our Credit Agreement;
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the cost of acquisitions;
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our debt service requirements;
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fluctuations in our working capital needs;
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our ability to access capital markets;
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compliance with our debt agreements; and
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the amount of cash reserves established by our general partner.
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The
amount of cash we have available for distribution to holders of
our common units and subordinated units depends primarily on our
cash flow and not solely on profitability.
The amount of cash we have available for distribution depends
primarily upon our cash flow and not solely on profitability,
which may be affected by non-cash items. As a result, we may
make cash distributions during periods when we report net
losses, and conversely, we might fail to make cash distributions
during periods when we report net profits.
At the present level of outstanding units, we require
$46.3 million of distributable cash flow annually to
maintain the current level of distributions. We may not have
sufficient available cash from operating surplus each quarter to
enable us to make cash distributions at the current distribution
rate under our cash distribution policy.
12
Estimates
of oil and gas reserves depend on many assumptions that may turn
out to be inaccurate and any material inaccuracies in these
reserve estimates could materially reduce the volumes that we
gather and process and consequently could adversely affect our
financial performance and our ability to make cash
distributions.
The process of estimating natural gas, NGL and crude oil
reserves is complex. It requires interpretations of available
technical data and various assumptions, including assumptions
relating to economic factors. Any significant inaccuracies in
these interpretations or assumptions could materially affect the
estimated quantities and present value of reserves.
In order to prepare these estimates, our customers must project
production rates and timing of development expenditures. They
must also analyze available geological, geophysical, production
and engineering data, and the extent, quality and reliability of
this data can vary. The process also requires economic
assumptions with respect to natural gas and crude oil prices,
drilling and operating expenses, capital expenditures, taxes and
availability of funds. Actual volume produced, costs paid and
prices realized most likely will vary from these estimates. Any
significant variance could materially affect the estimated
quantities and present value of reserves disclosed by
Quicksilver or any customer. In addition, each customer may
adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing
petroleum prices and other factors, which may be beyond their
control that may impact recoverability of reserves. Therefore,
actual production by our customers could vary materially from
these estimates of reserves, which could result in material
reductions in the volumes we gather and process and consequently
could adversely affect our revenue and cash available for
distribution.
In addition, we typically do not obtain independent evaluations
of natural gas reserves connected to our systems. Accordingly,
we do not have independent estimates of total reserves dedicated
to our systems or the anticipated life of such reserves. If the
total reserves or estimated life of the reserves connected to
our systems is less than we anticipate and we are unable to
secure additional sources of natural gas, it could have a
material adverse effect on our business, results of operations,
financial condition and our ability to make cash distributions
to our unitholders.
Because
of the natural decline in production from existing wells in our
area of operations, our success depends on our ability to obtain
new supplies of natural gas. Any decrease in supplies of
natural gas could result in a material decline in the volumes we
gather and process.
Our gathering systems are connected to wells whose production
will naturally decline over time, which means that our cash
flows associated with these wells will also decline over time.
To maintain or increase throughput levels on our system, we must
continually obtain new natural gas supplies. Our ability to
obtain additional sources of natural gas depends in part on the
level of successful drilling activity near our pipeline systems
by Quicksilver and our ability to compete for volumes from other
third parties.
We have no control over the level of drilling activity in our
area of operations, the amount of reserves associated with the
wells drilled or the rate at which production from a well will
decline. In addition, we have no control over producers
drilling or production decisions, which are affected by, among
other things, prevailing and projected energy prices, demand for
hydrocarbons, the level of reserves, geological considerations,
governmental regulations, availability of drilling rigs and
other production and development services and the availability
and cost of capital. Fluctuations in energy prices can greatly
affect investments to develop natural gas reserves. Drilling
activity generally decreases as natural gas prices decrease.
Declines in natural gas prices during late 2008 and most of 2009
have caused a negative impact on exploration, development and
production activity. Reductions in exploration or production
activity in our area of operations could lead to reduced
utilization of our systems. Because of these factors, even if
natural gas reserves are known to exist in areas served by our
assets, producers may choose not to develop those reserves.
Moreover, Quicksilver is not contractually obligated to develop
the reserves it has dedicated to us. If reductions in drilling
activity or increased competition result in our inability to
obtain new sources of supply to replace the natural decline of
volumes from existing wells, throughput on our system would
decline, which could reduce our revenue and cash available for
distribution.
Our
construction of new assets may not result in revenue increases
and is subject to regulatory, environmental, political, legal
and economic risks, which could adversely affect our cash flows,
results of operations and financial condition.
One of the ways we intend to grow our business is through the
construction of new midstream assets. Additions or
modifications to our asset base involve numerous regulatory,
environmental, political and legal uncertainties beyond our
control and may require the expenditure of significant amounts
of capital. If we undertake
13
these projects, they may not be completed on schedule, at the
budgeted cost, or at all. Moreover, our revenue may not
increase as anticipated for a particular project. For instance,
we may construct facilities to capture anticipated future growth
in production in a region in which such growth does not
materialize. We may not have access to estimates of potential
non-Quicksilver reserves in an area prior to constructing or
acquiring facilities in such area. To the extent we rely on
estimates of future production by parties other than Quicksilver
in our decision to expand our systems, such estimates may prove
to be inaccurate due to numerous uncertainties inherent in
estimating quantities of future production. As a result, new
facilities may not be able to attract enough throughput to
achieve our expected investment return, which could adversely
affect our results of operations and financial condition. In
addition, expansion of our asset base generally requires us to
obtain new
rights-of-way.
We may be unable to obtain such
rights-of-way
or it may become more expensive for us to obtain or renew
rights-of-way.
If the cost of
rights-of-way
increases, our cash flows could be adversely affected.
If we
do not make acquisitions on economically acceptable terms, our
future growth will be limited.
In addition to expanding our existing systems, we may pursue
acquisitions. If we are unable to make these acquisitions
because we are: (1) unable to identify attractive
acquisition candidates, to analyze acquisition opportunities
successfully from an operational and financial point of view or
to negotiate acceptable purchase contracts with them;
(2) unable to obtain financing for these acquisitions on
economically acceptable terms; or (3) outbid by
competitors; then our future growth and ability to increase
distributions could be limited. Furthermore, even if we do make
acquisitions, these acquisitions may not result in an increase
in the cash generated by operations.
Any acquisition involves potential risks, including, among other
things:
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mistaken assumptions about volumes, revenue and costs, including
synergies;
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an inability to integrate successfully the assets we acquire;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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mistaken assumptions about the overall costs of equity or debt;
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the diversion of managements and employees attention
from other business matters;
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unforeseen difficulties operating in new product areas, with new
customers, or new geographic areas; and
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customer or key employee losses at the acquired businesses.
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We
depend on our midstream assets to generate our revenue, and if
the utilization of these assets was reduced significantly, there
could be a material adverse effect on our revenue, earnings, and
ability to make distributions to our unitholders.
Operations at our midstream assets could be partially curtailed
or completely shut down, temporarily or permanently, as a result
of:
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operational problems, labor difficulties or environmental
proceedings or other litigation that compel curtailing of all or
a portion of the operations;
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catastrophic events at our facilities or at downstream
facilities owned by others;
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lack of transportation or fractionation capacity;
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an inability to obtain sufficient quantities of natural
gas; or
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prolonged reductions in exploration or production activity by
producers in the areas in which we operate.
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The magnitude of the effect on us of any curtailment of our
operations will depend on the length of the curtailment and the
extent of the operations affected by such curtailment. We have
no control over many of the factors that may lead to a
curtailment of operations.
In the event that we are unable to provide either gathering or
processing services, Quicksilver may use others to gather or
process its production as it so determines. In the event that
we are unable to provide either gathering or processing services
for 60 consecutive days, for reasons other than force majeure,
causing Quicksilvers wells to be shut-in (in the case of
gathering) or resulting in Quicksilvers inability to
by-pass our gathering or processing facilities and deliver its
natural gas production to an alternative pipeline (in the case
of processing), Quicksilver has the right to terminate our
gathering and processing agreement as it relates to the affected
wells. In light of our asset concentration, if such a
termination were to occur, it could cause our revenue, earnings
and cash distributions to our unitholders, available for
distribution to decrease significantly.
14
We
cannot control the operations of gas processing, liquids
fractionation and transportation facilities we do not own or
operate, and our revenue and cash available for distribution
could be adversely affected.
We depend upon liquids, fractionation and transportation systems
that we do not own. Since we do not own or operate these
assets, their continuing operation is not within our control.
If any of these pipelines and other facilities becomes
unavailable or capacity constrained, it could have a material
adverse effect on our business, financial condition and results
of operations and cash available for distribution.
A
change in the jurisdictional characterization of some of our
assets by federal, state or local regulatory agencies or a
change in policy by those agencies may result in increased
regulation of our assets, which may cause our revenue to decline
and operating expenses to increase.
Our natural gas gathering operations are generally exempt from
FERC regulation, but FERC regulation still affects these
businesses and the markets for products derived from these
businesses. FERCs policies and practices across the range
of its oil and natural gas regulatory activities, including, for
example, its policies on open access transportation, ratemaking,
capacity release and market center promotion, indirectly affect
intrastate markets. In recent years, FERC has pursued
pro-competitive policies in its regulation of interstate oil and
natural gas pipelines. However, we have no assurance that FERC
will continue this approach as it considers matters such as
pipeline rates and rules and policies that may affect rights of
access to oil and natural gas transportation capacity. In
addition, the distinction between FERC-regulated transmission
services and federally unregulated gathering services has
regularly been the subject of litigation, so, the classification
and regulation of some of our pipelines could change based on
future determinations by FERC and the courts. If our gas
gathering operations become subject to FERC jurisdiction, the
result may adversely affect the rates we are able to charge and
the services we currently provide, and may include the potential
for a termination of the gathering and processing agreement with
Quicksilver.
State and municipal regulations also affect our business.
Common purchaser statutes generally require gatherers to
purchase without undue discrimination as to source of supply or
producer, as a result, these statutes restrict our right to
decide whose production we gather. Federal law leaves any
economic regulation of natural gas gathering to the states.
Texas, the only state in which we currently operate, has adopted
complaint-based regulation of gathering activities, which allows
oil and natural gas producers and shippers to file complaints
with state regulators in an effort to resolve access and rate
grievances. Other state and municipal regulations may not
directly regulate our business, but may nonetheless affect the
availability of natural gas for purchase, processing and sale,
including state regulation of production rates and maximum daily
production allowable from gas wells. While our gathering lines
currently are subject to limited state regulation, there is a
risk that state laws will be changed, which may give producers a
stronger basis to challenge the rates, terms and conditions of
our gathering lines.
We are
subject to environmental laws, regulations and permits,
including greenhouse gas requirements, that may expose us to
significant costs, liabilities and obligations.
We are subject to stringent and complex federal, state and local
environmental laws, regulations and permits, relating to, among
other things, the generation, storage, handling, use, disposal,
movement and remediation of natural gas, NGLs, crude oil and
other hazardous materials; the emission and discharge of such
materials to the ground, air and water; wildlife protection; and
the health and safety of our employees. Failure to comply with
these environmental requirements may result in our being subject
to litigation, fines or other sanctions, including the
revocation of permits and suspension of operations. We expect
to continue to incur significant capital and other compliance
costs related to such requirements.
We could be liable for any environmental contamination at our or
our predecessors currently or formerly owned or operated
properties or third party waste disposal sites, regardless of
whether we were at fault. In addition to potentially
significant investigation and remediation costs, such matters
can give rise to claims from governmental authorities and other
third parties for fines or penalties, natural resource damages,
personal injury and property damage.
These laws, regulations and permits, and the enforcement and
interpretation thereof, change frequently and generally have
become more stringent over time. In particular, requirements
pertaining to air emissions, including volatile organic compound
emissions, have been implemented or are under development that
could lead us to incur significant costs or obligations or
curtail our operations. For example, GHG emission regulation is
becoming more stringent. We are currently required to report
annual GHG emissions from some of our operations, and additional
GHG emission related requirements are in various stages of
development. The U.S. Congress is considering legislation
that would establish a nationwide
cap-and-trade
system for GHGs. In addition, the EPA has proposed regulating
GHG emissions from stationary sources pursuant to the Prevention
of Significant Deterioration and
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Title V provisions of the federal Clean Air Act. If
enacted, such regulations could require us to modify existing or
obtain new permits, implement additional pollution control
technology, curtail operations or increase significantly our
operating costs. Any regulation of GHG emissions, including
through a
cap-and-trade
system, technology mandate, emissions tax, reporting requirement
or other program, could adversely affect our business,
reputation, operating performance and product demand. In
addition, to the extent climate change results in more severe
weather, our customers operations may be disrupted, which
could reduce product demand.
In addition, various federal and state initiatives are underway
to regulate, or further investigate the environmental impacts
of, hydraulic fracturing, a practice that involves the
pressurized injection of water, chemicals and other substances
into rock formations to stimulate hydrocarbon production. To
the extent these initiatives reduce the volume of natural gas or
associated NGLs that we gather and process, they could adversely
affect our business.
Our costs, liabilities and obligations relating to environmental
matters could have a material adverse effect on our business,
reputation, results of operations and financial condition.
We may
incur significant costs as a result of pipeline integrity
management program testing.
The DOT requires pipeline operators to develop integrity
management programs for pipelines located where a leak or
rupture could harm high consequence areas. The
regulations require operators, including us, to:
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perform ongoing assessments of pipeline integrity;
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identify and characterize applicable threats to pipeline
segments that could impact a high consequence area;
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maintain processes for data collection, integration and analysis;
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repair and remediate pipelines as necessary; and
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implement preventive and mitigating actions.
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We currently estimate that we will incur future costs of
approximately $1.8 million through 2014 to complete the
testing required by existing DOT regulations. This estimate
does not include the costs, if any, for repair, remediation,
preventative or mitigating actions that may be determined to be
necessary as a result of the testing program, which could be
substantial.
If we are unable to obtain needed capital or financing on
satisfactory terms, our ability to make cash distributions may
be diminished or our financial leverage could increase.
Historically, we have used our cash flow from operations,
borrowings under our Credit Agreement and issuances of equity to
fund our capital program, working capital needs and
acquisitions. Our capital program may require additional
financing above the level of cash generated by our operations to
fund our growth. If our cash flow from operations decreases as
a result of lower throughput volumes on our gathering and
processing systems or otherwise, our ability to expend the
capital necessary to expand our business or increase our future
cash distributions may be limited. If our cash flow from
operations is insufficient to satisfy our financing needs, we
cannot be certain that additional financing will be available to
us on acceptable terms or at all. Our ability to obtain bank
financing or to access the capital markets for future equity or
debt offerings may be limited by our financial condition or
general economic conditions at the time of any such financing or
offering. Even if we are successful in obtaining the necessary
funds, the terms of such financings could have a material
adverse effect on our business, results of operations, financial
condition and ability to make distributions to our unitholders.
Further, incurring additional debt may significantly increase
our interest expense and financial leverage and issuing
additional limited partner interests may result in significant
unitholder dilution and would increase the aggregate amount of
cash required to maintain the cash distribution rate, which
could materially decrease our ability to pay distributions. If
additional capital resources are unavailable, we may curtail our
activities or be forced to sell some of our assets on an
untimely or unfavorable basis.
We do
not own all of the land on which our pipelines and facilities
are located, which could disrupt our operations.
We do not own all of the land on which our pipelines and
facilities have been constructed, which subjects us to the
possibility of more onerous terms or increased costs to obtain
and maintain valid easements and
rights-of-way.
We obtain standard easement rights to construct and operate our
pipelines on land owned by third parties. Our rights generally
revert back to the landowner after we stop using the easement
for its specified purpose. Therefore, these easements exist for
varying periods of time. Our loss of easement rights could have
a material adverse effect on our ability to operate our
business, thereby resulting in a material reduction in our
revenue, earnings and ability to make cash distributions.
16
Our
business involves many hazards and operational risks, some of
which may not be adequately covered by insurance. The occurrence
of a significant accident or other event that is not adequately
insured could curtail our operations and have a material adverse
effect on our business, results of operations, financial
condition and ability to make cash distributions.
Our operations are subject to many risks inherent in the
midstream industry including:
|
|
|
|
|
damage to pipelines and plants, related equipment and
surrounding properties caused by natural disasters and acts of
terrorism;
|
|
|
inadvertent damage from construction, farm and utility equipment;
|
|
|
leaks or losses of natural gas or NGLs as a result of the
malfunction of equipment or facilities;
|
|
|
fires and explosions; and
|
|
|
other hazards that could also result in personal injury, loss of
life, pollution or suspension of operations.
|
These risks could result in curtailment or suspension of our
related operations. We maintain insurance against some, but not
all, of such risks and losses in accordance with customary
industry practice. For example, we do not have any property
insurance on any of our underground pipeline systems that would
cover damage to the pipelines. In addition some of our
insurance policies cover us as named insured on
Quicksilvers policies. As a result, if Quicksilver or
another named insureds claim is paid under such policy it
would reduce the coverage available to us. We are not insured
against all environmental incidents, claims or damages that
might occur. Any significant accident or event that is not
adequately insured could adversely affect our business, results
of operations and financial condition. In addition, we may be
unable to economically obtain or maintain the insurance that we
desire. As a result of market conditions, premiums and
deductibles for certain of our insurance policies could escalate
further. In some instances, certain insurance could become
unavailable or available only at reduced coverage levels. Any
type of catastrophic event could have a material adverse effect
on our business, results of operation, financial condition and
ability to make cash distributions.
The
provisions of our Credit Agreement and the risks associated with
our debt could adversely affect our business, financial
condition, results of operations, ability to make distributions
to unitholders and value of our units.
Our Credit Agreement restricts our ability to, among other
things:
|
|
|
|
|
incur additional debt;
|
|
|
make distributions on, redeem or repurchase units;
|
|
|
make certain investments and acquisitions;
|
|
|
incur or permit certain liens to exist;
|
|
|
enter into certain types of transactions with affiliates;
|
|
|
merge, consolidate or amalgamate with another company; and
|
|
|
transfer or otherwise dispose of assets.
|
Our Credit Agreement, among other things, requires the
maintenance of financial covenants that are more fully described
in Note 7 to the condensed consolidated financial
statements in Item 8 of this annual report. Our ability to
comply with the covenants and other provisions of our Credit
Agreement may be affected by events beyond our control, and we
may be unable to comply with all aspects of our Credit Agreement
in the future.
The provisions of our Credit Agreement may affect the manner in
which we obtain future financing, pursue attractive business
opportunities and plan for and react to changes in business
conditions. In addition, failure to comply with the provisions
of our Credit Agreement could result in an event of default
which could enable the applicable creditors to declare the
outstanding principal and accrued interest to be immediately due
and payable. If we were unable to repay the accelerated
amounts, our lenders could proceed against the collateral
granted to them to secure such debt. If the payment of our debt
is accelerated, we may have insufficient assets to repay such
debt in full, and our unitholders could experience a partial or
total loss of their investment.
We are
exposed to the credit risks of Quicksilver, and any material
nonpayment by Quicksilver could reduce our ability to make
distributions to our unitholders.
We are heavily dependent on Quicksilver for the volumes that we
gather and process, and are consequently subject to the risk of
nonpayment or late payment by Quicksilver. Quicksilvers
credit ratings are below investment grade, where we expect them
to remain for the foreseeable future. Accordingly, this risk is
higher than it would be with a more creditworthy customer or
with a more diversified group of customers. Unless and until we
significantly diversify our customer base, we expect to remain
subject to non-diversified risk of nonpayment or late payment of
17
our fees. Any material nonpayment or nonperformance by
Quicksilver could reduce our ability to make distributions to
our unitholders. Furthermore, Quicksilver is highly leveraged
and subject to its own operating and regulatory risks, which
could increase the risk that it may default on its obligations
to us.
The
loss of key personnel could adversely affect our ability to
operate.
We depend on the leadership, involvement and services of a
relatively small group of Quicksilvers key management
personnel. There is a risk that the services of all of these
individuals may not be available to us in the future. The loss
of the services of any of these individuals could adversely
affect our ability to operate our business.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
A detailed description of our properties and associated 2009
developments is included in Item 1 of this annual report
and is incorporated herein by reference.
|
|
Item 3.
|
Legal
Proceedings
|
Our operations are subject to a variety of risks and disputes
normally incident to our business. As a result, we may become a
defendant in various legal proceedings and litigation arising in
the ordinary course of business.
18
PART II
|
|
Item 5.
|
Market
For Registrants Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities
|
Market
Information
Our common units are currently traded on the NYSE under the
symbol KGS. The following table sets forth the high
and low sales prices of our common units and the per unit
distributions paid for the periods indicated below.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Per Common
|
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|
|
|
|
|
|
|
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|
Quarter Ended
|
|
High
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|
Low
|
|
|
Unit
|
|
|
Record Date
|
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|
Payment Date
|
|
|
|
|
|
March 31, 2008
|
|
$
|
25.75
|
|
|
$
|
22.15
|
|
|
$
|
0.315
|
|
|
|
Apr. 30, 2008
|
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|
May 15, 2008
|
|
|
|
|
|
June 30, 2008
|
|
$
|
25.90
|
|
|
$
|
23.50
|
|
|
$
|
0.350
|
|
|
|
July 31, 2008
|
|
|
|
Aug. 14, 2008
|
|
|
|
|
|
September 30, 2008
|
|
$
|
23.13
|
|
|
$
|
17.25
|
|
|
$
|
0.350
|
|
|
|
Oct. 31, 2008
|
|
|
|
Nov. 14, 2008
|
|
|
|
|
|
December 31, 2008
|
|
$
|
18.60
|
|
|
$
|
5.59
|
|
|
$
|
0.370
|
(1)
|
|
|
Feb. 3, 2009
|
|
|
|
Feb. 13, 2009
|
|
|
|
|
|
March 31, 2009
|
|
$
|
14.84
|
|
|
$
|
10.06
|
|
|
$
|
0.370
|
|
|
|
May 5, 2009
|
|
|
|
May 15, 2009
|
|
|
|
|
|
June 30, 2009
|
|
$
|
14.78
|
|
|
$
|
11.46
|
|
|
$
|
0.370
|
|
|
|
Aug. 4, 2009
|
|
|
|
Aug. 14, 2009
|
|
|
|
|
|
September 30, 2009
|
|
$
|
17.88
|
|
|
$
|
13.52
|
|
|
$
|
0.390
|
|
|
|
Nov. 3, 2009
|
|
|
|
Nov. 13, 2009
|
|
|
|
|
|
December 31, 2009
|
|
$
|
22.77
|
|
|
$
|
17.20
|
|
|
$
|
0.390
|
(2)
|
|
|
Feb. 2, 2010
|
|
|
|
Feb. 12, 2010
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The 4th
quarter 2008 distribution is reflected as 2009 activity, since
distributions are recorded when paid
|
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|
(2)
|
The 4th
quarter 2009 distribution will be reflected as 2010 activity,
since distributions are recorded when paid
|
We also have 11,513,625 subordinated units outstanding for which
there is no established market. Quicksilver is the only holder
of record of our subordinated units at December 31, 2009.
The last reported sale price of our common units on the NYSE on
February 15, 2010, was $19.76. As of that date, there were
3 holders of record.
Cash
Distribution Policy
Our cash distribution policy reflects a basic judgment that our
unitholders are best served by our distributing cash available
after expenses and reserves rather than retaining it. We will
strive to finance our maintenance capital expenditures through
cash generated from operations and to distribute all of our
available cash. Since we are not directly subject to federal
income tax, we have more cash to distribute to unitholders than
would be the case were we subject to such tax. Our Partnership
Agreement requires that we distribute all of our available cash
quarterly, except under certain types of circumstances. Our
ability to make quarterly distributions is subject to certain
restrictions, including restrictions under our debt agreements
and Delaware law.
19
Performance
Graph
The following performance graph compares the cumulative total
unitholder return on KGS common units with the
Standard & Poors 500 Stock Index (S&P
500) and the Alerian MLP Index for the period from
August 7, 2007 to December 31, 2009, assuming an
initial investment of $100.
Comparison
of Cumulative Total Return
20
|
|
Item 6.
|
Selected
Financial Data
|
The information in this section should be read in conjunction
with Items 7 and 8 of this annual report. The following
table includes selected financial data as of and for each of the
five years in the period ended December 31, 2009.
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|
|
Year Ended December 31,
|
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|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating Results
Data: (1)
|
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|
|
|
|
|
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|
(In thousands, except per unit and volume data)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
91,706
|
|
|
$
|
76,084
|
|
|
$
|
35,695
|
|
|
$
|
13,918
|
|
|
$
|
4,868
|
|
Total operating expenses
|
|
|
47,610
|
|
|
|
38,659
|
|
|
|
22,513
|
|
|
|
11,340
|
|
|
|
3,315
|
|
Operating income
|
|
|
44,096
|
|
|
|
37,425
|
|
|
|
13,182
|
|
|
|
2,578
|
|
|
|
1,553
|
|
Income before income taxes
|
|
|
35,578
|
|
|
|
28,999
|
|
|
|
9,161
|
|
|
|
2,591
|
|
|
|
1,553
|
|
Net income from continuing operations
|
|
|
35,179
|
|
|
|
28,746
|
|
|
|
8,848
|
|
|
|
2,456
|
|
|
|
1,553
|
|
Loss from discontinued operations
|
|
|
(1,992
|
)
|
|
|
(2,330
|
)
|
|
|
(592
|
)
|
|
|
(35
|
)
|
|
|
-
|
|
Net income
|
|
|
33,187
|
|
|
|
26,416
|
|
|
|
8,256
|
|
|
|
2,421
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted earnings per unit:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per unit
|
|
$
|
1.28
|
|
|
$
|
1.04
|
|
|
$
|
0.22
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Net earnings per unit
|
|
$
|
1.21
|
|
|
$
|
0.96
|
|
|
$
|
0.20
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Cash distributions per
unit (2)
|
|
$
|
1.52
|
|
|
$
|
1.39
|
|
|
$
|
0.47
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
68,133
|
|
|
$
|
52,683
|
|
|
$
|
14,949
|
|
|
$
|
6,445
|
|
|
$
|
2,304
|
|
Investing activities
|
|
|
(54,818
|
)
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
|
|
(78,360
|
)
|
|
|
(43,707
|
)
|
Financing activities
|
|
|
(12,872
|
)
|
|
|
94,574
|
|
|
|
57,176
|
|
|
|
74,712
|
|
|
|
41,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes gathered (MMcf)
|
|
|
78,469
|
|
|
|
70,617
|
|
|
|
34,284
|
|
|
|
14,263
|
|
|
|
3,561
|
|
Volumes processed (MMcf)
|
|
|
54,386
|
|
|
|
56,225
|
|
|
|
30,802
|
|
|
|
13,496
|
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross
margin (3)(5)(6)
|
|
$
|
63,420
|
|
|
$
|
50,393
|
|
|
$
|
20,884
|
|
|
$
|
5,506
|
|
|
$
|
2,167
|
|
EBITDA (4)(5)(6)
|
|
|
63,421
|
|
|
|
50,404
|
|
|
|
21,120
|
|
|
|
5,519
|
|
|
|
2,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition
Information: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
396,952
|
|
|
$
|
432,272
|
|
|
$
|
254,555
|
|
|
$
|
128,456
|
|
|
$
|
53,783
|
|
Total assets
|
|
|
402,079
|
|
|
|
493,015
|
|
|
|
278,410
|
|
|
|
134,623
|
|
|
|
53,783
|
|
Long-term debt
|
|
|
125,400
|
|
|
|
174,900
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
Other long-term
obligations (7)
|
|
|
60,897
|
|
|
|
123,842
|
|
|
|
118,306
|
|
|
|
503
|
|
|
|
29
|
|
Partners capital
|
|
|
204,561
|
|
|
|
105,703
|
|
|
|
110,200
|
|
|
|
118,652
|
|
|
|
48,949
|
|
|
|
|
|
(1)
|
Reflects retroactive presentation of revenues, expenses, assets
and liabilities of the HCDS as discontinued operations for 2009
and prior periods.
|
|
|
(2)
|
Reported amounts include the fourth quarter distribution on all
common units paid in the first quarter of the subsequent year.
|
|
|
(3)
|
Defined as total revenues less operations and maintenance
expense and general and administrative expense. Additional
information regarding Adjusted Gross Margin, including a
reconciliation of Adjusted Gross Margin to Net Income as
determined in accordance with GAAP, is included in Results
of Operations in Item 7 of this annual report.
|
|
|
(4)
|
Defined as net income plus income tax provision, interest
expense, and depreciation and accretion expense. Additional
information regarding EBITDA, including a reconciliation of
EBITDA to Net Income as determined in accordance with GAAP, is
included in Results of Operations in Item 7 of
this annual report.
|
|
|
(5)
|
For 2006, adjusted gross margin and EBITDA of $5.5 million
less $3.1 million in depreciation and accretion expense
equals reported net income of $2.4 million.
|
|
|
(6)
|
For 2005, adjusted gross margin and EBITDA of $2.2 million
less $0.6 million in depreciation and accretion expense
equals reported net income of $1.6 million.
|
|
|
(7)
|
Other long-term obligations include the subordinated note
payable to Quicksilver, repurchase obligations to Quicksilver
and asset retirement obligations.
|
21
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following is a discussion of our historical consolidated
financial condition and results of operations that is intended
to help the reader understand our business, results of
operations and financial condition. It should be read in
conjunction with other sections of this annual report, including
our historical consolidated financial statements and
accompanying notes thereto included in Item 8.
This MD&A includes the following sections:
|
|
|
|
|
Current Year Highlights
|
|
|
Overview and Performance Metrics
|
|
|
Results of Operations
|
|
|
Liquidity and Capital Resources
|
|
|
Critical Accounting Estimates
|
CURRENT
YEAR HIGHLIGHTS
The following key events took place during 2009 which have
impacted or are likely to impact our financial condition and
results of operations:
|
|
|
|
|
The Corvette Plant was placed into service, providing enhanced
compression assets and additional compression fee revenue.
|
|
|
Credit agreement was amended by lenders to increase their
commitments to $320 million
|
|
|
Waived repurchase of the HCDS, which resulted in recognition of
discontinued operations
|
|
|
Agreement to purchase the Alliance midstream gathering and
treating assets from Quicksilver, including a secondary offering
to enable the purchase
|
OVERVIEW
AND PERFORMANCE METRICS
We are a growth-oriented limited partnership engaged in
gathering, processing and treating natural gas produced from the
Barnett Shale geologic formation of the Fort Worth Basin
located in North Texas. We began operations in 2004 to provide
midstream services primarily to Quicksilver and to other natural
gas producers in this area. During 2009, more than 90% of our
total gathering and processing volumes were comprised of natural
gas owned or controlled by Quicksilver.
The results of our operations are significantly influenced by
the volumes of natural gas gathered and processed through our
systems. We gather, process and treat natural gas pursuant to
contracts under which we receive fees. We do not take title to
the natural gas or associated NGLs that we gather and process,
and therefore, we avoid direct commodity price exposure.
However, a sustained decline in commodity prices could result in
our customers reducing their production volumes which would
cause a resulting decrease in our revenues. Our contracts
provide relatively stable cash flows, but little upside in
higher commodity price environments.
Our management uses a variety of financial and operational
measures to analyze our performance. We view these measures as
important factors affecting our profitability and unitholder
value and therefore we review them monthly for consistency and
to identify trends in our operations. These performance
measures are outlined below:
Volume We must continually obtain new
supplies of natural gas to maintain or increase throughput
volumes on our gathering and processing systems. We routinely
monitor producer activity in the areas we serve to identify new
supply opportunities. Our ability to achieve these objectives
is impacted by:
|
|
|
|
|
the level of successful drilling and production activity in
areas where our systems are located;
|
|
|
our ability to compete with other midstream companies for
production volumes; and
|
|
|
our pursuit of new opportunities.
|
Adjusted Gross Margin We use adjusted gross
margin information to evaluate the relationship between our
gathering and processing revenues and the cost of operating our
facilities, including our general and administrative overhead.
Adjusted gross margin is not a measure calculated in accordance
with GAAP as it does not include deductions for expenses such as
interest and income tax which are necessary to maintain our
business. In measuring 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 another company
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.
22
Operating Expenses We consider operating
expenses in evaluating the performance of our 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. Our ability to manage
operating expenses has a significant impact on our profitability
and ability to pay distributions.
EBITDA We believe that EBITDA is a widely
accepted financial indicator of a companys 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 depreciation, interest and
income taxes, which are necessary to maintain our business.
EBITDA should not be considered 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 may not
be comparable to EBITDA measures of other entities. In
evaluating EBITDA, we believe that investors should also
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.
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
companies in the midstream industry without regard to financing
methods, capital structure or historical cost basis; and
|
|
|
the viability of acquisitions and capital expenditure projects
and the rates of return on investment opportunities.
|
23
RESULTS
OF OPERATIONS
The following table summarizes our combined results of
operations for each of the three years in the period ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except volume data)
|
|
|
Total revenues
|
|
$
|
91,706
|
|
|
$
|
76,084
|
|
|
$
|
35,695
|
|
Operations and maintenance expense
|
|
|
20,677
|
|
|
|
19,284
|
|
|
|
11,432
|
|
General and administrative expense
|
|
|
7,609
|
|
|
|
6,407
|
|
|
|
3,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross margin
|
|
|
63,420
|
|
|
|
50,393
|
|
|
|
20,884
|
|
Other income
|
|
|
1
|
|
|
|
11
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
63,421
|
|
|
|
50,404
|
|
|
|
21,120
|
|
Depreciation and accretion expense
|
|
|
19,324
|
|
|
|
12,968
|
|
|
|
7,702
|
|
Interest expense
|
|
|
8,519
|
|
|
|
8,437
|
|
|
|
4,257
|
|
Income tax provision
|
|
|
399
|
|
|
|
253
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
35,179
|
|
|
|
28,746
|
|
|
|
8,848
|
|
Loss from discontinued operations
|
|
|
(1,992
|
)
|
|
|
(2,330
|
)
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,187
|
|
|
$
|
26,416
|
|
|
$
|
8,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our volumes for each of the three
years ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
|
|
Processing
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(MMcf)
|
|
|
|
|
|
|
|
|
Cowtown System
|
|
|
55,337
|
|
|
|
57,550
|
|
|
|
32,673
|
|
|
|
54,386
|
|
|
|
56,225
|
|
|
|
30,802
|
|
Lake Arlington Dry System
|
|
|
23,132
|
|
|
|
13,067
|
|
|
|
1,611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
78,469
|
|
|
|
70,617
|
|
|
|
34,284
|
|
|
|
54,386
|
|
|
|
56,225
|
|
|
|
30,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in our revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
|
|
Processing
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenue for the year ended December 31, 2007
|
|
$
|
16,616
|
|
|
$
|
18,554
|
|
|
$
|
525
|
|
|
$
|
35,695
|
|
Volume changes
|
|
|
17,610
|
|
|
|
15,314
|
|
|
|
-
|
|
|
|
32,924
|
|
Price changes
|
|
|
5,473
|
|
|
|
1,617
|
|
|
|
375
|
|
|
|
7,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2008
|
|
$
|
39,699
|
|
|
$
|
35,485
|
|
|
$
|
900
|
|
|
$
|
76,084
|
|
Volume changes
|
|
|
4,414
|
|
|
|
(1,161
|
)
|
|
|
-
|
|
|
|
3,253
|
|
Price changes
|
|
|
11,265
|
|
|
|
363
|
|
|
|
741
|
|
|
|
12,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2009
|
|
$
|
55,378
|
|
|
$
|
34,687
|
|
|
$
|
1,641
|
|
|
$
|
91,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
Compared with 2008
Total Revenues and Volumes The
increase in revenue is related to the $9.8 million of
additional compression fees on the Cowtown System where
additional compression assets were placed into service during
2009. The increase in total revenues was also due to an
increase in volumes that we gathered particularly on the LADS.
Additionally, this volume increase was principally due to the
well connections made during 2009 as Quicksilver completed and
brought on-line additional wells in the Lake Arlington area. We
expect our revenues to increase in the future with the addition
of the Alliance Midstream Assets which we purchased in January
2010, as well as increases to our volumes on other existing
systems. We expect the Alliance Midstream Assets revenue
to be approximately $5.1 million for the first quarter of
2010.
Operations and Maintenance Expense The
increase in operations and maintenance expense was mainly due to
the Corvette Plant placed in service in March 2009 and
additional costs to operate compression assets that were
24
placed into service during 2009. However, the increases in our
operations and maintenance expenses have been less significant
than the increases in our throughput volumes and revenues.
Operations and maintenance expenses will likely increase in the
future based primarily on the addition of the Alliance Midstream
Assets, although we expect these costs to grow at a slower rate
than gathering and processing volume increases. We expect the
Alliance Midstream Assets operations and maintenance
expenses to be approximately $2.2 million for the first
quarter of 2010.
General and Administrative Expense The
increase in general and administrative expense was primarily the
result of our expanded operations and the increase in the
allocable portion of Quicksilvers overhead costs,
primarily related to safety and purchasing and transaction costs
incurred during 2009 related to the Alliance Midstream Assets
purchase. General and administrative expense includes
$1.8 million and $1.2 million of equity-based
compensation for 2009 and 2008, respectively.
Adjusted Gross Margin and EBITDA
Adjusted gross margin and EBITDA increased primarily as a
result of the increase in revenues described above. As a
percentage of revenues, adjusted gross margin and EBITDA
increased from 66% in 2008 to approximately 69% in 2009,
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 property, plant and equipment placed into service
during 2009 in expanding our gathering network and increasing
our processing and compression capabilities. Depreciation and
accretion expenses will likely increase by an estimated
$1.3 million for the first quarter of 2010 as a result of
our purchase of the Alliance Midstream Assets.
Interest Expense Interest expense increased
primarily due to greater amounts outstanding under the Credit
Agreement throughout 2009, partially offset by lower repurchase
obligation balance and lower effective interest rates. During
December 2009, we used $80.5 million of proceeds from our
secondary offering to pay down the Credit Agreement. During
January 2010, we re-borrowed $95 million to purchase the
Alliance Midstream Assets and repaid $11 million upon the
underwriters exercise of their over-allotment.
The following table summarizes the details of interest expense
for the years ended December 31, 2009 and 2008. With the
culmination of our repurchase obligations during 2009, we expect
no interest expense for such items in 2010, although the
increased borrowing spreads as a result of our lenders
redetermination will likely result in an increase to our
interest expense:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Interest cost:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
5,076
|
|
|
$
|
3,158
|
|
Repurchase obligation
|
|
|
1,681
|
|
|
|
4,283
|
|
Subordinated note to Quicksilver
|
|
|
2,072
|
|
|
|
2,802
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
8,829
|
|
|
|
10,243
|
|
Less interest capitalized
|
|
|
(310
|
)
|
|
|
(1,806
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
8,519
|
|
|
$
|
8,437
|
|
|
|
|
|
|
|
|
|
|
2008
Compared with 2007
Total Revenues and Volumes
Approximately $32.9 million of the increase in total
revenues was due to the increase in volumes that we gathered and
processed in the Fort Worth Basin. This volume increase
was principally due to the well connections made during 2008
across each of our systems.
Operations and Maintenance Expense The
increase in operations and maintenance expense was mainly due to
the continued expansion of our natural gas gathering systems and
additional operating costs related to the full year effect of
the natural gas processing facility at the Cowtown Plant placed
in service in March 2007 on the Cowtown System. However, the
increases in our operations and maintenance expenses were less
significant than the increases in our throughput volumes and
revenues.
General and Administrative Expense The
increase in general and administrative expense was primarily the
result of our expanded operations and the resulting increase in
administrative and managerial personnel and their
25
related expenses to support that growth, as well as the full
year effect of being a publicly-traded partnership. General and
administrative expense includes equity-based compensation for
2008 and 2007 of $1.2 million and $0.4 million,
respectively.
Adjusted Gross Margin and EBITDA
Adjusted gross margin and EBITDA increased primarily as a
result of the increase in revenues described above. As a
percentage of revenues, adjusted gross margin and EBITDA
increased from 59% in 2007 to approximately 66% in 2008,
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 property, plant and equipment placed into service
during 2008 in expanding our gathering network and increasing
our processing capability.
Interest Expense Interest expense increased
primarily due to the increases in the repurchase obligation to
Quicksilver, the subordinated note payable to Quicksilver and
the borrowings under the Credit Agreement. Capitalized interest
for 2008 relates to their construction of the Corvette Plant.
The following table summarizes the details of interest expense
for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Interest cost:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
3,158
|
|
|
$
|
353
|
|
Repurchase obligation
|
|
|
4,283
|
|
|
|
2,235
|
|
Subordinated note to Quicksilver
|
|
|
2,802
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
10,243
|
|
|
|
4,257
|
|
Less interest capitalized
|
|
|
(1,806
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
8,437
|
|
|
$
|
4,257
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
The volumes of natural gas that we gather and process are
dependent upon the natural gas volumes produced by our
customers, which may be affected by prevailing natural gas
prices, the availability and cost of capital, their level of
successful drilling activity and other factors beyond their
control. Although Quicksilver has mitigated its near-term
exposure to low prices through the use of derivative financial
instruments covering portions of its production through 2012, we
cannot predict future changes to natural gas prices and how any
such pricing changes will influence producers behaviors.
If reduced drilling and development conditions were to persist
or worsen over a prolonged period of time, we could experience a
reduction in volumes through our system and therefore reductions
of revenue and cash flows.
Our sources of liquidity include:
|
|
|
|
|
cash generated from operations;
|
|
|
borrowings under our credit agreement; and
|
|
|
future capital market transactions.
|
We believe that the cash generated from these sources will be
sufficient to meet our expected $0.39 per unit quarterly cash
distributions during 2010 and satisfy our short-term working
capital and maintenance capital expenditure requirements. In
funding the $95.2 million purchase of the Alliance
Midstream Assets in January 2010, we re-borrowed
$95 million from our Credit Agreement in January 2010 and
repaid $11 million upon the underwriters exercise of
their over-allotment option.
Since the inception of operations in 2004, our cash flows have
been significantly influenced by Quicksilvers production
in the Fort Worth Basin. As Quicksilver and others have
developed the Fort Worth Basin, we have expanded our
gathering and processing facilities to serve the additional
volumes produced by such development.
26
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
68,133
|
|
|
$
|
52,683
|
|
|
$
|
14,949
|
|
Net cash used in investing activities
|
|
|
(54,818
|
)
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(12,872
|
)
|
|
|
94,574
|
|
|
|
57,176
|
|
2009
Cash Flows Compared to 2008
Cash Flows Provided by Operating Activities
The increase in cash flows provided by operating activities
resulted primarily from increased revenues and higher
profitability associated with the natural gas gathered and
processed through our systems, due to factors discussed above in
our results of operations.
Cash Flows Used in Investing Activities The
decrease in cash flows used in investing activities resulted
from the lower capital expenditures used to expand our gathering
system and processing capabilities, particularly due to an
$80 million decrease in spending on plant capital, most
significantly related to spending for the Corvette Plant
construction. In 2009, we spent $26.9 million on gathering
assets, and $27.9 million on processing facilities, which
included $26.6 million related to the Corvette Plant. The
cash flows used in investing activities during 2009 include the
payment of $25.8 million that was incurred and accrued at
December 31, 2008.
Cash Flows Used in Financing Activities
Changes in cash flows used in financing activities during
2009 consisted primarily of the 2009 net pay down under our
Credit Agreement of $49.5 million compared with
2008 net borrowings of $169.9 million. In addition,
we distributed $5.0 million more to our unitholders during
2009. Our secondary offering during December 2009, generated
proceeds of $80.8 million for which there was no comparable
2008 event. Cash flows in 2009 also reflect $36.4 million
of lower payments pursuant to repurchase obligations compared to
2008, when we purchased LADS.
2008
Cash Flows Compared to 2007
Cash Flows Provided by Operating Activities
The increase in cash flows provided by operating activities
resulted primarily from increased revenues and higher
profitability associated with the services we provided to the
customers whose wells are connected to our systems.
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. In 2008 we paid
$40.5 million on gathering assets and $107.6 million
on processing facilities which included $101.9 million
related to the Corvette Plant.
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 $169.9 million used to expand our fixed
asset base, partially offset by the full year effect of
distributions of $31.9 million to our unitholders. We
funded a portion of our repurchase obligation to Quicksilver for
our 2008 purchase of the LADS for $42.1 million with
borrowings under the Credit Agreement.
Capital
Expenditures
The midstream energy business is capital intensive, requiring
significant investment for the acquisition or development of new
facilities. We categorize our capital expenditures as either:
|
|
|
|
|
expansion capital expenditures, which are made to construct
additional assets, expand and upgrade existing systems, 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.
|
Since our inception in 2004, we have made substantial capital
expenditures. We anticipate that we will continue to make
capital expenditures to develop our gathering and processing
network as Quicksilver continues to expand its development
efforts in the Fort Worth Basin. Consequently, our ability
to develop and maintain sources of funds to meet our capital
requirements is critical to our ability to meet our growth
objectives and to maintain our distribution levels.
27
We have budgeted $80 million in capital expenditures for
2010, of which $6.6 million is classified as maintenance
capital expenditures. The capital budget includes
$50 million for the construction of pipelines and gathering
systems, $22 million for compression assets and
$8 million for processing plants. The $80 million
2010 capital budget includes approximately $44 million for
additional post-acquisition expenditures on the Alliance
Midstream Assets.
Repurchase
Obligation to Quicksilver
During 2009, KGS independent directors voted to acquire
certain of the Cowtown Pipeline assets subject to the repurchase
obligation that had an original cost of approximately
$5.6 million. KGS paid $5.6 million for these assets
in September 2009. Furthermore, the independent directors
elected not to acquire certain Cowtown Pipeline assets that had
been previously included in the repurchase obligation. In doing
so, KGS derecognized assets with a carrying value of
$56.8 million and also derecognized liabilities associated
with the repurchase of $68.6 million. The difference of
$11.8 million between the assets carrying values and
their repurchase obligation was reflected as an increase in
partners capital effective upon the decision not to
purchase. KGS also entered into an agreement with Quicksilver
to permit KGS to gather third party gas for a fee across the
Cowtown Pipeline laterals retained by Quicksilver. The decision
not to purchase certain Cowtown Pipeline assets did not have a
material effect on KGS gathering and processing revenues
as the natural gas stream from these laterals continues to flow
into our Cowtown Pipeline gathering and processing facilities.
We had been obligated to repurchase from Quicksilver a gas
gathering system in Hill County, Texas, which we refer to as the
HCDS, at its fair market value within two years after its
completion and commencement of commercial service. As a result
of this contractual purchase obligation, we have historically
included the HCDS in our financial statements since our initial
public offering. In November 2009, we and Quicksilver mutually
agreed to waive both parties rights and obligations to
transfer ownership of the HCDS to us. The assets, liabilities,
revenues and expenses directly attributable to the HCDS for the
periods prior to November 2009 have been retroactively reported
as discontinued operations.
For a complete description of our repurchase obligations to
Quicksilver, see Note 2 to our consolidated financial
statements included in Item 8 of this annual report, which
is incorporated herein by reference.
Other
Matters
We regularly review opportunities for both organic growth
projects and acquisitions that will enhance our financial
performance. Since we strive to distribute most of our
available cash to our unitholders, we will depend on a
combination of borrowings under our Credit Agreement, operating
cash flows and debt or equity offerings to finance any future
growth capital expenditures or acquisitions.
Credit
Agreement and Subordinated Note
For a complete description of Long Term Debt, see Note 7 to
our consolidated financial statements included in Item 8 of
this annual report, which is incorporated herein by reference.
Total
Contractual Obligations
The following table summarizes our total contractual cash
obligations as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual
Obligations
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Long-term
debt (1)
|
|
$
|
181.1
|
|
|
$
|
2.5
|
|
|
$
|
1.1
|
|
|
$
|
126.5
|
|
|
$
|
51.0
|
|
|
$
|
|
|
Scheduled interest
obligations (2)(3)
|
|
|
18.7
|
|
|
|
6.5
|
|
|
|
6.5
|
|
|
|
5.3
|
|
|
|
0.4
|
|
|
|
|
|
Asset retirement
obligations (4)
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
207.5
|
|
|
$
|
9.0
|
|
|
$
|
7.6
|
|
|
$
|
131.8
|
|
|
$
|
51.4
|
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, we had $125.4 million
outstanding under our Credit Agreement and a $55.7 million
subordinated note payable to Quicksilver. |
|
(2) |
|
Based on our debt outstanding and interest rates in effect at
December 31, 2009, we would anticipate interest payments to
be approximately $4 million annually on our Credit
Agreement and approximately $2.5 million on our
subordinated note. For each additional $10.0 million in
borrowings, annual interest payments will increase by |
28
|
|
|
|
|
approximately $0.8 million. If the committed amount under
our Credit Agreement were to be fully utilized by year-end 2010
at interest rates in effect at December 31, 2009, we
estimate that annual interest expenses would increase by
approximately $6.3 million. If interest rates on our
December 31, 2009 variable debt balance of
$181.1 million increase or decrease by one percentage
point, our annual income will decrease or increase by
$1.8 million. |
|
(3) |
|
Based on our debt outstanding at December 31, 2009 and the
net re-borrowing of $84 million, in January 2010, to fund
the Alliance Midstream Assets and interest rates in effect at
December 31, 2009, we anticipate interest payments to be
approximately $9.2 million in 2010. For each additional
$10.0 million in borrowings, annual interest payments will
increase by approximately $0.8 million. If the committed
amount under our Credit Agreement were to be fully utilized by
year-end 2010 at interest rates in effect at December 31,
2009, we estimate that annual interest expenses would increase
by approximately $3.6 million. If interest rates on our
December 31, 2009 variable debt balance of
$265.1 million increase or decrease by one percentage
point, our annual income will decrease or increase by
$2.6 million. |
|
(4) |
|
For more information regarding our asset retirement obligations,
see Note 8 to our consolidated financial statements,
included in Item 8 of this annual report, none of which is
expected to be due before 2015. |
CRITICAL
ACCOUNTING ESTIMATES
Management discusses with our Audit Committee the development,
selection and disclosure of our critical accounting policies and
estimates and the application of these policies and estimates.
Our consolidated financial statements are prepared in accordance
with GAAP in the United States. We believe our accounting
policies are appropriately selected and applied.
Use of
Estimates
GAAP requires management to make estimates and judgments that
affect the amounts reported in the financial statements and
notes. These estimates and judgments are based on information
available at the time that we make such estimates and
judgments. These estimates and judgments principally affected
the reported amounts of depreciation expense, asset retirement
obligations and stock-based compensation.
Depreciation
Expense and Cost Capitalization Policies
Policy
Description
Our assets consist primarily of natural gas gathering pipelines,
processing plants and compression facilities. We capitalize all
construction-related direct labor and material costs plus the
interest cost associated with financing the construction of new
facilities. These aggregate costs less the estimated salvage
value are then depreciated using the straight-line method over
the estimated useful life of the constructed asset. The costs
of renewals and betterments that extend the useful life or
substantially improve the efficiency of property, plant and
equipment are also capitalized. The costs of repairs,
replacements and normal maintenance projects are expensed as
incurred.
Judgments
and Assumptions
The computation of depreciation expense requires judgment
regarding the estimated useful lives and salvage value of
assets. As circumstances warrant, depreciation estimates are
reviewed to determine if any changes are needed. Such changes
could involve an increase or decrease in estimated useful lives
or salvage values which could impact current and future
depreciation expense. When making expenditures, we also must
determine whether they improve efficiency or extend the useful
life of the underlying assets, to determine whether to
capitalize such amounts paid.
Asset
Retirement Obligations
Policy
Description
In certain instances, we have obligations to remove equipment
and restore land at the end of our
right-of-way
period or the assets useful life. We estimate the amount
and timing of asset retirement expenditures and record the
discounted fair value of asset retirement obligations as a
liability in the period in which it is legally or contractually
incurred. Upon initial recognition of the asset retirement
liability, an asset retirement cost is capitalized by increasing
the carrying amount of the related long-lived asset by the same
amount as the liability. Changes in the liability for the asset
retirement obligation are recognized for both the passage of
time and revisions to either the timing or the amount of the
estimated cash flows. In periods subsequent to initial
measurement, the asset retirement cost is allocated to expense
on a straight-line basis over the assets useful life.
29
Judgments
and Assumptions
Inherent in the fair value calculation of asset retirement
obligations are numerous assumptions and judgments including the
estimated remaining lives of the wells connected to our systems,
the estimated cost to remove equipment or restore land in the
future, inflation factors, credit adjusted discount rates and
changes in the legal or regulatory requirements. To the extent
future revisions to these assumptions impact the fair value of
our existing asset retirement obligation, a corresponding
adjustment is made to our liability.
Equity-Based
Compensation
Policy
Description
Prior to 2007, we issued no equity-based compensation awards.
During 2007, 2008 and 2009, we issued phantom units to certain
non-management directors and executive officers of our general
partner and employees of Quicksilver who provide services to
us. An estimate of fair value is determined for all share-based
payment awards on grant date. Compensation expense for all
share-based payment awards is recognized over the vesting period
for each award.
Judgments
and Assumptions
Generally accepted valuation techniques require management to
make assumptions and to apply judgment to determine the fair
value of our awards. These assumptions and judgments include
forfeiture rates and estimated distributions during the vesting
period. Changes in these assumptions can materially affect the
fair value estimate.
We do not believe there is a reasonable likelihood that there
will be a material change in the future estimates or assumptions
that we use to determine stock-based compensation expense.
However, if actual results are not consistent with our estimates
or assumptions, we may be exposed to changes in stock-based
compensation expense that could be material. If actual results
are not consistent with the assumptions used, the stock-based
compensation expense reported in our financial statements may
not be representative of the actual economic cost of the
stock-based compensation.
OFF-BALANCE
SHEET ARRANGEMENTS
We have no off-balance sheet arrangements within the meaning of
Item 303(a)(4) of SEC
Regulation S-K.
Recently
Issued Accounting Pronouncements
The information regarding recent accounting pronouncements is
included in Note 2 to our consolidated financial
statements, included in Item 8 of this annual report.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We have established policies and procedures for managing risk
within our organization, including internal controls. The level
of risk assumed by us is based on our objectives and capacity to
manage risk.
Credit
Risk
Our primary credit risk relates to our dependency on Quicksilver
for the majority of our natural gas volumes, which causes us to
be subject to the risk of nonpayment or late payment by
Quicksilver for gathering and processing fees.
Quicksilvers credit ratings are below investment grade,
where we expect them to remain for the foreseeable future.
Accordingly, this risk is higher than it might be with a more
creditworthy customer or with a more diversified group of
customers. Unless and until we significantly diversify our
customer base, we expect to continue to be subject to
non-diversified risk of nonpayment or late payment of our fees.
Additionally, broad market factors such as lower credit
availability, prompt us to perform frequent credit analyses of
our customers. We have not had any significant losses due to
counter-party failures to perform.
Interest
Rate Risk
As base interest rates remain low, the credit markets have
caused the spreads charged by lenders to increase. As base
rates or spreads increase, our financing costs will increase
accordingly. Although this could limit our ability to raise
funds in the capital markets, we expect that our competitors
would face similar challenges with respect to funding
acquisitions and capital projects.
We are exposed to variable interest rate risk as a result of
borrowings under our Credit Agreement and our subordinated note
to Quicksilver. The table of contractual obligations contained
in Item 7 contains more information regarding interest rate
sensitivity.
30
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
QUICKSILVER
GAS SERVICES LP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
31
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Quicksilver Gas Services LP
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of
Quicksilver Gas Services LP and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of income, cash flows, and
changes in partners capital for each of the three years in
the period ended December 31, 2009. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Quicksilver Gas Services LP and subsidiaries at
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 15, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte & Touche LLP
Fort Worth, Texas
March 15, 2010
32
QUICKSILVER
GAS SERVICES LP
CONSOLIDATED
STATEMENTS OF INCOME
In thousands, except for per unit
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering and transportation revenue - Quicksilver
|
|
$
|
53,253
|
|
|
$
|
34,468
|
|
|
$
|
14,932
|
|
Gathering and transportation revenue
|
|
|
2,125
|
|
|
|
5,231
|
|
|
|
1,684
|
|
Gas processing revenue - Quicksilver
|
|
|
32,605
|
|
|
|
30,127
|
|
|
|
16,564
|
|
Gas processing revenue
|
|
|
2,082
|
|
|
|
5,358
|
|
|
|
1,990
|
|
Other revenue - Quicksilver
|
|
|
1,641
|
|
|
|
900
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
91,706
|
|
|
|
76,084
|
|
|
|
35,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
20,677
|
|
|
|
19,284
|
|
|
|
11,432
|
|
General and administrative
|
|
|
7,609
|
|
|
|
6,407
|
|
|
|
3,379
|
|
Depreciation and accretion
|
|
|
19,324
|
|
|
|
12,968
|
|
|
|
7,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
47,610
|
|
|
|
38,659
|
|
|
|
22,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
44,096
|
|
|
|
37,425
|
|
|
|
13,182
|
|
Other income
|
|
|
1
|
|
|
|
11
|
|
|
|
236
|
|
Interest expense
|
|
|
8,519
|
|
|
|
8,437
|
|
|
|
4,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
35,578
|
|
|
|
28,999
|
|
|
|
9,161
|
|
Income tax provision
|
|
|
399
|
|
|
|
253
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
35,179
|
|
|
|
28,746
|
|
|
|
8,848
|
|
Loss from discontinued operations
|
|
|
(1,992
|
)
|
|
|
(2,330
|
)
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,187
|
|
|
$
|
26,416
|
|
|
$
|
8,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the period from January 1, 2007
to August 9, 2007
|
|
|
|
|
|
|
|
|
|
$
|
3,444
|
|
Net income attributable to the period from August 10, 2007
to December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
4,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
8,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner interest in net
income (1)
|
|
$
|
1,189
|
|
|
$
|
652
|
|
|
$
|
93
|
|
Common and subordinated unitholders interest in net
income (1)
|
|
$
|
31,998
|
|
|
$
|
25,764
|
|
|
$
|
4,719
|
|
Basic earnings per
unit: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
1.41
|
|
|
$
|
1.18
|
|
|
$
|
0.22
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.02
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
1.33
|
|
|
$
|
1.08
|
|
|
$
|
0.20
|
|
Diluted earnings per
unit: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
1.28
|
|
|
$
|
1.04
|
|
|
$
|
0.22
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.02
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
1.21
|
|
|
$
|
0.96
|
|
|
$
|
0.20
|
|
Weighted average number of common and subordinated units
outstanding: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,057
|
|
|
|
23,783
|
|
|
|
23,777
|
|
Diluted
|
|
|
28,189
|
|
|
|
29,583
|
|
|
|
23,787
|
|
|
|
|
(1) |
|
Amounts for 2007 represent the post-IPO period after
August 10, 2007 |
The accompanying notes are an integral part of these
consolidated financial statements.
33
QUICKSILVER
GAS SERVICES LP
CONSOLIDATED
BALANCE SHEETS
In thousands, except for unit data
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
746
|
|
|
$
|
303
|
|
Accounts receivable
|
|
|
1,342
|
|
|
|
1,908
|
|
Prepaid expenses and other current assets
|
|
|
180
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,268
|
|
|
|
2,805
|
|
Property, plant and equipment, net
|
|
|
396,952
|
|
|
|
432,272
|
|
Assets of discontinued operations
|
|
|
-
|
|
|
|
56,022
|
|
Other assets
|
|
|
2,859
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
402,079
|
|
|
$
|
493,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of debt
|
|
$
|
2,475
|
|
|
$
|
1,375
|
|
Accounts payable to Quicksilver
|
|
|
1,727
|
|
|
|
10,917
|
|
Accrued additions to property, plant and equipment
|
|
|
4,011
|
|
|
|
13,755
|
|
Accounts payable and other
|
|
|
2,240
|
|
|
|
1,852
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,453
|
|
|
|
27,899
|
|
Long-term debt
|
|
|
125,400
|
|
|
|
174,900
|
|
Note payable to Quicksilver
|
|
|
53,243
|
|
|
|
52,271
|
|
Repurchase obligations to Quicksilver
|
|
|
-
|
|
|
|
66,997
|
|
Asset retirement obligations
|
|
|
7,654
|
|
|
|
4,574
|
|
Deferred income tax liability
|
|
|
768
|
|
|
|
369
|
|
Liabilities of discontinued operations
|
|
|
-
|
|
|
|
60,302
|
|
Commitments and contingent liabilities (Note 9)
|
|
|
|
|
|
|
|
|
Partners capital
|
|
|
|
|
|
|
|
|
Common unitholders (16,313,451 and 12,269,714 units issued
and outstanding at December 31, 2009 and December 31,
2008, respectively)
|
|
|
200,963
|
|
|
|
108,036
|
|
Subordinated unitholders (11,513,625 units issued and
outstanding at December 31, 2009 and 2008)
|
|
|
3,040
|
|
|
|
(2,328
|
)
|
General partner
|
|
|
558
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
204,561
|
|
|
|
105,703
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
402,079
|
|
|
$
|
493,015
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
34
QUICKSILVER
GAS SERVICES LP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,187
|
|
|
$
|
26,416
|
|
|
$
|
8,256
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,542
|
|
|
|
14,382
|
|
|
|
7,987
|
|
Accretion of asset retirement obligations
|
|
|
394
|
|
|
|
184
|
|
|
|
83
|
|
Deferred income taxes
|
|
|
399
|
|
|
|
196
|
|
|
|
38
|
|
Equity-based compensation
|
|
|
1,705
|
|
|
|
1,017
|
|
|
|
130
|
|
Non-cash interest expense
|
|
|
6,191
|
|
|
|
9,787
|
|
|
|
4,396
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
740
|
|
|
|
(1,200
|
)
|
|
|
(815
|
)
|
Prepaid expenses and other assets
|
|
|
387
|
|
|
|
(612
|
)
|
|
|
(543
|
)
|
Accounts receivable and payable with Quicksilver
|
|
|
3,621
|
|
|
|
4,002
|
|
|
|
(5,975
|
)
|
Accounts payable and other
|
|
|
(33
|
)
|
|
|
(1,489
|
)
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
68,133
|
|
|
|
52,683
|
|
|
|
14,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(54,818
|
)
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(54,818
|
)
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets to Quicksilver
|
|
|
-
|
|
|
|
-
|
|
|
|
29,508
|
|
Proceeds from revolving credit facility borrowings
|
|
|
56,000
|
|
|
|
169,900
|
|
|
|
5,000
|
|
Debt issuance costs paid
|
|
|
(1,446
|
)
|
|
|
(486
|
)
|
|
|
(1,041
|
)
|
Repayment of repurchase obligation to Quicksilver
|
|
|
(5,645
|
)
|
|
|
(42,085
|
)
|
|
|
-
|
|
Repayments of credit facility
|
|
|
(105,500
|
)
|
|
|
-
|
|
|
|
-
|
|
Repayment of subordinated note payable to Quicksilver
|
|
|
-
|
|
|
|
(825
|
)
|
|
|
-
|
|
Proceeds from issuance of equity units
|
|
|
80,760
|
|
|
|
-
|
|
|
|
112,298
|
|
Issuance costs of equity units paid
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(2,933
|
)
|
Distribution of offering proceeds to partners
|
|
|
-
|
|
|
|
-
|
|
|
|
(119,806
|
)
|
Contributions by Quicksilver
|
|
|
-
|
|
|
|
-
|
|
|
|
38,045
|
|
Contributions by other partners
|
|
|
-
|
|
|
|
-
|
|
|
|
167
|
|
Distributions to unitholders
|
|
|
(36,947
|
)
|
|
|
(31,930
|
)
|
|
|
(4,062
|
)
|
Other
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(12,872
|
)
|
|
|
94,574
|
|
|
|
57,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash increase (decrease)
|
|
|
443
|
|
|
|
(822
|
)
|
|
|
(1,672
|
)
|
Cash at beginning of period
|
|
|
303
|
|
|
|
1,125
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
746
|
|
|
$
|
303
|
|
|
$
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4,682
|
|
|
$
|
2,341
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
332
|
|
|
$
|
-
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital related to capital expenditures
|
|
$
|
6,101
|
|
|
$
|
31,920
|
|
|
$
|
30,809
|
|
Debt issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
Costs in connection with the equity offering
|
|
|
(416
|
)
|
|
|
-
|
|
|
|
(275
|
)
|
Issuance of subordinated note payable to Quicksilver
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
Disposition (acquisition) of property, plant and equipment under
repurchase obligation, net
|
|
|
111,070
|
|
|
|
(77,108
|
)
|
|
|
(50,118
|
)
|
Equity contribution related to assets not purchased pursuant to
repurchase obligations
|
|
$
|
20,663
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
35
QUICKSILVER
GAS SERVICES LP
CONSOLIDATED
STATEMENTS OF CHANGES IN PARTNERS CAPITAL
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners Capital
|
|
|
|
|
|
|
|
|
|
Limited Partners
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Parent
|
|
|
Partners
|
|
|
|
|
|
|
|
|
General
|
|
|
|
|
|
|
Equity
|
|
|
Capital
|
|
|
Common
|
|
|
Subordinated
|
|
|
Partner
|
|
|
Total
|
|
|
Balance at January 1, 2007
|
|
$
|
118,652
|
|
|
$
|
7,431
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
126,083
|
|
Net income attributable to the period from January 1, 2007
through August 9, 2007
|
|
|
3,119
|
|
|
|
326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,445
|
|
Contributions
|
|
|
38,045
|
|
|
|
167
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,212
|
|
Initial public offering of units, net of offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
109,090
|
|
|
|
-
|
|
|
|
-
|
|
|
|
109,090
|
|
Distribution of initial public offering proceeds
|
|
|
(112,112
|
)
|
|
|
(7,694
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(119,806
|
)
|
Distribution of subordinated note payable to Quicksilver
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
Reclass Quicksilvers equity balance to receivable from
Quicksilver
|
|
|
2,296
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,296
|
|
Reclass redeemable partners capital
|
|
|
-
|
|
|
|
(230
|
)
|
|
|
230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Distributions paid to partners
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,054
|
)
|
|
|
(1,929
|
)
|
|
|
(79
|
)
|
|
|
(4,062
|
)
|
Equity-based compensation expense recognized
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
Net income attributable to the period from August 10, 2007
through December 31, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
2,434
|
|
|
|
2,285
|
|
|
|
93
|
|
|
|
4,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
109,830
|
|
|
|
356
|
|
|
|
14
|
|
|
|
110,200
|
|
Equity-based compensation expense recognized
|
|
|
-
|
|
|
|
-
|
|
|
|
1,017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,017
|
|
Distributions paid to partners
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,135
|
)
|
|
|
(15,140
|
)
|
|
|
(655
|
)
|
|
|
(31,930
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
13,324
|
|
|
|
12,456
|
|
|
|
636
|
|
|
|
26,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
108,036
|
|
|
|
(2,328
|
)
|
|
|
(5
|
)
|
|
|
105,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense recognized
|
|
|
-
|
|
|
|
-
|
|
|
|
1,705
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,705
|
|
Distributions paid to partners
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,471
|
)
|
|
|
(17,270
|
)
|
|
|
(1,206
|
)
|
|
|
(36,947
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
19,072
|
|
|
|
12,926
|
|
|
|
1,189
|
|
|
|
33,187
|
|
Contribution by Quicksilver
|
|
|
-
|
|
|
|
-
|
|
|
|
10,371
|
|
|
|
9,712
|
|
|
|
580
|
|
|
|
20,663
|
|
Public offering of units, net of offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
80,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,313
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
200,963
|
|
|
$
|
3,040
|
|
|
$
|
558
|
|
|
$
|
204,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
36
QUICKSILVER
GAS SERVICES LP
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
ORGANIZATION
AND DESCRIPTION OF BUSINESS
|
Organization Quicksilver Gas Services LP
(KGS) is a Delaware limited partnership formed in
January 2007 for the purpose of completing a public offering of
common units and concurrently acquiring the assets of
Quicksilver Gas Services Predecessor (KGS
Predecessor). KGS general partner is Quicksilver Gas
Services GP LLC, a Delaware limited liability company, which is
owned by Quicksilver Resources Inc. (Quicksilver).
KGS Predecessor, since its inception in 2004, was comprised of
entities under the common control of Quicksilver.
KGS IPO was accomplished through the sale of 5,000,000
common units on August 10, 2007 and the sale of
750,000 units to the underwriters on September 7,
2007. The proceeds from the IPO, net of total expenses, were
approximately $109.1 million. From August 10, 2007
to December 31, 2007, KGS used net proceeds of the IPO,
together with cash on hand of $25.1 million, to:
(i) distribute $162.1 million (consisting of
$112.1 million in cash and a $50.0 million
subordinated promissory note payable) to Quicksilver and
$7.7 million in cash to the private investors as a return
of their investment capital contributed and reimbursement for
capital expenditures advanced, and (ii) pay
$4.3 million of expenses associated with the IPO, the
Credit Agreement and other transactions related to the IPO, and
(iii) for general partnership purposes.
On December 10, 2009, KGS entered into an underwriting
agreement to offer 4,000,000 common units at a price to the
public of $21.10 per common unit. The total net proceeds that
we received from the secondary offering, before expenses, were
approximately $81 million. In January 2010, pursuant to
the underwriting agreement, the underwriters exercised their
option to purchase an additional 549,200 common units, for
$11.1 million. During December 2009, we used the proceeds
from our secondary offering to pay down the Credit Agreement.
During January 2010, we re-borrowed $95 million to complete
the purchase of the Alliance Midstream Assets. Also in January
2010, we used $11 million from the over-allotment to pay
down borrowings under the Credit Agreement.
The ownership of KGS is as follows:
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
|
|
December 31,
2009
|
|
|
January
2010 (1)
|
|
|
Common unitholders:
|
|
|
|
|
|
|
|
|
Public
|
|
|
37.5%
|
|
|
|
39.0%
|
|
Quicksilver
|
|
|
20.1%
|
|
|
|
19.7%
|
|
Subordinated unitholders:
|
|
|
|
|
|
|
|
|
Quicksilver
|
|
|
40.7%
|
|
|
|
39.7%
|
|
|
|
|
|
|
|
|
|
|
Total limited partner interest
|
|
|
98.3%
|
|
|
|
98.4%
|
|
|
|
|
|
|
|
|
|
|
General Partner interest:
|
|
|
|
|
|
|
|
|
Quicksilver
|
|
|
1.7%
|
|
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the effects of the underwriters exercise of the
over-allotment and the vesting of phantom units that occurred in
January 2010 |
The general partner is a wholly-owned subsidiary of
Quicksilver. Neither KGS nor the general partner has any
employees. Employees of Quicksilver have been seconded to
KGS general partner pursuant to a services and secondment
agreement. The seconded employees, including field operations
personnel, general and administrative personnel and a vice
president, operate or directly support KGS gathering and
processing assets.
Description of Business We are engaged in the
gathering, processing, compression and treating of natural gas
and the delivery of NGLs, produced from the Barnett Shale
formation in the Fort Worth Basin located in Texas. We
provide services under contracts, whereby we receive fees for
performing gathering, processing and treating services. We do
not take title to the natural gas or associated NGLs therefore
avoiding direct commodity price exposure.
37
KGS assets include or formerly included:
Cowtown
System
The Cowtown System, located principally in Hood and Somervell
counties in the southern portion of the Fort Worth Basin,
which includes:
|
|
|
|
-
|
the Cowtown Pipeline, consisting of a gathering system and gas
compression facilities. This system gathers natural gas
produced by our customers and delivers it to the Cowtown and
Corvette Plants for processing;
|
|
|
-
|
the Cowtown Plant, consisting of two natural gas processing
units with a total capacity of 200 MMcfd that extract NGLs
from the natural gas stream and deliver customers residue
gas and extracted NGLs to unaffiliated pipelines for further
transport and sale downstream; and
|
|
|
-
|
the Corvette Plant, placed in service during 2009, consisting of
a 125 MMcfd natural gas processing unit that extracts NGLs
from the natural gas stream and delivers customers residue
gas and extracted NGLs to unaffiliated pipelines for further
transport and sale downstream.
|
Lake
Arlington Dry System
The LADS, located in Tarrant County, which consists of a gas
gathering system and a gas compression facility with capacity of
120 MMcfd. This system gathers natural gas produced by our
customers and delivers it to unaffiliated pipelines for further
transport and sale downstream.
Hill
County Dry System
As more fully described in Note 2 to our financial
statements, KGS financial information through November
2009 also includes the operations of a gathering system in Hill
County, Texas, HCDS, which gathers natural gas and delivers it
to unaffiliated pipelines for further transport and sale
downstream. As of November 2009, the assets, liabilities,
revenues and expenses directly attributable to the HCDS for the
periods prior to November 2009 have been retrospectively
reported as discontinued operations based upon our decision not
to purchase the system from Quicksilver.
Alliance
Midstream Assets
During January 2010, we completed the purchase of the Alliance
Midstream Assets, located in Tarrant and Denton counties of
Texas, from Quicksilver for $95.2 million. The acquired
assets consist of gathering systems and a compression facility
with a total capacity of 115 MMcfd, an amine treating
facility with capacity of 180 MMcfd and a dehydration
treating facility with capacity of 200 MMcfd. This system
gathers natural gas produced by our customers and delivers it to
unaffiliated pipelines for further transport downstream.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation The accompanying
consolidated financial statements and related notes present the
financial position, results of operations, cash flows and
changes in partners capital of our natural gas gathering
and processing assets. The financial statements include
historical cost-basis accounts of the assets of KGS Predecessor
which were contributed to KGS by Quicksilver and two private
investors in connection with the IPO.
Discontinued Operations In November 2009,
Quicksilver and KGS mutually agreed to waive both parties
rights and obligations to transfer ownership of the HCDS from
Quicksilver to us, which we refer to as the Repurchase
Obligation Waiver. The Repurchase Obligation Waiver caused
derecognition of the assets and liabilities directly
attributable to the HCDS, most significantly the property, plant
and equipment and repurchase obligation, beginning in November
2009. In addition, the Repurchase Obligation Waiver caused the
elimination of the HCDS revenues and expenses from our
consolidated results of operations beginning in November 2009.
The assets, liabilities, revenues and expenses directly
attributable to the HCDS for the periods prior to November 2009
have been retrospectively reported as discontinued operations.
Use of Estimates The preparation of the
financial statements in accordance with GAAP requires management
to make estimates and judgments that affect the reported amount
of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities that exist at the date of the
financial statements. Estimates and judgments are based on
information available at the time such estimates and judgments
are made. Although management believes the estimates are
appropriate, actual results can differ from those estimates.
Cash and Cash Equivalents We consider all
highly liquid investments with a remaining maturity of three
months or less at the time of purchase to be cash or cash
equivalents. These cash equivalents consist principally of
temporary investments of cash in short-term money market
instruments.
38
Accounts receivable Accounts receivable are
due from Quicksilver and other independent natural gas
producers. Each of our customers is reviewed as to credit
worthiness prior to the extension of credit and on a regular
basis thereafter. Although we do not require collateral,
appropriate credit ratings are required. Receivables are
generally due within 60 days. At December 31, 2009
and 2008, we have recorded no allowance for uncollectible
accounts receivable. During 2009, we experienced no significant
non-payment for services.
Property, Plant and Equipment Property, plant
and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The cost of maintenance
and repairs, which are not significant improvements, are
expensed when incurred. Expenditures to extend the useful lives
of the assets or enhance their productivity or efficiency from
their original design are capitalized over the expected
remaining period of use.
Impairment of Long-Lived Assets We review
long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. If we determine that an assets
estimated future cash flows will not be sufficient to recover
its carrying amount, we would record an impairment charge to
reduce the carrying amount for the asset to its estimated fair
value. At December 31, 2009, our analysis of estimated
future cash flows indicated that there was no impairment on our
long-lived assets.
Other Assets Other assets consist of costs
associated with debt issuance and pipeline license agreements
net of amortization. Debt issuance costs are amortized over the
term of the associated debt. Pipeline license agreements
provide us the right to construct, operate and maintain certain
pipelines with local municipalities. The pipeline license
agreements are amortized over the term of the agreement.
Asset Retirement Obligations We record the
discounted fair value of the liability for asset retirement
obligations in the period in which it is legally or
contractually incurred. Upon initial recognition of the asset
retirement liability, an asset retirement cost is capitalized by
increasing the carrying amount of the long-lived asset by the
same amount as the liability. In periods subsequent to the
initial measurement, the asset retirement cost is allocated to
expense using a straight line method over the assets
useful life. Changes in the liability for the asset retirement
obligation are recognized for (a) the passage of time and
(b) revisions to either the timing or the amount of the
estimated cash flows.
Repurchase Obligations to Quicksilver On
June 5, 2007, KGS Predecessor sold several pipeline and
gathering assets to Quicksilver. These assets consist of:
|
|
|
|
|
a portion of the gathering lines in the Cowtown Pipeline;
|
|
|
the LADS; and
|
|
|
the HCDS.
|
At June 5, 2007, the assets were either constructed and in
service or partially constructed. The selling price for these
assets was approximately $29.5 million, which represented
KGS Predecessors historical cost. KGS Predecessor
collected the $29.5 million on August 9, 2007. All
assets conveyed were subject to repurchase by KGS from
Quicksilver as follows:
Cowtown Pipeline - During 2009, KGS
independent directors voted to acquire certain of the Cowtown
Pipeline assets subject to the repurchase obligation that had an
original cost of approximately $5.6 million. KGS paid
$5.6 million for these assets in September 2009.
Furthermore, the independent directors elected not to acquire
certain Cowtown Pipeline assets that had been previously
included in the repurchase obligation. In doing so, KGS
derecognized assets with a carrying value of $56.8 million
and also derecognized liabilities associated with the repurchase
of $68.6 million. The difference of $11.8 million
between the assets carrying values and their repurchase
obligation was reflected as an increase in partners
capital effective upon the decision not to purchase. KGS also
entered into an agreement with Quicksilver to permit KGS to
gather third party gas for a fee across the laterals retained by
Quicksilver. The decision not to purchase certain Cowtown
Pipeline assets did not have a material effect on KGS
gathering and processing revenues as the natural gas stream from
these laterals continues to flow into our Cowtown Pipeline
gathering and processing facilities.
Lake Arlington Dry System - KGS completed the
purchase of the LADS during the fourth quarter of 2008 for
approximately $42 million.
Hill County Dry System - In November 2009,
Quicksilver and KGS mutually agreed to waive both parties
rights and obligations to transfer ownership of the HCDS from
Quicksilver to us, which we refer to as the Repurchase
Obligation Waiver. The Repurchase Obligation Waiver caused
derecognition of the assets and liabilities directly
attributable to the HCDS, most significantly the property, plant
and equipment and repurchase obligation, beginning in November
2009. The difference of $8.9 million between the
assets carrying values and the liabilities was reflected
as an increase in partners capital effective upon the
decision
39
not to purchase. In addition, the Repurchase Obligation Waiver
caused the elimination of the HCDS revenues and expenses
from our consolidated results of operations, beginning in
November 2009. The assets, liabilities, revenues and expenses
directly attributable to the HCDS for the periods prior to
November 2009 have been retrospectively reported as discontinued
operations.
All of these assets conveyance from KGS to Quicksilver was
not treated as a sale for accounting purposes because KGS
operated them and originally intended to purchase them.
Accordingly, the original cost and subsequently incurred costs
were recognized in both KGS property, plant and equipment
and its repurchase obligations to Quicksilver. Similarly,
KGS results of operations included the revenues and
expenses for these operations. For 2009, KGS recognized
$3.7 million of interest expense associated with the
repurchase obligations to Quicksilver based on a
weighted-average interest rate of 3.8%, of which
$2.0 million is reflected in discontinued operations. All
repurchase obligations for these assets were concluded by
December 31, 2009.
Environmental Liabilities Liabilities for
environmental loss contingencies, including environmental
remediation costs, are charged to expense when it is probable
that a liability has been incurred and the amount of the
assessment or remediation can be reasonably estimated.
Redeemable Partners Capital Prior to
the IPO, KGS Predecessor accounted for partners capital
subject to provisions for redemption outside of its control as
mezzanine equity. Redeemable partners capital was
recorded at fair value at the date of issue and was thereafter
accreted to the redemption amount. Any resulting increases in
the carrying amount of the redeemable partners capital
were reflected through decreases in net Quicksilver equity. No
accretion was recorded as the carrying amounts exceeded the
redemption amounts for all periods presented. Redeemable
partners capital was eliminated through transactions
contemporaneous with the IPO.
Revenue Recognition Our primary service
offerings are the gathering and processing of natural gas. KGS
has contracts under which it receives revenue based on the
volume of natural gas gathered and processed. KGS recognizes
revenue when all of the following criteria are met:
|
|
|
|
|
persuasive evidence of an exchange arrangement exists;
|
|
|
services have been rendered;
|
|
|
the price for its services is fixed or determinable; and
|
|
|
collectability is reasonably assured.
|
Income Taxes We are subject to a margin tax
that requires tax payments at a maximum statutory effective rate
of 0.7% of the gross revenue apportioned to Texas. The margin
tax qualifies as an income tax under GAAP, which requires us to
recognize currently the impact of this tax on the temporary
differences between the financial statement assets and
liabilities and their tax basis. Under the margin tax, taxable
entities that are part of an affiliated group engaged in a
unitary business must file a combined group report. As a
result, KGS is included in a combined group report with
Quicksilver and is allocated its proportionate share of the tax
liability.
Earnings per Limited Partner Unit Earnings
per unit presented on the statement of income for 2007 reflect
only the earnings for the period subsequent to KGS IPO.
KGS net income is allocated to the general partner and the
limited partners, including the holders of the common and
subordinated units, in accordance with their respective
ownership percentages, after giving effect to incentive
distributions paid to the general partner. Basic earnings per
unit are computed by dividing net income attributable to limited
partner unitholders by the weighted-average number of limited
partner units outstanding during each period. Diluted earnings
per unit are computed using the treasury stock method, which
considers the impact to net income and common units from the
potential issuance of units and conversion of debt into limited
partner units.
Segment Information KGS operates solely in
the midstream segment in Texas where it provides natural gas
gathering, treating and processing services.
Fair Value of Financial Instruments The fair
value of accounts receivable, accounts payable, long-term debt
and the note payable to Quicksilver approximate their carrying
amounts.
Equity-Based Compensation At time of issuance
of phantom units, our general partners board of directors
determines whether they will be settled in cash or settled in
KGS units. For awards payable in cash, we amortize the expense
associated with the award over the vesting period. The
liability for fair value is reassessed at every balance sheet
date, such that the vested portion of the liability is adjusted
to reflect revised fair value through compensation expense.
Phantom unit awards payable in units are valued at the closing
market price of KGS common units on the date of grant. The
unearned compensation is amortized to compensation expense over
the vesting period of the phantom unit award.
40
Recently
Issued Accounting Standards
Accounting standard-setting organizations frequently issue new
or revised accounting rules. We regularly review all new
pronouncements to determine their impact, if any, on our
financial statements. Below, we present a discussion of only
those pronouncements that we expect will have an impact on our
financial statements.
Pronouncements
Impacting KGS That Have Been Implemented
In June 2009, and through subsequent updates, the FASB issued
guidance that identified the FASB Accounting Standards
Codification as the single source of authoritative GAAP not
promulgated by the SEC. The FASC retains existing GAAP and had
no effect on our financial statements upon its adoption by us on
September 30, 2009, although any references to GAAP herein
have been converted to the codified reference.
The FASB issued revised guidance for business combinations in
December 2007, which retained fundamental requirements that the
acquisition method of accounting be used for all business
combinations and that an acquirer be identified for each
business combination. The acquirer is the entity that obtains
control in the business combination and the guidance establishes
the criteria to determine the acquisition date. An acquirer is
also required to recognize the assets acquired and liabilities
assumed measured at their fair values as of the acquisition
date. In addition, acquisition costs are required to be
recognized separately from the acquisition. Additional
clarifications were issued on April 1, 2009 that address
application issues regarding initial recognition and
measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies
in a business combination. Had we made or should we make any
acquisition after January 1, 2009, when we adopted FASC
Topic 805, Business Combinations, we would have applied
and will apply this guidance, but otherwise adoption had no
effect on our financial statements.
In February 2008, the FASB issued guidance which allowed for a
one-year deferral of the effective date of the accounting
guidance in FASC Topic 820, Fair Value Measurements and
Disclosures, as it applies to non-financial assets and
liabilities that are recognized or disclosed at fair value on a
nonrecurring basis. Beginning January 1, 2009, we applied
the accounting guidance for all fair value measurements to
non-financial assets and liabilities.
The FASB issued guidance in 2008 to address how master limited
partnerships should calculate earnings per unit using the
two-class method and how current period earnings of a master
limited partnership should be allocated among the general
partner, limited partner, and other participating securities.
We adopted the guidance, found in FASC Subtopic
260-10,
Earnings Per Share, on January 1, 2009, without
material impact and with prior periods retroactively presented.
The FASB issued guidance in June 2008 regarding unvested
share-based payment awards that contain nonforfeitable rights to
dividends. The guidance was effective and adopted by us on
January 1, 2009 and had no impact. Under this guidance,
found at FASC Subtopic
260-10,
Earnings Per Share, unvested share-based payment awards
that contain nonforfeitable rights to dividends (whether paid or
unpaid) are participating securities and should be included in
the computation of basic earnings per share pursuant to the
two-class method.
The FASB issued guidance in May 2009 for disclosure of events
that occur after the balance sheet date but before financial
statements are issued by public entities. It mirrors the
longstanding existing guidance for subsequent events that was
promulgated by the American Institute of Certified Public
Accountants. We adopted the guidance found in FASC Subtopic
855-10,
Subsequent Events, during the quarter ended June 30,
2009 when the guidance became effective, without impact.
The FASB issued updated disclosure guidance in August 2009,
which updated FASC Topic 820, Fair Value Measurements and
Disclosures, for the fair value measurement of liabilities.
We have adopted all relevant guidance related to fair value
measurement and disclosure.
Pronouncements
Not Yet Implemented
There are currently no pronouncements that have been issued and
that we believe will impact us, which we have not already
adopted.
41
|
|
3.
|
NET
INCOME PER COMMON AND SUBORDINATED UNIT
|
The following is a reconciliation of the weighted-average common
and subordinated units used in the basic and diluted earnings
per unit calculations for 2009, 2008 and 2007. The impact of
the convertible debt is dilutive for 2009 and 2008, but was
anti-dilutive for 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
Common and subordinated unitholders interest in net income
from continuing operations
|
|
$
|
33,957
|
|
|
$
|
28,049
|
|
|
$
|
5,199
|
|
Common and subordinated unitholders interest in net loss
from discontinued operations
|
|
|
(1,959
|
)
|
|
|
(2,285
|
)
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and subordinated unitholders interest in net income
|
|
$
|
31,998
|
|
|
$
|
25,764
|
|
|
$
|
4,719
|
|
Impact of interest on subordinated note to Quicksilver
|
|
|
2,038
|
|
|
|
2,748
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available assuming conversion of convertible debt
|
|
$
|
34,036
|
|
|
$
|
28,512
|
|
|
$
|
4,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common and subordinated units basic
|
|
|
24,057
|
|
|
|
23,783
|
|
|
|
23,777
|
|
Effect of restricted phantom units
|
|
|
486
|
|
|
|
141
|
|
|
|
10
|
|
Effect of subordinated note to
Quicksilver (2)
|
|
|
3,646
|
|
|
|
5,659
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common and subordinated units
diluted
|
|
|
28,189
|
|
|
|
29,583
|
|
|
|
23,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
1.41
|
|
|
$
|
1.18
|
|
|
$
|
0.22
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.02
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
1.33
|
|
|
$
|
1.08
|
|
|
$
|
0.20
|
|
Diluted earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
1.28
|
|
|
$
|
1.04
|
|
|
$
|
0.22
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.02
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
1.21
|
|
|
$
|
0.96
|
|
|
$
|
0.20
|
|
Assumed conversion
price (2)
|
|
$
|
15.28
|
|
|
$
|
9.48
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Amounts for 2007 represent the
period from August 10, 2007 to December 31, 2007
|
|
(2) |
|
Assumes that convertible debt is converted using the lesser of
average closing price per unit or final closing price on
December 31. |
|
|
4.
|
DISCONTINUED
OPERATIONS
|
In November 2009, Quicksilver and KGS mutually agreed to waive
both parties rights and obligations to transfer ownership
of the HCDS from Quicksilver to us, which we refer to as the
Repurchase Obligation Waiver. The Repurchase Obligation Waiver
caused derecognition of the assets and liabilities directly
attributable to the HCDS, most significantly the property, plant
and equipment and repurchase obligation, beginning in November
2009. In addition, the Repurchase Obligation Waiver caused the
elimination of the HCDS revenues and expenses from our
consolidated results of operations beginning in November 2009.
The assets, liabilities, revenues and expenses directly
attributable to the HCDS for the periods prior to November 2009
have been retrospectively reported as discontinued operations
based upon our decision not to purchase the system from
Quicksilver as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
3,771
|
|
|
$
|
1,974
|
|
|
$
|
246
|
|
Operating Expenses
|
|
|
(3,718
|
)
|
|
|
(2,564
|
)
|
|
|
(448
|
)
|
Interest Expense
|
|
|
(2,045
|
)
|
|
|
(1,740
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,992
|
)
|
|
$
|
(2,330
|
)
|
|
$
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
As of December 31,
2008
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
55,848
|
|
Accounts receivable
|
|
|
174
|
|
|
|
|
|
|
Total assets
|
|
$
|
56,022
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and other
|
|
$
|
3,341
|
|
Repurchase obligations to Quicksilver
|
|
|
56,301
|
|
Asset retirement obligations
|
|
|
660
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
60,302
|
|
|
|
|
|
|
|
|
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Depreciable Life
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
Gathering and transportation systems
|
|
|
20 years
|
|
|
$
|
126,468
|
|
|
$
|
146,061
|
|
Processing plants and compression facilities
|
|
|
20-25 years
|
|
|
|
271,311
|
|
|
|
146,106
|
|
Construction in progress - plant
|
|
|
|
|
|
|
-
|
|
|
|
106,563
|
|
Construction in progress - pipeline
|
|
|
|
|
|
|
5,630
|
|
|
|
24,315
|
|
Rights-of-way
and easements
|
|
|
20 years
|
|
|
|
26,858
|
|
|
|
30,208
|
|
Land
|
|
|
|
|
|
|
1,101
|
|
|
|
1,114
|
|
Buildings and other
|
|
|
20-40 years
|
|
|
|
2,732
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,100
|
|
|
|
456,203
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(37,148)
|
|
|
|
(23,931)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
|
|
|
$
|
396,952
|
|
|
$
|
432,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress plant of
$106.5 million in 2008, reflects the construction of the
Corvette Plant, a processing plant and compression facility
attached to the Cowtown Pipeline, which was placed in service
during the first quarter of 2009.
|
|
6.
|
ACCOUNTS
PAYABLE AND OTHER
|
Accounts payable and other consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued operating expenses
|
|
$
|
204
|
|
|
$
|
879
|
|
Equity compensation payable
|
|
|
242
|
|
|
|
116
|
|
Equity offering expense
|
|
|
416
|
|
|
|
-
|
|
Tax services
|
|
|
236
|
|
|
|
-
|
|
Legal services
|
|
|
376
|
|
|
|
-
|
|
Interest payable
|
|
|
660
|
|
|
|
734
|
|
Other
|
|
|
106
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,240
|
|
|
$
|
1,852
|
|
|
|
|
|
|
|
|
|
|
43
The following table summarizes our long-term debt payments due
by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Long-Term Debt
|
|
Total
|
|
|
2010
|
|
|
2011-2013
|
|
|
2014-2015
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Credit Agreement
|
|
$
|
125.4
|
|
|
$
|
-
|
|
|
$
|
125.4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Subordinated Note to Quicksilver
|
|
|
55.7
|
|
|
|
2.5
|
|
|
|
53.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
181.1
|
|
|
$
|
2.5
|
|
|
$
|
178.6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement As of
December 31, 2008, we had a $235 million senior
secured credit facility (Credit Agreement). During
October 2009, our lenders amended our Credit Agreement and
increased their commitments to a total of $320 million, and
with additional commitment increases and lender consent, our
available capacity could expand to $350 million. The
Credit Agreement matures in August 2012, but can be extended up
to two additional years with lenders approval.
Also as part of the amendment in October 2009, the Credit
Agreement borrowing spreads were revised as follows:
|
|
|
Interest rate option
|
|
After Amendment
|
|
ABR borrowings
|
|
2.00% to 3.00%
|
Eurodollar borrowings
|
|
3.00% to 4.00%
|
Swingline borrowings
|
|
3.00% to 4.00%
|
Commitment fee on used capacity
|
|
0.50%
|
The Credit Agreement provides for revolving loans, swingline
loans and letters of credit. The Credit Agreement is secured by
substantially all of KGS and its subsidiaries assets
and is guaranteed by KGS subsidiaries.
The Credit Agreement contains certain covenants which can limit
KGS borrowing capacity. All of the financial covenants
exclude the subordinated note payable to Quicksilver and
KGS repurchase obligations to Quicksilver and any related
non-cash interest. These financial covenants are summarized
below:
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Maximum Debt to EBITDA
|
|
|
Minimum EBITDA to Interest
|
December 31, 2009 and thereafter
|
|
|
4.50 to 1
|
|
|
2.50 to 1
|
Based on our results through December 31, 2009, our total
borrowing capacity was $297 million and our borrowings were
$125.4 million. The weighted-average interest rate as of
December 31, 2009 was 3.3%. The Credit Agreement contains
restrictive covenants that prohibit the declaration or payment
of distributions by KGS if a default then exists or would result
therefrom, and otherwise limits the amount of distributions that
KGS can make. Upon an event of default, the Credit Agreement
allows for the acceleration of the loans, the termination of the
Credit Agreement and foreclosure on collateral.
During December 2009, we used $80.5 million of proceeds
from our secondary offering to pay down the Credit Agreement.
During January 2010, we re-borrowed $95 million to complete
the purchase of the Alliance Midstream Assets. In January 2010,
we used $11 million from the over-allotment to pay down the
Credit Agreement.
Subordinated Note In August 2007, KGS
executed a subordinated promissory note (the Subordinated
Note) payable to Quicksilver in the principal amount of
$50.0 million.
The Subordinated Note accrues interest based upon the rate
applicable to borrowings under the Credit Agreement plus 1%,
which is locked at the time of borrowing. The weighted-average
interest rate at December 31, 2009 was 3.8%. Accrued and
unpaid interest is payable quarterly on the last business day of
each calendar quarter, beginning on March 31, 2008, and on
the Subordinated Notes maturity date described below.
Quarterly interest may be paid in cash or by adding it to the
outstanding principal balance of the Subordinated Note. Subject
to certain restrictions, quarterly installments of $275,000 are
payable on the last business day of each calendar quarter. The
final payment is due on February 10, 2013. However, if the
maturity date of the Credit Agreement is extended, the maturity
date of the Subordinated Note will also be automatically
extended to the date that is six months after the revised Credit
Agreement maturity date. Amounts payable under the Subordinated
Note may at all times, at Quicksilvers election, be paid,
in whole or in part, using KGS units. The Subordinated Note
contains events of
44
default that permit, among other things, the acceleration of the
debt (unless otherwise prohibited pursuant to the subordination
provisions described below). Such events of default include,
but are not limited to, payment defaults under the Subordinated
Note, the breach of certain covenants after applicable grace
periods and the occurrence of an event of default under the
Credit Agreement.
Amounts due under the Subordinated Note are subordinated in
right of payment to all of our obligations under the Credit
Agreement. KGS is precluded from making any payments under the
Subordinated Note if any of the following events exist or would
result as of the date of the proposed Subordinated Note payment:
|
|
|
|
|
an event of default under the Credit Agreement;
|
|
|
the existence of a pending judicial proceeding with respect to
any event of default under the Credit Agreement; or
|
|
|
our ratio of total indebtedness (which includes the Subordinated
Note) to EBITDA as of the end of the fiscal quarter immediately
preceding the date of such payment was equal to or greater than
3.5 or would be greater than 3.5 after consideration of such
payment.
|
Through December 31, 2009, we have made all scheduled
quarterly interest payments at the end of each quarter by adding
them to the principal of the Subordinated Note in accordance
with its terms. Accordingly, interest expense of
$2.1 million recognized during 2009 was added to the
Subordinated Note. In 2009, all of the quarterly principal
payments were prevented by the indebtedness to EBITDA limitation
described above.
|
|
8.
|
ASSET
RETIREMENT OBLIGATIONS
|
The following table provides a reconciliation of the changes in
the asset retirement obligation:
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
2009
|
|
|
(In thousands)
|
|
Beginning asset retirement obligations
|
|
$
|
4,574
|
Incremental liability incurred
|
|
|
3,195
|
Repurchase obligations not exercised
|
|
|
(509)
|
Accretion expense
|
|
|
394
|
|
|
|
|
Ending asset retirement obligations
|
|
$
|
7,654
|
|
|
|
|
As of December 31, 2009, no assets are legally restricted
for use in settling asset retirement obligations.
|
|
9.
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Litigation At December 31, 2009, KGS was
not subject to any material lawsuits or other legal proceedings.
Casualties or Other Risks Quicksilver
maintains coverage in various insurance programs on KGS
behalf, which provides it with property damage, and other
coverages which are customary for the nature and scope of its
operations.
Management of our general partner believes that Quicksilver has
adequate insurance coverage, although insurance will not cover
every type of loss that might occur. As a result of insurance
market conditions, premiums and deductibles for certain
insurance policies have increased substantially and, in some
instances, certain insurance may become unavailable, or
available for only reduced amounts of coverage. As a result,
Quicksilver may not be able to renew existing insurance policies
or procure other desirable insurance on commercially reasonable
terms, if at all. KGS maintains its own directors and
officers insurance policy separate from the policy
maintained by Quicksilver.
If KGS were to incur a significant loss for which it was not
adequately insured, the loss could have a material impact on our
consolidated financial condition and results of operations. In
addition, the proceeds of any available insurance may not be
paid in a timely manner and may be insufficient if such an event
were to occur. Any event that interrupts our revenues, or which
causes us to make significant expenditures not covered by
insurance, could reduce our ability to meet our financial
obligations.
Regulatory Compliance In the ordinary course
of our business, we are subject to various laws and
regulations. In the opinion of management of our general
partner, compliance with current laws and regulations will not
have a material adverse effect on our financial condition or
results of operations.
45
Environmental Compliance Our operations are
subject to stringent and complex laws and regulations pertaining
to health, safety, and the environment. As an owner or operator
of these facilities, we are subject to laws and regulations at
the federal, state and local levels that relate to air and water
quality, hazardous and solid waste management and disposal and
other environmental matters. The cost of planning, designing,
constructing and operating our facilities must incorporate
compliance with environmental laws and regulations and safety
standards. Failure to comply with these laws and regulations
may trigger a variety of administrative, civil and potentially
criminal enforcement measures. At December 31, 2009, we
had recorded no liabilities for environmental matters.
Commitments KGS purchased the Alliance
Midstream Assets from Quicksilver in January 2010 for
approximately $95 million and also assumed construction
commitments of approximately $7.4 million related thereto.
We have recorded no provision for federal income taxes in our
consolidated financial statements as such income is taxable
directly to the partners holding interests in KGS.
Temporary differences relating to KGS assets and
liabilities will affect the Texas margin tax and a deferred tax
liability has been recorded in the amount of $0.8 million
and $0.4 million as of December 31, 2009 and 2008,
respectively. KGS derives all of its revenue from operations in
Texas.
Quicksilver does not expect to owe consolidated Texas margin tax
for 2009 and, accordingly, KGS does not expect to make a cash
payment for its 2009 liability for Texas margin tax, based upon
Texas filing rules. All effects of the 2009 Texas margin tax
calculation are captured in deferred income taxes.
Awards of phantom units have been granted under KGS 2007
Equity Plan, as amended, which, as of December 31, 2009,
had capacity for the issuance of up to 750,000 remaining units.
The following table summarizes information regarding the phantom
unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in cash
|
|
|
Payable in units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
Average Grant
|
|
|
|
Units
|
|
|
Date Fair Value
|
|
|
Units
|
|
|
Date Fair Value
|
|
|
Unvested phantom units - January 1, 2009
|
|
|
60,319
|
|
|
$
|
21.63
|
|
|
|
139,918
|
|
|
$
|
25.15
|
|
Vested
|
|
|
(26,526
|
)
|
|
|
13.79
|
|
|
|
(49,789
|
)
|
|
|
25.25
|
|
Issued
|
|
|
5,420
|
|
|
|
16.65
|
|
|
|
405,428
|
|
|
|
10.06
|
|
Cancelled
|
|
|
(5,973
|
)
|
|
|
21.36
|
|
|
|
(9,885
|
)
|
|
|
15.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested phantom units - December 31, 2009
|
|
|
33,240
|
|
|
$
|
20.90
|
|
|
|
485,672
|
|
|
$
|
12.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2009, KGS had total unvested compensation
expense of $2.3 million related to phantom units. KGS
recognized compensation expense of approximately
$2.6 million during 2009, including $0.4 million
related to Quicksilver equity grants issued to employees
seconded to KGS. Grants of phantom units during 2009 had an
estimated grant date fair value of $4.2 million. KGS has
unearned compensation expense of $2.9 million at
December 31, 2009 that will be recognized in expense
through September 2012. Phantom units that vested during 2009
had a fair value of $1.6 million on their vesting date.
At December 31, 2008 and 2009, respectively, 603,993 and
750,000 units were available for issuance under the 2007
Equity Plan, as amended.
On October 7, 2009, unitholders approved an amendment to
the 2007 Equity Plan, which increased the number of units
available for issuance to 750,000 units as of
November 4, 2009. The plan was subsequently amended by our
general partners board of directors.
46
|
|
12.
|
TRANSACTIONS
WITH RELATED PARTIES
|
Upon completion of, or in connection with, our IPO, we entered
into a number of agreements with related parties. A description
of those agreements follows:
Omnibus Agreement On August 10, 2007,
KGS entered into an agreement with its general partner and
Quicksilver, which addressed, among other matters:
|
|
|
|
|
restrictions on Quicksilvers ability to engage in
midstream activities in Quicksilver Counties;
|
|
|
Quicksilvers and our rights and obligations related to the
LADS and the HCDS;
|
|
|
Our obligation to reimburse Quicksilver for all general and
administrative expenses incurred by it on our behalf;
|
|
|
Our obligation to reimburse Quicksilver for all insurance
coverage expenses it incurs or payments it makes with respect to
our assets; and
|
|
|
Quicksilvers obligation to indemnify us for certain
liabilities and our obligation to indemnify Quicksilver for
certain liabilities.
|
Secondment Agreement Quicksilver and our
general partner have a services and secondment agreement
pursuant to which specified employees of Quicksilver have been
seconded to our general partner to provide operating, routine
maintenance and other services with respect to the assets owned
or operated by us. We reimburse Quicksilver for the services
provided by the seconded employees. The initial term of the
agreement runs through August 2017, but will extend for
additional annual periods unless cancelled by either party with
180 days written notice. In 2009, we reimbursed
Quicksilver $9.7 million for the services provided by the
seconded employees.
Gas Gathering and Processing Agreements
Quicksilver has agreed to dedicate all of the natural gas
produced on properties operated by Quicksilver within the areas
served by our Cowtown System and LADS through 2017 and for the
areas served by Alliance Midstream Assets through 2019. These
dedications do not obligate Quicksilver to develop the reserves
subject to these agreements.
Cowtown System - Effective September 1,
2008, Quicksilver and KGS revised the previous agreement by
specifying that Quicksilver has agreed to pay a fee per MMBtu
for gathering, processing and compression of gas on the Cowtown
System. The compression fee payable by Quicksilver at a
gathering system delivery point shall never be less than our
actual cost to perform such compression service. Quicksilver
may also pay us a treating fee based on carbon dioxide content
at the pipeline entry point. The rates are each subject to an
annual inflationary escalation. During 2009, we recognized
$71.3 million related to this agreement.
During 2009, we entered into an agreement with Quicksilver to
redeliver gas from the Cowtown Plant to a group of wells located
near the facility. We recognized $0.9 million in revenue
during 2009 related to this agreement.
Lake Arlington Dry System - During the fourth
quarter of 2008, we completed the acquisition of the LADS from
Quicksilver for $42.1 million. In conjunction with the
purchase, Quicksilver assigned its gas gathering agreement to
us. Under the terms of that agreement, Quicksilver agreed to
allow us to gather all of the natural gas produced by wells that
it operated and from future wells operated by it within the Lake
Arlington area through August 2017. Quicksilvers fee is
subject to annual inflationary escalation. During 2009, we
recognized $13.7 million related to this agreement.
Alliance Midstream Assets - In June 2009, we
entered into an agreement with Quicksilver by which KGS waived
its right to purchase midstream assets located in and around the
Alliance Airport area in Tarrant County, Texas. The agreement
permitted Quicksilver to own and operate the Alliance Midstream
Assets and granted KGS an option to purchase the Alliance
Midstream Assets and additional midstream assets located in
Denton and Tarrant County, Texas. During January 2010, we
completed the purchase of the Alliance Midstream Assets for
$95.2 million, located in Tarrant and Denton counties of
Texas, from Quicksilver. The acquired assets consist of
gathering systems and a compression facility with a total
capacity of 115 MMcfd, an amine treating facility with
capacity of 180 MMcfd and a dehydration treating facility
with capacity of 200 MMcfd. Under the terms of that
agreement, Quicksilver agreed to allow KGS to gather all of the
natural gas produced by wells that it operated and from future
wells operated by it within the Alliance area through December
2019. The gathering fee paid by Quicksilver ranges from between
$0.40 to $0.55 per Mcf based on volumes.
Hill County Dry System - In November 2009,
Quicksilver and KGS mutually agreed to waive both parties
rights and obligations to transfer ownership of the HCDS from
Quicksilver to us, which we refer to as the Repurchase
Obligation Waiver. The Repurchase Obligation Waiver caused
derecognition of the assets and liabilities directly
attributable to the HCDS, most significantly the property, plant
and equipment and repurchase obligation,
47
beginning in November 2009. The difference of $8.9 million
between the assets carrying values and the liabilities was
reflected as an increase in partners capital effective
upon the decision not to purchase. In addition, the Repurchase
Obligation Waiver caused the elimination of the HCDS
revenues and expenses from our consolidated results of
operations beginning in November 2009. The assets, liabilities,
revenues and expenses directly attributable to the HCDS for the
period prior to November 2009 have been retrospectively reported
as discontinued operations.
Other Agreements Quicksilver has engaged us
to operate midstream assets owned by it for a monthly fee of
$75,000. We recognized $0.8 million in revenue during 2009
related to this agreement which ended during the fourth quarter
of 2009.
KGS leased compressors to Quicksilver for use with the Alliance
Midstream Assets. KGS recognized $0.8 million in revenue
for the year ended 2009 related to these agreements. These
agreements terminated with the purchase of the Alliance
Midstream Assets.
On August 10, 2007, we executed a subordinated promissory
note payable to Quicksilver in the principal amount of
$50 million. At December 31, 2009, the outstanding
balance of the promissory note was $55.7 million. For a
more detailed description of the promissory note, see
Note 7 to our consolidated financial statements included in
Item 8 of this annual report which is incorporated herein
by reference.
Contribution, Conveyance and Assumption
Agreement On August 10, 2007, we entered
into a contribution, conveyance, and assumption agreement
(Contribution Agreement) with our general partner,
certain other affiliates of Quicksilver and the private
investors. The following transactions, among others, occurred
just prior to the IPO pursuant to the Contribution Agreement:
|
|
|
|
|
the transfer of all of the interests of certain entities to us;
|
|
|
the issuance of the incentive distribution rights to our general
partner and the continuation of its 2% general partner interest
in us;
|
|
|
Our issuance of 5,696,752 common units, 11,513,625 subordinated
units and the right to receive $162.1 million, to
Quicksilver in exchange for the contributed interests; and
|
|
|
Our issuance of 816,873 common units and the right to receive
$7.7 million to private investors in exchange for their
contributed interests.
|
Centralized cash management Prior to our IPO,
revenues settled with Quicksilver and other customers, net of
expenses paid by Quicksilver on behalf of KGS Predecessor, are
reflected as partners capital activity on the consolidated
balance sheets and as a reduction of net cash provided by
financing activities on the consolidated statements of cash
flows. Subsequent to the IPO, revenues settled and expenses paid
on behalf of KGS are settled in cash on a monthly basis
utilizing KGS bank accounts.
Distributions KGS paid distributions to
Quicksilver of $27.0 million, $23.3 million and
$3.0 million during 2009, 2008 and 2007, respectively.
Allocation of costs The individuals
supporting our operations are employees of Quicksilver.
KGS consolidated financial statements include costs
allocated to KGS by Quicksilver for centralized general and
administrative services performed by Quicksilver, as well as
depreciation of assets utilized by Quicksilvers
centralized general and administrative functions. Costs
allocated to us are based on identification of
Quicksilvers resources which directly benefit us and our
estimated usage of shared resources and functions. All of the
allocations are based on assumptions that management believes
are reasonable.
48
The following table summarizes the change in net Quicksilver
equity during 2007 and a summary of general and administrative
expenses, including the cost allocated from Quicksilver for the
years ended 2009, 2008 and 2007. Management believes these
transactions are executed on terms comparable to those that
would apply to transactions executed with third parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net Parent equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
$
|
118,652
|
|
Net change in Quicksilver advances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
45,040
|
|
Settled revenue with Quicksilver
|
|
|
|
|
|
|
|
|
|
|
(11,760
|
)
|
Payments received by Quicksilver for trade accounts receivable
|
|
|
|
|
|
|
|
|
|
|
(625
|
)
|
Payments made to settle expenses by Quicksilver
|
|
|
|
|
|
|
|
|
|
|
4,378
|
|
Allocation of general and administrative overhead
|
|
|
|
|
|
|
|
|
|
|
850
|
|
Contribution of other current assets
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in Quicksilver advances
|
|
|
|
|
|
|
|
|
|
|
38,045
|
|
Quicksilver share of net income
|
|
|
|
|
|
|
|
|
|
|
3,119
|
|
Distribution of initial public offering proceeds
|
|
|
|
|
|
|
|
|
|
|
(112,112
|
)
|
Distribution of subordinated note payable to Quicksilver
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
Reclassify to receivable from Quicksilver
|
|
|
|
|
|
|
|
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense - parent
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of general and administrative overhead
|
|
$
|
2,809
|
|
|
$
|
2,411
|
|
|
$
|
1,978
|
|
Audit and tax services
|
|
|
894
|
|
|
|
896
|
|
|
|
405
|
|
Equity-based compensation expense
|
|
|
1,791
|
|
|
|
1,220
|
|
|
|
471
|
|
Legal services
|
|
|
838
|
|
|
|
501
|
|
|
|
143
|
|
Insurance expense
|
|
|
339
|
|
|
|
338
|
|
|
|
232
|
|
Salary and benefits
|
|
|
373
|
|
|
|
421
|
|
|
|
-
|
|
Other
|
|
|
565
|
|
|
|
620
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$
|
7,609
|
|
|
$
|
6,407
|
|
|
$
|
3,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
PARTNERS
CAPITAL AND DISTRIBUTIONS
|
General. The KGS Partnership Agreement
requires that KGS distribute all of its Available Cash
(discussed below) to unitholders within 45 days after the
end of each calendar quarter.
Available Cash, for any quarter, consists of all cash and cash
equivalents on hand at the end of that quarter plus additional
cash on hand on the date of determination of Available Cash for
the quarter resulting from working capital borrowings made
subsequent to the end of the quarter less the amount of cash
reserves established by the general partner to:
|
|
|
|
|
provide for the proper conduct of KGS business;
|
|
|
comply with applicable law, any of KGS debt instruments or
other agreements; or
|
|
|
provide funds for distributions to partners for the succeeding
four quarters.
|
49
The following table presents cash distributions for 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to the
|
|
Per Unit
|
|
|
Total Cash
|
|
Payment Date
|
|
Quarter Ended
|
|
Distribution (1)
|
|
|
Distribution
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Pending Distributions
|
|
|
|
|
|
|
|
|
|
|
February 12,
2010 (2)
|
|
December 31, 2009
|
|
$
|
0.390
|
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed Distributions
|
|
|
|
|
|
|
|
|
|
|
November 13,
2009 (3)
|
|
September 30, 2009
|
|
$
|
0.390
|
|
|
$
|
9.7
|
|
August 14,
2009 (4)
|
|
June 30, 2009
|
|
$
|
0.370
|
|
|
$
|
9.1
|
|
May 15,
2009 (4)
|
|
March 31, 2009
|
|
$
|
0.370
|
|
|
$
|
9.1
|
|
February 13,
2009 (4)
|
|
December 31, 2008
|
|
$
|
0.370
|
|
|
$
|
9.1
|
|
November 14,
2008 (5)
|
|
September 30, 2008
|
|
$
|
0.350
|
|
|
$
|
8.5
|
|
August 14,
2008 (5)
|
|
June 30, 2008
|
|
$
|
0.350
|
|
|
$
|
8.5
|
|
May 15, 2008
|
|
March 31, 2008
|
|
$
|
0.315
|
|
|
$
|
7.6
|
|
|
|
|
(1) |
|
Represents common and subordinated unitholders |
(2) |
|
Total cash distribution includes an Incentive Distribution
Rights amount of approximately $261,000 to the general partner |
|
|
|
(3) |
|
Total cash distribution includes an Incentive Distribution
Rights amount of approximately $219,000 to the general partner |
(4) |
|
Total cash distribution includes an Incentive Distribution
Rights amount of approximately $90,000 to the general partner |
(5) |
|
Total cash distribution includes an Incentive Distribution
Rights amount of approximately $20,000 to the general partner |
General Partner Interest and Incentive Distribution
Rights. The general partner is entitled to its
pro rata portion of all our quarterly distributions. The
general partner has the right, but not the obligation, to
contribute a proportionate amount of capital to maintain its
initial 2% interest. At December 31, 2009, the general
partners interest has been reduced to 1.7% due to the
issuance of the equity offering. The incentive distribution
rights held by the general partner entitle it to receive
increasing percentages, up to a maximum of 48%, of distributions
from operating surplus in excess of pre-defined distribution
targets.
Subordinated Units. Quicksilver holds all of
the subordinated units, which are limited partner interests.
Our partnership agreement provides that, during the
subordination period, the common units have the right to receive
quarterly distributions of $0.30 per unit plus any arrearages
from prior quarters before any distributions from operating
surplus may be made to the subordinated unit holders.
Furthermore, no arrearages will be paid on subordinated units.
The practical effect of the subordinated units is to create a
higher likelihood of distribution to the common unit holders
during the subordination period. The subordination period will
end, and the subordinated units will convert to an equal number
of common units, when KGS has earned and paid at least $0.30 per
quarter on each common unit, subordinated unit and general
partner unit for any three consecutive years, which we expect
will occur in February 2011. The subordination period will also
terminate automatically if the general partner is removed
without cause and the units held by the general partner and its
affiliates are not cast in favor of removal. Once the
subordination period ends, the common units will no longer be
entitled to arrearages.
Distributions of Available Cash to
Unitholders. During the subordination period and
assuming the absence of arrearages and the distributions of at
least $0.30 distributed per unit per quarter:
|
|
|
|
|
quarterly distributions of up to $.0345 per unit are first
allocable to the common unit holders and to general partner at
their pro rata ownership percentages and then to subordinated
unit holders in their pro rata ownership percentage.
|
|
|
quarterly distributions in excess of $.0345 per unit are
allocable in the same fashion as lesser distributions, except
that the general partner is entitled to increasing percentages
of the distribution pursuant to the incentive distribution
rights.
|
After the subordination period and given the same assumptions,
the quarterly distributions are identical to the distributions
during the subordination period, except that the previously
subordinated units would have converted into common units and be
entitled to the same priority as other common unitholders.
50
|
|
14.
|
SELECTED
QUARTERLY DATA (UNAUDITED)
|
The following presents a summary of selected quarterly data,
restated to reflect the amounts attributable to the HCDS prior
to December 2009 as discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per unit data)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
23,712
|
|
|
$
|
23,108
|
|
|
$
|
23,216
|
|
|
$
|
21,670
|
|
Operating income
|
|
|
12,267
|
|
|
|
10,721
|
|
|
|
10,975
|
|
|
|
10,134
|
|
Net income from continuing operations
|
|
|
10,069
|
|
|
|
8,231
|
|
|
|
9,001
|
|
|
|
7,878
|
|
Loss from discontinued operations
|
|
|
(635
|
)
|
|
|
(819
|
)
|
|
|
(348
|
)
|
|
|
(190
|
)
|
Net income
|
|
|
9,434
|
|
|
|
7,412
|
|
|
|
8,653
|
|
|
|
7,688
|
|
Basic earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
0.41
|
|
|
$
|
0.34
|
|
|
$
|
0.36
|
|
|
$
|
0.31
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
0.38
|
|
|
$
|
0.31
|
|
|
$
|
0.35
|
|
|
$
|
0.30
|
|
Diluted earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
0.34
|
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.29
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
$
|
0.31
|
|
|
$
|
0.28
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
14,852
|
|
|
$
|
17,957
|
|
|
$
|
18,890
|
|
|
$
|
24,385
|
|
Operating income
|
|
|
5,441
|
|
|
|
8,348
|
|
|
|
9,506
|
|
|
|
14,131
|
|
Net income from continuing operations
|
|
|
3,385
|
|
|
|
6,255
|
|
|
|
7,176
|
|
|
|
11,930
|
|
Loss from discontinued operations
|
|
|
(501
|
)
|
|
|
(649
|
)
|
|
|
(788
|
)
|
|
|
(392
|
)
|
Net income
|
|
|
2,884
|
|
|
|
5,606
|
|
|
|
6,388
|
|
|
|
11,538
|
|
Basic earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
0.14
|
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
|
$
|
0.49
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
0.12
|
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
$
|
0.47
|
|
Diluted earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations per common and subordinated unit
|
|
$
|
0.14
|
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
From discontinued operations per common and subordinated unit
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Net earnings per common and subordinated unit
|
|
$
|
0.12
|
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
$
|
0.40
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Disclosure controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) are controls and other procedures
that are designed to ensure that the information that we are
required to disclose in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated
to the management of our general partner, including the Chief
Executive Officer and Chief Financial Officer of our general
partner, as appropriate to allow timely decisions regarding
required disclosure.
In connection with the preparation of this annual report, the
management of our general partner, under the supervision and
with the participation of the Chief Executive Officer and the
Chief Financial Officer of our general partner, carried out an
evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31,
2009. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer of our general partner concluded that
our disclosure controls and procedures were effective as of
December 31, 2009.
51
Managements
Report on Internal Control Over Financial Reporting
Management of our general partner, under the supervision and
with the participation of our general partners Chief
Executive Officer and Chief Financial Officer, is responsible
for establishing and maintaining adequate internal control over
financial reporting as such term is defined in
Rules 13a-15(f)
under the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with existing policies or
procedures may deteriorate.
Under the supervision and with the participation of our general
partners Chief Executive Officer and Chief Financial
Officer, our general partners management conducted an
assessment of our internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, our general
partners management has concluded that, as of
December 31, 2009, our internal control over financial
reporting was effective.
The effectiveness of our internal control over financial
reporting as of December 31, 2009, has been audited by
Deloitte & Touche LLP, our independent registered
public accounting firm, and they have issued an attestation
report expressing an unqualified opinion on the effectiveness of
our internal control over financial reporting, as stated in
their report included herein.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2009 that
materially affected, or are reasonably likely to affect, our
internal control over financial reporting.
52
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Quicksilver Gas Services LP
Fort Worth, Texas
We have audited the internal control over financial reporting of
Quicksilver Gas Services LP and subsidiaries (the
Company) as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009 of the Company and our report dated
March 15, 2010 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
Fort Worth, Texas
March 15, 2010
|
|
Item 9B.
|
Other
Information
|
On October 7, 2009, the First Amended and Restated 2007
Equity Plan was approved by the written consent of the holder of
5,696,752 common units and 11,513,625 subordinated units (a
majority of our common and subordinated units then outstanding),
effective as of November 4, 2009. There were no votes cast
against this plan nor any abstentions or broker non-votes.
53
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
General
Our general partner, Quicksilver Gas Services GP LLC, manages
our operations and activities. Unitholders are not entitled to
elect our general partner or the directors of our general
partner, or to participate, directly or indirectly, in our
management or operations.
The directors and executive officers of Quicksilver Gas Services
GP LLC oversee our operations. Quicksilver Gas Services GP LLC
currently has seven directors, three of whom are independent
under the independence standards established by the NYSE.
Directors
and Executive Officers
The following information is provided with respect to the
directors and executive officers of Quicksilver Gas Services GP
LLC as of February 15, 2010.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Quicksilver Gas
Services GP LLC
|
|
Glenn Darden
|
|
|
54
|
|
|
Chairman of the Board and Director
|
Thomas F. Darden
|
|
|
56
|
|
|
President and Chief Executive Officer and Director
|
Jeff Cook
|
|
|
53
|
|
|
Executive Vice President - Chief Operating Officer and Director
|
Philip W. Cook
|
|
|
48
|
|
|
Senior Vice President - Chief Financial Officer and Director
|
John C. Cirone
|
|
|
60
|
|
|
Senior Vice President, General Counsel and Secretary
|
John C. Regan
|
|
|
40
|
|
|
Vice President - Chief Accounting Officer
|
Alvin Bledsoe
|
|
|
61
|
|
|
Director
|
Philip D. Gettig
|
|
|
64
|
|
|
Director
|
John W. Somerhalder II
|
|
|
54
|
|
|
Director
|
Although the limited liability company agreement of our general
partner provides flexibility in the directors length of
service, we anticipate that the sole member of our general
partner will appoint directors annually to serve until the
earlier of their death, resignation, retirement,
disqualification or removal. Officers serve at the discretion
of the board of directors. The following biographies describe
the business experience of the directors and executive officers
of Quicksilver Gas Services GP LLC. Also presented below is
information regarding each directors experience,
qualifications, attributes and skills that led the sole member
of Quicksilver Gas Services GP LLC to the conclusion that each
should serve as a director.
Glenn Darden was appointed to the position of Chairman of
the Board and elected as a director of our general partner in
March 2007. Mr. Darden has served on the Board of
Directors of Quicksilver Resources Inc. since December 1997 and
became the Chief Executive Officer of Quicksilver in December
1999. He served as Vice President of Quicksilver until he was
elected President and Chief Operating Officer of Quicksilver in
March 1999. Prior to that time, he served with Mercury
Exploration Company (Mercury) for 18 years, the
last five as Executive Vice President. Prior to working for
Mercury, Mr. Darden worked as a geologist for Mitchell
Energy Company LP (subsequently merged with Devon Energy).
Mr. Darden was selected to serve as a director of
Quicksilver Gas Services GP LLC due to his depth of knowledge of
KGS, including its strategies, operations and markets, his
development of the midstream business within Quicksilver, his
30 years of experience in the oil and gas industry and his
positions with us and with Quicksilver.
Thomas F. Darden was appointed to the position of
President and Chief Executive Officer of our general partner in
January 2007 and elected as a director of our general partner in
July 2007. Mr. Darden has served on the Board of Directors
of Quicksilver since December 1997 and became Chairman of the
Board in March 1999. Prior to joining Quicksilver,
Mr. Darden was employed by Mercury for 22 years in
various executive level positions. Mr. Darden was selected
to serve as a director of Quicksilver Gas Services GP LLC due to
his depth of knowledge of KGS, including its strategies,
operations and markets, his development of the midstream
business within Quicksilver, his 34 years of experience in
the oil and gas industry and his positions with us and with
Quicksilver.
Jeff Cook was appointed to the position of Executive Vice
President Chief Operating Officer of our general
partner in January 2007 and elected as a director of our general
partner in July 2007. Mr. Cook became Executive Vice
President Operations of Quicksilver in January 2006,
after serving as Senior Vice President Operations
since July 2000. From 1979 to 1981, he held the position of
Operations Supervisor with Western Company of
54
North America. In 1981, he became a District Production
Superintendent for Mercury Production Company and became Vice
President of Operations in 1991 and Executive Vice President in
1998 of Mercury before joining Quicksilver. Mr. Cook was
selected to serve as a director of Quicksilver Gas Services GP
LLC due to his depth of knowledge of KGS, including its
strategies, operations and markets, his development of the
midstream business within Quicksilver, his 30 years of
experience in the oil and gas industry, and his positions with
us and with Quicksilver.
Philip W. Cook was appointed to the position of Senior
Vice President Chief Financial Officer and elected
as a director of our general partner in January 2007.
Mr. Cook became Senior Vice President Chief
Financial Officer of Quicksilver in October 2005. From October
2004 until October 2005, Mr. Cook served as President and
Chief Financial Officer of a private chemical company. From
August 2001 until September 2004, he served as Vice President
and Chief Financial Officer of a private oilfield service
company. From August 1993 to July 2001, he served in various
capacities, including Vice President and Controller, Vice
President and Chief Information Officer and Vice President of
Audit, of Burlington Resources Inc. (subsequently merged with
ConocoPhillips), a public independent oil and gas company
engaged in exploration, development, production and marketing.
Mr. Cook was selected to serve as a director of Quicksilver
Gas Services GP LLC due to his accounting and financial
expertise, including extensive experience with capital markets
transactions, his knowledge of the energy industry and his
positions with us and with Quicksilver.
John C. Cirone was appointed to the position of Senior
Vice President, General Counsel and Secretary of our general
partner in January 2007. Mr. Cirone was named the Senior
Vice President, General Counsel and Secretary of Quicksilver in
January 2006, after serving as Vice President, General Counsel
and Secretary since July 2002. Mr. Cirone was employed by
Union Pacific Resources (subsequently merged with Anadarko
Petroleum Corporation) from 1978 to 2000. During that time, he
served in various positions in the Law Department, and from 1997
to 2000 he was the Manager of Land and Negotiations. In 2000,
he became Assistant General Counsel of Union Pacific Resources.
After leaving Union Pacific Resources in August 2000,
Mr. Cirone was engaged in the private practice of law prior
to joining Quicksilver in July 2002.
John C. Regan was appointed to the position of Vice
President Chief Accounting Officer of our general
partner in September 2007. Mr. Regan also became the Vice
President, Controller and Chief Accounting Officer of
Quicksilver in September 2007. He is a Certified Public
Accountant with more than 15 years of combined public
accounting, corporate finance and financial reporting
experience. Mr. Regan joined Quicksilver from Flowserve
Corporation where he held various management positions of
increasing responsibility from 2002 to 2007, including Vice
President of Finance for the Flow Control Division and Director
of Financial Reporting. He was also a senior manager
specializing in the energy industry in the audit practice of
PricewaterhouseCoopers, where he was employed from 1994 to 2002.
Alvin Bledsoe was elected director of our general partner
in July 2007. Prior to his retirement in 2005, Mr. Bledsoe
served as a certified public accountant for 33 years at
PricewaterhouseCoopers. From 1978 to 2005, he was a senior
client engagement and audit partner for large, publicly-held
energy, utility, pipeline, transportation and manufacturing
companies. From 1998 to 2000, Mr. Bledsoe served as Global
Leader of PwCs Energy, Mining and Utilities Industries
Assurance and Business Advisory Services Group, and from 1992 to
2005 as a Managing Partner and Regional Managing Partner.
During his career, Mr. Bledsoe also served as a member of
PwCs governing body. Mr. Bledsoe was selected to
serve as a director of Quicksilver Gas Services GP LLC due to
his extensive background in public accounting and auditing,
including experience advising publicly-traded energy companies.
Philip D. Gettig was elected director of our general
partner in July 2007. From February 2000 to December 2005,
Mr. Gettig served as the Vice President, General Counsel
and Secretary of Prism Gas Systems I, L.P., a natural gas
gathering and processing company that was purchased by Martin
Midstream Partners L.P., a publicly-traded limited partnership,
in November 2005. From 1981 to 1999, Mr. Gettig held
various positions in the law department of Union Pacific
Resources Company (UPR), a publicly traded exploration and
production company with substantial natural gas gathering,
processing and marketing operations. Positions held by
Mr. Gettig included Managing Senior Counsel from 1996 to
1999. Mr. Gettig also served as General Counsel of Union
Pacific Fuels, Inc., UPRs wholly-owned gathering,
processing and marketing affiliate, from 1996 to 1999. After
his retirement from Prism in 2005, he provided consulting and
legal services to Prism and he has also provided such services
to individuals and small businesses since his retirement.
Mr. Gettig was selected to serve as a director of
Quicksilver Gas Services GP LLC due to his 29 years of
legal experience within the oil and gas industry.
John W. Somerhalder II was elected director of our
general partner in July 2007. Mr. Somerhalder has served
as the President, Chief Executive Officer and a director of AGL
Resources Inc., a publicly-traded energy services holding
company whose principal business is the distribution of natural
gas, since March 2006 and as Chairman of
55
the Board of AGL Resources since November 2007. From 2000 to
May 2005, Mr. Somerhalder served as the Executive Vice
President of El Paso Corporation, a natural gas and related
energy products provider and one of North Americas largest
independent natural gas producers, where he continued service
under a professional services agreement from May 2005 to March
2006. From 2001 to 2005, he served as the President of
El Paso Pipeline Group. From 1996 to 1999,
Mr. Somerhalder served as the President of Tennessee Gas
Pipeline Company, an El Paso subsidiary company. From
April 1996 to December 1996, Mr. Somerhalder served as the
President of El Paso Energy Resources Company. From 1992
to 1996, he served as the Senior Vice President, Operations and
Engineering, of El Paso Natural Gas Company. From 1990 to
1992, Mr. Somerhalder served as the Vice President,
Engineering of El Paso Natural Gas Company. From 1977 to
1990, Mr. Somerhalder held various other positions at
El Paso Corporation and its subsidiaries until being named
an officer in 1990. Mr. Somerhalder was selected to serve
as a director of Quicksilver Gas Services GP LLC due to his
years of experience in the oil and gas industry and his
extensive business and management expertise, including as
President, Chief Executive Officer and a director of a
publicly-traded energy company.
Family
Relationships
Thomas F. Darden and Glenn Darden are brothers. Jeff Cook and
Philip W. Cook are not related.
Committees
of the Board of Directors
The NYSE does not require its listed limited partnerships to
have a compensation committee or a nominating and governance
committee. Accordingly, each director of our general partner
may participate in the consideration of compensation, nomination
and governance matters.
Our general partners board of directors has established an
audit committee. The audit committee consists of
Messrs. Bledsoe, Gettig and Somerhalder. Our general
partners board of directors has determined that each of
the members of the audit committee meets the independence and
experience standards established by the NYSE and the Exchange
Act and that Mr. Bledsoe is an audit committee
financial expert within the meaning of SEC rules. The
audit committee assists the board of directors in its oversight
of the integrity of our financial statements and our compliance
with legal and regulatory requirements and corporate policies
and controls. The audit committee has the sole authority to
retain and terminate our independent registered public
accounting firm, approve all auditing services and related fees
and the terms thereof, and pre-approve any non-audit services to
be rendered by our independent registered public accounting
firm. The audit committee is also responsible for confirming
the independence and objectivity of our independent registered
public accounting firm.
Our general partners board of directors has also
established a conflicts committee. The conflicts committee
consists of Messrs. Bledsoe, Gettig and Somerhalder and is
charged with reviewing specific matters that our general
partners board of directors believes may involve conflicts
of interest. Any matters approved by the conflicts committee
will be conclusively deemed to be fair and reasonable to us, to
have been approved by all of our unitholders, and not to involve
a breach of any duties that may be owed to our unitholders.
Code of
Business Conduct and Ethics
Our general partners board of directors has adopted a Code
of Business Conduct and Ethics that applies to, among other
persons, the principal executive officer, principal financial
officer and principal accounting officer of our general
partner. A copy of this Code of Business Conduct and Ethics
appears in the Corporate Governance section of our website
(http://www.kgslp.com/corporate/corporate_governance).
We intend to post any amendments to or waivers of our Code of
Business Conduct and Ethics with respect to the directors or
executive officers of our general partner in the Corporate
Governance section of our website.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the executive
officers and directors of our general partner, and persons who
own more than 10% of our common units, to file reports of
ownership and changes in ownership with the SEC. The executive
officers and directors of our general partner and owners of more
than 10% of our common units are required by SEC rules to
furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished
to us and written representations from the directors and
executive officers of our general partner, we believe that
during 2009 all directors and executive officers of our general
partner and all owners of more than 10% of our common units were
in compliance with all applicable Section 16(a) filing
requirements.
56
|
|
Item 11.
|
Executive
Compensation
|
Compensation
Discussion and Analysis
Overview
We do not directly employ any of the persons responsible for
managing or operating our business. Instead, we are managed by
our general partner, the executive officers of which are also
executive officers of Quicksilver and are compensated by
Quicksilver in their capacities as such. The following table
sets forth the name and title of the individuals who served
during 2009 as the principal executive officer and principal
financial officer of our general partner and the three persons
other than the principal executive officer and principal
financial officer that constitute the most highly compensated
executive officers of our general partner in 2009 (collectively,
the named executive officers):
|
|
|
Name
|
|
Title
|
|
Glenn Darden
|
|
Chairman of the Board
|
Thomas F. Darden
|
|
President and Chief Executive Officer
|
Jeff Cook
|
|
Executive Vice President Chief Operating Officer
|
Philip W. Cook
|
|
Senior Vice President Chief Financial Officer
|
John C. Cirone
|
|
Senior Vice President, General Counsel and Secretary
|
On August 10, 2007, we entered into the Omnibus Agreement
with Quicksilver and Quicksilver Gas Services GP LLC. Pursuant
to the Omnibus Agreement, Quicksilver provides certain general
and administrative services to us and we are obligated to
reimburse Quicksilver for any expenses it incurs in conjunction
with the performance of those services, including compensation
and benefits provided by Quicksilver to the named executive
officers.
Although we pay an allocated portion of Quicksilvers
direct costs of providing compensation and benefits to the named
executive officers, we have no direct control over such costs.
Quicksilvers board of directors and compensation committee
establish the base salary, bonus and other elements of
compensation for Quicksilvers executive officers, and such
determinations are not subject to approvals by our general
partners board of directors or any of its committees.
In addition to compensation paid to the named executive officers
by Quicksilver, the named executive officers are eligible to
participate in our Second Amended and Restated 2007 Equity Plan,
which is administered by our general partners board of
directors. Other than awards granted under this plan, the named
executive officers receive no other compensation from us.
Compensation
Objectives, Strategies and Elements for 2009
Pursuant to the Omnibus Agreement, we are allocated a portion of
the direct costs associated with the compensation and benefits
provided by Quicksilver to the named executive officers. In
discussing the allocated portion of the costs for compensation
and benefits to the named executive officers for 2009, the Chief
Executive Officer and Chief Financial Officer of Quicksilver
(who serve as the Chairman of the Board and the Chief Financial
Officer, respectively, of our general partner) determined that
it was appropriate for us to bear a portion of these costs in
two forms.
The first component is an allocation to us of a percentage of
costs for base salary and benefits provided by Quicksilver to
the named executive officers, generally based on the estimated
amount of time that the named executive officers devote to our
business and affairs relative to the amount of time they devote
to those of Quicksilver. For 2009, Quicksilver allocated
$0.3 million of these costs to us. In determining this
amount, Quicksilver considered the estimated amount of time that
the named executive officers devoted to our business and
affairs, the amounts of the compensation and benefits provided
by Quicksilver to them and the value of the equity-based awards
our general partners board of directors made to them in
the form of phantom partnership equity. This amount is paid by
us to Quicksilver and not to the named executive officers
directly.
The second component is a grant of equity-based awards under the
2007 Equity Plan. For 2009, this grant made up 25% of the total
long-term incentive equity-based awards payable to each named
executive officer. The other 75% was granted directly by
Quicksilver. We agreed to award these long-term incentive
equity-based awards because we did not bear any portion of the
2009 annual cash bonus paid to the named executive officers,
which was borne entirely by Quicksilver, and we believed that
these grants align the interests of the named executive officers
directly with those of our unitholders. This is the only
compensation the named executive officers received from us in
2009.
57
Although our general partners board of directors had no
direct control over the compensation paid to the named executive
officers by Quicksilver, our general partners board of
directors reviewed and concurred with Quicksilvers
compensation philosophy and strategies with respect to
Quicksilvers executive officers. These strategies for
2009 included the long-term incentive equity-based component
mentioned above. Generally, Quicksilver targets long-term
incentive compensation, in the form of equity-based awards, at
the 50th to 75th percentile for Quicksilvers peer group.
In consultation with Hewitt Associates LLC, the compensation
consultants employed by Quicksilver, Quicksilvers
management proposed to Quicksilvers compensation
committee, and Quicksilvers compensation committee
concurred, that the long-term incentive compensation provided to
Quicksilvers executive officers in the form of
equity-based awards would consist of three components in the
following percentages (based on grant date values) for 2009:
options to purchase Quicksilver common stock (37.5%); restricted
shares of Quicksilver common stock (37.5%); and awards in the
form of phantom partnership equity (25%).
Our general partners board of directors determined that it
would be desirable to grant equity-based awards to the named
executive officers in order to encourage them to think and act
like owners of the partnership, to provide them additional
incentives to advance our interests and the interests of holders
of our units, and to enhance their commitment to our success.
Our general partners board of directors also believed
these awards were appropriate, because they reduced the amount
of cash we paid directly to Quicksilver for the services of the
named executive officers in 2009.
For the named executive officers other than the Chief Executive
Officer, the amounts of awards were determined by our general
partners board of directors based on the recommendations
of the Chief Executive Officer and his evaluation of the
performance of each other named executive officer. In addition,
our general partners board of directors considered the
appropriateness of the amounts awarded relative to the desired
effect of the awards in motivating the named executive officers
to achieve the goals of the partnership. Our general
partners board of directors agreed that 25% of the grant
date value of the total long-term incentive equity-based awards
provided to the named executive officers in 2009 should consist
of phantom partnership equity. Our general partners board
of directors also considered and was satisfied with the
appropriateness of the dollar values established by
Quicksilvers compensation committee for this purpose.
Accordingly, our general partners board of directors
approved, effective January 2, 2009, the following grants
of phantom units to the named executive officers under the 2007
Equity Plan:
|
|
|
|
|
Executive
|
|
Number of Phantom
Units
|
|
|
Glenn Darden
|
|
|
82,721
|
|
Thomas F. Darden
|
|
|
82,721
|
|
Jeff Cook
|
|
|
38,692
|
|
Philip W. Cook
|
|
|
32,021
|
|
John C. Cirone
|
|
|
21,347
|
|
The phantom units vest one-third on the first business day
occurring on or after each of the first three anniversaries of
the date of grant (or, if earlier, the named executive
officers death or disability or a
change-in-control)
and are to be settled in common units immediately upon vesting.
Our general partners board of directors determined that,
in order to simplify administration of partner capital accounts,
it was appropriate to grant phantom units that settle in common
units near the end of the year.
Compensation
Objectives, Strategies and Elements for 2010
Compensation for 2010 was determined using the same objectives,
strategies and elements as were used in 2009. Except for John
C. Cirone, Quicksilver chose not to increase the named
executive officers compensation for 2010 from 2009 levels
based on consultation with its compensation consultant,
including the consultants analysis of market factors. In
2010, pursuant to the Omnibus Agreement, we will again be
allocated a portion of the direct costs associated with the
compensation and benefits provided by Quicksilver to the named
executive officers, which will be borne by us in two forms. The
amount of the first component, an allocation to us of the
percentage of costs for base salary and benefits provided by
Quicksilver to the named executive officers, has not yet been
determined for 2010. The second component, a grant of
equity-based awards under the Second Amended and Restated 2007
Equity Plan, was determined to be 25% of the total long-term
incentive equity-based awards payable to each named executive
officer for 2010 based on the same considerations and process
discussed above in the context of 2009 compensation decisions.
58
Accordingly, our general partners board of directors
approved, effective January 4, 2010, the following grants
of phantom units to the named executive officers under the
Second Amended and Restated 2007 Equity Plan:
|
|
|
|
|
Executive
|
|
Number of Phantom
Units
|
|
|
Glenn Darden
|
|
|
38,182
|
|
Thomas F. Darden
|
|
|
38,182
|
|
Jeff Cook
|
|
|
17,859
|
|
Philip W. Cook
|
|
|
14,780
|
|
John C. Cirone
|
|
|
13,548
|
|
Change-in-Control
Arrangements
In the event of a
change-in-control
as described in the Second Amended and Restated 2007 Equity
Plan, all of a named executive officers equity-based
awards that have been granted under the 2007 Equity Plan, as
amended, would immediately vest. The board of directors of our
general partner believes that this
change-in-control
arrangement aligns the interests of the named executive officers
with those of the holders of our units.
Summary
Compensation Table
The following table sets forth certain information regarding the
compensation provided by us in 2009, 2008 and 2007 to the Chief
Executive Officer, the Chief Financial Officer and the three
most highly-compensated executive officers of our general
partner, other than the Chief Executive Officer and the Chief
Financial Officer. These five individuals are also referred to
as named executive officers as discussed in our Compensation
Discussion and Analysis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Name and
|
|
|
|
Awards
|
|
Total
|
Principal Position
|
|
Year
|
|
($) (1)
|
|
($)
|
|
Glenn Darden
|
|
2007
|
|
|
213,600
|
|
|
|
213,600
|
|
Chairman of the Board
|
|
2008
|
|
|
752,778
|
|
|
|
752,778
|
|
|
|
2009
|
|
|
832,173
|
|
|
|
832,173
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas F. Darden
|
|
2007
|
|
|
213,600
|
|
|
|
213,600
|
|
President and
|
|
2008
|
|
|
752,778
|
|
|
|
752,778
|
|
Chief Executive Officer
|
|
2009
|
|
|
832,173
|
|
|
|
832,173
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Cook
|
|
2007
|
|
|
106,800
|
|
|
|
106,800
|
|
Executive Vice President -
|
|
2008
|
|
|
379,785
|
|
|
|
379,785
|
|
Chief Operating Officer
|
|
2009
|
|
|
389,242
|
|
|
|
389,242
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip W. Cook
|
|
2007
|
|
|
106,800
|
|
|
|
106,800
|
|
Senior Vice President -
|
|
2008
|
|
|
298,405
|
|
|
|
298,405
|
|
Chief Financial Officer
|
|
2009
|
|
|
322,131
|
|
|
|
322,131
|
|
|
|
|
|
|
|
|
|
|
|
|
John C. Cirone
|
|
2007
|
|
|
85,440
|
|
|
|
85,440
|
|
Senior Vice President -
|
|
2008
|
|
|
176,321
|
|
|
|
176,321
|
|
General Counsel and
|
|
2009
|
|
|
214,751
|
|
|
|
214,751
|
|
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This column reports the aggregate grant date fair value of the
phantom unit awards granted in 2009, 2008 and 2007 computed in
accordance with FASC Topic 718. Additional information
regarding the calculation of these amounts is included in
Notes 2 and 11 to the consolidated financial statements
included in Item 8. Financial Statements and
Supplementary Data of this annual report and our annual
reports for the respective year end. |
Grants of
Plan-Based Awards in 2009
The following table sets forth certain information regarding
grants of awards under our 2007 Equity Plan made to the named
executive officers in 2009. Each of these grants consists of
phantom units that vest one-third on the first business day
occurring on or after each of the first three anniversaries of
the date of grant (or if earlier, the
59
named executive officers death or disability or a
change-in-control)
and are to be settled in common units immediately upon vesting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards
|
|
|
Grant Date
|
|
|
|
|
|
Board
|
|
Number of
|
|
|
Fair Value of
|
|
|
|
|
|
Approval
|
|
Units:
|
|
|
Equity Awards
|
|
Name
|
|
Grant Date
|
|
Date
|
|
(#)
|
|
|
($) (1)
|
|
|
Glenn Darden
|
|
1/2/2009
|
|
12/19/2008
|
|
|
82,721
|
|
|
$
|
832,173
|
|
Thomas F. Darden
|
|
1/2/2009
|
|
12/19/2008
|
|
|
82,721
|
|
|
|
832,173
|
|
Jeff Cook
|
|
1/2/2009
|
|
12/19/2008
|
|
|
38,692
|
|
|
|
389,242
|
|
Philip W. Cook
|
|
1/2/2009
|
|
12/19/2008
|
|
|
32,021
|
|
|
|
322,131
|
|
John C. Cirone
|
|
1/2/2009
|
|
12/19/2008
|
|
|
21,347
|
|
|
|
214,751
|
|
|
|
|
(1) |
|
This column reports the grant date fair value of the phantom
unit awards granted in 2009 computed in accordance with FASC
Topic 718. Additional information regarding the calculation of
these amounts is included in Notes 2 and 11 to the
consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data of this annual
report. |
Outstanding
Equity Awards at Year-End 2009
The following table sets forth information regarding the
holdings of phantom unit awards by the named executive officers
at December 31, 2009. No options with regard to our units
have been granted to our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards in Cash
|
|
|
Equity Awards in Units
|
|
|
|
Number of Shares
|
|
|
Market Value of
|
|
|
Number of Shares
|
|
|
Market Value of
|
|
|
|
or Units of Stock
|
|
|
Shares or Units of
|
|
|
or Units of Stock
|
|
|
Shares or Units of
|
|
|
|
That Have Not
|
|
|
Stock That Have Not
|
|
|
That Have Not
|
|
|
Stock That Have Not
|
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
(#) (2)
|
|
|
($) (1)
|
|
|
(#)
|
|
|
($) (1)
|
|
|
Glenn Darden
|
|
|
3,333
|
|
|
$
|
69,893
|
|
|
|
19,875
|
(3)
|
|
$
|
416,779
|
|
|
|
|
|
|
|
|
|
|
|
|
82,721
|
(4)
|
|
|
1,734,659
|
|
Thomas F. Darden
|
|
|
3,333
|
|
|
|
69,893
|
|
|
|
19,875
|
(3)
|
|
|
416,779
|
|
|
|
|
|
|
|
|
|
|
|
|
82,721
|
(4)
|
|
|
1,734,659
|
|
Jeff Cook
|
|
|
1,667
|
|
|
|
34,957
|
|
|
|
10,027
|
(3)
|
|
|
210,266
|
|
|
|
|
|
|
|
|
|
|
|
|
38,692
|
(4)
|
|
|
811,371
|
|
Philip W. Cook
|
|
|
1,667
|
|
|
|
34,957
|
|
|
|
7,878
|
(3)
|
|
|
165,202
|
|
|
|
|
|
|
|
|
|
|
|
|
32,021
|
(4)
|
|
|
671,480
|
|
John C. Cirone
|
|
|
1,333
|
|
|
|
27,953
|
|
|
|
4,655
|
(3)
|
|
|
97,615
|
|
|
|
|
|
|
|
|
|
|
|
|
21,347
|
(4)
|
|
|
447,647
|
|
|
|
|
(1) |
|
The market value of phantom unit awards is based on $20.97, the
closing market price of KGS common units on December 31,
2009. |
(2) |
|
These units will vest on August 10, 2010. |
(3) |
|
One-half of these units vested on January 4, 2010, the
remaining one-half of these units will vest on January 3,
2011. |
(4) |
|
One-third of these units vested on January 4, 2010, and
one-third of these units will vest on each of January 3,
2011 and 2012. |
60
Potential
Payments upon Termination or
Change-in-Control
Upon a named executive officers termination by reason of
death or disability or upon a
change-in-control
as defined under the 2007 Equity Plan, as amended, such named
executive officers outstanding unvested equity awards
granted under the 2007 Equity Plan, as amended, would
immediately vest. The payments set forth in the table are based
on the assumption that the event occurred on December 31,
2009, the last business day of 2009. The amounts shown in the
table do not include payments and benefits that could be
received by such individual from Quicksilver.
|
|
|
|
|
|
|
|
|
|
|
Equity
Awards (1)
|
|
|
|
|
|
|
Market Value of Shares
|
|
|
|
Number of Shares
|
|
|
or Units of Stock That
|
|
|
|
or Units of Stock
|
|
|
Have Not Vested and will
|
|
|
|
That Have Not
|
|
|
Vest upon a Triggering
|
|
|
|
Vested
|
|
|
Event
|
|
Name
|
|
(#)
|
|
|
($) (2)
|
|
|
Glenn Darden
|
|
|
105,929
|
|
|
$
|
2,221,331
|
|
Thomas F. Darden
|
|
|
105,929
|
|
|
|
2,221,331
|
|
Jeff Cook
|
|
|
50,386
|
|
|
|
1,056,594
|
|
Philip W. Cook
|
|
|
41,566
|
|
|
|
871,639
|
|
John C. Cirone
|
|
|
27,335
|
|
|
|
573,215
|
|
|
|
|
(1) |
|
Includes phantom units that will be settled in cash and phantom
units that will be settled in units upon vesting. |
(2) |
|
The market value of unit awards is based on $20.97, the closing
market price of KGS common units on December 31, 2009. |
Director
Compensation for 2009
Directors of our general partner who are also employees of
Quicksilver are not separately compensated for their services as
directors. For the year ended 2009, each of our non-employee
directors received a fee of $80,000, payable 50% in phantom
units and 50% in cash (subject to their elections to receive
phantom units in lieu of some or all of the cash portion). Each
of these phantom unit awards was granted under our 2007 Equity
Plan and settles in units upon vesting.
The following table sets forth certain information regarding the
compensation of the non-employee directors of Quicksilver Gas
Services GP LLC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Equity
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Total
|
|
Name
|
|
($) (1)
|
|
|
($) (2)
|
|
|
($)
|
|
|
Alvin Bledsoe
|
|
$
|
40,000
|
|
|
$
|
39,999
|
(3)
|
|
$
|
79,999
|
|
Philip D. Gettig
|
|
$
|
40,000
|
|
|
$
|
39,999
|
(4)
|
|
$
|
79,999
|
|
John W. Somerhalder II
|
|
$
|
-
|
|
|
$
|
79,997
|
(5)
|
|
$
|
79,997
|
|
|
|
|
(1) |
|
This column reports the aggregate compensation earned in 2009
and paid in cash and excludes $40,000 that Mr. Somerhalder
elected to receive in the form of phantom units. |
|
(2) |
|
This column reports the grant date fair value of the phantom
unit awards granted in 2009 computed in accordance with FASC
Topic 718. Additional information regarding the calculation of
these amounts is included in Notes 2 and 11 to the
consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data of this annual
report. |
|
(3) |
|
The grant date fair value calculated for the 3,976 phantom units
granted to Mr. Bledsoe in 2009. As of December 31,
2009, Mr. Bledsoe held 5,656 phantom units. |
|
(4) |
|
The grant date fair value calculated for the 3,976 phantom units
granted to Mr. Gettig in 2009. As of December 31,
2009, Mr. Gettig held 5,656 phantom units. |
|
(5) |
|
The grant date fair value calculated for the 7,952 phantom units
granted to Mr. Somerhalder in 2009, including those phantom
units he acquired in lieu of $40,000 of his cash fees. As of
December 31, 2009, Mr. Somerhalder held 9,632 phantom
units. |
61
Compensation
Committee Interlocks and Insider Participations
Our general partner does not have a compensation committee.
Messrs. Glenn Darden, Thomas Darden, Jeff Cook and Philip
W. Cook, each of whom is an executive officer of our general
partner, participated in his capacity as a director in the
deliberations of the board of directors of our general partner
concerning executive officer compensation. In addition,
Mr. Thomas Darden made recommendations on behalf of the
management of our general partner to the board of directors of
our general partner regarding executive officer compensation.
Messrs. Glenn Darden and Thomas Darden also serve as
directors of Quicksilver, and Messrs. Glenn Darden, Thomas
Darden, Jeff Cook and Philip W. Cook serve as executive officers
of Quicksilver.
Compensation
Committee Report
As our general partner does not have a compensation committee,
the board of directors makes compensation decisions. Our
general partners board of directors reviewed and discussed
the Compensation Discussion and Analysis with the management of
our general partner. Based on this review and discussion, our
general partners board of directors has directed that the
Compensation Discussion and Analysis be included in this annual
report for filing with the SEC.
Members
of the Board of Directors of Quicksilver Gas Services GP
LLC
|
|
|
|
Alvin Bledsoe
Jeff Cook
Philip W. Cook
Glenn Darden
|
|
Thomas F. Darden
Philip D. Gettig
John W. Somerhalder II
|
62
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Quicksilver
Gas Services LP
The following table sets forth certain information regarding the
beneficial ownership of our common and subordinated units as of
February 15, 2010 by:
|
|
|
|
|
each person known by us to beneficially own more than 5% of our
common or subordinated units;
|
|
|
each named executive officer of Quicksilver Gas Services GP LLC;
|
|
|
each director of Quicksilver Gas Services GP LLC; and
|
|
|
all directors and executive officers of Quicksilver Gas Services
GP LLC as a group.
|
Unless otherwise indicated by footnote, the beneficial owner
exercises sole voting and investment power over the units. The
percentages of beneficial ownership are calculated on the basis
of 16,988,429 common units and 11,513,625 subordinated units
outstanding as of February 15, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage of
|
|
|
Common and
|
|
|
|
|
|
|
Common
|
|
|
of Common
|
|
|
Subordinated
|
|
|
Subordinated
|
|
|
Subordinated
|
|
|
|
|
Beneficial Owner
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
Units
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn
Darden (1)
|
|
|
114,575
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Thomas F.
Darden (1)
|
|
|
114,575
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Jeff Cook
|
|
|
16,180
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Philip W.
Cook (2)
|
|
|
14,748
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
John C. Cirone
|
|
|
9,411
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Alvin
Bledsoe (3)
|
|
|
48,412
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Philip D. Gettig
|
|
|
8,317
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
John W. Somerhalder II
|
|
|
18,788
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Directors and executive officers as a group (9 persons)
|
|
|
271,522
|
|
|
|
1.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
|
|
|
|
Holders of More Than 5% Not
Named Above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quicksilver Resources
Inc. (4)(6)
|
|
|
5,696,752
|
|
|
|
33.5
|
%
|
|
|
11,513,625
|
|
|
|
100.0
|
%
|
|
|
60.4
|
%
|
|
|
|
|
Quicksilver Gas Services
Holdings LLC (5)(6)
|
|
|
5,696,752
|
|
|
|
33.5
|
%
|
|
|
11,513,625
|
|
|
|
100.0
|
%
|
|
|
60.4
|
%
|
|
|
|
|
FMR
LLC (7)
|
|
|
967,000
|
|
|
|
5.7
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
* |
|
Indicates less than 1% |
|
(1) |
|
Includes as to each of Messrs. G. Darden and T. Darden
76,100 common units held in a trust for which he has shared
voting and investment power as a co-trustee. Each of
Messrs. G. Darden and T. Darden disclaims beneficial
ownership of the shares held in this trust, except to the extent
of his pecuniary interest therein. |
|
(2) |
|
Includes 14,748 common units held by Mr. Cook jointly with
his spouse and 2,819 common units that are pledged in accordance
with customary terms and conditions of a standard margin account
arrangement. |
|
(3) |
|
Includes 200 common units over which Mr. Bledsoe exercises
shared investment power. |
|
(4) |
|
Quicksilver Resources Inc. is the ultimate parent company of
Quicksilver Gas Services Holdings LLC (Holdings) and
may, therefore, be deemed to beneficially own the units held by
Holdings. |
|
(5) |
|
Holdings, an indirect wholly owned subsidiary of Quicksilver,
owns a 100% interest in our general partner and a 59.4% limited
partner interest in us. |
|
(6) |
|
Quicksilver has shared voting power and shared investment power
with Holdings, Cowtown Gas Processing LP (Processing
LP), Cowtown Pipeline LP (Pipeline LP),
Cowtown Pipeline Management, Inc. (Management) and
Cowtown Pipeline Funding, Inc. (Funding) over
5,696,752 common units of Quicksilver Gas Services
LP. Holdings also owns 11,513,625 subordinated units
representing limited partner interests in Quicksilver Gas
Services LP, which may be converted into common units on a
one-for-one
basis upon the termination of the subordination period under
certain circumstances as set forth in the Partnership
Agreement. Quicksilver, Processing LP, Pipeline LP, Management
and Funding may also be deemed to beneficially own 11,513,625
subordinated units owned by Holdings. Quicksilver Gas Services
GP LLC, the sole general partner of Quicksilver Gas Services LP,
owns a 1.6% general partner interest and incentive distribution
rights (which represent the right to receive increasing
percentages of quarterly distributions in excess of specified
amounts) in Quicksilver Gas Services LP. The address of
Quicksilver is 777 West Rosedale Street, Fort Worth,
Texas 76104. |
|
(7) |
|
According to a Schedule 13G/A filed by FMR LLC with the SEC
on February 16, 2010, FMR LLC had sole investment power
over 967,000 common units. The address of FMR LLC is 82
Devonshire Street, Boston, Massachusetts 02109. |
63
Quicksilver
Resources Inc.
The following table sets forth certain information regarding the
beneficial ownership of Quicksilvers common stock as of
February 15, 2010 by:
|
|
|
|
|
Each named executive officer of Quicksilver Gas Services GP LLC;
|
|
|
Each director of Quicksilver Gas Services GP LLC; and
|
|
|
All directors and executive officers of Quicksilver Gas Services
GP LLC as a group.
|
Unless otherwise indicated by footnote, the beneficial owner
exercises sole voting and investment power over the shares. The
percentage of beneficial ownership is calculated on the basis of
170,222,678 shares of Quicksilver common stock outstanding
as of February 15, 2010.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Share Ownership
|
|
|
|
Number of
|
|
|
Percent of
|
|
Beneficial Owner
|
|
Shares
|
|
|
Outstanding Shares
|
|
|
|
|
|
|
Glenn
Darden (1)(2)(3)(4)(5)
|
|
|
45,253,028
|
|
|
|
26.6
|
%
|
Thomas F.
Darden (1)(2)(3)(4)(5)
|
|
|
45,368,524
|
|
|
|
26.6
|
%
|
Jeff
Cook (3)(5)
|
|
|
685,647
|
|
|
|
|
*
|
Philip W.
Cook (2)(3)(4)(5)(6)
|
|
|
236,888
|
|
|
|
|
*
|
John C.
Cirone (3)(5)
|
|
|
205,343
|
|
|
|
|
*
|
Alvin Bledsoe
|
|
|
-
|
|
|
|
-
|
|
Philip D. Gettig
|
|
|
-
|
|
|
|
-
|
|
John W. Somerhalder II
|
|
|
-
|
|
|
|
-
|
|
Directors and executive officers as a group
(9 persons) (1)(2)(3)(4)(5)
|
|
|
50,141,880
|
|
|
|
29.4
|
%
|
|
|
|
* |
|
Indicates less than 1% |
|
(1) |
|
Includes as to each of Messrs. G. Darden and T. Darden:
41,677,288 shares beneficially owned by Quicksilver Energy
L.P., for which each has shared voting and investment power as a
member of Pennsylvania Management, LLC, the sole general partner
of Quicksilver Energy L.P. Each of Messrs. G. Darden and
T. Darden disclaims beneficial ownership of all shares owned by
Quicksilver Energy L.P., except to the extent of his pecuniary
interest therein. |
|
(2) |
|
Includes with respect to each of the following individuals and
the directors and executive officers as a group, the following
approximate numbers of shares represented by units in a Unitized
Stock Fund held through Quicksilvers 401(k) Plan:
Mr. G. Darden 32,594; Mr. T.
Darden 100,660; Mr. Philip W. Cook
9,511 and all directors and executive officers as a
group 142,765. |
|
(3) |
|
Includes with respect to each of the following individuals and
the directors and executive officers as a group, the following
numbers of shares subject to options that will vest on or before
April 16, 2010: Mr. G. Darden 162,534;
Mr. T. Darden 162,534; Mr. Jeff
Cook 77,796; Mr. Cirone 40,795;
Mr. Philip W. Cook 63,366 and all directors and
executive officers as a group 529,885. |
|
(4) |
|
Includes with respect to each of the following individuals and
the directors and executive officers as a group, the following
number of shares pledged as collateral security for loans or
loan commitments or in accordance with customary terms and
conditions of standard margin account arrangements: Mr. G.
Darden 14,855,095 (including 14,011,383 shares
beneficially owned by Quicksilver Energy L.P.); Mr. T
Darden 15,011,735 (including 14,011,383 shares
beneficially owned by Quicksilver Energy L.P.); Mr. Philip
W. Cook 30,125; and all directors and executive
officers as a group 15,885,572 (including
14,011,383 shares beneficially owned by Quicksilver Energy
L.P.). |
|
(5) |
|
Includes with respect to each of the following individuals and
the directors and executive officers as a group, the following
numbers of shares of unvested restricted stock for which the
indicated beneficial owners have no investment power:
Mr. G. Darden 337,226; Mr. T.
Darden 337,226; Mr. Jeff Cook
164,048; Mr. Philip W. Cook 131,886;
Mr. Cirone 86,482; and all directors and
officers as a group 1,089,378. |
|
(6) |
|
Includes 30,125 shares held by Mr. Philip W. Cook
jointly with his spouse. |
64
Equity
Compensation Plan Information
The following table sets forth information as of
December 31, 2009, with respect to shares of common stock
that may be issued under our existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
|
|
|
|
|
|
future issuance under
|
|
|
|
Number of securities to
|
|
|
Weighted-average
|
|
|
equity compensation
|
|
|
|
be issued upon exercise
|
|
|
exercise price of
|
|
|
plans (excluding
|
|
|
|
of outstanding options,
|
|
|
outstanding options,
|
|
|
securities reflected in
|
|
Plan Category
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
column (a))
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security
holders (1)
|
|
|
485,672
|
|
|
|
N/A
|
(2)
|
|
|
750,000
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
485,672
|
|
|
|
N/A
|
(2)
|
|
|
750,000
|
|
|
|
|
(1) |
|
Consists of the 2007 Equity Plan, as amended. |
|
(2) |
|
Only phantom units have been issued under the 2007 Equity Plan,
as amended Each phantom unit entitles the holder to receive one
common unit (or an amount in cash equal to the fair market value
thereof) with respect to each phantom unit at vesting.
Accordingly, without payment of cash, there is no reportable
weighted-average exercise price. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
General
As of February 15, 2010, our general partner and its
affiliates owned 5,696,752 common units and 11,513,625
subordinated units representing an aggregate 60.4% limited
partner interest in us. In addition, as of February 15,
2010, our general partner owned approximately a 1.6% general
partner interest in us and all of the incentive distribution
rights. We and our general partner and its affiliates are also
parties to various contractual arrangements. The terms of these
arrangements are not the result of arms length
negotiations.
Distributions
and Payments to Our General Partner and its Affiliates
We make cash distributions of approximately 98% to our
unitholders pro rata, including our general partner and its
affiliates, as the holders of an aggregate 5,696,752 common
units and 11,513,625 subordinated units, and 1.6% to our general
partner. In addition, if distributions exceed the minimum
quarterly distribution and other higher target distribution
levels, our general partner is entitled to increasing
percentages of the distributions, up to 48% of the distributions
above the highest target distribution level.
Assuming we have sufficient available cash to maintain the
current level of quarterly distribution on all of our
outstanding units for four quarters, our general partner and its
affiliates would receive an annual distribution of approximately
$1.8 million on their general partner interest and
incentive distribution rights and $26.8 million on their
common and subordinated limited partner units. For 2009 the
general partner and its affiliates were paid $27.0 million.
Property
Transactions with Quicksilver
On June 5, 2007, KGS Predecessor sold several pipeline and
gathering assets to Quicksilver. These assets consist of:
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a portion of the gathering lines in the Cowtown Pipeline;
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the LADS; and
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the HCDS.
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At June 5, 2007, the assets were either constructed and in
service or partially constructed. The selling price for these
assets was approximately $29.5 million, which represented
KGS Predecessors historical cost. KGS
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Predecessor collected the $29.5 million on August 9,
2007. All assets conveyed were subject to repurchase by KGS
from Quicksilver as follows:
Cowtown Pipeline - During 2009, KGS
independent directors voted to acquire certain of the Cowtown
Pipeline assets subject to the repurchase obligation that had an
original cost of approximately $5.6 million. KGS paid
$5.6 million for these assets in September 2009.
Furthermore, the independent directors elected not to acquire
certain Cowtown Pipeline assets that had been previously
included in the repurchase obligation. In doing so, KGS
derecognized assets with a carrying value of $56.8 million
and also derecognized liabilities associated with the repurchase
of $68.6 million. The difference of $11.8 million
between the assets carrying values and their repurchase
obligation was reflected as an increase in partners
capital effective upon the decision not to purchase. KGS also
entered into an agreement with Quicksilver to permit KGS to
gather third party gas across the laterals retained by
Quicksilver for a fee which totaled $48,116 for 2009. The
decision not to purchase certain Cowtown Pipeline assets did not
have a material effect on KGS gathering and processing
revenues as the natural gas stream from these laterals continues
to flow into our Cowtown Pipeline gathering and processing
facilities.
Lake Arlington Dry System - KGS completed the
purchase of the LADS during the fourth quarter of 2008 for
approximately $42 million.
Hill County Dry System - In November 2009,
Quicksilver and KGS mutually agreed to waive both parties
rights and obligations to transfer ownership of the HCDS from
Quicksilver to us, which we refer to as the Repurchase
Obligation Waiver. The Repurchase Obligation Waiver caused
derecognition of the assets and liabilities directly
attributable to the HCDS, most significantly the property, plant
and equipment and repurchase obligation, beginning in November
2009. The difference of $8.9 million between the
assets carrying values and the liabilities was reflected
as an increase in partners capital effective upon the
decision not to purchase. In addition, the Repurchase
Obligation Waiver caused the elimination of the HCDS
revenues and expenses from our consolidated results of
operations beginning in November 2009. The assets, liabilities,
revenues and expenses directly attributable to the HCDS for the
periods prior to November 2009 have been retrospectively
reported as discontinued operations based upon the decision not
to purchase the system from Quicksilver.
All of these assets conveyance from KGS to Quicksilver was
not treated as a sale for accounting purposes because KGS
operated them and originally intended to purchase them.
Accordingly, the original cost and subsequently incurred costs
were recognized in both KGS property, plant and equipment
and its repurchase obligations to Quicksilver. Similarly,
KGS results of operations included the revenues and
expenses for these operations. For 2009, KGS recognized
$3.7 million of interest expense associated with the
repurchase obligations to Quicksilver based on a
weighted-average interest rate of 3.8%, of which
$2.0 million is reflected in discontinued operations. All
repurchase obligations for these assets were concluded by
December 31, 2009.
Omnibus
Agreement
We have entered into an Omnibus Agreement with Quicksilver and
our general partner that addresses the following matters: