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
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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
(State or other jurisdiction of
incorporation or organization)
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56-2639586
(I.R.S. Employer
Identification No.)
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777 West Rosedale St., Fort Worth, Texas
(Address of principal executive offices)
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76104
(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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Common Units of Limited Partner Interests
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NYSE Arca
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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 Exchange Act 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 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. [ ]
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)
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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, 2008, the aggregate market value of the
registrants common units held by non-affiliates of the
registrant was approximately $154,464,607 based on the closing
sale price of $23.50 as reported on the NYSE Arca.
As of February 10, 2009, the registrant has 12,313,451
common units, 11,513,625 subordinated units outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
DEFINITIONS
As used in this annual report unless the context requires
otherwise:
Bbl
or
Bbls
means barrel or barrels
Bbld
means barrel or barrels per day
Bcf
means billion cubic feet
Bcfd
means billion cubic feet per day
Bcfe
means Bcf of natural gas
equivalents, calculated as one Bbl of oil or NGLs equaling six
Mcf of gas
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, which promulgates accounting standards
FERC
means the Federal Energy
Regulatory Commission
GAAP
means Generally Accepted
Accounting Principles
Gas Gathering and Processing Agreement
means the Amended and Restated Gas Gathering and
Processing Agreement, among Quicksilver Resources Inc., Cowtown
Pipeline Partners, L.P. and Cowtown Gas Processing Partners L.P.
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.
Lake Arlington Gas Gathering Agreement
means the Amended and Restated Gas Gathering Agreement,
dated September 1, 2008, among Quicksilver Resources Inc.
and Cowtown Pipeline L.P. and then assigned to Cowtown Pipeline
Partners L.P.
LIBOR
means London Interbank Offered
Rate
Management
means management of the
Partnerships general partner
MMBtu
means million Btu
Mcf
means thousand cubic feet
MMcf
means million cubic feet
MMcfd
means million cubic feet per day
MMcfe
means MMcf of natural gas
equivalents, calculated as one Bbl of oil or NGLs equaling six
Mcf of gas
MMcfed
means MMcfe per day
NGL
or
NGLs
means natural gas liquids
Oil
includes crude oil and condensate
Omnibus Agreement
means the Omnibus
Agreement, dated August 10, 2007, among Quicksilver Gas
Services LP, Quicksilver Gas Services GP LLC and Quicksilver
Resources Inc.
OSHA
means Occupational Safety and
Health Administration
Quicksilver
means, unless the context
otherwise requires, Quicksilver Resources Inc. and its
subsidiaries
Quicksilver Counties
means Hood,
Somervell, Johnson, Tarrant, Hill, Parker, Bosque and Erath
Counties in north Texas
Partnership Agreement
means the Second
Amended and Restated Agreement of Limited Partnership of
Quicksilver Gas Services LP, dated February 19, 2008
SEC
means the United States Securities
and Exchange Commission
SFAS
means Statement of Financial
Accounting Standards issued by the FASB
Tcfe
means trillion cubic feet of
natural gas equivalents, determined by using the ratio of one
Bbl of oil or NGLs to six Mcf of gas
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INDEX TO
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2008
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
On August 10, 2007, we completed our IPO of 5,000,000
common units representing limited partnership interests. On
September 7, 2007, we sold an additional 750,000 common
units upon the exercise by the underwriters of the IPO of their
over-allotment option.
Upon the completion of the IPO, our common units began trading
on the NYSE Arca exchange under the ticker symbol
KGS and we succeeded to the assets and operations of
KGS Predecessor. Prior to the completion of the IPO, KGS
Predecessor was owned indirectly 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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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; and
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the effects of future litigation.
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All forward-looking statements contained in this annual report
are expressly qualified in their entirety by the foregoing
cautionary statements.
4
PART I
Item 1. Business
General
We are a master limited partnership engaged in the business of
gathering and processing natural gas and NGLs. We own assets in
the Fort Worth Basin located in North Texas which consist
of a 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. We provide gathering and processing services to
Quicksilver, the owner of our general partner, as well as other
natural gas producers in this area. These services are provided
under fee-based contracts, whereby we receive fees for
performing the gathering and processing 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 began trading publicly on August 7, 2007
on the NYSE Arca exchange under the ticker symbol
KGS pursuant to our IPO. Our principal and
administrative offices are located at 777 West Rosedale
Street, Fort Worth, Texas 76104.
Formation
and Development of Business
We began operations in 2004 to provide gathering and processing
services to Quicksilver. We were organized as a Delaware limited
partnership in January 2007.
Initial Public Offering
On August 6,
2007, we entered into an underwriting agreement (the
Underwriting Agreement) with our general partner,
Quicksilver and Quicksilver Gas Services Holdings LLC
(Holdings) and the underwriters (the
Underwriters) for the sale of 5,000,000 common units
at a price to the public of $21.00 per common unit. On
September 7, 2007, pursuant to the Underwriting Agreement,
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 approximately $97.7 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 approximately $162.1 million (consisting of
$112.1 million in cash and a $50.0 million convertible
subordinated note payable) to Quicksilver and approximately
$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 approximately $4.3 million of expenses associated with
the IPO, the credit agreement and certain other formative
transactions; and
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make expenditures for general partnership purposes, including
post-IPO capital expenditures.
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Additionally, the following transactions occurred at or near the
time of the IPO:
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Quicksilver affiliates contributed to KGS their 95% interest in
Cowtown Gas Processing Partners L.P. and their 93% interest in
Cowtown Pipeline Partners L.P.;
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Private investors contributed to KGS their 5% interests in
Cowtown Gas Processing Partners L.P. and their 7% interests in
Cowtown Pipeline Partners L.P.;
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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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As of December 31, 2008, the ownership of KGS is as follows:
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Percentage
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Ownership
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Common unitholders:
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Public
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27.1%
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Quicksilver
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23.5%
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Subordinated unitholders:
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Quicksilver
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47.5%
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Total limited partner interest
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98.1%
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General Partner interest:
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Quicksilver
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1.9%
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Total
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100.0%
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Our general partner is a wholly-owned subsidiary of Quicksilver.
Quicksilver indirectly owns all of the entities that own and
operate KGS assets.
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. At the time of our IPO, we acquired
substantially all of Quicksilvers existing midstream
assets in the Quicksilver Counties. 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 their midstream
services through 2017. We believe that our relationship with
Quicksilver provides us with an 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.
Large, long-lived reserve
base.
Quicksilver estimates that it had approximately
1.9 Tcfe of proved reserves in the Fort Worth Basin as
of December 31, 2008, which also yielded total production
of approximately 71.9 Bcfe, in 2008.
Substantial Fort Worth Basin acreage
position.
As of December 31, 2008, Quicksilver
held approximately 192,000 net acres in the Fort Worth
Basin with several years worth of remaining drilling
locations.
Proven track record.
As of
December 31, 2008, Quicksilver had drilled a total of
703 gross wells in the Fort Worth Basin since it began
exploration and development operations in 2003. In 2008,
Quicksilver drilled 255 gross wells and tied 256 gross
wells into sales.
Active development program in the Fort Worth
Basin.
Quicksilver has allocated approximately
$475 million of its 2009 capital budget to the development
of its acreage within the Fort Worth Basin.
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 and processing needs.
We
expect that the primary growth in our gathering and processing
volumes will come from Quicksilvers volume.
Quicksilvers announced capital plans for 2009 indicate
continued investment in the Fort Worth Basin that should
result in 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
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Quicksilver do not restrict our ability to provide services to
other natural gas producers. We aim to attract increased
gathering and processing volumes from third parties by marketing
our midstream services, expanding our gathering system and
processing capabilities and providing superior customer service
to these natural gas producers. Further, the petroleum price
decreases during the second half of 2008 and the high costs of
entry into the midstream business serve as barriers to
competitors from entering the market and heighten our ability to
compete for production from third parties.
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,
and we intend to structure all of our future contracts
similarly. We also intend to continue to pursue 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 intend to increase throughput, which
improves operational efficiencies and enhances overall asset
utilization. At the end of 2008, we were processing
approximately 170 MMcfd at the Cowtown Plant and we
expanded our processing capacity by an additional 125 MMcfd
to 325 MMcfd with the addition of the Corvette Plant that
was placed into service during the first quarter of 2009.
Pursuing midstream acquisitions.
We plan
to pursue strategic midstream acquisition opportunities that
will complement and expand our existing business for volumes
from both 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 the acquisition, such
as return on capital and cash flow stability, 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 73% of our outstanding units,
including all of the general partner interest. Given its
relationship with us, we believe Quicksilver will have a vested
interest in our growth and overall success, thereby looking to
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 are less
risks associated with our capital expenditures, because we can
coordinate our capacity additions with Quicksilvers
production growth and associated gathering and processing needs.
Quicksilver is an active operator and growing
producer in the Fort Worth Basin.
Quicksilvers
average annual natural gas production from the Fort Worth
Basin reached 259 MMcfed during the fourth quarter of 2008.
Quicksilver continues to develop its acreage in the
Fort Worth Basin in pursuit of reserves and production. We
expect its continued development in the Fort Worth Basin to
increase throughput of our gathering and processing systems.
Our assets are strategically located in the
Fort Worth Basin to attract volumes from third parties.
We believe that the Fort Worth Basin, particularly the
southern portion of the basin in which we concentrate, 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.
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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
transporting NGLs.
We have the financial flexibility to pursue
growth opportunities.
At December 31, 2008, the
lenders commitments under our credit agreement were
$235 million and may be further increased to as much as
$350 million. Based on our results through
December 31, 2008, our total borrowing capacity is
$235 million and our borrowings were $174.9 million.
The facility, which matures August 10, 2012, may be
extended up to two additional years. The facility is available
for capital expenditures, acquisitions and other general
partnership purposes. We believe that the current and future
capacity under the facility, 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.
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 the natural gas
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 and processing, with all
of our operations conducted in the Quicksilver Counties in Texas.
Properties
- Our Assets and Operations
KGS assets consist of the following:
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The Cowtown System, which includes:
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the Cowtown Pipeline, which consists of a pipeline gathering
system and gas compression facilities in the southern portion of
the Fort Worth Basin that gathers natural gas produced by
KGS customers and delivers it for processing;
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the Cowtown Plant, in Hood County, Texas, which consists of a
125 MMcfd natural gas processing unit and a 75 MMcfd
natural gas processing unit which extract NGLs from the natural
gas stream and deliver customers residue gas to
unaffiliated pipelines for transport and sale
downstream; and
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the Corvette Plant, in Hood County, Texas, which was placed in
service during the first quarter 2009 and consists of a
125 MMcfd natural gas processing unit that extracts NGLs
from the natural gas stream and delivers KGS customers
residue gas to unaffiliated pipelines for transport and sale
downstream.
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The Lake Arlington Dry System, located in Tarrant County, Texas,
which consists of a pipeline gathering system and a gas
compression facility, which we purchased from Quicksilver in the
fourth quarter of 2008. This system is connected to unaffiliated
pipelines for sale downstream.
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As more fully described in Note 2 to the consolidated
financial statements, KGS financial statements also
include the operations of a gathering system in Hill County,
Texas (Hill County Dry System). This system gathers
production from the Fort Worth Basin and delivers it to
unaffiliated pipelines for sale downstream.
KGS manages approximately 350 miles of natural gas
gathering pipelines, ranging in size up to 20 inches in
diameter, all within the Fort Worth Basin.
At the Cowtown Plant, our customers residue gas is
delivered to several large unaffiliated parties for further
transport downstream and their extracted NGLs are transported to
two large unaffiliated pipelines through our NGL pipelines. For
the fourth quarter of 2008, the Cowtown Plant had a total
average throughput of 167 MMcfd of natural gas, resulting
in average NGL recovery of 19,183 Bbld.
8
Since our inception in 2004, we have made substantial capital
expenditures in support of Quicksilvers production growth
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.
We have an option to repurchase certain Cowtown Pipeline Assets
from Quicksilver at their original cost in or before 2011 based
upon the expected timing of their commencement of commercial
service. Additionally, we have the obligation in or before 2011
to purchase the Hill County Dry System from Quicksilver at its
fair market value based upon the expected timing of its
commerciality. We have significant continuing involvement in the
operation of the Cowtown Pipeline Assets and the Hill County Dry
System and intend to purchase them. Therefore, the original cost
of these properties has been included in both property, plant
and equipment and our repurchase obligations to Quicksilver.
Similarly, our results of operations include the revenues and
expenses attributable to these assets. See additional discussion
in Note 2 under Repurchase Obligations to
Quicksilver, in Item 8. Financial Statements
and Supplementary Data of this annual report.
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. Nonetheless, we do not believe
that any of these encumbrances will materially detract from the
value of our properties or from our interest in these properties
or interfere with their use in the operation or 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 1997, 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 five years. We believe that improved
drilling and production techniques have increased the production
from the Barnett Shale formation within this basin, making 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 Quicksilver
Counties, 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 with throughput from other existing
or new customers. During 2008, Quicksilver accounted for more
than 80% of our revenues, making it by far the largest user of
our service offerings. No other customer contributed in excess
of 10% of our revenues.
Competition
During 2008, more than 80% of our total natural gas gathering
and processing volumes were comprised of gas owned or controlled
by Quicksilver. We have a commitment from Quicksilver through
2017 to dedicate to us all of its natural gas production from
the Quicksilver Counties. Therefore, there is little likelihood
that a competitor could effectively compete for
Quicksilvers gathering and processing needs within the
Quicksilver Counties.
If we expand our business in the future, either through organic
growth or acquisitions, and are successful in attracting volumes
from other producers, we could face increased competition. We
anticipate that our primary competitors for unaffiliated volumes
in the Quicksilver Counties are Crosstex Energy LP, DCP
Midstream LLC and Energy Transfer Partners, L.P. We believe that
we are able to compete with other systems located in the
Quicksilver Counties 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.
9
Safety
and Maintenance Regulation
We are subject to regulation by the DOT, under the Accountable
Pipeline and Safety Partnership Act of 1996, also known as the
Hazardous Liquid Pipeline Safety Act, and comparable state
statutes, which relate to the design, installation, testing,
construction, operation, replacement and management of pipeline
facilities. Any entity that owns or operates 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 believe that we are in material compliance with
all regulations imposed by the DOT pursuant to the Hazardous
Liquid Pipeline Safety Act.
We are also 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
costs of approximately $1.7 million through 2011 to conduct
testing under these programs. 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 including OSHA and comparable state
statutes, whose purpose is to protect the health and safety of
workers, both generally and within the pipeline industry. The
OSHA hazard communication standard, the EPA community
right-to-know regulations under Title III of the federal
Superfund Amendment and Reauthorization Act and comparable state
statutes require that information be maintained concerning
hazardous materials used or produced in our operations and that
this information be provided to employees, state and local
government authorities and citizens. We are also subject to OSHA
Process Safety Management regulations, which 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 do not anticipate
any significant challenges in complying with laws and
regulations applicable to our operations. Our natural gas and
NGL pipelines have continuous inspection and compliance programs
designed to maintain compliance with all regulatory requirements.
Governmental
Regulation
Regulation of pipeline gathering and transportation services,
natural gas sales and transportation of NGLs may affect certain
aspects of our business and the market for our products and
services.
State regulation of gathering facilities generally includes
various safety, environmental and, in some circumstances,
nondiscriminatory take requirements, complaint-based rate
regulation or general utility regulation.
We are subject to rate regulation under the Texas Utilities
Code, as implemented by the TRRC, and have a tariff on file with
the TRRC. Generally, the TRRC has vested with 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 under Texas law unless challenged in
a complaint. We cannot predict whether such a complaint will be
filed against us or whether the TRRC will change its regulation
of these rates. Failure to comply with the Texas Utilities Code
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.
10
The TRRCs 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.
We own and operate an intrastate common carrier NGL pipeline
subject to the regulation of the TRRC. The TRRC 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 also limit rates to
provide no more than a fair return on the aggregate value of the
pipeline property used to render services.
Environmental
Matters
General.
Our natural gas gathering and processing,
and NGL transportation activities are subject to stringent and
complex federal, state, and local laws and regulations governing
environmental protection as well as the discharge of materials
into the environment. These laws and regulations can restrict or
impact our business activities in many ways, such as,
restricting the way we can handle or dispose of our wastes;
requiring remedial action to mitigate pollution conditions that
may be caused by our operations or that are attributable to
former operators; and enjoining some or all of the operations of
facilities deemed in
non-compliance
with permits issued pursuant to such environmental laws and
regulations. Failure to comply with these laws and regulations
may result in the assessment of administrative, civil and
criminal penalties, the imposition of remedial requirements, and
the issuance of orders enjoining future operations. Certain
environmental statutes impose strict, joint and several
liability for costs required to clean up and restore sites where
substances or wastes have been disposed or otherwise released
into the environment. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the
release of substances or wastes into the environment.
We believe that our operations are in substantial compliance
with applicable environmental laws and regulations and that
compliance with existing federal, state and local environmental
laws and regulations will not have a material adverse effect on
our business, financial position or results of operations.
Nevertheless, the trend in environmental regulation is to place
more restrictions and limitations on activities that may affect
the environment. As a result, there can be no assurance as to
the amount or timing of future expenditures for environmental
compliance or remediation, and actual future expenditures may be
different from the amounts we currently anticipate. Moreover, we
cannot assure you that future events, such as changes in
existing laws, the promulgation of new laws, or the development
or discovery of new facts or conditions will not cause us to
incur significant costs.
Hazardous Waste.
Our operations generate wastes,
including some hazardous wastes, that may be subject to the
federal Resource Conservation and Recovery Act, or RCRA, and
comparable state laws, which impose detailed requirements for
the handling, storage, treatment and disposal of hazardous and
solid waste. RCRA currently exempts many natural gas gathering
and field processing wastes from classification as hazardous
waste. Specifically, RCRA excludes from the definition of
hazardous waste produced waters and other wastes associated with
the exploration, development, or production of crude oil and
natural gas. However, these oil and gas exploration and
production wastes may still be regulated under state law or the
less stringent solid waste requirements of RCRA. Moreover,
ordinary industrial wastes such as paint wastes, waste solvents,
laboratory wastes, and waste compressor oils may be regulated as
hazardous waste. The transportation of natural gas and NGL in
pipelines may also generate some hazardous wastes that are
subject to RCRA or comparable state law requirements.
Site Remediation.
The Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, also known
as the Superfund law, and comparable state laws impose liability
without regard to fault or the legality of the original conduct,
on certain classes of persons responsible for the release of
hazardous substances into the environment. Such classes of
persons include the current and past owners or operators of
sites where a hazardous substance was released, and companies
that disposed or arranged for disposal of hazardous substances
at offsite locations, such as landfills. Although petroleum as
well as natural gas is excluded from CERCLAs definition of
hazardous substance, in the course of our ordinary
operations, we generate wastes that may fall within the
definition of a hazardous substance. CERCLA
authorizes the U.S. Environmental Protection Agency, or
EPA, and in some cases, third parties to take actions in
response to threats to the public health or the environment and
to seek to recover from the responsible classes of persons
11
the costs they incur. Under CERCLA, we could be subject to joint
and several, strict liability for the costs of cleaning up and
restoring sites where hazardous substances have been released
into the environment, for damages to natural resources, and for
the costs of certain health studies.
We currently own or lease, and may have in the past owned or
leased, properties that for many years have been used for the
measurement, gathering, field compression and processing of
natural gas. 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 owned or leased by us or on
or under other locations where such substances have been taken
for disposal. In addition, some of the properties may have been
operated by third parties or by previous owners whose treatment
and disposal or release of petroleum hydrocarbons or wastes was
not under our control. These properties and the substances
disposed or released on them may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, we could be required to
remove previously disposed wastes, including waste disposed of
by prior owners or operators; remediate contaminated property,
including groundwater contamination, whether from prior owners
or operators or other historic activities or spills; or perform
remedial closure operations to prevent future contamination.
Air Emissions.
The Clean Air Act, and comparable
state laws, regulate emissions of air pollutants from various
industrial sources, including processing plants and compressor
stations, and also impose various monitoring and reporting
requirements. Such laws and regulations may require
pre-approval
for the construction or modification of certain projects or
facilities expected to produce air emissions or result in an
increase of existing air emissions; application for, and strict
compliance with, air permits containing various emissions and
operational limitations; or the utilization of specific emission
control technologies to limit emissions. Failure to comply with
these requirements could result in monetary penalties,
injunctions, conditions or restrictions on operations, and
potentially criminal enforcement actions. We may incur capital
expenditures in the future for air pollution control equipment
in connection with obtaining or maintaining operating permits
and approvals for air emissions. However, we do not believe that
such requirements will have a material adverse affect on our
operations.
Water Discharges.
The Federal Water Pollution
Control Act, or the Clean Water Act, and analogous state laws
impose restrictions and strict controls with respect to the
discharge of pollutants, including spills and leaks of oil and
other substances, into waters of the United States. The
discharge of pollutants into regulated waters is prohibited,
except in accordance with the terms of a permit issued by EPA or
an analogous state agency. Federal and state regulatory agencies
can impose administrative, civil and criminal penalties for
non-compliance
with discharge permits or other requirements of the Clean Water
Act and analogous state laws and regulations.
In addition, the U.S. Oil Pollution Act (OPA)
requires owners and operators of facilities that could be the
source of an oil spill into such areas as rivers, creeks,
wetlands and coastal waters, to adopt and implement plans and
procedures to prevent any such spill. OPA also requires affected
facility owners and operators to demonstrate that they have at
least $35 million in financial resources to pay for the
costs of cleaning up an oil spill and compensating any parties
damaged by an oil spill. Substantial civil and criminal fines
and penalties can be imposed for violations of OPA and other
environmental statutes.
Other Laws and Regulations.
Recent studies have
suggested that emissions of certain gases may be contributing to
warming of the Earths atmosphere. In response to these
studies, many foreign nations have agreed to limit emissions of
greenhouse gases, pursuant to the United Nations
Framework Convention on Climate Change, also known as the
Kyoto Protocol. Methane, a primary component of
natural gas, and carbon dioxide, a byproduct of the burning of
oil and natural gas, and refined petroleum products, are
greenhouse gases regulated by the Kyoto Protocol.
Although the United States is not participating in the Kyoto
Protocol, the current session of Congress is considering climate
control legislation, with multiple bills having already been
introduced in the Senate that propose to restrict greenhouse gas
emissions. Several states have already adopted legislation,
regulations
and/or
regulatory initiatives to reduce emissions of greenhouse gases.
For instance, California adopted the California Global
Warming Solutions Act of 2006, which requires the
California Air Resources Board to achieve a 25% reduction in
emissions of greenhouse gases
12
from sources in California by 2020. Additionally, the
U.S. Supreme Court has begun reviewing the
U.S. Circuit Court of Appeals for the District of
Columbias ruling in
Massachusetts, et al v.
EPA
, in which the appellate court held that the
U.S. Environmental Protection Agency had discretion under
the Clean Air Act to refuse to regulate carbon dioxide emissions
from mobile sources. Passage of climate control legislation by
Congress or a Supreme Court reversal of the appellate decision
could result in federal regulation of carbon dioxide emissions
and other greenhouse gases. Any federal or state restrictions on
emissions of greenhouse gases that may be imposed in areas of
the United States in which we conduct operations could adversely
affect our business and demand for our services.
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 the subject of a services and
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 as set forth in the Omnibus Agreement.
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. Unitholders
may request copies of these documents by writing to the Investor
Relations Department at 777 West Rosedale Street,
Fort Worth, Texas 76104.
You should carefully consider the following risk factors
together with all of the other information included in this
annual report, including the financial statements and related
notes, 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 herein and elsewhere in this annual
report could have a material adverse effect on our business,
financial position, results of operations and cash flows. In
that case, 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 single natural gas producer,
Quicksilver, for a majority of our volumes. The loss of this
customer would result in a material decline in our volumes,
revenues and cash available for distribution.
We rely on Quicksilver for the majority of our natural gas
throughput. During 2008, Quicksilver accounted for more than 80%
of our natural gas throughput. 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
Quicksilvers production from the Quicksilver Counties
after the initial
10-year
term
of the contract. Furthermore, during the term of the contract
and thereafter, even if we are able to renew this contract,
Quicksilver may have decreased 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 revenues and cash available for
distribution.
Quicksilver has no contractual obligation to develop its
properties in the Quicksilver Counties and may determine in the
future that drilling activity in other areas is strategically
more attractive than in the
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Quicksilver Counties. A shift in Quicksilvers focus away
from the Quicksilver Counties could result in reduced volumes
gathered and processed by us and a material decline in our
revenues 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 $0.37 per
unit per quarter, or $1.48 per unit per year, we will require
available cash of approximately $9.1 million per quarter,
or $36.3 million per year. The amount of cash we can
distribute depends principally upon the amount of cash we
generate from our operations, which will fluctuate from quarter
to quarter based on, among other things:
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the fees we charge and the margins we realize for our services;
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the level of production of, 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, and
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prevailing economic conditions.
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In addition, the actual amount of cash we have available for
distribution will depend on other factors, some of which may be
beyond our control, including:
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the level of capital expenditures we make;
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our ability to make borrowings under our revolving 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
$36.3 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.
Estimates of oil and gas reserves depend on many
assumptions that may be inaccurate and any material inaccuracies
could materially reduce the production that we gather and
process and consequently could adversely affect our financial
performance and our ability to make cash distributions.
The reserve information for Quicksilver or any company
represents only estimates based on reports prepared by petroleum
engineers. Such estimates are calculated using oil and gas
prices in effect on the dates indicated in the reports. Any
significant price changes may have a material effect on the
quantity and recoverability of reserves. Petroleum engineering
is a complex and subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact
manner. Estimates of economically recoverable oil and gas
reserves and of future net cash flows depend upon a number of
variable factors and assumptions, including:
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historical production from the area compared with production
from other comparable producing areas;
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the assumed effects of regulations by governmental agencies;
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assumptions concerning future oil and gas prices; and
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assumptions concerning future operating costs, severance and
excise taxes, development costs and workover and remedial costs.
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Because all reserve estimates can be subjective, the number of
wells that can be economically drilled, the quantities of oil
and gas that are ultimately recovered and the timing of the
recovery of oil and gas reserves may differ materially from
those assumed in estimating reserves. Furthermore, different
reserve engineers may interpret different results from the same
available data. Actual production could vary materially from
estimates of reserves, which could result in material reductions
in the volumes we gather and process and consequently could
adversely affect our revenues and cash available for
distribution.
Because of the natural decline in production from existing
wells in our area of operations, our success depends on our
ability to obtain new sources of 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 third
parties from their successful new wells.
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 new natural gas reserves. Recently
announced decreases in drilling and capital investments in the
Fort Worth Basin will decrease expected 2009 production
activity. Drilling activity generally decreases as natural gas
prices decrease. Declines in natural gas prices could 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 system. Because of these factors, even if new
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 in the Quicksilver Counties.
If reductions in drilling activity or 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 these projects, they may not be completed on schedule,
at the budgeted cost, or at all. Moreover, our revenues 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 do 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
15
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 that would increase the cash generated by
operations. 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 that we
believe will be accretive, these acquisitions may nevertheless
result in a decrease in the cash generated by operations.
Any acquisition involves potential risks, including, among other
things:
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mistaken assumptions about volumes, revenues and costs,
including synergies;
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an inability to integrate successfully the businesses 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
revenues, and if the utilization of these assets were reduced
significantly, there could be a material adverse effect on our
revenues, 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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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
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 the Cowtown Plant 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 gas. In light
of our asset concentration, if such a termination were to occur,
it could cause our revenues, earnings and cash distributions to
our unitholders, to decrease significantly.
Pipelines and facilities interconnected to our natural gas
and NGL pipelines and facilities could become unavailable to
transport natural gas and NGLs, and our revenues and cash
available for distribution could be adversely affected.
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We depend upon pipelines and other facilities owned by others to
provide delivery options from our pipelines and facilities for
our customers benefit. 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 become
unavailable to transport natural gas and NGLs, our revenues and
cash available for distribution could be adversely affected.
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 revenues to
decline and operating expenses to increase.
Our natural gas gathering and intrastate transportation
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 gathering
facilities and intrastate transportation pipelines could change
based on future determinations by FERC and the courts. If our
gas gathering and processing agreement with Quicksilver, or our
performance under that agreement, becomes subject to FERC
jurisdiction, the agreement may be terminated.
State and local regulations also affect our business. Common
purchaser statutes generally require gatherers to purchase
without undue discrimination as to source of supply or producer.
These statutes restrict our right to decide whose production we
gather or transport. 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 local 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 and regulations that
may expose us to significant costs and liabilities.
Our operations are subject to stringent and complex federal,
state and local environmental laws and regulations. We may incur
substantial costs to conduct our operations in compliance with
these laws and regulations. Moreover, new or stricter
environmental laws, regulations or enforcement policies could be
implemented that significantly increase our compliance or
remediation costs.
Failure to comply with environmental laws and regulations or the
permits issued under them may result in the assessment of
administrative, civil, and criminal penalties, the imposition of
remedial obligations and the issuance of injunctions limiting
our operations. In addition, strict joint and several
liabilities may be imposed under environmental laws, which could
cause us to become liable for the conduct of others or for
consequences of our own actions that did comply at the time
those actions were taken. Private parties may also have the
right to pursue legal actions against us to enforce compliance,
as well as to seek damages for
non-compliance,
with environmental laws and regulations or for personal injury
or property damage that may result from environmental and other
impacts of our operations. We may not be able to recover some or
any of these costs through insurance or increased revenues,
which may materially reduce our earnings and have a material
adverse effect on our ability to make cash distributions.
17
We may incur significant costs and liabilities as a result
of pipeline integrity management program testing and any related
pipeline repair or preventative or remedial measures.
The DOT requires pipeline operators to develop integrity
management programs for transportation pipelines located where a
leak or rupture could harm high consequence areas.
The regulations require operators to:
|
|
|
|
|
perform ongoing assessments of pipeline integrity;
|
|
|
identify and characterize applicable threats to pipeline
segments that could impact a high consequence area;
|
|
|
maintain processes for data collection, integration and analysis;
|
|
|
repair and remediate pipelines as necessary; and
|
|
|
implement preventive and mitigating actions.
|
We currently estimate that we will incur costs of approximately
$1.7 million through 2011 to perform 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.
We will be required to make substantial capital
expenditures to increase our asset base. 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.
In order to increase our asset base, we will need to make
expansion capital expenditures. If we do not make sufficient or
effective expansion capital expenditures, we may be unable to
expand our business operations or increase our future cash
distributions. To fund our expansion capital expenditures, we
will be required to use cash from our operations, incur
borrowings or sell additional common units or other securities.
Such uses of cash from operations will reduce cash otherwise
available for distribution to our unitholders. 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
adversely impact our ability to pay 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.
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 maintain
valid 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 revenues, earnings and ability to make cash
distributions.
Our business involves many hazards and operational risks,
some of which may not be fully covered by insurance. The
occurrence of a significant accident or other event that is not
fully insured could curtail our operations and have a material
adverse effect on our cash flows and, accordingly, the market
price for our common units.
Our operations are subject to many risks inherent in the
midstream business including:
|
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|
|
|
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;
|
18
|
|
|
|
|
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 are not fully insured against all risks inherent to our
business. For example, we do not have any property insurance on
any of our underground pipeline systems that would cover damage
to the pipelines. We are not insured against all environmental
accidents that might occur which may include certain types of
toxic tort claims. Any significant accident or event that is not
fully insured could adversely affect our earnings and cash
distributions. In addition, we may not be able to economically
obtain or maintain insurance of the type and amount 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 for reduced amounts of coverage. Additionally, we
may be unable to recover from prior owners of our assets,
pursuant to our indemnification rights, for potential
environmental liabilities. We currently carry business
interruption insurance; however, any catastrophic event of the
sort that is not covered by our business interruption or other
insurance could have a material adverse effect on our ability to
distribute cash to our unitholders.
Restrictions in our revolving credit agreement limit our
ability to make distributions to unitholders and may limit our
ability to capitalize on acquisitions and other business
opportunities.
Our revolving credit agreement contains restrictive and
financial covenants. Any subsequent replacement of our credit
agreement or any new indebtedness could have similar or greater
restrictions.
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 dependent on Quicksilver for the preponderance of 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 counterparty or with a more diversified group of
customers, and unless and until we significantly increase our
customer base, we expect to remain subject to significant and
non-diversified risk of nonpayment or late payment of 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. 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 2008
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.
19
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
For Registrants Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities
|
Market
Information
Our common units are traded on the NYSE Arca exchange 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 during the period from August 10, 2007,
the date of our IPO, through December 31, 2008.
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|
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|
|
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|
Distributions
|
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|
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|
|
|
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|
Per Common
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|
Quarter Ended
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|
High
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|
Low
|
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|
Unit
|
|
|
Record Date
|
|
Payment Date
|
|
September 30, 2007
|
|
$
|
24.98
|
|
|
$
|
20.17
|
|
|
$
|
0.1675
|
(1)
|
|
Oct. 31, 2007
|
|
Nov. 14, 2007
|
December 31, 2007
|
|
$
|
25.02
|
|
|
$
|
23.15
|
|
|
$
|
0.300
|
|
|
Jan. 31, 2008
|
|
Feb. 14, 2008
|
March 31, 2008
|
|
$
|
25.75
|
|
|
$
|
22.15
|
|
|
$
|
0.315
|
|
|
Apr. 30, 2008
|
|
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
|
(2)
|
|
Feb. 3, 2009
|
|
Feb. 13, 2009
|
|
|
|
(1)
|
|
Represents a pro rata portion of a $0.30 quarterly distribution
from the date of the closing of our IPO paid on all units to
holders of record as of the close of business on
October 31, 2007
|
(2)
|
|
The 4
th
quarter 2008 distribution will be reflected as 2009 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, 2008.
The last reported sale price of our common units on NYSE Arca on
February 10, 2009, was $14.00. As of that date, there were
2,948 holders of record.
Cash
Distribution Policy
Our cash distribution policy reflects a basic judgment that our
unitholders are best served by distributing our cash available
after expenses and reserves rather than retaining it. Because we
will strive to finance most of our maintenance capital
expenditures through cash generated from operations, we believe
that our investors are generally best served by distributing all
of our available cash. Since we are not subject to an
entity-level 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. Based on uncertainty within the credit markets,
we decided to limit our distribution for the fourth quarter of
2008 to $0.37, although the amount earned was substantially
higher. Our ability to make quarterly distributions is subject
to certain restrictions, including restrictions under our debt
agreements and Delaware law.
20
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 8, 2007 to December 31, 2008, assuming an
initial investment of $100.
Comparison
of Cumulative Total Return
21
|
|
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 for each of the four
years ended December 31, 2008, and for the period from
January 21, 2004 (date of inception) to December 31,
2004.
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|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
Period from
|
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|
|
|
|
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|
|
|
|
|
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|
January 21,
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 to
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Results Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(in thousands, except per unit and volume data)
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
78,058
|
|
|
$
|
35,941
|
|
|
$
|
13,918
|
|
|
|
4,868
|
|
|
$
|
36
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
41,223
|
|
|
|
22,961
|
|
|
|
11,375
|
|
|
|
3,315
|
|
|
|
33
|
|
Operating income
|
|
|
36,835
|
|
|
|
12,980
|
|
|
|
2,543
|
|
|
|
1,553
|
|
|
|
3
|
|
Income before income taxes
|
|
|
26,669
|
|
|
|
8,569
|
|
|
|
2,556
|
|
|
|
1,553
|
|
|
|
3
|
|
Net income
|
|
|
26,416
|
|
|
|
8,256
|
|
|
|
2,421
|
|
|
|
1,553
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per unit
|
|
$
|
0.96
|
|
|
$
|
0.20
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Cash distributions per unit
|
|
$
|
1.3850
|
(1)
|
|
$
|
0.4675
|
(1)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
52,683
|
|
|
$
|
14,949
|
|
|
$
|
6,445
|
|
|
$
|
2,304
|
|
|
$
|
29
|
|
Investing activities
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
|
|
(78,360
|
)
|
|
|
(43,707
|
)
|
|
|
(6,020
|
)
|
Financing activities
|
|
|
94,574
|
|
|
|
57,176
|
|
|
|
74,712
|
|
|
|
41,403
|
|
|
|
5,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes gathered (MMcf)
|
|
|
75,701
|
|
|
|
34,995
|
|
|
|
14,263
|
|
|
|
3,561
|
|
|
|
103
|
|
Volumes processed (MMcf)
|
|
|
56,225
|
|
|
|
30,802
|
|
|
|
13,496
|
|
|
|
3,561
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross
margin
(2)(4)
|
|
$
|
51,401
|
|
|
$
|
21,050
|
|
|
$
|
5,506
|
|
|
$
|
2,167
|
|
|
$
|
11
|
|
EBITDA
(3)(5)
|
|
|
51,412
|
|
|
|
21,286
|
|
|
|
5,519
|
|
|
|
2,167
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
488,120
|
|
|
$
|
273,948
|
|
|
$
|
130,791
|
|
|
$
|
53,783
|
|
|
$
|
6,603
|
|
Total assets
|
|
|
493,015
|
|
|
|
278,410
|
|
|
|
134,623
|
|
|
|
53,783
|
|
|
|
6,603
|
|
Long-term debt
|
|
|
174,900
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other long-term
obligations
(6)
|
|
|
180,803
|
|
|
|
135,613
|
|
|
|
503
|
|
|
|
29
|
|
|
|
-
|
|
Net equity
|
|
|
105,703
|
|
|
|
110,200
|
|
|
|
118,652
|
|
|
|
48,949
|
|
|
|
5,993
|
|
|
|
|
(1)
|
|
2008 reported amount includes a $0.37 distribution for the
fourth quarter of 2008 on all common units to holders of record
as of the close of business on February 3, 2009. 2007
reported amount includes a $0.30 distribution for the fourth
quarter of 2007 on all common units to holders of record as of
the close of business on January 31, 2008.
|
|
(2)
|
|
Defined as total revenues less operations and maintenance
expense and general and administrative expense. For additional
information regarding Adjusted Gross Margin, including a
reconciliation of Adjusted Gross Margin to Net Income as
determined in accordance with GAAP, see Results of
Operations in Item 7 of this annual report.
|
|
(3)
|
|
Defined as net income plus income tax provision, interest
expense, and depreciation and amortization expense. For
additional information regarding EBITDA, including a
reconciliation of EBITDA to Net Income as determined in
accordance with GAAP, see Results of Operations in
Item 7 of this annual report.
|
22
|
|
|
(4)
|
|
For 2005, gross margin and EBITDA of $2.2 million less
$0.6 million in depreciation and amortization expense
equals reported net income of $1.6 million.
|
|
(5)
|
|
For 2004, gross margin and EBITDA of $11,000 less $8,000 in
depreciation and amortization expense equals reported net income
of $3,000.
|
|
(6)
|
|
Other long-term obligations include the following: Note payable
to Quicksilver, Repurchase obligations to Quicksilver and Asset
retirement obligations.
|
23
|
|
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:
|
|
|
Overview
|
|
Results of Operations
|
|
Liquidity and Capital Resources
|
|
Critical Accounting Estimates
|
OVERVIEW
We are a growth-oriented Delaware limited partnership engaged in
gathering and processing 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 these
services primarily to Quicksilver, the owner of our general
partner, and to other natural gas producers in this area. During
2008, more then 80% of our total gathering 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 and process 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 reduced
production volumes by our customers and a resulting decrease in
our revenues. Our contracts provide relatively stable cash
flows, but little upside in higher commodity price environments.
All of our natural gas volumes gathered and processed during
2008 was subject to fee-based contracts.
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 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. 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 where a limited number of
midstream companies conduct business.
|
We routinely monitor producer activity in the areas we serve to
identify new supply opportunities.
Adjusted Gross Margin
Adjusted gross margin
information is presented as a supplemental disclosure because it
is a key measure used by management to evaluate the relationship
between our gathering and processing revenues and our 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 below.
Operating Expenses
Operating expenses are a
separate measure that we use to evaluate 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
24
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.
|
Items Impacting
Comparability of Our Financial Results
Our historical results of operations for the periods presented
may not be comparable to prior periods or to future expected
results for the reasons described below:
|
|
|
|
|
Quicksilvers Barnett Shale operations began in 2004 and
have grown significantly from these initial levels;
|
|
|
as we expanded our systems capacity we have incurred
expenses that we do not expect to recur;
|
|
|
expenses are largely independent of throughput volumes and are
more directly related to our facilities capacity; and
|
|
|
revenues are highly dependent on producers ability to
develop reserves and to connect producing wells to our system.
|
25
RESULTS
OF OPERATIONS
The following table summarizes our combined results of
operations for each of the three years in the period ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except volume data)
|
|
|
Total revenues
|
|
$
|
78,058
|
|
|
$
|
35,941
|
|
|
$
|
13,918
|
|
Operations and maintenance expense
|
|
|
20,250
|
|
|
|
11,512
|
|
|
|
7,475
|
|
General and administrative expense
|
|
|
6,407
|
|
|
|
3,379
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross margin
|
|
|
51,401
|
|
|
|
21,050
|
|
|
|
5,506
|
|
Other income
|
|
|
11
|
|
|
|
236
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
51,412
|
|
|
|
21,286
|
|
|
|
5,519
|
|
Depreciation and accretion expense
|
|
|
14,566
|
|
|
|
8,070
|
|
|
|
2,963
|
|
Interest expense
|
|
|
10,177
|
|
|
|
4,647
|
|
|
|
-
|
|
Income tax provision
|
|
|
253
|
|
|
|
313
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,416
|
|
|
$
|
8,256
|
|
|
$
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes gathered (MMcf)
|
|
|
75,701
|
|
|
|
34,995
|
|
|
|
14,263
|
|
Volumes processed (MMcf)
|
|
|
56,225
|
|
|
|
30,802
|
|
|
|
13,496
|
|
The following table summarizes our volumes for each of the three
years ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
|
|
Processing
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(MMcf)
|
|
|
Cowtown System
|
|
|
57,550
|
|
|
|
32,673
|
|
|
|
14,263
|
|
|
|
56,225
|
|
|
|
30,802
|
|
|
|
13,496
|
|
Lake Arlington Dry System
|
|
|
13,067
|
|
|
|
1,611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hill County Dry System
|
|
|
5,084
|
|
|
|
711
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
75,701
|
|
|
|
34,995
|
|
|
|
14,263
|
|
|
|
56,225
|
|
|
|
30,802
|
|
|
|
13,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in our revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
|
|
|
Processing
|
|
|
Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Revenue for the year ended December 31, 2006
|
|
$
|
6,513
|
|
|
$
|
7,405
|
|
|
$
|
-
|
|
|
$
|
13,918
|
|
Volume changes
|
|
|
9,990
|
|
|
|
10,425
|
|
|
|
-
|
|
|
|
20,415
|
|
Price changes
|
|
|
359
|
|
|
|
724
|
|
|
|
525
|
|
|
|
1,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2007
|
|
$
|
16,862
|
|
|
$
|
18,554
|
|
|
$
|
525
|
|
|
$
|
35,941
|
|
Volume changes
|
|
|
22,409
|
|
|
|
16,045
|
|
|
|
-
|
|
|
|
38,454
|
|
Price changes
|
|
|
2,402
|
|
|
|
886
|
|
|
|
375
|
|
|
|
3,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2008
|
|
$
|
41,673
|
|
|
$
|
35,485
|
|
|
$
|
900
|
|
|
$
|
78,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Compared with 2007
Total Revenues
and
Volumes
Approximately $38.5 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. We expect our revenues to increase further
as more of the Fort Worth Basin is developed and more
reserves are produced. Further, our expanded facilities,
including the Corvette Plant which was placed into service in
first quarter of 2009, will likely result in more throughput and
higher revenues for us.
26
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 placed in service in March
2007. 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 Corvette Plant, although we expect these
costs to grow at a slower rate than gathering and processing
volume increases. We expect the Corvette Plant and related
facilities operations and maintenance expenses to average
$1.8 million per quarter in 2009.
General and Administrative Expense
The
increase in general and administrative expense was primarily the
result of of our expanded operations and the resulting increase
in administrative and managerial personnel and their 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
the years ended December 31, 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 EBITBA
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. Depreciation and accretion expenses
will likely increase by an estimated $0.9 million per
quarter in 2009 based on the Corvette Plant being placed into
service.
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 revolving credit agreement. Capitalized
interest for 2008 is related to the 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:
|
|
|
|
|
|
|
|
|
Repurchase obligation
|
|
$
|
6,023
|
|
|
$
|
2,625
|
|
Subordinated note to Quicksilver
|
|
|
2,802
|
|
|
|
1,669
|
|
Revolving credit facility
|
|
|
3,158
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
11,983
|
|
|
|
4,647
|
|
Less interest capitalized
|
|
|
1,806
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
10,177
|
|
|
$
|
4,647
|
|
|
|
|
|
|
|
|
|
|
2007
Compared with 2006
Total Revenues
and
Volumes
Approximately $20.4 million of the increase in total
revenues was due to the increase in volumes that we gathered and
processed in the Fort Worth Basin as the exploration and
development efforts in the region advanced. In particular, the
gathering activity on the Cowtown Pipeline and the resulting
processing of that gas drove most of the growth.
Operations and Maintenance Expense
The
increase in operations and maintenance expenses was mainly due
to the additional operating costs related to the natural gas
processing facility that we placed into service in March 2007
and the continued expansion of our natural gas gathering system.
On a per gathered Mcf basis, our operations and maintenance
expense decreased 37% as we better utilized the fixed portion of
our cost structure with higher throughput.
27
General and Administrative Expense
The
increase in general and administrative expense was primarily the
result of the expansion of our operations and the resulting
increase in administrative and managerial personnel and related
expenses to support that growth. Costs related to being a
publicly traded partnership in 2007 also contributed to the
increase in general and administrative expense.
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 40% in 2006 to approximately 59% in 2007,
primarily due to the increase in revenues, which were partially
offset by higher operations and maintenance expense associated
with our current scale of operations and higher general and
administrative expense.
Depreciation and Accretion Expense
Depreciation and accretion expense increased primarily as a
result of the higher gross cost of property, plant and equipment
due to capital expenditures made during 2007 to expand our
gathering network and due to the effect of the processing
facility placed into service during 2007.
Interest Expense
Interest expense increased
primarily due to the repurchase obligation to Quicksilver, the
subordinated note to Quicksilver and the borrowings under the
revolving credit agreement.
LIQUIDITY
AND CAPITAL RESOURCES
The volumes of natural gas gathered and processed through our
systems 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, the 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 substantial portions of its expected 2009
and 2010 production, we cannot predict whether or when natural
gas prices will increase or decrease. In addition, the turmoil
in the credit and financial markets deepened significantly
during the second half of 2008, which resulted in Quicksilver
and other customers announcing year-over-year reductions in
their planned levels of capital expenditures and drilling
activity for 2009. If these conditions were to persist or worsen
over a prolonged period of time, we could experience a reduction
in volumes through our system and therefore a reduction of
revenues and cash flows.
Our sources of liquidity include:
|
|
|
|
|
cash generated from operations;
|
|
|
borrowings under our revolving credit agreement; and
|
|
|
future debt and equity offerings.
|
We believe that the cash generated from these sources will be
sufficient to meet our expected $0.37 per unit quarterly cash
distributions during 2009 and satisfy our short-term working
capital and capital expenditure requirements.
Since the inception of operations in 2004, our cash flows have
been significantly influenced by Quicksilvers production
in the Fort Worth Basin. Quicksilvers average natural
gas production from the Fort Worth Basin reached
259 MMcfed during the fourth quarter of 2008. 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.
Cash
Flows
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
28
$101.9 million related to the Corvette Plant. We believe
that these expenditures will be accretive to future operating
results.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities in 2008
consisted primarily of the proceeds from borrowings under our
credit agreement of $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 Lake Arlington Dry System for
$42.1 million.
2007
Cash Flows Compared to 2006
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 higher gathering and processing
volumes associated with the increased number of Quicksilver
wells connected to our system.
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
transportation network and processing capabilities, as 2006 was
significantly impacted by the construction of one of the
processing units at the Cowtown Plant which was placed in
service during March 2007.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities during 2007 were
significantly impacted by the IPO and IPO-related transactions,
many of which we do not expect to recur, whereas 2006 consisted
of capital contributions to us by Quicksilver and by the private
investors.
Capital
Expenditures
The midstream energy business is capital intensive, requiring
significant investment for the acquisition or development of new
facilities, particularly in emerging production areas such as
the Fort Worth Basin. We categorize our capital
expenditures as either:
|
|
|
|
|
expansion capital expenditures, which are made to construct
additional assets, expand and upgrade existing systems,
including compression, and facilities or acquire additional
assets; or
|
|
|
maintenance capital expenditures, which are made to replace
partially or fully depreciated assets, to maintain the existing
operating capacity of our assets and extend their useful lives,
or to maintain existing system volumes and related cash flows.
|
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.
We have budgeted approximately $35 million in capital
expenditures for 2009, of which $10.0 million is classified
as maintenance capital expenditures. The capital budget includes
approximately $15 million for the construction of pipelines
and gathering systems, approximately $16 million for
compression and approximately $4 million associated with
its natural gas processing plants. The Corvette Plant, with a
design capacity of approximately 125 MMcf per day, was
placed into service in the first quarter of 2009 and increased
our total processing capacity to approximately 325 MMcf per
day.
Additionally, Quicksilver has the right to complete construction
and to operate the new gathering system for the Hill County Dry
System, which we are obligated to purchase from Quicksilver at
fair market value in or before 2011 based on the expected timing
of the systems commerciality. Quicksilver expects to incur
capital expenditures of $12 million for the Hill County Dry
System in 2009.
29
We have the option to purchase the Cowtown Pipeline Assets from
Quicksilver at their original cost within two years after those
assets commence commercial service. We expect to complete their
purchase in or before 2011 based upon the expected timing of
their commencement of commercial service.
We also assist Quicksilver with the operations of other
midstream assets for which we receive a fee of $75,000 per month.
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 revolving credit agreement and operating
cash flows to finance any future growth capital expenditures or
acquisitions.
Revolving
Credit Facility and Subordinated Note
For a complete description of Long Term Debt, see Note 6 to
our consolidated financial statements included in Item 8 of
this annual report, which is incorporated herein by reference.
Repurchase
Obligations to Quicksilver
For a complete description of 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.
Total
Contractual Cash Obligations
The following table summarizes our total contractual cash
obligations as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual
Obligations
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
(in millions)
|
|
|
Long-Term
Debt
(1)
|
|
$
|
228.5
|
|
|
$
|
1.4
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
176.0
|
|
|
$
|
48.9
|
|
|
$
|
-
|
|
Contractual
Obligations
(2)
|
|
$
|
13.8
|
|
|
$
|
13.8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Repurchase
Obligations
(3)
|
|
$
|
123.3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
123.3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Asset Retirement
Obligations
(4)
|
|
$
|
5.2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
370.8
|
|
|
$
|
15.2
|
|
|
$
|
1.1
|
|
|
$
|
124.4
|
|
|
$
|
176.0
|
|
|
$
|
48.9
|
|
|
$
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2008, we had $174.9 million
outstanding under our revolving credit agreement and a
$53.6 million subordinated note payable to Quicksilver.
Based on our debt outstanding and interest rates in effect at
December 31, 2008, we anticipate interest payments to be
approximately $7.5 million in 2009. For each additional
$10.0 million in borrowings, annual interest payments will
increase by approximately $0.3 million. If the committed
amount under our revolving credit agreement were to be fully
utilized by year-end 2009 at interest rates in effect at
December 31, 2008, we estimate that interest payments would
increase by approximately $1.7 million. If interest rates
on our December 31, 2008 variable debt balance of
$228.5 million increase or decrease by one percentage
point, our annual income will decrease or increase by
$2.3 million.
|
|
(2)
|
|
These amounts include agreements for which we have signed
contracts to construct natural gas processing and compression
facilities in various locations. See Note 8 in
Item 8. Financial Statements and Supplementary
Data of this annual report for more information regarding
Commitments and Contingent Liabilities.
|
|
(3)
|
|
We are obligated to purchase the Hill County Dry System from
Quicksilver at its fair market value in or before 2011 based
upon the expected timing of its commerciality. The Repurchase
Obligations to Quicksilver balance of $123.3 million
includes $67.0 million related to Cowtown Pipeline Assets
that we have the option to purchase. We expect to complete the
repurchase of these assets in or before 2011 based upon the
expected timing of their commerciality. The estimated remaining
cost to complete the construction of the assets subject to the
repurchase obligation is approximately
|
30
|
|
|
|
|
$24.0 million. Based on our interest rates in effect at
December 31, 2008, we anticipate non-cash interest expense
to be approximately $5.5 million in 2009.
|
|
(4)
|
|
For more information regarding our Asset Retirement Obligations,
see Note 7 to our consolidated financial statements,
included in Item 8. Financial Statements and Supplementary
Data of this annual report.
|
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 in the United States require 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
Our assets consist primarily of natural gas gathering pipelines,
processing plants, compression facilities and transmission
pipelines. 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 are then depreciated using the straight-line method over
the estimated useful life of the constructed asset. The cost of
renewals and betterments that extend the useful life or
substantially improve the efficiency of property, plant and
equipment are also capitalized. The cost of repairs,
replacements and normal maintenance projects are expensed as
incurred.
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.
Repurchase
Obligations to Quicksilver
We have an option to repurchase certain Cowtown Pipeline Assets
from Quicksilver at original cost in or before 2011 based upon
the expected timing of their commerciality. Additionally, KGS
has an obligation to purchase the Hill County Dry System from
Quicksilver at its fair market value in or before 2011 based
upon the expected timing of its commerciality. KGS has
significant continuing involvement in the operation of the
Cowtown Pipeline Assets and the Hill County Dry System and
intends to purchase those assets from Quicksilver. Accordingly,
the original cost of these assets has been included in both
property, plant and equipment and repurchase obligations to
Quicksilver. Similarly, KGS results of operations include
the revenues and expenses for these operations. Note 2 to
our consolidated financial statements included in Item 8.
of this annual report contains additional discussion of our
repurchase obligations.
Asset
Retirement Obligations
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
long-lived
asset by the same amount as the liability. In periods subsequent
to initial measurement, the asset retirement cost is allocated
to expense on
31
a
straight-line
basis over the assets useful life. 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 original estimate of undiscounted cash flows.
Stock
Based Compensation
Prior to 2007, we issued no
equity-based
compensation awards. During 2007 and 2008, we issued phantom
units to certain independent directors, executive officers and
employees of Quicksilver who provide services to us. We account
for all
share-based
payment transactions by recognizing the cost of such phantom
units in the financial statements at their fair value on the
grant date. The amount of expense we recognize is impacted by
assumptions for forfeiture rates and estimated distributions
during the vesting period.
OFF-BALANCE
SHEET ARRANGEMENTS
We have no
off-balance
sheet arrangements within the meaning of the rules issued by the
SEC.
Recently
Issued Accounting Pronouncements
The information regarding recent accounting pronouncements is
included in Note 2 to our consolidated financial
statements, included in Item 8. Financial Statements
and Supplementary Data 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 is that we are dependent on Quicksilver
for the majority of our natural gas volumes and are consequently
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 contract
counterparty or with a more diversified group of customers.
Unless and until we significantly increase our customer base, we
expect to continue to be subject to significant and
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 customers fail to perform on their financial
obligations to us.
Interest
Rate Risk
As base interest rates remain low, the credit markets have
caused the spreads charged by lenders to increase. As base rate
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 we may have under our revolving credit agreement and
our Subordinated Note and repurchase obligations to Quicksilver.
32
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
QUICKSILVER
GAS SERVICES LP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
33
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
Partnership) as of December 31, 2008 and 2007,
and the related consolidated statements of income,
partners capital and cash flows for each of the three
years in the period ended December 31, 2008. These
financial statements are the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on these 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 as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008, 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
Partnerships internal control over financial reporting as
of December 31, 2008, 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 2, 2009 expressed an
unqualified opinion on the Partnerships internal control
over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 2, 2009
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering and transportation revenue - Quicksilver
|
|
$
|
36,061
|
|
|
$
|
15,089
|
|
|
$
|
6,460
|
|
Gathering and transportation revenue
|
|
|
5,612
|
|
|
|
1,773
|
|
|
|
53
|
|
Gas processing revenue - Quicksilver
|
|
|
30,127
|
|
|
|
16,564
|
|
|
|
7,342
|
|
Gas processing revenue
|
|
|
5,358
|
|
|
|
1,990
|
|
|
|
63
|
|
Other revenue - Quicksilver
|
|
|
900
|
|
|
|
525
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
78,058
|
|
|
|
35,941
|
|
|
|
13,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance - Quicksilver
|
|
|
20,250
|
|
|
|
11,512
|
|
|
|
7,475
|
|
General and administrative - Quicksilver
|
|
|
6,407
|
|
|
|
3,379
|
|
|
|
937
|
|
Depreciation and accretion
|
|
|
14,566
|
|
|
|
8,070
|
|
|
|
2,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
41,223
|
|
|
|
22,961
|
|
|
|
11,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
36,835
|
|
|
|
12,980
|
|
|
|
2,543
|
|
Other income
|
|
|
11
|
|
|
|
236
|
|
|
|
13
|
|
Interest expense
|
|
|
10,177
|
|
|
|
4,647
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
26,669
|
|
|
|
8,569
|
|
|
|
2,556
|
|
Income tax provision
|
|
|
253
|
|
|
|
313
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,416
|
|
|
$
|
8,256
|
|
|
$
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the period from beginning of period
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)
|
|
$
|
652
|
|
|
$
|
93
|
|
|
|
|
|
Common and subordinated unitholders interest in net income
(1)
|
|
$
|
25,764
|
|
|
$
|
4,719
|
|
|
|
|
|
Earnings per common and subordinated unit:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.08
|
|
|
$
|
0.20
|
|
|
|
|
|
Diluted
|
|
$
|
0.96
|
|
|
$
|
0.20
|
|
|
|
|
|
Weighted average number of common and subordinated units
outstanding:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,783
|
|
|
|
23,777
|
|
|
|
|
|
Diluted
|
|
|
29,583
|
|
|
|
23,787
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts for 2007 represent the post-IPO period from
August 10, 2007 to December 31, 2007
|
The accompanying notes are an integral part of these
consolidated financial statements.
35
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
303
|
|
|
$
|
1,125
|
|
Accounts receivable
|
|
|
2,082
|
|
|
|
882
|
|
Accounts receivable from Quicksilver
|
|
|
-
|
|
|
|
800
|
|
Prepaid expenses and other current assets
|
|
|
594
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,979
|
|
|
|
3,497
|
|
Properties, plant and equipment, net
|
|
|
488,120
|
|
|
|
273,948
|
|
Other assets
|
|
|
1,916
|
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
493,015
|
|
|
$
|
278,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of debt
|
|
$
|
1,375
|
|
|
$
|
1,100
|
|
Accounts payable to Quicksilver
|
|
|
10,502
|
|
|
|
-
|
|
Accrued additions to property, plant and equipment
|
|
|
17,433
|
|
|
|
23,624
|
|
Accounts payable and other
|
|
|
1,930
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,240
|
|
|
|
27,424
|
|
Long-term debt
|
|
|
174,900
|
|
|
|
5,000
|
|
Note payable to Quicksilver
|
|
|
52,271
|
|
|
|
50,569
|
|
Repurchase obligations to Quicksilver
|
|
|
123,298
|
|
|
|
82,251
|
|
Asset retirement obligations
|
|
|
5,234
|
|
|
|
2,793
|
|
Deferred income tax liability
|
|
|
369
|
|
|
|
173
|
|
Commitments and contingent liabilities (Note 8)
|
|
|
|
|
|
|
|
|
Partners capital
|
|
|
|
|
|
|
|
|
Common unitholders (12,269,714 and 12,263,625 units issued
and outstanding at December 31, 2008 and 2007, respectively)
|
|
|
108,014
|
|
|
|
109,830
|
|
Subordinated unitholders (11,513,625 units issued and
outstanding at December 31, 2008 and 2007)
|
|
|
(2,322
|
)
|
|
|
356
|
|
General partner
|
|
|
11
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
105,703
|
|
|
|
110,200
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
493,015
|
|
|
$
|
278,410
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,416
|
|
|
$
|
8,256
|
|
|
$
|
2,421
|
|
Items included in net income not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
14,382
|
|
|
|
7,987
|
|
|
|
2,942
|
|
Accretion of asset retirement obligation
|
|
|
184
|
|
|
|
83
|
|
|
|
21
|
|
Deferred income taxes
|
|
|
196
|
|
|
|
38
|
|
|
|
135
|
|
Equity-based compensation
|
|
|
1,017
|
|
|
|
130
|
|
|
|
-
|
|
Amortization of debt issuance costs
|
|
|
243
|
|
|
|
88
|
|
|
|
-
|
|
Non-cash interest expense
|
|
|
8,825
|
|
|
|
4,294
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,200
|
)
|
|
|
(815
|
)
|
|
|
(66
|
)
|
Prepaid expenses and other assets
|
|
|
(612
|
)
|
|
|
(543
|
)
|
|
|
(146
|
)
|
Accounts receivable from Quicksilver
|
|
|
4,002
|
|
|
|
(5,975
|
)
|
|
|
-
|
|
Accounts payable and other
|
|
|
(770
|
)
|
|
|
1,406
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
52,683
|
|
|
|
14,949
|
|
|
|
6,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
|
|
(77,539
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(148,079
|
)
|
|
|
(73,797
|
)
|
|
|
(78,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets to Quicksilver
|
|
|
-
|
|
|
|
29,508
|
|
|
|
-
|
|
Proceeds from revolving credit facility borrowings
|
|
|
169,900
|
|
|
|
5,000
|
|
|
|
-
|
|
Debt issuance costs
|
|
|
(486
|
)
|
|
|
(1,041
|
)
|
|
|
-
|
|
Repayment of repurchase obligation to Quicksilver
|
|
|
(42,085
|
)
|
|
|
-
|
|
|
|
-
|
|
Repayment of subordinated note payable to Quicksilver
|
|
|
(825
|
)
|
|
|
-
|
|
|
|
-
|
|
Net proceeds from issuance of equity units
|
|
|
-
|
|
|
|
112,298
|
|
|
|
-
|
|
Issuance costs of equity units paid
|
|
|
-
|
|
|
|
(2,933
|
)
|
|
|
-
|
|
Distribution of offering proceeds to partners
|
|
|
-
|
|
|
|
(119,806
|
)
|
|
|
-
|
|
Contributions by Quicksilver
|
|
|
-
|
|
|
|
38,045
|
|
|
|
67,421
|
|
Contributions by other partners
|
|
|
-
|
|
|
|
167
|
|
|
|
7,291
|
|
Distributions to unitholders
|
|
|
(31,930
|
)
|
|
|
(4,062
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
94,574
|
|
|
|
57,176
|
|
|
|
74,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(822
|
)
|
|
|
(1,672
|
)
|
|
|
2,797
|
|
Cash at beginning of period
|
|
|
1,125
|
|
|
|
2,797
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
303
|
|
|
$
|
1,125
|
|
|
$
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,341
|
|
|
|
-
|
|
|
|
-
|
|
Cash paid for income taxes
|
|
$
|
332
|
|
|
|
-
|
|
|
|
-
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital related to capital expenditures
|
|
$
|
31,920
|
|
|
$
|
30,809
|
|
|
$
|
6,608
|
|
Debt issuance costs
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
Cost in connection with the initial public offering
|
|
|
-
|
|
|
|
(275
|
)
|
|
|
-
|
|
Issuance of subordinated note payable to Quicksilver
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
Acquisition of property, plant and equipment under repurchase
obligation
|
|
$
|
(77,108
|
)
|
|
$
|
(50,118
|
)
|
|
$
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Partners Capital
|
|
|
|
Parent
|
|
|
Redeemable
|
|
|
Limited Partners
|
|
|
General
|
|
|
|
|
|
|
Equity
|
|
|
Partners Capital
|
|
|
Common
|
|
|
Subordinated
|
|
|
Partner
|
|
|
Total
|
|
|
Balance at January 1, 2006
|
|
$
|
48,949
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,949
|
|
Contributions
|
|
|
71,930
|
|
|
|
7,291
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,221
|
|
Distributions
|
|
|
(4,508
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,508
|
)
|
Net income
|
|
|
2,281
|
|
|
|
140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
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, net of offering and other 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
|
|
|
|
|
|
|
|
|
|
|
13,302
|
|
|
|
12,462
|
|
|
|
652
|
|
|
|
26,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
108,014
|
|
|
$
|
(2,322
|
)
|
|
$
|
11
|
|
|
$
|
105,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
38
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.
As of December 31, 2008 the ownership of KGS is as follows:
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ownership
|
|
|
Common unitholders:
|
|
|
|
|
Public
|
|
|
27.1%
|
|
Quicksilver
|
|
|
23.5%
|
|
Subordinated unitholders:
|
|
|
|
|
Quicksilver
|
|
|
47.5%
|
|
|
|
|
|
|
Total limited partner interest
|
|
|
98.1%
|
|
|
|
|
|
|
General Partner interest:
|
|
|
|
|
Quicksilver
|
|
|
1.9%
|
|
|
|
|
|
|
Total
|
|
|
100.0%
|
|
|
|
|
|
|
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
KGS is engaged in
gathering and processing natural gas and NGLs, produced from the
Barnett Shale formation in the Fort Worth Basin located in
North Texas. KGS provides services under contracts, whereby it
receives fees for performing the gathering and processing
services. KGS does not take title to the natural gas or
associated NGLs that it gathers and processes therefore avoids
direct commodity price exposure.
KGS assets include:
|
|
|
|
|
The Cowtown System, which includes:
|
|
|
|
|
-
|
the Cowtown Pipeline, which consists of a pipeline gathering
system and gas compression facilities in the southern portion of
the Fort Worth Basin and gathers natural gas produced by
KGS customers and delivers it for processing;
|
39
|
|
|
|
-
|
the Cowtown Plant, in Hood County, Texas, which consists of two
natural gas processing units that extract NGLs from the natural
gas stream and deliver customers residue gas to
unaffiliated pipelines for transport and sale
downstream; and
|
|
-
|
the Corvette Plant in Hood County, Texas, which was placed in
service during the first quarter 2009, and consists of a natural
gas processing unit that extracts NGLs from the natural gas
stream and delivers KGS customers residue gas to
unaffiliated pipelines for transport and sale downstream.
|
|
|
|
|
|
The Lake Arlington Dry System, located in Tarrant County, Texas,
which consists of a gathering system and a gas compression
facility, which KGS purchased from Quicksilver in the fourth
quarter of 2008. This system is connected to affiliated
pipelines for transport and sale downstream.
|
As more fully described in Note 2, KGS financial
statements also include the operations of a gathering system in
Hill County, Texas (Hill County Dry System) that
gathers production from the Fort Worth Basin and delivers
it to unaffiliated pipelines for transport and sale downstream.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying
consolidated financial statements and related notes of KGS
present the financial position, results of operations, cash
flows and changes in partners capital of KGS 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.
Use of Estimates
The preparation of the
financial statements in accordance with GAAP in the United
States 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
KGS considers 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.
Accounts receivable
Accounts receivable are
due from Quicksilver and other independent natural gas
producers. Each customer of KGS is reviewed as to credit
worthiness prior to the extension of credit and on a regular
basis thereafter. Although KGS does not require collateral,
appropriate credit ratings are required. Receivables are
generally due within 60 days. At December 31, 2008 and
2007, KGS recorded no allowance for uncollectible accounts
receivable. During 2008, KGS experienced no non-payment for its
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.
Asset Retirement Obligations
KGS records 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.
40
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 Lake Arlington Dry System; and
|
|
|
the Hill County Dry System.
|
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 are or were subject to repurchase by KGS from
Quicksilver as follows:
Cowtown Pipeline repurchase
- KGS has the option to
purchase portions of the Cowtown Pipeline from Quicksilver at
their original cost in or before 2011 based upon the expected
timing of their commerciality.
Lake Arlington Dry System repurchase
- KGS was obligated
to purchase the Lake Arlington Dry System from Quicksilver at
its fair market value within two years after it was completed
and commercial service commenced. During the fourth quarter
2008, KGS completed the acquisition of the Lake Arlington Dry
System from Quicksilver for approximately $42 million. The
purchase was financed through the use of the credit agreement
and resulted in the reduction of the repurchase obligation. In
conjunction with the purchase of the Lake Arlington Dry System,
Quicksilver assigned its gas gathering agreement to KGS. 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 Lake Arlington
area through August 2017. Quicksilvers fee of $0.62 per
Mcf gathered by KGS in the Lake Arlington Dry System is subject
to annual inflationary escalation.
Hill County Dry System repurchase
- KGS is obligated to
purchase the Hill County Dry System from Quicksilver at its fair
market value in or before 2011 based upon the systems
expected timing of commerciality.
The following table summarizes the assets subject to repurchase
rights and obligations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimate of
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Costs Recognized
|
|
|
Repurchase
|
|
|
|
|
|
|
|
|
Costs as of
|
|
|
through
|
|
|
obligation at
|
|
|
|
|
|
June 5, 2007
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Sales Price
|
|
|
2008
(1)
|
|
|
2008
|
|
|
2008
|
|
|
KGS Repurchase
|
|
Cowtown Pipeline
|
|
$
|
22.9
|
|
|
$
|
62.6
|
|
|
$
|
67.0
|
|
|
$
|
67.0
|
|
|
Optional at Cost
|
Lake Arlington Dry System
|
|
|
3.6
|
|
|
|
-
|
(2)
|
|
|
42.1
|
|
|
$
|
-
|
|
|
Repurchased at FV in 2008
|
Hill County Dry System
|
|
|
3.0
|
|
|
|
78.0
|
|
|
|
56.3
|
|
|
$
|
56.3
|
|
|
Obligatory at FV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29.5
|
|
|
$
|
140.6
|
|
|
$
|
165.4
|
|
|
$
|
123.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimates may change based on changes in producers
drilling progress, material and labor costs, easement costs and
other factors
|
(2)
|
|
Excludes any estimated costs after completion of purchase
|
The assets conveyance was not treated as a sale for
accounting purposes because KGS operates them and intends to
purchase them. Accordingly, the original cost and subsequently
incurred costs are recognized in both KGS property, plant
and equipment and its repurchase obligations to Quicksilver.
Similarly, KGS results of operations include the revenues
and expenses for these operations. For 2008, KGS recognized
$6.0 million of interest expense associated with the
repurchase obligations to Quicksilver based on a
weighted-average interest rate of 5.2%.
Impairment of Long-Lived Assets
KGS reviews
its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. If it is determined that an assets
estimated future cash flows will not be sufficient to recover
its carrying amount, an impairment charge
41
will be recorded to reduce the carrying amount for the asset to
its estimated fair value if such carrying amount exceeds the
fair value. At December 31, 2008, KGS performed an analysis
of its estimated future cash flows and determined that there was
no impairment on its long-lived assets.
Other Assets
Other assets as of
December 31, 2008 consist of costs associated with debt
issuance and pipeline license agreements net of amortization.
Other assets at December 31, 2007 consisted of cost
associated with debt issuance net of amortization. Debt issuance
costs are amortized over the term of the associated debt.
Pipeline license agreements provide KGS the right to construct,
operate and maintain certain pipelines with local
municipalities. The pipeline license agreements are amortized
over the term of the agreement.
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
KGS primary service
offerings are the gathering and processing of natural gas. KGS
has contracts under which it receives revenues 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
KGS is subject to a margin tax
that requires tax payments at a maximum effective rate of 0.7%
of the gross revenue apportioned to Texas. The margin tax
qualifies as an income tax under GAAP, which requires KGS 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 is computed by dividing net income attributable to
unitholders by the weighted average number of units outstanding
during each period. Diluted earnings per unit is computed using
the treasury stock method, which considers the impact to net
income and common units from the potential issuance of units and
conversion debt.
Segment Information
KGS operates solely in
the midstream segment in Texas where it provides natural gas
gathering, transportation and processing services.
Fair Value of Financial Instruments
The fair
value of accounts receivable, accounts payable, long-term debt,
the note payable to Quicksilver and repurchase obligations to
Quicksilver approximate their carrying amounts.
Equity Based Compensation
At time of issuance
of phantom units, the Board of Directors of KGS determines
whether they will be settled in cash or settled in KGS units.
For awards payable in cash, KGS
42
amortizes 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.
Recently
Issued Accounting Standards
Pronouncements
Implemented
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157),
which defines fair value, establishes a framework for measuring
fair value under GAAP and expands disclosures about fair value
measurements. The Statement applies under other accounting
pronouncements that require or permit fair value measurements.
No new requirements are included in SFAS No. 157, but
application of the Statement has changed current practice. KGS
adopted SFAS No. 157 on January 1, 2008 with no
impact.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115
. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value that were not previously required to be
measured at fair value. While SFAS No. 159 became
effective on January 1, 2008, KGS did not elect the fair
value measurement option for any of its financial assets or
liabilities.
On April 30, 2007, the FASB issued FASB Staff Position
No. 39-1,
Amendment of FASB Interpretation No. 39
. The FSP
amends paragraph 3 of FIN No. 39 to replace the
terms conditional contracts and exchange
contracts with the term derivative instruments
as defined in SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
. It also
amends paragraph 10 of Interpretation 39 to permit a
reporting entity to offset fair value amounts recognized for
derivative instruments executed with the same counterparty under
the same master netting arrangement that have been offset in
accordance with that paragraph. KGS adopted FSP
No. 39-1
on January 1, 2008 without any impact.
In May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
, which
identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation
of financial statements in conformity with GAAP in the United
States. This Statement is generally viewed as a necessary step
in the ultimate convergence of global accounting rules. This
Statement became effective on November 15, 2008 and was
adopted by KGS with no significant impact on our financial
statements or related disclosures.
Pronouncements
Not Yet Implemented
SFAS No. 141(R) (revised 2007),
Business
Combinations
, was issued in December 2007.
SFAS No. 141(R) replaces SFAS No. 141,
Business Combinations
, while retaining its fundamental
requirements that the acquisition method of accounting be used
for all business combinations and for an acquirer to be
identified for each business combination.
SFAS No. 141(R) defines the acquirer as the entity
that obtains control in the business combination and it
establishes the criteria to determine the acquisition date. The
Statement also requires an acquirer 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 as period expenses as incurred. The
Statement will apply to any acquisition completed by KGS after
January 1, 2009, but otherwise had no effect on our
financial statements upon adoption.
SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements an amendment of
ARB No. 51
was issued in December 2007. The Statement
amends ARB 51 to establish accounting and reporting standards
for the noncontrolling interest in a subsidiary (previously
referred to as minority interest) and for the
deconsolidation of a subsidiary. SFAS No. 160
clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be
reported as a component of its equity. The Statement also
changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both Quicksilver and
noncontrolling
43
interest. Additionally, SFAS No. 160 establishes a
single method for accounting for changes in Quicksilvers
ownership interest in a subsidiary that do not result in
deconsolidation. KGS adopted SFAS No. 160 on
January 1, 2009 with no impact.
The FASB issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities,
in March
2008. Under SFAS No. 161, companies are required to
disclose the fair value of all derivative and hedging
instruments and their gains or losses in tabular format and
information about credit
risk-related
features in derivative agreements, counterparty credit risk, and
its strategies and objectives for using derivative instruments.
KGS adopted SFAS No. 161 with prospective application
on January 1, 2009 with no impact.
Emerging Issues Task Force (EITF) Issue
No. 07-4,
Application of the Two - Class Method under FASB
Statement No. 128, Earnings per Share, to Master Limited
Partnerships
(EITF 07-4),
was issued in March 2008.
EITF 07-4
addresses how master limited partnerships should calculate
earnings per unit using the
two-class
method in SFAS No. 128,
Earnings per
Share
and how earnings of a master limited partnership
should be allocated among its general partner, limited partners
and other participating securities. KGS adopted EITF
No. 07-4
on January 1, 2009 with no significant impact to 2009 or
prior allocation of earnings.
In May 2008, the FASB issued Staff Position APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)
(FSP APB
14-1),
which indicates that issuers of convertible debt instruments
generally should separately account for the liability component
at its fair value and may result in amounts previously reported
as debt being reclassified to equity. Furthermore, interest
expense in periods subsequent to issuance may increase if the
amount of reported debt changes. We adopted FSP APB
14-1
on
January 1, 2009 with no impact to 2009 or previously
reported results.
|
|
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 2008 and 2007. The impact of the
convertible debt is dilutive for 2008, but was
anti-dilutive
for 2007.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
(1)
|
|
|
|
(In thousands, except per unit data)
|
|
|
Common and subordinated unitholders interest in net income
|
|
|
$ 25,764
|
|
|
|
$ 4,719
|
|
Impact of interest on convertible debt
|
|
|
2,748
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income available assuming conversion of convertible debt
|
|
|
$ 28,512
|
|
|
|
$ 4,719
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and subordinated units - basic
|
|
|
23,783
|
|
|
|
23,777
|
|
Effect of restricted phantom units
|
|
|
141
|
|
|
|
10
|
|
Effect of convertible
debt
(2)
|
|
|
5,659
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and subordinated units - diluted
|
|
|
29,583
|
|
|
|
23,787
|
|
|
|
|
|
|
|
|
|
|
Earnings per common and subordinated unit:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.08
|
|
|
|
$0.20
|
|
Diluted
|
|
|
$0.96
|
|
|
|
$0.20
|
|
|
|
|
(1)
|
|
Amounts for 2007 represent the period from August 10, 2007
to December 31, 2007
|
(2)
|
|
Assumes that convertible debt is converted using the
December 31, 2008 closing price of $9.48 per unit
|
44
4. PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Depreciable Life
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in thousands)
|
|
|
Gathering and transportation systems
|
|
|
20 years
|
|
|
$
|
179,594
|
|
|
$
|
106,478
|
|
Processing plants
|
|
|
20-25 years
|
|
|
|
157,353
|
|
|
|
117,571
|
|
Construction in progress - plant
|
|
|
|
|
|
|
106,563
|
|
|
|
12,636
|
|
Construction in progress - pipeline
|
|
|
|
|
|
|
27,994
|
|
|
|
20,046
|
|
Rights-of-way and easements
|
|
|
20 years
|
|
|
|
39,473
|
|
|
|
26,905
|
|
Land
|
|
|
|
|
|
|
1,239
|
|
|
|
952
|
|
Buildings and other
|
|
|
20-40 years
|
|
|
|
1,836
|
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
514,052
|
|
|
|
285,498
|
|
Accumulated Depreciation
|
|
|
|
|
|
|
(25,932
|
)
|
|
|
(11,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
|
|
|
$
|
488,120
|
|
|
$
|
273,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress plant 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.
|
|
5.
|
ACCOUNTS
PAYABLE AND OTHER
|
Accounts payable and other consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Accrued operating expenses
|
|
$
|
957
|
|
|
$
|
882
|
|
Accrued property taxes
|
|
|
-
|
|
|
|
895
|
|
State income taxes
|
|
|
-
|
|
|
|
276
|
|
Equity compensation payable
|
|
|
116
|
|
|
|
275
|
|
Interest payable
|
|
|
734
|
|
|
|
147
|
|
Other
|
|
|
123
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,930
|
|
|
$
|
2,700
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our long-term debt payments due
by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Long-Term Debt
|
|
Total
|
|
|
2009
|
|
|
2010-2012
|
|
|
2013-2014
|
|
|
Thereafter
|
|
|
|
(in millions)
|
|
|
Credit Agreement
|
|
$
|
174.9
|
|
|
$
|
-
|
|
|
$
|
174.9
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Subordinated Note to Quicksilver
|
|
|
53.6
|
|
|
|
1.4
|
|
|
|
3.3
|
|
|
|
48.9
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
228.5
|
|
|
$
|
1.4
|
|
|
$
|
178.2
|
|
|
$
|
48.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement
On August 10,
2007, KGS entered into a five-year $150 million senior
secured revolving credit facility (Credit
Agreement). The Credit Agreement featured an accordion
option that with lenders approval increases the facility up to
$250 million. On October 10, 2008, the lenders
approved an increase of the facility to $235 million. Also,
the revised Credit Agreement permits the future expansion of the
facility to $350 million, with lender approval. The
facility, which matures August 10, 2012, can be extended up
to two additional years with requisite lender consent.
45
The Credit Agreement provides for revolving credit loans,
swingline loans and letters of credit. Borrowings under the
facility are guaranteed by KGS subsidiaries and are
secured by substantially all of the assets of KGS and its
subsidiaries. KGS has both LIBOR and U.S. prime rate
options for revolving loans and a specified rate for swingline
loans.
The Credit Agreement contains certain covenants which can limit
KGS borrowing capacity. All of the covenants exclude the
subordinated note payable to Quicksilver and KGS
obligations to Quicksilver and related non-cash interest. These
financial covenants are summarized below:
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Maximum Debt to EBITDA
|
|
|
Minimum EBITDA to Interest
|
December 31, 2008 and thereafter
|
|
|
4.50 to 1
|
|
|
2.50 to 1
|
|
|
|
|
|
|
|
At December 31, 2008, the lenders commitments under
our credit agreement were $235 million and may be further
increased to as much as $350 million. Based on our results
through December 31, 2008, our total borrowing capacity is
$235 million and our borrowings were $174.9 million,
and the weighted average interest rate was 2.9%. 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. In the event of
default, the Credit Agreement allows for the acceleration of the
loans, the termination of the credit agreement and foreclosure
on collateral. KGS was in compliance with all such covenants as
of December 31, 2008.
Subordinated Note
On August 10,
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 interest rate at
December 31, 2008 was 4.485%. 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 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 revolving credit agreement;
|
|
|
the existence of a pending judicial proceeding with respect to
any event of default under the revolving credit
agreement; or
|
|
|
our ratio of total indebtedness (which includes the
$50.0 million 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, 2008, 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
$2.8 million recognized during 2008 was added to the
Subordinated Note. In 2008, we made three quarterly principal
payments of the Subordinated Note for a total of
$0.8 million. The fourth quarter principal payment was
prevented by the indebtedness limitation on EBITDA described
above.
46
|
|
7.
|
ASSET
RETIREMENT OBLIGATIONS
|
The following table provides a reconciliation of the changes in
the asset retirement obligation:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Beginning asset retirement obligations
|
|
$
|
2,793
|
|
|
$
|
503
|
|
Additional liability incurred
|
|
|
2,257
|
|
|
|
2,207
|
|
Accretion expense
|
|
|
184
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Ending asset retirement obligations
|
|
$
|
5,234
|
|
|
$
|
2,793
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, no assets are legally restricted
for use in settling asset retirement obligations.
|
|
8.
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Litigation
- At December 31, 2008, 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, business interruption
and other coverages which are customary for the nature and
scope of its operations.
Management of the 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
fully insured, the loss could have a material impact on its
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 the revenues generated
by KGS, or which causes KGS to make significant expenditures not
covered by insurance, could reduce its ability to meet its
financial obligations.
Regulatory Compliance
- In the ordinary course of
business, KGS is subject to various laws and regulations. In the
opinion of management of the general partner, compliance with
current laws and regulations will not have a material adverse
effect on KGS financial condition or results of operations.
Environmental Compliance
- The operation of
KGS pipelines, plants and other facilities is subject to
stringent and complex laws and regulations pertaining to health,
safety, and the environment. As an owner or operator of these
facilities, KGS must comply with 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 KGS 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, 2008, KGS
had no liabilities recorded for environmental matters.
Commitments
- KGS has entered into agreements with
third parties providing for natural gas compression equipment
and the construction of the Corvette plant, which was placed in
service during the first quarter of 2009.
47
The following table summarizes KGS contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual
Obligations
|
|
Total
|
|
2009
|
|
2010-2012
|
|
2013-2014
|
|
Thereafter
|
|
|
(in millions)
|
|
Construction commitments
|
|
$
|
13.8
|
|
|
$
|
13.8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
13.8
|
|
|
$
|
13.8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No provision for federal income taxes related to KGS
results of operations is included in the 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 $0.4 million
and $0.2 million as of December 31, 2008 and 2007,
respectively. KGS derives all of its revenue from operations in
Texas.
During the third quarter of 2008, KGS paid $0.3 million
related to its 2007 liability for Texas margin tax. Quicksilver
does not expect to owe consolidated Texas margin tax for 2008
and, accordingly, KGS does not expect to make a cash payment for
its 2008 liability for Texas margin tax, based upon Texas filing
rules. All effects of the 2008 Texas margin tax calculation are
captured in deferred income taxes.
Awards of phantom units have been granted under KGS 2007
Equity Plan, which permits the issuance of up to
750,000 units. The following table summarizes information
regarding the phantom unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in cash
|
|
|
Payable in units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Date Fair
|
|
|
|
|
|
Date Fair
|
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Unvested phantom units - January 1, 2008
|
|
|
84,961
|
|
|
$
|
21.36
|
|
|
|
9,833
|
|
|
$
|
21.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(28,247
|
)
|
|
|
21.43
|
|
|
|
(6,089
|
)
|
|
|
21.36
|
|
Issued
|
|
|
6,605
|
|
|
|
24.12
|
|
|
|
137,148
|
|
|
|
25.25
|
|
Cancelled
|
|
|
(3,000
|
)
|
|
|
21.36
|
|
|
|
(974
|
)
|
|
|
25.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested phantom units - December 31, 2008
|
|
|
60,319
|
|
|
$
|
21.63
|
|
|
|
139,918
|
|
|
$
|
25.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2008, KGS had total unvested compensation
cost of $1.9 million related to unvested phantom units. KGS
recognized compensation expense of approximately
$1.4 million during 2008, including $0.4 million for
remeasuring the vested portion of awards to be settled in cash
to their revised fair value. Grants of phantom units during the
year ended December 31, 2008 had an estimated grant date
fair value of $3.6 million. KGS has unearned compensation
expense of $2.3 million at December 31, 2008 that will
be recognized in expense over the next 1.9 years. Phantom
units that vested during the year ended December 31, 2008
had a fair value of $0.7 million on their vesting date.
On January 2, 2009, in accordance with its annual
compensation changes, KGS granted a total of 405,428 phantom
units to the independent directors and executive officers of
KGS general partner and employees seconded to KGS. Each
phantom unit will settle in KGS units and had a grant date fair
value of $10.06, which will be recognized over the vesting
period of three years.
48
|
|
11.
|
TRANSACTIONS
WITH RELATED PARTIES
|
Upon completion of, or in connection with, the IPO, KGS 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 omnibus agreement (the Omnibus
Agreement) with its general partner and Quicksilver, which
addresses, among other matters:
|
|
|
|
|
restrictions on Quicksilvers ability to engage in
midstream business activities in Quicksilver Counties;
|
|
|
|
Quicksilvers construction of the Lake Arlington Dry System
and the Hill County Dry System and KGS obligations to
purchase those assets from Quicksilver at their fair market
value;
|
|
|
|
KGS obligation to reimburse Quicksilver for all general
and administrative expenses incurred by Quicksilver on behalf of
KGS;
|
|
|
|
KGS obligation to reimburse Quicksilver for all insurance
coverage expenses it incurs or payments it makes with respect to
KGS assets; and
|
|
|
|
Quicksilvers obligation to indemnify KGS for certain
liabilities and KGS obligation to indemnify Quicksilver
for certain liabilities.
|
Secondment Agreement
On August 10, 2007,
Quicksilver and KGS general partner entered into a
services and secondment agreement (the Secondment
Agreement) pursuant to which specified employees of
Quicksilver have been seconded to KGS general partner to
provide operating, routine maintenance and other services with
respect to the assets owned or operated by KGS. Under the
Secondment Agreement, the general partner reimburses Quicksilver
for the services provided by the seconded employees. The initial
term of the Secondment Agreement is 10 years, but will
extend for additional annual periods unless cancelled by either
party with 180 days written notice.
Gas Gathering and Processing Agreement
On
August 10, 2007, Quicksilver, Cowtown Gas Processing
Partners LP (Processing Partners) and Cowtown
Pipeline Partners LP (Pipeline Partners) together
with Processing Partners (the Cowtown Partnerships)
entered into the Fifth Amended and Restated Gas Gathering and
Processing Agreement. In connection with the IPO, Processing
Partners and Pipeline Partners became indirect wholly-owned
subsidiaries of KGS. Under the Gas Gathering and Processing
Agreement, Quicksilver has agreed, for an initial term of
10 years, to dedicate and deliver for processing all of the
natural gas produced on properties operated by Quicksilver
within the Quicksilver Counties. The dedication does not oblige
Quicksilver to develop the reserves subject to the Gas Gathering
and Processing Agreement.
Effective September 1, 2008, Quicksilver and KGS entered
into the Sixth Amended and Restated Gas Gathering and Processing
Agreement, which amended the previous agreement by specifying
that Quicksilver has agreed to pay $0.4163 per MMBtu gathered
and $0.5204 per MMBtu processed and a compression fee of up to
$0.30 per MMBtu on the Cowtown System. The compression fee
payable by Quicksilver at a gathering system delivery point
shall never be less than KGS actual cost to perform such
compression service. Quicksilver may also pay KGS a treating fee
based on carbon dioxide content at the pipeline entry point. The
rates above are each subject to an annual inflationary
escalation.
If KGS determines that the gathering or processing of
Quicksilvers production becomes uneconomical, KGS may
cease gathering and processing Quicksilvers production as
long as the uneconomical conditions exist. If KGS is unable to
provide either gathering or processing services, Quicksilver may
use other providers. If KGS is unable to provide either
gathering or processing services for a period of 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 the Cowtown Plant and deliver its natural gas production
to an alternative pipeline (in the case of processing),
Quicksilver has the right to terminate the Gas Gathering and
Processing Agreement as it relates to the affected gas.
Absent written notice of termination, the Gas Gathering and
Processing Agreement is automatically renewed for one year
periods. In addition, if the Gas Gathering and Processing
Agreement, or performance
49
under this agreement, becomes subject to FERC jurisdiction, the
agreement would be terminated unless both parties agree to
continue the agreement.
During the second quarter of 2008, KGS agreed to purchase land
and a warehouse located in Hood County, Texas, from Quicksilver
for a purchase price of $0.3 million and the reimbursement
to Quicksilver of $0.6 million of costs. KGS also obtained
additional easement rights for a total cost of $0.2 million
from an affiliate of an entity that beneficially owns a small
portion of KGS outstanding units.
Contribution, Conveyance and Assumption
Agreement
On August 10, 2007 KGS entered
into a contribution, conveyance, and assumption agreement
(Contribution Agreement) with its 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 KGS
and its subsidiaries;
|
|
|
the issuance of the incentive distribution rights to the general
partner and the continuation of its 2% general partner interest
in KGS;
|
|
|
KGS issuance of 5,696,752 common units, 11,513,625
subordinated units and the right to receive $162.1 million,
to Holdings in exchange for the contributed interests; and
|
|
|
KGS 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 the IPO,
revenues settled with Quicksilver and other customers, net of
expenses paid by Quicksilver on behalf of KGS Predecessor, are
reflected as equity 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.
As of December 31, 2008 revenues settled with Quicksilver
and other customers, net of expenses paid by Quicksilver on
behalf of KGS, are reflected as a receivable from or a payable
to Quicksilver on the consolidated balance sheets and as a
reduction of net cash provided by or used by operating
activities on the consolidated statements of cash flows.
Distributions -
KGS paid distributions to
Quicksilver of $23.3 million and $3.0 million during
2008 and 2007, respectively.
Services to affiliates
KGS routinely conducts
business with Quicksilver and its affiliates. The related
transactions result primarily from fee-based arrangements for
gathering and processing of natural gas. Fees were determined
based on fees to third parties and reflect the cost of providing
such services. Quicksilver has engaged us to operate midstream
assets owned by it for a monthly fee of $75,000.
Allocation of costs
The individuals
supporting KGS 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 KGS are based on identification of
Quicksilvers resources which directly benefit KGS and its
estimated usage of shared resources and functions. All of the
allocations are based on assumptions that management believes
are reasonable.
50
The following table summarizes the change in
net Quicksilver equity during 2007 and 2006 and a summary
of general and administrative expenses, including the cost
allocated from Quicksilver for the years ended 2008, 2007 and
2006. Management believes these transactions are executed on
terms comparable to those that would apply to transactions
executed with third parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Net Parent equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
$
|
118,652
|
|
|
$
|
48,949
|
|
Net change in Quicksilver advances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of property, plant and equipment
|
|
|
|
|
|
|
45,040
|
|
|
|
77,539
|
|
Distribution to Quicksilver
|
|
|
|
|
|
|
-
|
|
|
|
(4,506
|
)
|
Settled revenue with Quicksilver
|
|
|
|
|
|
|
(11,760
|
)
|
|
|
(13,802
|
)
|
Payments received by Quicksilver for trade accounts receivable
|
|
|
|
|
|
|
(625
|
)
|
|
|
(49
|
)
|
Payments made to settle expenses by Quicksilver
|
|
|
|
|
|
|
4,378
|
|
|
|
6,665
|
|
Allocation of general and administrative overhead
|
|
|
|
|
|
|
850
|
|
|
|
667
|
|
Contribution of long-term deposit
|
|
|
|
|
|
|
-
|
|
|
|
821
|
|
Contribution of other current assets
|
|
|
|
|
|
|
162
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in Quicksilver advances
|
|
|
|
|
|
|
38,045
|
|
|
|
67,422
|
|
Quicksilver share of net income
|
|
|
|
|
|
|
3,119
|
|
|
|
2,281
|
|
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
|
|
|
|
|
|
$
|
-
|
|
|
$
|
118,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense - Quicksilver
Allocation of general and administrative overhead
|
|
$
|
2,411
|
|
|
$
|
1,978
|
|
|
$
|
667
|
|
Equity-based compensation expense
|
|
|
1,220
|
|
|
|
405
|
|
|
|
-
|
|
Audit and tax services
|
|
|
896
|
|
|
|
471
|
|
|
|
-
|
|
Legal services
|
|
|
501
|
|
|
|
143
|
|
|
|
-
|
|
Insurance expense
|
|
|
338
|
|
|
|
232
|
|
|
|
-
|
|
Management fee
|
|
|
-
|
|
|
|
-
|
|
|
|
180
|
|
Salary and benefits
|
|
|
421
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
620
|
|
|
|
150
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense - Quicksilver
|
|
$
|
6,407
|
|
|
$
|
3,379
|
|
|
$
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
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.
|
51
The following table presents cash distributions for 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to the
|
|
Per Unit
|
|
|
Total Cash
|
|
Payment Date
|
|
quarter ended
|
|
Distribution
(1)
|
|
|
Distribution
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Pending
Distributions
(2)
|
|
|
|
|
|
|
|
|
|
|
February 13, 2009
(3)
|
|
December 31, 2008
|
|
$
|
0.370
|
|
|
$
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed Distributions
|
|
|
|
|
|
|
|
|
|
|
November 14,
2008
(4)
|
|
September 30, 2008
|
|
$
|
0.350
|
|
|
$
|
8.5
|
|
August 14,
2008
(4)
|
|
June 30, 2008
|
|
$
|
0.350
|
|
|
$
|
8.5
|
|
May 15, 2008
|
|
March 31, 2008
|
|
$
|
0.315
|
|
|
$
|
7.6
|
|
February 14, 2008
|
|
December 31, 2007
|
|
$
|
0.300
|
|
|
$
|
7.3
|
|
November 14,
2007
(5)
|
|
September 30, 2007
|
|
$
|
0.168
|
|
|
$
|
4.1
|
|
|
|
|
(1)
|
|
Represents common and subordinated unitholders
|
(2)
|
|
Distributions are recognized as a reduction to partners
capital upon payment
|
(3)
|
|
Total cash distribution includes an Incentive Distribution
Rights amount of approximately $90,000 to the general partner
|
(4)
|
|
Total cash distribution includes an Incentive Distribution
Rights amount of approximately $20,000 per quarter to the
general partner
|
(5)
|
|
Represents the post-IPO period from August 10, 2007 to
September 30, 2007
|
General Partner Interest and Incentive Distribution
Rights.
The general partner is entitled to its pro rata
portion of all KGS 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. The general partners initial 2% interest will be
reduced if KGS issues additional units in the future and the
general partner does not contribute a proportionate amount of
capital to maintain a 2% ownership level. 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. The
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 Available Cash 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 of Available Cash 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.
|
52
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.
|
|
13.
|
SELECTED
QUARTERLY DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(in thousands, except per unit data)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
15,185
|
|
|
$
|
18,205
|
|
|
$
|
19,304
|
|
|
$
|
25,365
|
|
Operating income
|
|
|
5,262
|
|
|
|
8,064
|
|
|
|
9,193
|
|
|
|
14,317
|
|
Net income
|
|
|
2,884
|
|
|
|
5,606
|
|
|
|
6,388
|
|
|
|
11,538
|
|
Earnings per common and subordinated unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
5,372
|
|
|
$
|
7,118
|
|
|
$
|
10,282
|
|
|
$
|
13,169
|
|
Operating income
|
|
|
864
|
|
|
|
2,380
|
|
|
|
3,805
|
|
|
|
5,931
|
|
Net income
|
|
|
835
|
|
|
|
2,135
|
|
|
|
2,099
|
|
|
|
3,187
|
|
Earnings per common and subordinated unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
Diluted
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
|
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,
2008. 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 at the
reasonable assurance level as of December 31, 2008.
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 the changes in
conditions, or that the degree of compliance with existing
policies or procedures may deteriorate.
53
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, 2008, 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, 2008, our internal control over financial
reporting was effective.
The effectiveness of our internal control over financial
reporting as of December 31, 2008, 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 reports, as stated in their
report included herein.
Changes
in Internal Control over Financial Reporting
There has been no change in our internal control over financial
reporting during the quarter ended December 31, 2008 that
has materially affected, or is reasonably likely to affect, our
internal control over financial reporting.
54
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
Partnership) as of December 31, 2008, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Partnerships
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 Partnerships 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 Partnership maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, 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, 2008 of the Partnership and our report dated
March 2, 2009 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 2, 2009
|
|
Item 9B.
|
Other
Information
|
None.
55
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 NYSE Arca.
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 10, 2009.
|
|
|
|
|
Name
|
|
Age
|
|
Position with Quicksilver Gas
Services GP LLC
|
|
Glenn Darden
|
|
53
|
|
Chairman of the Board and Director
|
Thomas F. Darden
|
|
55
|
|
President and Chief Executive Officer and Director
|
Jeff Cook
|
|
52
|
|
Executive Vice President - Chief Operating Officer and Director
|
Philip W. Cook
|
|
47
|
|
Senior Vice President - Chief Financial Officer and Director
|
John C. Cirone
|
|
59
|
|
Senior Vice President - General Counsel and Secretary
|
John C. Regan
|
|
39
|
|
Vice President - Chief Accounting Officer
|
Alvin Bledsoe
|
|
60
|
|
Director
|
Philip D. Gettig
|
|
63
|
|
Director
|
John W. Somerhalder II
|
|
53
|
|
Director
|
Although the limited liability agreement of our general partner
provides flexibility in the directors length of service,
we anticipate that the sole member of our general partner will
elect 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.
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).
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.
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 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 us.
56
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,
Chief Financial Officer and Director of EcoProduct Solutions, a
Houston-based chemical company. From August 2001 until September
2004, he served as Vice President and Chief Financial Officer of
PPI Technology Services, an 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), an independent oil and gas company engaged in
exploration, development, production and marketing.
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 LLP. 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.
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. Since
retiring from Prism in 2005, Mr. Gettig has provided
consulting services and legal counsel to Prism and to various
small business entities and individuals.
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 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
57
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.
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
NYSE Arca 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 NYSE Arca 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),
and you may submit a written request to obtain a copy of this
document free of charge by writing to our Investor Relations
Department at 777 West Rosedale Street, Fort Worth,
Texas 76104. 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 2008 all directors and executive
58
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, except that Philip D.
Gettig filed one late report disclosing one transaction not
timely reported.
|
|
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 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
(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 its 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 2007 Equity Plan, which is administered by
our general partners board of directors.
Compensation
Objectives, Strategies and Elements for 2008
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.
Generally, this allocation is based on the 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 2008, Quicksilver allocated $0.3 million
of these costs to us. In determining this amount, Quicksilver
estimated the amount of time that the named executive officers
devoted to our business and affairs, the amounts of their
compensation and benefits provided by Quicksilver and the equity
awards our general partners board of directors made to
them.
In 2008, 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. Accordingly, in January 2008 our
general partners board of directors awarded phantom units
to the named executive officers under our 2007 Equity Plan. The
phantom unit awards vest
one-third
on
each of the first business day occurring on or after each of the
first
59
three anniversaries of the date of grant (or the named executive
officers death or disability or a
change-in-control)
and are to be settled in units upon vesting. 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 recommendations of the Chief
Executive Officer and his evaluation of the performance of each
such executive. 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.
Compensation
Objectives, Strategies and Elements for 2009
Our general partners board of directors has reviewed and
concurs with Quicksilvers compensation philosophy and
strategies with respect to Quicksilvers executive
officers. These strategies for 2009 include a long-term equity
component. 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 discussing the allocated portion of the costs for
compensation and benefits to the named executive officers, 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, for 2009, it is appropriate for us to bear a
portion of these costs in two forms. First, we will be allocated
a percentage of costs for base salary and benefits provided by
Quicksilver, generally based on the estimated percentage of time
the named executive officers will devote to our interests. The
second component will be in the form of equity, as to which we
have provided 25% of the total long-term incentive equity awards
payable to each individual. We agreed to award the long-term
incentive equity awards because, among other things, we do not
bear any portion of the annual bonus paid to the named executive
officers which is borne entirely by Quicksilver, and we believe
these grants align the named executive officers directly with
our unitholders.
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 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
partnership equity (25%).
Our general partners board of directors agreed that 25% of
the grant date value of the total long-term incentive equity
awards provided to the named executive officers should consist
of partnership equity. Our general partners board of
directors also considered and was satisfied with the
appropriateness of the dollar values proposed by
Quicksilvers management, which were later established by
Quicksilvers compensation committee for this purpose. In
addition, our general partners board of directors believes
it is appropriate to grant equity awards to encourage our named
executive officers to think and act like owners of the
partnership and to reduce the amount of cash we pay to
Quicksilver for the services of the named executive officers.
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 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
phantom units settled in common units near the end of the year
were the appropriate form of equity to grant to the executives
to simplify administration of partner capital accounts.
60
Change-in-Control
Arrangements
In the event of a change in control as described in the 2007
Equity Plan, all of a named executive officers equity
awards that have been granted under the 2007 Equity Plan 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
Name and
|
|
|
|
|
Awards
|
|
|
Total
|
|
Principal Position
|
|
Year
|
|
|
($)
(1)
|
|
|
($)
|
|
|
Glenn Darden
|
|
|
2007
|
|
|
|
32,318
|
|
|
|
32,318
|
|
Chairman of the Board
|
|
|
2008
|
|
|
|
259,101
|
|
|
|
259,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas F. Darden
|
|
|
2007
|
|
|
|
32,318
|
|
|
|
32,318
|
|
President and
Chief Executive Officer
|
|
|
2008
|
|
|
|
259,101
|
|
|
|
259,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff Cook
|
|
|
2007
|
|
|
|
16,159
|
|
|
|
16,159
|
|
Executive Vice President -
Chief Operating Officer
|
|
|
2008
|
|
|
|
130,472
|
|
|
|
130,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip W. Cook
|
|
|
2007
|
|
|
|
16,159
|
|
|
|
16,159
|
|
Senior Vice President -
Chief Financial Officer
|
|
|
2008
|
|
|
|
108,383
|
|
|
|
108,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John C. Cirone
|
|
|
2007
|
|
|
|
12,927
|
|
|
|
12,927
|
|
Senior Vice President -
General Counsel and Secretary
|
|
|
2008
|
|
|
|
69,768
|
|
|
|
69,768
|
|
|
|
|
(1)
|
|
This column reports the dollar amounts recognized for financial
statement reporting purposes in accordance with SFAS 123(R)
for the fair value of phantom units. The amounts recognized for
2008 reflect phantom units granted in 2008 and 2007 whose
expense will be recognized over the entire vesting period. The
amounts recognized for 2007 reflect the phantom units granted in
2007 whose expense will also be recognized over the entire
vesting period. Additional information regarding the calculation
of these amounts is included in Notes 2 and 10 to the
consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data of this annual
report.
|
Grants of
Plan-Based Awards in 2008
The following table sets forth certain information regarding
grants of awards under our 2007 Equity Plan made to the named
executive officers in 2008. 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
61
grant (or the named executive officers death or disability
or a
change-in-control)
and are to be settled in common units immediately upon vesting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Equity Awards
|
|
|
Fair Value of
|
|
|
|
|
|
|
Number of Units:
|
|
|
Awards
|
|
Name
|
|
Grant Date
(1)
|
|
|
(#)
|
|
|
($)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn Darden
|
|
|
1/2/2008
|
|
|
|
29,813
|
|
|
$
|
612,983
|
|
Thomas F. Darden
|
|
|
1/2/2008
|
|
|
|
29,813
|
|
|
|
612,983
|
|
Jeff Cook
|
|
|
1/2/2008
|
|
|
|
15,041
|
|
|
|
309,257
|
|
Philip W. Cook
|
|
|
1/2/2008
|
|
|
|
11,818
|
|
|
|
242,989
|
|
John C. Cirone
|
|
|
1/2/2008
|
|
|
|
6,983
|
|
|
|
143,577
|
|
|
|
|
(1)
|
|
On December 17, 2007, the board of directors of our general
partner approved grants of phantom units to the named executive
offices with each grant being effective January 2,
2008, the first business day in 2008.
|
|
(2)
|
|
This column reports the dollar amounts that have or will
ultimately be recognized for financial statement reporting
purposes in accordance with SFAS 123(R) for the phantom
units granted in 2008. Additional information regarding the
calculation of these amounts is included in Notes 2 and 10
to the consolidated financial statements included in
Item 8. Financial Statements and Supplementary
Data of this annual report.
|
Outstanding
Equity Awards at Year-End 2008
The following table sets forth information regarding the
holdings of phantom unit awards by the named executive officers
at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards in Cash
|
|
|
Equity Awards in Units
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
or Units of Stock
|
|
|
Market Value of Shares
|
|
|
Number of Shares or
|
|
|
Market Value of Shares
|
|
|
|
That Have Not
|
|
|
or Units of Stock That
|
|
|
Units of Stock That
|
|
|
or Units of Stock That
|
|
|
|
Vested
|
|
|
Have Not Vested
|
|
|
Have Not Vested
|
|
|
Have Not Vested
|
|
Name
|
|
(#)
(2)
|
|
|
($)
(1)
|
|
|
(#)
(3)
|
|
|
($)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn Darden
|
|
|
6,666
|
|
|
$
|
63,194
|
|
|
|
29,813
|
|
|
$
|
282,627
|
|
Thomas F. Darden
|
|
|
6,666
|
|
|
|
63,194
|
|
|
|
29,813
|
|
|
|
282,627
|
|
Jeff Cook
|
|
|
3,333
|
|
|
|
31,597
|
|
|
|
15,041
|
|
|
|
142,589
|
|
Philip W. Cook
|
|
|
3,333
|
|
|
|
31,597
|
|
|
|
11,818
|
|
|
|
112,035
|
|
John C. Cirone
|
|
|
2,666
|
|
|
|
25,274
|
|
|
|
6,983
|
|
|
|
66,199
|
|
|
|
|
(1)
|
|
The market value of unit awards is based on $9.48, the closing
market price of KGS common units on December 31, 2008.
|
(2)
|
|
One-half of these units will vested on August 10, 2009; the
remaining one-half of these units will vest on August 10,
2010.
|
(3)
|
|
One-third of these units vested on January 2, 2009, and
one-third of these units will vest on each of January 4,
2010 and January 3, 2011.
|
62
Potential
Payments upon Termination or in Connection with a Change in
Control
In addition to amounts payable upon a change of control, an
executive officers termination by reason of death or
disability would trigger immediate vesting of all the nonvested
equity awards granted under the 2007 Equity Plan. The payments
set forth in the table are based on the assumption that the
event occurred on December 31, 2008, the last business day
of 2008. The amounts shown in the table do not include payments
and benefits that could be received by such individual from
Quicksilver.
|
|
|
|
|
|
|
|
|
|
|
Equity
Awards
(1)
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
or Units of Stock
|
|
|
Market Value of Shares
|
|
|
|
That Have Not
|
|
|
or Units of Stock That
|
|
|
|
Vested
|
|
|
Have Not Vested
|
|
Name
|
|
(#)
|
|
|
($)
(2)
|
|
|
Glenn Darden
|
|
|
36,479
|
|
|
$
|
345,821
|
|
Thomas F. Darden
|
|
|
36,479
|
|
|
|
345,821
|
|
Jeff Cook
|
|
|
18,374
|
|
|
|
174,186
|
|
Philip W. Cook
|
|
|
15,151
|
|
|
|
143,631
|
|
John C. Cirone
|
|
|
9,649
|
|
|
|
91,473
|
|
|
|
|
(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 $9.48, the closing
market price of KGS common units on December 31, 2008.
|
Compensation
of Directors
Directors of our general partner who are also employees of
Quicksilver are not separately compensated for their services as
directors. For 2008, each of our non-employee directors received
a fee of $80,000, payable 50% in phantom units and 50% in cash
(subject to their elections to receive phantom units in lieu of
some or all of the cash portion). Each of these phantom unit
awards was granted under our 2007 Equity Plan on January 2,
2008, and settles in units upon vesting.
The following table sets forth certain information regarding the
compensation of the non-employee directors of Quicksilver Gas
Services GP LLC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Equity
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Total
|
|
Name
|
|
($)
(1)
|
|
|
($)
(2)
|
|
|
($)
|
|
|
Alvin Bledsoe
|
|
$
|
-
|
|
|
$
|
60,423
(3
|
)
|
|
$
|
60,423
|
|
Philip D. Gettig
|
|
|
25,000
|
|
|
|
36,701
(4
|
)
|
|
|
61,701
|
|
John W. Somerhalder II
|
|
|
-
|
|
|
|
60,423
(5
|
)
|
|
|
60,423
|
|
|
|
|
(1)
|
|
This column reports the aggregate compensation earned in 2008
and paid in cash and excludes $40,000 that Mr. Bledsoe,
$15,000 that Mr. Gettig, and $40,000 that
Mr. Somerhalder elected to receive in the form of phantom
units.
|
|
(2)
|
|
This column reports the dollar amounts recognized for financial
statement reporting purposes with respect to the year ended
December 31, 2008, as well as in accordance with
SFAS No. 123(R). This amount represents the phantom
units granted in 2008 and 2007 whose expense will be recognized
over the entire vesting period. Additional information regarding
the calculation of these amounts is included in Notes 2 and
10 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 in accordance with
SFAS 123(R) of the 3,168 phantom units granted to
Mr. Bledsoe in 2008, including those phantom units he
acquired in lieu of $40,000 of his cash fees, was $70,524. As of
December 31, 2008, Mr. Bledsoe held 4,416 phantom
units.
|
63
|
|
|
(4)
|
|
The grant date fair value calculated in accordance with
SFAS 123(R) of the 2,178 phantom units granted to
Mr. Gettig in 2008, including those phantom units he
acquired in lieu of $15,000 of his cash fees, was $46,802. As of
December 31, 2008, Mr. Gettig held 3,426 phantom units.
|
|
(5)
|
|
The grant date fair value calculated in accordance with
SFAS 123(R) of the 3,168 phantom units granted to
Mr. Somerhalder in 2008, including those phantom units he
acquired in lieu of $40,000 of his cash fees, was $70,524. As of
December 31, 2008, Mr. Somerhalder held 4,416 phantom
units.
|
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, each of
Messrs. Glenn Darden and 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
|
|
Thomas F. Darden
|
Jeff Cook
|
|
Philip D. Gettig
|
Philip W. Cook
|
|
John W. Somerhalder II
|
Glenn Darden
|
|
|
64
|
|
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 10, 2009 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 12,313,451 common units and 11,513,625 subordinated units
outstanding as of February 10, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
90,738
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Thomas F.
Darden
(1)
|
|
|
90,738
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Jeff Cook
|
|
|
3,687
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Philip W. Cook
(2) (3)
|
|
|
4,001
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
John C. Cirone
|
|
|
2,467
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Alvin Bledsoe
(4)
|
|
|
45,934
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Philip D. Gettig
|
|
|
5,839
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
John W. Somerhalder II
|
|
|
12,334
|
|
|
|
|
*
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Directors and executive officers as
a group (9 persons)
|
|
|
179,638
|
|
|
|
1.5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
*
|
Holders of More Than 5% Not
Named Above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quicksilver Resources Inc.
(5) (7)
|
|
|
5,696,752
|
|
|
|
46.3
|
%
|
|
|
11,513,625
|
|
|
|
100.0
|
%
|
|
|
72.2
|
%
|
Quicksilver Gas Services Holdings LLC
(6)
(7)
|
|
|
5,696,752
|
|
|
|
46.3
|
%
|
|
|
11,513,625
|
|
|
|
100.0
|
%
|
|
|
72.2
|
%
|
FMR LLC
(8)
|
|
|
936,900
|
|
|
|
7.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
3.9
|
%
|
Swank Capital, LLC
(9)
|
|
|
1,118,156
|
|
|
|
9.1
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
4.7
|
%
|
* 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 4,001 common units held by Mr. Cook jointly with
his spouse.
|
|
|
(3)
|
Includes 4,001 common units pledged in accordance with customary
terms and conditions of a standard margin account arrangement.
|
|
|
(4)
|
Includes 200 common units over which Mr. Bledsoe exercises
shared investment power.
|
|
|
(5)
|
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.
|
65
|
|
|
|
(6)
|
Holdings, an indirect wholly owned subsidiary of Quicksilver,
owns a 100% interest in our general partner and a 72.2% limited
partner interest in us.
|
|
|
(7)
|
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
1.94% 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.
|
|
|
(8)
|
According to a Schedule 13G/A filed by FMR LLC with the SEC
on February 17, 2009, FMR LLC had sole investment power
over 936,900 common units. The address of FMR LLC is 82
Devonshire Street, Boston, Massachusetts 02109.
|
|
|
(9)
|
According to a Schedule 13G/A filed by Swank Capital, LLC
with the SEC on February 17, 2009, Swank Capital, LLC had
sole voting power and sole investment power over 1,118,156
common units, Swank Energy Income Advisors, LP had shared voting
power and shared investment power over 1,118,156 common units,
and Jerry V. Swank had sole voting power and sole investment
power over 1,118,156 common units. The address of Swank Capital,
LLC, Swank Energy Income Advisors, LP, and Jerry V. Swank is
3300 Oak Lawn Avenue, Suite 650, Dallas, Texas 75219.
|
Quicksilver
Resources Inc.
The following table sets forth certain information regarding the
beneficial ownership of Quicksilvers common stock as of
February 10, 2009 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
168,752,835 shares of Quicksilver common stock outstanding
as of February 10, 2009.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Share Ownership
|
|
|
|
Number of
|
|
|
Percent of
|
|
Beneficial Owner
|
|
Shares
|
|
|
Outstanding Shares
|
|
|
|
|
|
|
Glenn Darden
(1)(2)(3)(4)(5)
|
|
|
44,961,436
|
|
|
|
26.6%
|
|
Thomas F. Darden
(1)(2)(3)(4)(5)
|
|
|
45,078,072
|
|
|
|
26.7%
|
|
Jeff Cook
(3)(5)
|
|
|
688,081
|
|
|
|
*
|
|
Philip W. Cook
(4)(5)(6)
|
|
|
145,904
|
|
|
|
*
|
|
John C. Cirone
(3)(5)
|
|
|
188,912
|
|
|
|
*
|
|
Alvin Bledsoe
|
|
|
-
|
|
|
|
-
|
|
Philip D. Gettig
|
|
|
-
|
|
|
|
-
|
|
John W. Somerhalder II
|
|
|
-
|
|
|
|
-
|
|
Directors and executive officers as a group (9 persons)
(1)(2)(3)(4)(5)
|
|
|
49,430,361
|
|
|
|
29.3%
|
|
* Indicates less than 1%
66
|
|
|
(1)
|
|
Includes as to each of Messrs. G. Darden and T. Darden:
(i) 681,467 and 307,456, respectively, shares held in
grantor retained annuity trusts; and
(ii) 41,677,288 shares beneficially owned by
Quicksilver Energy L.P., for which he 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 26,665; Mr. T.
Darden 95,871; Mr. Philip W. Cook
2,834 and all directors and executive officers as a
group 125,370.
|
|
(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 10, 2009: Mr. G. Darden 148,240;
Mr. T. Darden 112,240; Mr. Jeff
Cook 53,216; Mr. Cirone 62,322;
Mr. Philip W. Cook 9,560 and all directors and
executive officers as a group 389,634.
|
|
(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 14,745,095 (including 14,011,383 shares
beneficially owned by Quicksilver Energy L.P.); Mr. T.
Darden 16,494,525 (including 14,011,383 shares
beneficially owned by Quicksilver Energy L.P.); Mr. Philip
W. Cook 28,203; and all directors and executive
officers as a group 17,256,440 (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 269,793; Mr. T.
Darden 269,793; Mr. Jeff Cook
130,534; Mr. Philip W. Cook 105,307;
Mr. Cirone 70,686; and all directors and
officers as a group 882,804.
|
|
(6)
|
|
Includes 28,203 shares held by Mr. Philip W. Cook
jointly with his spouse.
|
Equity
Compensation Plan Information
The following table set forth information as of
December 31, 2008, with respect to shares of common stock
that may be issued under Quicksilver Gas Services 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
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security
holders
(1)
|
|
|
139,918
|
|
|
N/A
(2)
|
|
|
743,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
139,918
|
|
|
N/A
(2)
|
|
|
743,911
|
|
67
|
|
|
(1)
|
|
The board of directors of our general partner adopted the
Quicksilver Gas Services LP 2007 Equity Plan prior to our IPO.
For a description of the material features of this plan, see
Note 10 to the consolidated financial statements included
in Item 8. Financial Statements and Supplementary
Data of this annual report.
|
|
(2)
|
|
Only phantom units have been issued under the 2007 Equity Plan.
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 10, 2009, our general partner and its
affiliates owned 5,696,752 common units and 11,513,625
subordinated units representing an aggregate 72.2% limited
partner interest in us. In addition, as of February 10,
2009, our general partner owned approximately a 1.9% 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 generally make cash distributions of 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 1.9% 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 50% of the distributions above the highest
target distribution level.
Assuming we have sufficient available cash to pay the full
minimum quarterly distribution on all of our outstanding units
for four quarters, our general partner and its affiliates would
receive an annual distribution of approximately
$1.1 million on their general partner and incentive
distribution rights units and $35.2 million on their common
and subordinated units. For 2008 the general partner and its
affiliates were paid $0.7 million.
Sales of
Certain Assets 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 Lake Arlington Dry System; and
|
|
|
the Hill County Dry System.
|
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 are or were subject to repurchase by KGS from
Quicksilver as follows:
Cowtown Pipeline repurchase
- In accordance
with the Gas Gathering and Processing Agreement, KGS has the
option to purchase portions of the Cowtown Pipeline from
Quicksilver at their original cost in or before 2011 based upon
the expected timing of their commerciality.
Lake Arlington Dry System repurchase
- In
accordance with the Omnibus Agreement, KGS was obligated to
purchase the Lake Arlington Dry System from Quicksilver at its
fair market value within two years after those assets are
completed and commercial service has commenced. During the
fourth quarter of 2008, KGS completed the acquisition of the
Lake Arlington Dry System from Quicksilver for
$42.1 million. The purchase was financed through the use of
the credit agreement and resulted in the reduction of the
repurchase obligation.
68
Hill County Dry System repurchase
- KGS is
obligated to purchase the Hill County Dry System from
Quicksilver at its fair market value in or before 2011 based
upon the expected timing of its commerciality.
Omnibus
Agreement
We have entered into an Omnibus Agreement with Quicksilver and
our general partner that addresses the following matters:
|
|
|
|
|
restrictions on Quicksilvers ability to engage in certain
midstream business activities or own certain related assets in
the Quicksilver Counties;
|
|
|
Quicksilvers right to construct and operate the Lake
Arlington Dry System and Hill County Dry System and our
obligation to purchase those assets from Quicksilver at fair
market value of those assets within two years after the assets
commence commercial service;
|
|
|
Quicksilvers obligation to indemnify us for certain
liabilities and our obligation to indemnify Quicksilver for
certain liabilities;
|
|
|
our obligation to reimburse Quicksilver for all expenses
incurred by Quicksilver (or payments made on our behalf) in
conjunction with Quicksilvers provision of general and
administrative services to us, including salary and benefits of
Quicksilver personnel, our public company expenses, general and
administrative expenses and salaries and benefits of our
executive management who are Quicksilvers
employees; and
|
|
|
our obligation to reimburse Quicksilver for all insurance
coverage expenses it incurs or payments it makes with respect to
our assets.
|
The table below reflects the categories of expenses for which we
are obligated to reimburse Quicksilver pursuant to the Omnibus
Agreement, which includes the amounts for each category that we
paid to Quicksilver in 2008 and an estimate of the amounts for
each category that we expect to pay in 2009.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Estimates for
2009
|
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
Reimbursement of general and administrative expenses
|
|
$
|
2.4
|
|
|
$
|
2.6
|
|
Reimbursement of public company expenses
|
|
|
2.0
|
|
|
|
2.1
|
|
Reimbursement of compensation and benefits for executive
management of our general partner
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4.7
|
|
|
$
|
5.0
|
|
Our general partner and its affiliates will also receive
payments from us pursuant to the contractual arrangements
described below under the caption Contracts
with Affiliates.
Any or all of the provisions of the Omnibus Agreement are
terminable by Quicksilver at its option if our general partner
is removed without cause and units held by our general partner
and its affiliates are not voted in favor of that removal. The
Omnibus Agreement will also generally terminate in the event of
a change of control of us or our general partner.
Reimbursement
of Operating and General and Administrative
Expense
Under the Omnibus Agreement, we will reimburse Quicksilver for
the payment of certain operating expenses and for the provision
of various general and administrative services for our benefit
with respect to the assets contributed to us at the closing of
our IPO. The Omnibus Agreement further provides that we will
reimburse Quicksilver for all expenses it incurs or payments it
makes with respect to our assets. Pursuant to these
arrangements, Quicksilver performs centralized corporate
functions for us, such as legal, accounting, treasury, cash
management, insurance administration and claims processing, risk
management, health, safety and environmental, information
technology, human resources, credit, payroll, internal audit,
taxes and engineering, that are substantially similar to the
services of the type previously provided by Quicksilver in
connection with its management and operation of our assets
during the two-year period prior to the closing of our IPO.
Generally, these allocations are based on the amount of time
individuals performing these functions
69
devote to our business and affairs relative to the amount of
time that we believe they devote to Quicksilvers business
and affairs.
Indemnification
Under the Omnibus Agreement, Quicksilver is required to
indemnify us until August 10, 2009, two years after the
closing of our IPO, against certain potential environmental
claims, losses and expenses associated with the operation of our
assets and occurring before the closing date of the offering or
relating to any investigation, claim or proceeding under
environmental laws relating to such assets and pending as of the
closing of the offering. Quicksilver has no indemnification
obligation with respect to environmental claims made as a result
of additions to or modifications of environmental laws occurring
after August 10, 2007.
Additionally, Quicksilver will indemnify us for losses
attributable to the following:
|
|
|
|
(i)
|
our failure as of the closing date of the offering to have valid
easements, fee title or leasehold interests in and to the lands
on which our assets are located, to the extent such failure
renders us unable to use or operate our assets in substantially
the same manner in which they were used and operated immediately
prior to the closing of the offering;
|
|
|
(ii)
|
our failure as of the closing date of the offering to have any
consent or governmental permit necessary to allow (a) the
transfer of assets from Quicksilver to us at the closing of the
offering or (b) us to use or operate our assets in
substantially the same manner in which they were used and
operated immediately prior to the closing of the offering;
|
(iii) all income tax liabilities
|
|
|
|
(a)
|
attributable to the pre-closing operations of our assets,
|
|
|
(b)
|
arising from or relating to certain formation transactions
related to the IPO, or
|
|
|
(c)
|
arising under Treasury
Regulation Section 1.1502-6
and any similar provision from state, local or foreign
applicable law, by contract, as successor or transferee or
otherwise, and which income tax is attributable to having been a
member of any consolidated, combined or unitary group prior to
the closing of the offering; and
|
|
|
|
|
(iv)
|
the fire, personal injury and related personal and property
damage arising from the accident at the Cowtown Plant that
occurred on May 25, 2007.
|
Quicksilvers maximum liability for indemnification is
unlimited in amount. Quicksilver does not have any obligation to
indemnify us unless we furnish to Quicksilver in good faith a
claim for indemnification specifying in reasonable detail the
basis for such claim (a) with respect to a claim under
clause (i) or (ii) above, prior to the second
anniversary date of the closing of the offering or (b) with
respect to a claim under clause (iii) above, prior to the
first day after the expiration of the statute of limitations
period applicable to such claim. With respect to
clause (iv) above, such indemnification obligation shall
survive indefinitely. In no event shall Quicksilver be obligated
to indemnify us for any losses or income taxes to the extent
reserved for in our financial statements as of December 31,
2006 or to the extent we recover any such losses or income taxes
under available insurance coverage or from contractual rights
against any third party.
Under the Omnibus Agreement, we have agreed to indemnify
Quicksilver for all losses attributable to the post-closing
operations of the gathering and processing business contributed
to us at the closing of the offering to the extent not subject
to Quicksilvers indemnification obligations.
Competition
Under the Omnibus Agreement, Quicksilver has agreed that,
subject to specified exceptions, it will not engage in the
restricted businesses in the Quicksilver Counties. As used in
that agreement, restricted businesses include the
gathering, treating, processing, fractionating, transportation
or storage of natural gas, or the transportation or storage of
natural gas liquids, and constructing, buying or selling any
assets related to the foregoing businesses. Although the
exceptions referred to above include Quicksilvers right to
construct
70
assets, or acquire assets or businesses, that include restricted
businesses, Quicksilver has agreed to offer us the right to
acquire any such midstream business assets for their
construction costs, in the case of constructed assets, or fair
market value, in the case of acquired assets. Furthermore, that
offer would be required to be made not more than 120 days
after Quicksilvers construction or acquisition of those
assets or construction and the commencement of commercial
service (or 60 days after the commencement of commercial
service in the case of an expansion of the Cowtown Pipeline). In
addition, Quicksilver has the right to complete construction and
to operate the Hill County Dry System, as well as a small number
of lateral lines that will not connect to the Cowtown Plant.
Under the Omnibus Agreement, we must purchase these assets from
Quicksilver for their fair market value within two years after
such assets commence commercial service.
Except as described in the immediately preceding paragraph,
neither Quicksilver nor any of its affiliates will be
restricted, under either the Partnership Agreement or the
Omnibus Agreement, from competing with us. Subject to the
preceding paragraph, Quicksilver and any of its affiliates may
acquire, construct or dispose of additional midstream business
assets or other assets in the future without any obligation to
offer us the opportunity to purchase or construct those assets.
Quicksilvers right to construct expansions on the existing
Cowtown Pipeline is subject to our rights, under the Quicksilver
processing agreement described below, to elect to purchase from
Quicksilver such expansion pipelines for their actual cost
within two years of the initial delivery of production from such
assets. In addition, once those expansions commence commercial
operations, Quicksilver will pay us a gathering fee of $0.4163
per MMBtu for natural gas delivered to the Cowtown Pipeline.
The competition and business opportunity restriction provisions
under the Omnibus Agreement will terminate on the earlier of
August 10, 2017, the tenth anniversary of the closing of
the offering, or such time as Quicksilver or its affiliates
cease to own a majority interest in our general partner.
Contracts
with Affiliates
Services
and Secondment Agreement
Quicksilver and our general partner have entered into a services
and secondment agreement pursuant to which specified employees
of Quicksilver are seconded to our general partner to provide
operating, routine maintenance and other services with respect
to the Cowtown Plant and the Cowtown Pipeline under the
direction, supervision and control of our general partner. Under
this agreement, our general partner reimburses Quicksilver for
the services provided by the seconded employees. The initial
term of the services and secondment agreement is 10 years
(expiring 2017). The term will extend for additional
12-month
periods unless either party provides 180 days written
notice otherwise prior to the expiration of the applicable
12-month
period. Our general partner may terminate the agreement upon
180 days written notice. In 2008, we reimbursed Quicksilver
$4.6 million for the services provided by the seconded
employees.
Equity
Awards to Certain Quicksilver Executive Officers
On November 12, 2007, the board of directors of our general
partner granted phantom units under our 2007 Equity Plan to Anne
Darden Self, the sister of Glenn Darden and Thomas Darden and
the Vice President Human Resources of Quicksilver,
effective January 2, 2008, with a value on the date of
grant of approximately $95,000. Also, on December 9, 2008,
the board of directors of our general partner granted phantom
units under our 2007 Equity Plan to Ms. Self, effective
January 2, 2009, with a value on the date of grant of
approximately $107,000. These grants did not require review by
the conflicts committee of our general partner under our
related-party transaction policy. For further information
regarding the policy, see below Policies and
Procedures for Review and Approval of Transactions with Related
Parties.
Gas
Gathering and Processing Agreement
Under the Gas Gathering and Processing Agreement, Quicksilver
has agreed to dedicate and deliver for processing all of the
natural gas owned or controlled by Quicksilver and lawfully
produced from existing and
71
future wells drilled within the Quicksilver Counties or lands
pooled therewith. Notwithstanding the Processing Agreement,
Quicksilver has made no commitment to us that it will develop
the reserves subject to the Quicksilver Processing Agreement.
However, a memorandum of Quicksilvers obligations under
the Quicksilver Processing Agreement was filed of record in the
Quicksilver Counties and therefore would survive any direct or
indirect transfer by Quicksilver of its right, title or interest
associated with its natural gas production in the Quicksilver
Counties.
Under the Quicksilver Processing Agreement effective
September 1, 2008, we provide gathering and processing
services for a fee. Quicksilver has agreed to pay $0.4163 per
MMBtu gathered to the Cowtown Pipeline and $0.5204 per MMBtu
processed at the Cowtown Plant, each subject to annual
inflationary escalation tied to the Consumer Price Index.
If we determine that the gathering or processing of any natural
gas from Quicksilvers wells is or has become uneconomical,
we are not obligated to gather and process Quicksilvers
production from those wells so long as the uneconomical
conditions exist. In the event that we are unable to provide
either gathering or processing services, Quicksilver may dispose
of the natural gas not gathered or processed as it so
determines. In the event that we are unable to provide either
gathering or processing services for a period of 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 the Cowtown Plant and deliver its natural gas production
to an alternative pipeline (in the case of processing),
Quicksilver has the right, upon 30 days prior notice,
to terminate the Gas Gathering and Processing Agreement as it
relates to the affected gas.
The Gas Gathering and Processing Agreement has an initial term
of ten years, which expires in 2017, and will be automatically
renewed for one year periods unless we or Quicksilver provide
written notice of termination on or before 90 days prior to
the expiration of the primary term or the one-year renewal
period, as applicable. In addition, if the Gas Gathering and
Processing Agreement, or performance under that agreement,
becomes subject to FERC jurisdiction, the agreement terminates
pursuant to its terms, unless the parties agree within
30 days of such termination to continue the agreement.
The Gas Gathering and Processing Agreement is assignable in
whole or in part by the parties. The Gas Gathering and
Processing Agreement may not be amended in any manner that our
general partner determines will adversely affect the holders of
our common units without the prior approval of our conflicts
committee.
Other
Agreements
On August 10, 2007, we executed a subordinated promissory
note payable to Quicksilver in the principal amount of
$50 million. At December 31, 2008, the outstanding
balance of the promissory note was $53.6 million. For a
more detailed description of the promissory note, see
Note 6 to our consolidated financial statements included in
Item 8 of this annual report, which is incorporated herein
by reference.
In June 2008, Little Hoss Ranch Partners, L.P. (Little
Hoss) executed an easement amendment in favor of our
subsidiary, Cowtown Pipeline Partners L.P. Little Hoss has the
same general partner as two of our unitholders, Little Hoss
Cowtown Pipeline Partners and Little Hoss Cowtown Processing
Partners. At the time of the transaction, these two unitholders
together owned more than 5% of our outstanding units. The
easement amendment corrected the legal description of an
existing pipeline easement crossing real property owned by
Little Hoss, and permitted our subsidiary to construct an
additional pipeline within the easement. In exchange for its
execution of the easement amendment, our subsidiary paid Little
Hoss $246,597.
In May 2008, we purchased land and a warehouse located in Hood
County, Texas, from Quicksilver for a purchase price of
$0.3 million and reimbursed Quicksilver $0.6 million
of costs.
Policies
and Procedures for Review and Approval of Transactions with
Related Parties
Our general partners board of directors has adopted a
written policy covering transactions with related parties
pursuant to which it has delegated to the conflicts committee
the responsibility for reviewing and, if appropriate, approving
or ratifying such transactions. The policy covers transactions
to which we or any of our
72
subsidiaries is a party and in which any director or executive
officer of our general partner or any person that beneficially
owns more than 5% of our common units, any immediate family
member of such director, officer or owner, or any related entity
of such related party, had, has or will have a direct or
indirect interest, other than a transaction involving
(a) compensation by us or (b) less than $120,000. The
policy instructs directors and executive officers to bring any
possible related-party transaction to the attention of our
general partners General Counsel or Compliance Officer,
who, unless he or she determines that the transaction is not a
related-party
transaction, will notify the chairman of the conflicts
committee. The conflicts committee reviews each related-party
transaction of which it becomes aware and may approve or ratify
a related-party transaction if the conflicts committee
determines that the transaction is in the best interest of us
and our unitholders. In making this determination, the conflicts
committee considers (i) whether the terms of the
transaction are more or less favorable to us than those that
could be expected to be obtained from an unrelated third party
on an arms length basis (ii) any provisions in our
financing arrangements relating to transactions with related
parties or affiliates; and (iii) any other matters the
committee deems relevant and appropriate. The conflicts
committee reports periodically to our general partners
board of directors on the nature of the transactions with
related parties that have been presented to the conflicts
committee and the determinations that the conflicts committee
has made with respect to those transactions.
Director
Independence
Our general partners board of directors has adopted
categorical independence standards consistent with the current
listing standards of NYSE Arca to assist the board of directors
in determining which of its members is independent. A copy of
the categorical independence standards appears in the Corporate
Governance section of our website
(http://www.kgslp.com/corporate/corporate_governance).
Our general partners board of directors has determined
that each of Messrs. Bledsoe, Gettig and Somerhalder
satisfies our general partners categorical independence
standards and further determined that each of them is
independent within the meaning of NYSE Arcas listing
standards. NYSE Arca does not require a listed limited
partnership like us to have a compensation committee or a
nominating and governance committee. Accordingly, each director
of Quicksilver Gas Services GP LLC may participate in
consideration of compensation, nomination and governance
matters. Each of Messrs. Glenn Darden, Thomas Darden, Jeff
Cook and Philip W. Cook is a member of our general
partners board of directors and an executive officer of
our general partner, and accordingly these individuals are not
independent.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The following set forth fees billed by Deloitte &
Touche LLP for the audit of our annual financial statements and
other services rendered for the years ended December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Fees Billed for the Year
|
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Audit fees
(1)
|
|
$
|
364,500
|
|
|
$
|
316,000
|
|
Audit-related fees
(2)
|
|
|
-
|
|
|
|
324,000
|
|
Tax fees
(3)
|
|
|
-
|
|
|
|
-
|
|
All other fees
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
364,500
|
|
|
$
|
640,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes fees for audits of annual financial statements and
reviews of the related quarterly financial statements.
|
|
(2)
|
Includes fees related to consultations concerning financial
accounting and reporting standards and services related to the
completion of the IPO.
|
|
(3)
|
There were no tax fees billed for 2008 or 2007.
|
|
(4)
|
There were no fees billed for 2008 or 2007 for products and
services other than those describe above.
|
73
Pursuant to the charter of the audit committee, the audit
committee is responsible for the oversight of our accounting,
reporting and financial practices. The audit committee has the
responsibility to select, appoint, engage, oversee, retain,
evaluate and terminate our external auditors and
pre-approve
all audit and
non-audit
services. The audit committee has delegated to its chair the
responsibility to
pre-approve
all audit and
non-audit
services, provided that these decisions are presented to the
full Audit Committee at its next regularly scheduled meeting.
None of the services described above as
audit-related
fees were exempt from the
pre-approval
requirements set forth in SEC rules and regulations.
74
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements of ours and the report of our
Independent Auditors thereon are included on pages 34 through 53
of this
Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Income for the years ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Partners Capital for the years
ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2008, 2007 and 2006
2. Financial Statement Schedules:
All schedules are omitted because the required information is
inapplicable or the information is presented in the financial
statements or the notes thereto.
3. Exhibits:
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Certificate of Limited Partnership of Quicksilver Gas Services
LP (filed as Exhibit 3.1 to the Companys
Form S-1,
File
No. 33-140599,
filed February 12, 2007 and included herein by reference).
|
|
3
|
.2
|
|
Second Amended and Restated Agreement of Limited Partnership of
Quicksilver Gas Services LP, dated February 19, 2008 (filed
as Exhibit 3.1 to the Companys
Form 8-K
filed February 22, 2008 and included herein by reference).
|
|
3
|
.3
|
|
Certificate of Formation of Quicksilver Gas Services GP LLC
(filed as Exhibit 3.3 to the Companys
Form S-1,
File
No. 333-140599,
filed February 12, 2007 and included herein by reference).
|
|
3
|
.4
|
|
First Amended and Restated Limited Liability Company Agreement
of Quicksilver Gas Services GP LLC, dated July 24, 2007
(filed as Exhibit 3.4 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 25, 2007 and included herein by reference).
|
|
4
|
.1
|
|
Form of Common Unit Certificate (filed as Exhibit 4.1 to
the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
10
|
.1
|
|
Assignment and Conveyance, effective April 30, 2007,
between Cowtown Pipeline Partners L.P. and Cowtown Pipeline L.P.
(filed as Exhibit 10.13 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 30, 2007 and included herein by reference).
|
|
10
|
.2(a)
|
|
Form of Assignment, effective April 30, 2007, between
Cowtown Pipeline Partners L.P. and Cowtown Pipeline L.P. (filed
as Exhibit 10.14(a) to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 30, 2007 and included herein by reference).
|
|
10
|
.2(b)
|
|
Schedule of Assignments, effective April 30, 2007, between
Cowtown Pipeline Partners L.P. and Cowtown Pipeline L.P. (filed
as Exhibit 10.14(b) to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 30, 2007 and included herein by reference).
|
|
10
|
.3
|
|
Credit Agreement, dated as of August 10, 2007, among
Quicksilver Gas Services LP and the lenders and agents
identified therein (filed as Exhibit 10.1 to the
Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
75
|
|
|
|
|
|
10
|
.4
|
|
First Amendment to Credit Agreement, dated as of
October 10, 2008, among Quicksilver Gas Services LP and the
lenders and agents identified therein (filed as
Exhibit 10.1 to the Companys
Form 8-K
filed October 14, 2008 and included herein by reference).
|
|
10
|
.5
|
|
Subordinated Promissory Note, dated as of August 10, 2007,
made by Quicksilver Gas Services LP payable to the order of
Quicksilver Resources Inc. (filed as Exhibit 10.2 to the
Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.6
|
|
Omnibus Agreement, dated August 10, 2007, among Quicksilver
Gas Services LP, Quicksilver Gas Services GP LLC and Quicksilver
Resources Inc. (filed as Exhibit 10.4 to the Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.7
|
|
Services and Secondment Agreement, dated August 10, 2007,
between Quicksilver Resources Inc. and Quicksilver Gas Services
GP LLC (filed as Exhibit 10.5 to the Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.8
|
|
Contribution, Conveyance and Assumption Agreement, dated
August 10, 2007, among Quicksilver Gas Services LP,
Quicksilver Gas Services GP LLC, Cowtown Gas Processing L.P.,
Cowtown Pipeline L.P., Quicksilver Gas Services Holdings LLC,
Quicksilver Gas Services Operating GP LLC, Quicksilver Gas
Services Operating LLC and the private investors named therein
(filed as Exhibit 10.3 to the Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.9
|
|
Fifth Amended and Restated Gas Gathering and Processing
Agreement, dated August 10, 2007, among Quicksilver
Resources Inc., Cowtown Pipeline Partner L.P. and Cowtown Gas
Processing Partners L.P. (filed as Exhibit 10.6 to the
Companys
Form 8-K
filed August 16,2007 and included herein by reference).
|
|
10
|
.10
|
|
Sixth Amended and Restated Gas Gathering and Processing
Agreement, dated September 1, 2008, among Quicksilver
Resources Inc., Cowtown Pipeline Partners L.P. and Cowtown Gas
Processing Partners L.P. (filed as Exhibit 10.1 to the
Companys
Form 10-Q
filed November 6, 2008 and included herein by reference).
|
|
+ 10
|
.11
|
|
2007 Equity Plan (filed as Exhibit 99.1 to the
Companys
Form S-8,
File
No. 333-145326,
filed August 10, 2007 and included herein by reference).
|
|
+ 10
|
.12
|
|
Form of Phantom Unit Award Agreement for Directors
(3-year)
(filed as Exhibit 10.8 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
+ 10
|
.13
|
|
Form of Phantom Unit Award Agreement for Directors
(1-year)
(filed as Exhibit 10.9 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
+ 10
|
.14
|
|
Form of Phantom Unit Award Agreement for
Non-Directors
(Cash) (filed as Exhibit 10.10 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
+ 10
|
.15
|
|
Form of Phantom Unit Award Agreement for
Non-Directors
(Units) (filed as Exhibit 10.11 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 25, 2007 and included herein by reference).
|
|
+ 10
|
.16
|
|
Description of Non-Employee Director Compensation (filed as
Exhibit 10.14 to the Companys
Form 10-K
filed February 28, 2008 and included herein by reference)
|
|
+ 10
|
.17
|
|
Quicksilver Gas Services LP Annual Bonus Plan (filed as
Exhibit 10.1 to the Companys
Form 8-K
filed December 13, 2007 and included herein by reference).
|
|
+ 10
|
.18
|
|
Form of Indemnification Agreement by and between Quicksilver Gas
Services GP LLC and its officers and directors (filed as
Exhibit 10.7 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
*21
|
.1
|
|
List of Subsidiaries of Quicksilver Gas Services LP
|
|
*23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
*24
|
.1
|
|
Power of Attorney of Directors and Certain Officers
|
|
*31
|
.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
*31
|
.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
*32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
*
|
|
Filed herewith
|
+
|
|
Identifies management contracts and compensatory plans or
arrangements.
|
76
SIGNATURES
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
QUICKSILVER GAS SERVICES LP
By: QUICKSILVER GAS SERVICES GP LLC,
General Partner
|
|
|
|
|
By: /s/ Thomas F.
Darden
|
|
|
Thomas F. Darden
|
Dated: March 2, 2009
|
|
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, the following persons on behalf of the registrant and in
the capacities and on the dates indicated have signed this
report below.
|
|
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
|
*
Glenn
Darden
|
|
Chairman of the Board; Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Thomas
F. Darden
Thomas
F. Darden
|
|
President and Chief Executive Officer (Principal Executive
Officer); Director
|
|
March 2, 2009
|
|
|
|
|
|
*
Jeff
Cook
|
|
Executive Vice President Chief Operating Officer;
Director
|
|
March 2, 2009
|
|
|
|
|
|
*
Philip
Cook
|
|
Senior Vice President Chief Financial Officer
(Principal Financial Officer); Director
|
|
March 2, 2009
|
|
|
|
|
|
*
John
Regan
|
|
Vice President Chief Accounting Officer (Principal
Accounting Officer)
|
|
March 2, 2009
|
|
|
|
|
|
*
Alvin
Bledsoe
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
*
Philip
D. Gettig
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
*
John
W. Somerhalder II
|
|
Director
|
|
March 2, 2009
|
|
|
*
|
The undersigned, by signing his name hereto, does sign and
execute this Annual Report on Form 10-K pursuant to the
Powers of Attorney executed by the above-named officers and
directors and filed herewith.
|
|
|
|
|
|
|
|
|
Thomas F. Darden
Attorney-in-Fact
|
77
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Certificate of Limited Partnership of Quicksilver Gas Services
LP (filed as Exhibit 3.1 to the Companys
Form S-1,
File
No. 33-140599,
filed February 12, 2007 and included herein by reference).
|
|
3
|
.2
|
|
Second Amended and Restated Agreement of Limited Partnership of
Quicksilver Gas Services LP, dated February 19, 2008 (filed
as Exhibit 3.1 to the Companys
Form 8-K
filed February 22, 2008 and included herein by reference).
|
|
3
|
.3
|
|
Certificate of Formation of Quicksilver Gas Services GP LLC
(filed as Exhibit 3.3 to the Companys
Form S-1,
File
No. 333-140599,
filed February 12, 2007 and included herein by reference).
|
|
3
|
.4
|
|
First Amended and Restated Limited Liability Company Agreement
of Quicksilver Gas Services GP LLC, dated July 24, 2007
(filed as Exhibit 3.4 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 25, 2007 and included herein by reference).
|
|
4
|
.1
|
|
Form of Common Unit Certificate (filed as Exhibit 4.1 to
the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
10
|
.1
|
|
Assignment and Conveyance, effective April 30, 2007,
between Cowtown Pipeline Partners L.P. and Cowtown Pipeline L.P.
(filed as Exhibit 10.13 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 30, 2007 and included herein by reference).
|
|
10
|
.2(a)
|
|
Form of Assignment, effective April 30, 2007, between
Cowtown Pipeline Partners L.P. and Cowtown Pipeline L.P. (filed
as Exhibit 10.14(a) to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 30, 2007 and included herein by reference).
|
|
10
|
.2(b)
|
|
Schedule of Assignments, effective April 30, 2007, between
Cowtown Pipeline Partners L.P. and Cowtown Pipeline L.P. (filed
as Exhibit 10.14(b) to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 30, 2007 and included herein by reference).
|
|
10
|
.3
|
|
Credit Agreement, dated as of August 10, 2007, among
Quicksilver Gas Services LP and the lenders and agents
identified therein (filed as Exhibit 10.1 to the
Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.4
|
|
First Amendment to Credit Agreement, dated as of
October 10, 2008, among Quicksilver Gas Services LP and the
lenders and agents identified therein (filed as
Exhibit 10.1 to the Companys
Form 8-K
filed October 14, 2008 and included herein by reference).
|
|
10
|
.5
|
|
Subordinated Promissory Note, dated as of August 10, 2007,
made by Quicksilver Gas Services LP payable to the order of
Quicksilver Resources Inc. (filed as Exhibit 10.2 to the
Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.6
|
|
Omnibus Agreement, dated August 10, 2007, among Quicksilver
Gas Services LP, Quicksilver Gas Services GP LLC and Quicksilver
Resources Inc. (filed as Exhibit 10.4 to the Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.7
|
|
Services and Secondment Agreement, dated August 10, 2007,
between Quicksilver Resources Inc. and Quicksilver Gas Services
GP LLC (filed as Exhibit 10.5 to the Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.8
|
|
Contribution, Conveyance and Assumption Agreement, dated
August 10, 2007, among Quicksilver Gas Services LP,
Quicksilver Gas Services GP LLC, Cowtown Gas Processing L.P.,
Cowtown Pipeline L.P., Quicksilver Gas Services Holdings LLC,
Quicksilver Gas Services Operating GP LLC, Quicksilver Gas
Services Operating LLC and the private investors named therein
(filed as Exhibit 10.3 to the Companys
Form 8-K
filed August 16, 2007 and included herein by reference).
|
|
10
|
.9
|
|
Fifth Amended and Restated Gas Gathering and Processing
Agreement, dated August 10, 2007, among Quicksilver
Resources Inc., Cowtown Pipeline Partner L.P. and Cowtown Gas
Processing Partners L.P. (filed as Exhibit 10.6 to the
Companys
Form 8-K
filed August 16,2007 and included herein by reference).
|
78
|
|
|
|
|
|
10
|
.10
|
|
Sixth Amended and Restated Gas Gathering and Processing
Agreement, dated September 1, 2008, among Quicksilver
Resources Inc., Cowtown Pipeline Partners L.P. and Cowtown Gas
Processing Partners L.P. (filed as Exhibit 10.1 to the
Companys
Form 10-Q
filed November 6, 2008 and included herein by reference).
|
|
+ 10
|
.11
|
|
2007 Equity Plan (filed as Exhibit 99.1 to the
Companys
Form S-8,
File
No. 333-145326,
filed August 10, 2007 and included herein by reference).
|
|
+ 10
|
.12
|
|
Form of Phantom Unit Award Agreement for Directors
(3-year)
(filed as Exhibit 10.8 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
+ 10
|
.13
|
|
Form of Phantom Unit Award Agreement for Directors
(1-year)
(filed as Exhibit 10.9 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
+ 10
|
.14
|
|
Form of Phantom Unit Award Agreement for
Non-Directors
(Cash) (filed as Exhibit 10.10 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
+ 10
|
.15
|
|
Form of Phantom Unit Award Agreement for
Non-Directors
(Units) (filed as Exhibit 10.11 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 25, 2007 and included herein by reference).
|
|
+ 10
|
.16
|
|
Description of Non-Employee Director Compensation (filed as
Exhibit 10.14 to the Companys
Form 10-K
filed February 28, 2008 and included herein by reference)
|
|
+ 10
|
.17
|
|
Quicksilver Gas Services LP Annual Bonus Plan (filed as
Exhibit 10.1 to the Companys
Form 8-K
filed December 13, 2007 and included herein by reference).
|
|
+ 10
|
.18
|
|
Form of Indemnification Agreement by and between Quicksilver Gas
Services GP LLC and its officers and directors (filed as
Exhibit 10.7 to the Companys
Form S-1/A,
File
No. 333-140599,
filed July 17, 2007 and included herein by reference).
|
|
*21
|
.1
|
|
List of Subsidiaries of Quicksilver Gas Services LP
|
|
*23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
*24
|
.1
|
|
Power of Attorney of Directors and Certain Officers
|
|
*31
|
.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
*31
|
.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
*32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
+
|
|
Identifies management contracts and compensatory plans or
arrangements.
|
79
Kodiak Gas Services (NYSE:KGS)
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Kodiak Gas Services (NYSE:KGS)
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