UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): March 3, 2005
PENN VIRGINIA RESOURCE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
| | | | |
Delaware | | 1-16735 | | 23-3087517 |
(State or other jurisdiction of incorporation) | | (Commission File Number) | | (IRS Employer Identification No.) |
Three Radnor Corporate Center, Suite 230
100 Matsonford Road
Radnor Pennsylvania 19087
(Address of principal executive offices, including Zip Code)
Registrant’s telephone number, including area code: (610) 687-8900
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the obligation of the registrant under any of the following provisions (see General Instruction A.2.):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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Item 1.01 | Entry into a Material Definitive Agreement. |
On November 22, 2004, Penn Virginia Resource Partners, L.P. (“PVR”) announced (the “Announcement”) that it had entered into a Purchase Agreement (the “Purchase Agreement”) with Cantera Resources Holdings, LLC (“Holdings”) providing for PVR’s purchase from Holdings (as more fully described in Item 2.01 of this report, the “Transaction”) of 100% of the membership interests of Cantera Natural Gas, LLC (“CNG”). At the time of the Announcement, CNG owned midstream gas gathering and processing businesses located in the mid-continent area of Oklahoma and the panhandle of Texas (together, the “Texas/Oklahoma Business”) as well as in Wyoming (the “Wyoming Business”). The Purchase Agreement provided that, prior to closing the Transaction, CNG would distribute to Holdings all assets of CNG related to the Wyoming Business as well as any other assets not related to the Texas/Oklahoma Business. A copy of the Purchase Agreement is filed as Exhibit 2.01 to this report and is incorporated by reference herein.
On March 3, 2005, in connection with the closing of the Transaction, PVR and Holdings entered into Amendment No. 1 to the Purchase Agreement (the “Amendment”) to reflect, among other things, a restructuring (the “Restructuring”) of the Transaction. Under the Restructuring, PVR agreed to purchase 100% of the membership interests of a newly formed company, Cantera Gas Resources, LLC (“Cantera Resources”) into which CNG had contributed virtually all of its assets related to the Texas/Oklahoma Business. A copy of the Amendment is filed as Exhibit 2.02 to this report and is incorporated by reference herein. The descriptions of the Purchase Agreement and the Amendment are qualified in their entirety by reference to the text of Exhibits 2.01 and 2.02.
In conjunction with the closing of the Transaction, on March 3, 2005, PVR, Penn Virginia Operating Co., LLC, a wholly owned subsidiary of PVR (the “Operating Company”) and the Operating Company’s subsidiaries (the “Loan Parties”) also entered into the First Amendment (the “Note Amendment”) to the Note Purchase Agreement (the “Note Purchase Agreement”) dated as of March 27, 2003 under which the Operating Company currently has issued $88 million of its 5.77% senior notes (the “Notes”) which are due on March 27, 2010.
The Note Amendment amended the Note Purchase Agreement to, among other things, (i) permit PVR to enter the midstream natural gas business, (ii) increase the fixed interest rate on the Notes from 5.77% to 6.02%, (iii) require that PVR obtain an annual confirmation of its credit rating, with a one percent increase in the interest rate payable on the Notes in the event that PVR’s credit rating falls below investment grade, (iv) convert the debt incurrence test in the Notes to a maintenance test and (v) provide for a ratio of not more than 3.5 to 1.0 of total debt to consolidated EBITDA for each of the four most recently completed fiscal quarters, which can be increased to a ratio of not more than 4.0 to 1.0 for a period of up to two quarters in the event a permitted acquisition causes pro forma total debt to consolidated EBITDA to exceed 3.5 to 1.0 for each of the four most recently completed fiscal quarters.
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A copy of the Note Amendment is filed as Exhibit 10.1 to this report and is incorporated herein by reference. The description of the Note Amendment herein is qualified by reference to the text of Exhibit 10.1.
Item 2.01 | Completion of Acquisition or Disposition of Assets. |
On March 3, 2005, PVR completed the acquisition of 100% of the membership interests of Cantera Resources for total cash consideration of $191 million. The purchase price was funded with a $110 million term loan, and with borrowings under PVR’s $150 million revolving credit facility, which are more fully described in Item 2.03 of this report.
To facilitate the integration of Cantera Resources into its business, PVR has entered into a Transition Services Agreement (the “Transition Agreement”) with CNG. Under the Transition Agreement, CNG will provide to PVR certain accounting and other services in connection with PVR’s operation of the Texas/Oklahoma Business for up to a nine-month period after closing of the Transaction. Under the Transition Agreement, PVR will pay to CNG an amount equal to 160% of the salaries paid to each employee of CNG who provides services to PVR, adjusted for the portion of such employee’s time actually spent providing such services. In addition, PVR is also responsible for actual out-of-pocket expenses to third parties incurred in connection with such services.
The Texas/Oklahoma Business purchased by PVR includes three gas gathering and processing systems and one standalone gas gathering system. The systems currently gather aggregate volumes in excess of 135 MMcfd, and the gas plants process an estimated aggregate 113 MMcfd and produce an aggregate of approximately 9,200 barrels per day of natural gas liquids. Following is a description of each system.
| • | | Beaver/Perryton System. The Beaver/Perryton System is composed of gathering and processing assets in the panhandle regions of Oklahoma and Texas and includes 1,160 miles of two to 16-inch gas gathering pipe. The Beaver natural gas processing facility has processing capacity of 100 MMcfd and currently is processing a volume of approximately 87 MMcfd. |
| • | | Crescent System. The Crescent System is composed of gathering and processing assets in Central Oklahoma and includes 1,670 miles of two to 10-inch gas gathering pipe. The Crescent natural gas processing facility has processing capacity of 40 MMcfd and currently is processing a volume of approximately 19 MMcfd. |
| • | | Hamlin System. The Hamlin System is composed of gathering and processing assets in Central Texas and includes 515 miles of two to 12- inch gas gathering pipe. The Hamlin natural gas processing facility has processing capacity of 20 MMcfd and currently is processing a volume of approximately 7 MMcfd. |
| • | | Arkoma System. The Arkoma System is composed of three gathering systems in Eastern Oklahoma and consists of 78 miles of three to 12-inch gas gathering pipe. The gas gathered in the Arkoma System does not require any processing. Currently the Arkoma System is gathering a volume of approximately 16 MMcfd. |
In addition to the four midstream systems, PVR also acquired Cantera Resource’s natural gas marketing business, which aggregates third-party volumes and sells them into intrastate pipelines and at
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market hubs accessed by various interstate pipelines. Revenue from this business does not generate qualifying income for a master limited partnership.
Item 2.03 | Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. |
On March 3, 2005, the Loan Parties entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of lenders, including PNC Bank, National Association, as Administrative Agent (the “Agent”). The Credit Agreement provides for a term loan of $110 million (the “Term Loan”) and a five-year $150 million revolving credit facility (the “Revolver”). PVR has a one time option to request that the Revolver be increased by up to an additional $100 million upon increased commitments from existing or new lenders. The Revolver is available for general partnership purposes, including working capital, capital expenditures and acquisitions, and includes a $10 million sublimit for the issuance of letters of credit. The Term Loan is payable as interest only until March 3, 2006; thereafter, it is payable in 16 equal quarterly installments of principal plus accrued interest, with the final payment due on March 3, 2010. The Operating Company is required to make prepayments of the Term Loan with the proceeds of, among other things, any equity offering by PVR, and, once it has been repaid, the Term Loan cannot be re-borrowed. The expiration date of the Revolver is March 3, 2010. Borrowings under the Term Loan and the Revolver bear interest, at the Operating Company’s option, at either (i) the greater of (a) the Agent’s prime rate, plus an applicable margin (ranging from 0.00% to 1.00% depending on the Operating Company’s ratio of total indebtedness to EBITDA) and (b) the rate determined by the Agent to be the “open” rate for federal funds transactions, plus an applicable margin (ranging from 0.00% to 1.00% depending on the Operating Company’s ratio of total indebtedness to EBITDA), or (ii) a rate derived from LIBOR, as adjusted for statutory reserve requirements for Eurocurrency liabilities, plus an applicable margin (ranging from 1.00% to 2.00% depending on the Operating Company’s ratio of total indebtedness to EBITDA).
The Credit Agreement contains covenants and provisions that affect the Loan Parties, including, without limitation, those that
| • | | Prohibit the Loan Parties from incurring indebtedness (subject to enumerated exceptions); |
| • | | Prohibit the Loan Parties from incurring liens on their respective properties (subject to enumerated exceptions); |
| • | | Prohibit the Loan Parties from making certain loans, acquisitions or investments (subject to enumerated exceptions); |
| • | | Prohibit the Loan Parties from disposing of assets or entering into consolidations or mergers (subject to enumerated exceptions); |
| • | | Prohibit the Loan Parties from making certain dividend or other distributions if any potential default or event of default exists and subject to other enumerated exceptions; |
| • | | Prohibit the Loan Parties from making any material change to the nature of their business; |
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| • | | Require the Loan Parties to maintain specified ratios, calculated as of the end of each fiscal quarter, of |
| • | | Not less than 4.0 to 1.0 of consolidated EBITDA to consolidated interest expense for each of the four most recently completed fiscal quarters; |
| • | | Not more than 3.5 to 1.0 of total debt to consolidated EBITDA for each of the four most recently completed fiscal quarters which can be increased to a ratio of not more than 4.0 to 1.0 for a period of upto two quarters in the event of a permitted acquisition causes pro forma total debt to consolidated EBITDA to exceed 3.5 to 1.0 for each of the four most recently completed fiscal quarters; and |
| • | | Require the Loan Parties to place a lien in favor of the Lenders on the assets relating to the Texas/Oklahoma Business if the Lenders reasonably determine that a judgment in excess of $20 million against the Loan Parties in connection with certain enumerated litigation is probable and that the payment of such potential judgment by the Loan Parties’ indemnitors is uncertain. |
A copy of the Credit Agreement is filed as Exhibit 10.2 to this report and is incorporated herein by reference. The description of the Credit Agreement herein is qualified by reference to the text of Exhibit 10.2.
Item 7.01 | Regulation FD Disclosure. |
On March 3, 2005, PVR issued a press release announcing the Transactions described in Item 2.01. The press release is attached hereto as Exhibit 99.1 and is hereby incorporated into this Item 7.01. In accordance with General Instruction B.2 of Form 8-K, the press release shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall such information and Exhibit be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act of 1934, each as amended, except as shall be expressly set forth by specific reference in such a filing.
Item 9.01 | Financial Statements and Exhibits |
(a)Financial Statements of Businesses Acquired.
Following are these audited financial statements of Cantera Natural Gas, LLC—Mid Continent Division (a Division of Cantera Natural Gas, LLC):
| • | | Report of Independent Registered Public Accounting Firm |
| • | | Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003 |
| • | | Consolidated Statements of Operations for the Year ended December 31, 2004 and the Period from June 25, 2003 (inception) through December 31, 2003 |
| • | | Consolidated Statements of Divisional Equity for the Year ended December 31, 2004 and the Period from June 25, 2003 (inception) through December 31, 2003 |
| • | | Consolidated Statements of Cash Flows for the Year ended December 31, 2004 and the Period from June 25, 2003 (inception) through December 31, 2003 |
| • | | Notes to Consolidated Financial Statements |
Following are these audited financial statements of Penn Virginia Resources Partners, L.P. (Acquired Assets):
| • | | Report of Independent Registered Public Accounting Firm |
| • | | Statements of Operating Loss for the Year Ended December 31, 2002 and the Period from January 1, 2003 through July 2, 2003 (disposition) |
| • | | Notes to Statements of Operating Loss |
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Report of Independent Registered Public Accounting Firm
The Board of Directors
Cantera Natural Gas, LLC:
We have audited the accompanying balance sheets of Cantera Natural Gas, LLC—Mid Continent Division (a division of Cantera Natural Gas, LLC) as of December 31, 2004 and 2003, and the related statements of operations, divisional equity, and cash flows for the year ended December 31, 2004 and for the period from June 25, 2003 (inception) through December 31, 2003. These financial statements are the responsibility of the Company’s 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, the financial statements referred to above present fairly, in all material respects, the financial position of Cantera Natural Gas, LLC—Mid Continent Division (a division of Cantera Natural Gas, LLC) as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the year ended December 31, 2004 and for the period from June 25, 2003 (inception) through December 31, 2003, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 18, 2005
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CANTERA NATURAL GAS, LLC—MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Balance Sheets
December 31, 2004 and 2003
| | | | | | |
| | 2004
| | 2003
|
Assets | | | | | | |
Current assets: | | | | | | |
Accounts receivable, net of allowance of $210,788 and $210,788 in 2004 and 2003, respectively | | $ | 41,958,686 | | $ | 35,274,708 |
Product inventory | | | 2,362,140 | | | 1,274,875 |
Prepaids and other | | | 1,381,229 | | | 702,159 |
| |
|
| |
|
|
Total current assets | | | 45,702,055 | | | 37,251,742 |
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|
| |
|
|
Property, plant, and equipment, net | | | 81,681,270 | | | 83,777,564 |
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|
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|
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Other assets | | | 58,983 | | | 49,677 |
| |
|
| |
|
|
| | $ | 127,442,308 | | $ | 121,078,983 |
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|
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|
|
Liabilities and Divisional Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 37,261,192 | | $ | 31,658,291 |
Accrued liabilities | | | 324,863 | | | 2,507,947 |
Capital lease obligation | | | — | | | 101,670 |
Income taxes payable | | | — | | | 1,454,690 |
| |
|
| |
|
|
Total current liabilities | | | 37,586,055 | | | 35,722,598 |
| | |
Intercompany loan | | | 2,671,744 | | | 20,925,951 |
Deferred tax liability | | | — | | | 1,385,410 |
| |
|
| |
|
|
Total liabilities | | | 40,257,799 | | | 58,033,959 |
| |
|
| |
|
|
Commitments and contingencies | | | — | | | — |
Divisional equity: | | | | | | |
Divisional capital | | | 58,335,000 | | | 58,335,000 |
Retained earnings | | | 28,849,509 | | | 4,710,024 |
| |
|
| |
|
|
| | | 87,184,509 | | | 63,045,024 |
| |
|
| |
|
|
| | $ | 127,442,308 | | $ | 121,078,983 |
| |
|
| |
|
|
See accompanying notes to financial statements.
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CANTERA NATURAL GAS, LLC—MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Statements of Operations
Year ended December 31, 2004 and period from
June 25, 2003 (inception) through December 31, 2003
| | | | | | | | |
| | 2004
| | | 2003
| |
Revenue: | | | | | | | | |
Sale of residue gas | | $ | 178,318,766 | | | $ | 63,685,914 | |
Sale of natural gas liquids | | | 91,878,631 | | | | 30,484,830 | |
Sale of condensate and other | | | 6,484,780 | | | | 2,196,947 | |
Gathering/transportation fees and other | | | 6,720,562 | | | | 3,094,965 | |
Marketing revenue, net | | | 2,128,724 | | | | 5,505,521 | |
| |
|
|
| |
|
|
|
Total revenue | | | 285,531,463 | | | | 104,968,177 | |
| | |
Cost of gas purchased | | | 240,189,152 | | | | 86,991,752 | |
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|
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Gross margin | | | 45,342,311 | | | | 17,976,425 | |
| | |
Operating expenses | | | 11,802,086 | | | | 5,549,095 | |
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Net margin | | | 33,540,225 | | | | 12,427,330 | |
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General, administrative, and depreciation: | | | | | | | | |
General and administrative expense | | | 3,897,678 | | | | 1,403,397 | |
Depreciation expense | | | 6,026,785 | | | | 2,827,403 | |
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Total general, administrative, and depreciation | | | 9,924,463 | | | | 4,230,800 | |
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Operating income | | | 23,615,762 | | | | 8,196,530 | |
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Other income (expense): | | | | | | | | |
Interest expense | | | (533,780 | ) | | | (695,946 | ) |
Gain on sale of assets | | | 65,374 | | | | — | |
Other, net | | | 11,433 | | | | 49,540 | |
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Total other income (expense) | | | (456,973 | ) | | | (646,406 | ) |
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Income before taxes | | | 23,158,789 | | | | 7,550,124 | |
| | |
Income tax provision (benefit): | | | | | | | | |
Deferred | | | (1,385,410 | ) | | | 1,385,410 | |
Current | | | 404,714 | | | | 1,454,690 | |
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Net income | | $ | 24,139,485 | | | $ | 4,710,024 | |
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See accompanying notes to financial statements.
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CANTERA NATURAL GAS, LLC—MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Statements of Divisional Equity
Year ended December 31, 2004 and period from
June 25, 2003 (inception) through December 31, 2003
| | | | | | | | | |
| | Divisional Capital
| | Retained Earnings
| | Total
|
Balance, inception (June 25, 2003) | | | — | | | — | | | — |
Capital allocation from Parent | | $ | 58,335,000 | | | — | | $ | 58,335,000 |
Net income | | | — | | $ | 4,710,024 | | | 4,710,024 |
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Balance, December 31, 2003 | | | 58,335,000 | | | 4,710,024 | | | 63,045,024 |
Net income | | | — | | | 24,139,485 | | | 24,139,485 |
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Balance, December 31, 2004 | | $ | 58,335,000 | | $ | 28,849,509 | | $ | 87,184,509 |
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See accompanying notes to financial statements.
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CANTERA NATURAL GAS, LLC—MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Statements of Cash Flows
Year ended December 31, 2004 and period from
June 25, 2003 (inception) through December 31, 2003
| | | | | | | | |
| | 2004
| | | 2003
| |
Cash flow from operating activities: | | | | | | | | |
Net income | | $ | 24,139,485 | | | $ | 4,710,024 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Bad debt expense | | | — | | | | 210,788 | |
Depreciation | | | 6,026,785 | | | | 2,827,403 | |
Gain on sale of assets | | | (65,374 | ) | | | — | |
Deferred taxes | | | (1,385,410 | ) | | | 1,385,410 | |
Changes in operating assets and liabilities, net of effects of acquisition: | | | | | | | | |
Accounts receivable | | | (6,683,977 | ) | | | 3,661,969 | |
Product inventory | | | (1,087,265 | ) | | | 1,010,433 | |
Prepaids and other assets | | | (687,852 | ) | | | 1,664,652 | |
Accounts payable | | | 5,602,901 | | | | 2,586,628 | |
Accrued liabilities | | | (2,183,084 | ) | | | (2,965,575 | ) |
Income taxes payable | | | (1,454,690 | ) | | | 1,454,690 | |
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Net cash provided by operating activities | | | 22,221,519 | | | | 16,546,422 | |
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Cash flow from investing activities: | | | | | | | | |
Acquisition of CMS assets | | | (1,045,196 | ) | | | — | |
Capital expenditures | | | (2,885,820 | ) | | | (819,812 | ) |
Proceeds on sale of assets | | | 65,374 | | | | — | |
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| |
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Net cash used in investing activities | | | (3,865,642 | ) | | | (819,812 | ) |
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Cash flow from financing activities: | | | | | | | | |
Repayments under intercompany loan | | | (18,254,207 | ) | | | (15,430,582 | ) |
Payments on capital lease obligation | | | (101,670 | ) | | | (296,028 | ) |
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| |
|
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Net cash used in financing activities | | | (18,355,877 | ) | | | (15,726,610 | ) |
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Net change in cash and cash equivalents | | | — | | | | — | |
| | |
Cash and cash equivalents, beginning of year | | | — | | | | — | |
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Cash and cash equivalents, end of year | | $ | — | | | $ | — | |
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|
|
|
See accompanying notes to financial statements.
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CANTERA NATURAL GAS, LLC MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Notes to Financial Statements
December 31, 2004 and 2003
(1) Organization and Business
Cantera Natural Gas, LLC—Mid Continent Division (the Company) was formed as a division of Cantera Natural Gas, LLC (formerly Cantera Natural Gas, Inc.) (the Parent) on June 25, 2003 (Inception). On July 2, 2003, the Parent purchased all of the shares of CMS Field Services, Inc. (Field Services) (see note 3). On January 2, 2004, Cantera Natural Gas, Inc., previously a Delaware corporation subject to income tax, was reorganized into a Delaware limited liability company, Cantera Natural Gas, LLC and, consequently, is no longer subject to taxation. See note 5, Income Taxes, regarding the impact of the conversion.
The Company is composed of the Field Services assets located in the mid-continent region of the United States. The Company provides natural gas gathering and processing and related services, which include compression, treatment and natural gas liquids (NGLs) extraction services for natural gas producers. Such services are provided primarily to customers in Texas, Oklahoma, and Louisiana.
(2) Summary of Significant Accounting Policies
(a) Stand-Alone Presentation
The Parent does not maintain separate books and records for the Company. As such, in order to prepare stand-alone financial statements for the Company, the Parent compiled accounts specifically identifiable to the Company and calculated or allocated certain other balances as further discussed below.
Initial Allocation of Assets, Divisional Capital, and Intercompany Debt
The Parent utilized proceeds from equity contributions and third-party bank debt to finance the acquisition of Field Services. Certain of the Field Services assets acquired were assigned to the Company. In conjunction with the assignment of the Field Services assets to the Company, the Parent allocated divisional equity and intercompany debt to the Company on a pro rata basis. The initial balances allocated to the Company are presented in the following table:
| | | | |
Field services assets assigned | | $ | 94,691,533 | |
Divisional equity allocated | | | (58,335,000 | ) |
Intercompany debt allocated | | | (36,356,533 | ) |
| |
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| | $ | — | |
| |
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|
Intercompany Debt
The Parent serves as the cash collection point for each of its divisions, with the corresponding offset to intercompany debt. As such, no cash has been presented in the accompanying balance sheets. Subsequent to the initial allocation of intercompany debt discussed above, intercompany debt was increased or decreased based on the net cash generated or used by the Company.
Interest Expense
The accompanying statements of operations include interest expense allocated from the Parent. The amount of the interest expense is calculated on the Company’s intercompany loan balance at the end of the year using the same interest rate as the Parent’s bank debt (4.41% in 2004 and 4.86% in 2003). Interest charged to the Company for 2004 and 2003 was $533,780 and $695,946, respectively.
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CANTERA NATURAL GAS, LLC MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Notes to Financial Statements—(Continued)
December 31, 2004 and 2003
General and Administrative Expenses
The accompanying statements of operations include an allocation of the Parent’s general and administrative expenses. The amount of general and administrative expense allocated to the Company by the Parent was based on the proportionate value of the Field Services assets assigned to the Company to the value of all the Field Services assets acquired.
Income Tax Provision
The accompanying statements of operations include an income tax provision for 2003, which was determined by the Parent as if the Company was a stand-alone taxpayer. The deferred portion of the provision was reversed in 2004 with the corporate reorganization (see note 2 (i)).
Management of the Company believes that the allocation methods discussed above are reasonable and that the allocated amounts reflect a reasonable estimation of the costs the Company would have incurred had it operated as an unaffiliated entity.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(c) Gas Gathering and Processing and Natural Gas Liquids Operations
The Company’s revenue is derived from the sale of residue gas, NGLs, and condensate, marketing of gas for third parties and fees collected for gathering and transporting natural gas and NGLs. Revenue from the sale of NGLs and residue gas is recognized when the NGLs and residue gas produced at the Company’s gas processing plants are sold. The Company’s gathering and transportation revenue is recognized based upon actual volumes delivered. Costs are expensed as incurred.
(d) Imbalances
The Company’s activities periodically result in imbalances whereby the Company’s customers have either over or under delivered natural gas to the Company’s system. Cost for pipeline imbalances is determined based on the Company’s weighted average cost of gas, using the first-in, first-out method, during the month in which the imbalance was created. Net positive imbalances, representing under deliveries from customers, are recorded as gas imbalance inventory, whereas net negative imbalances, representing over deliveries from customers, are recorded as a liability. The cost of NGL inventory is determined based on the weighted average cost of NGLs, including transportation and carrying charges. At December 31, 2004 and 2003, the Company had net positive gas imbalance of $571,000 and $322,600, respectively, and net positive NGL imbalances of $1,790,400 and $952,200, respectively, which are included in product inventory. The weighted average cost of gas underlying the Company’s net product inventory at December 31, 2004 and 2003, respectively, approximates market value.
12
CANTERA NATURAL GAS, LLC MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Notes to Financial Statements—(Continued)
December 31, 2004 and 2003
(e) Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. Expenditures that extend the useful lives of assets are capitalized. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts. Any gain or loss on retirements is reflected in other income in the year in which the asset is disposed. Depreciation is provided on a straight-line basis over the estimated useful life for each asset. Property, plant, and equipment consists of the following at December 31:
| | | | | | | | | | |
| | Useful lives
| | 2004
| | | 2003
| |
Gas processing and gathering systems—acquired | | 15 years | | $ | 86,663,485 | | | $ | 85,620,817 | |
Gas processing and gathering systems—additions | | 20 years | | | 3,425,195 | | | | 803,247 | |
Vehicles, equipment, and tools | | 3 years | | | 439,159 | | | | 180,903 | |
| | | |
|
|
| |
|
|
|
| | | | | 90,527,839 | | | | 86,604,967 | |
Less accumulated depreciation | | | | | (8,846,569 | ) | | | (2,827,403 | ) |
| | | |
|
|
| |
|
|
|
Net property, plant, and equipment | | | | $ | 81,681,270 | | | $ | 83,777,564 | |
| | | |
|
|
| |
|
|
|
(f) Asset Impairment
The Company follows the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This statement does not apply to goodwill, intangible assets not being amortized, financial instruments, and deferred tax assets. SFAS No. 144 requires an impairment loss to be recorded for assets to be held and used when the carrying amount of a long-lived asset is not recoverable from future estimated cash flows and exceeds its fair value. An asset that is classified as held-for-sale shall be recorded at the lower of its carrying amount or fair value less cost to sell. At December 31, 2004, management believes that there is no impairment of the Company’s long-lived assets.
(g) Fair Value of Financial Instruments
The Company’s financial instruments consist of accounts receivable, accounts payable, other current liabilities, capital lease obligations, and intercompany debt. Except for capital lease obligations and intercompany debt, the carrying amounts of financial instruments approximate fair value due to their short maturities. At December 31, 2004 and 2003, based on rates available for similar types of debt, the fair value of capital lease obligations and intercompany debt approximated their carrying amounts.
(h) Concentration of Credit Risk
Substantially all of the Company’s accounts receivable at December 31, 2004 and 2003, result from the sale of natural gas and NGLs to and gas-gathering fees earned from, other companies in the oil and gas industry. This concentration of customers may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized. However, the Company performs credit evaluations on all its customers to minimize exposure to credit risk. During 2004 and 2003, credit losses were not significant.
Revenue for 2004 includes sales to four customers representing 19.5%, 15.3%, 13.0%, and 10.0% of total revenue and for 2003 included sales to four customers representing 25.8%, 19.9%, 13.1%, and 11.2% of total revenue. All remaining customers account for less than 10% each of total revenue.
13
CANTERA NATURAL GAS, LLC MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Notes to Financial Statements—(Continued)
December 31, 2004 and 2003
(i) Income Taxes
On January 2, 2004, the Parent changed its tax status from a C corporation (taxable entity) to a limited liability company (non-taxable entity). With the conversion to a limited liability company on January 2, 2004, the Company is no longer subject to income tax. Prior to the conversion the Company recorded deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carryforwards.
(j) Comprehensive Income
Comprehensive income (loss) includes all changes in equity during a period from nonowner sources. During 2004 and 2003, the Company had no transactions that were required to be reported as adjustments to net income (loss) to determine comprehensive income (loss).
(i) Derivative Financial Instruments
SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivatives and requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet at fair value as either an asset or liability. The statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not historically entered into derivative financial transactions that do not qualify as normal purchases and sales under the requirements of the statement.
(3) Acquisition of Gas Gathering and Processing Facilities
On July 2, 2003, the Parent purchased all of the shares of Field Services and assigned the Field Services assets located in the mid-continent region to the Company. The net purchase price of the assets assigned to the Company was $129,634,416 and consisted of the following:
| | | |
Cash paid | | $ | 94,691,533 |
Liabilities assumed | | | 34,942,883 |
| |
|
|
Total purchase price | | $ | 129,634,416 |
| |
|
|
The assets assigned to the Company consisted of six processing/treating plants, over 3,060 miles of gas gathering pipelines with installed gathering compression of more than 80,000 horsepower, interest in a gas gathering entity (Brightstar), and working capital. The Company accounted for the acquisition as a purchase and, accordingly, the operating results of the acquired assets have been included in the Company’s operations since the July 2, 2003 closing date.
The allocation of the purchase price was based on the fair market value of the assets acquired and was allocated to the assets acquired and liabilities assumed as follows:
| | | | |
Gas processing and gathering systems | | $ | 85,620,817 | |
Vehicles, equipment, and tools | | | 164,338 | |
Investment in partnerships | | | 40,140 | |
Current assets | | | 43,809,121 | |
Current liabilities | | | (34,942,883 | ) |
| |
|
|
|
| | $ | 94,691,533 | |
| |
|
|
|
14
CANTERA NATURAL GAS, LLC MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Notes to Financial Statements—(Continued)
December 31, 2004 and 2003
(4) Intercompany Loan
As discussed in note 2, the accompanying balance sheet includes an intercompany loan balance, which is made up of two components. First, the Parent’s allocated a portion of its total indebtedness based on the proportionate value of the Field Services assets assigned to the Company (see note 2). And second, the Parent manages the operations of the Company. The Parent collects the Company’s receivables and pays the Company’s costs and expenses. The net of receivables collected and payables paid on the Company’s behalf either increases or decreases the intercompany loan. As of December 31, 2004 and 2003, the intercompany loan balance was $2,671,744 and $20,925,951, respectively. The loan is unsecured and has no maturity date. Interest on the intercompany loan is based on interest paid by the Parent on its bank debt. In 2004 and 2003, 74.69% and 75.4%, respectively, of the Parent’s interest expense was allocated to the Company.
(5) Income Taxes
In connection with the Parent’s change in tax status from a taxable entity to a non-taxable entity, the Parent was required to pay income taxes based on the difference between the fair value of its assets and liabilities and the tax basis of those assets and liabilities. Therefore, the Parent allocated current tax expense of $404,714 to the Company, representing the Company’s portion of the taxes due in connection with the Parent’s change in tax status. As a result, the Company reported a net tax benefit of $980,696, representing the current tax expense allocated by the Parent less the reversal of the Company’s previously recorded deferred tax liability of $1,385,410.
Deferred tax assets and liabilities are comprised of the following at December 31, 2003:
| | | | |
| | 2003
| |
Deferred tax assets : | | | | |
Accounts receivable | | $ | 80,626 | |
Deferred tax liabilities : | | | | |
Property, plant, and equipment | | | (1,466,036 | ) |
| |
|
|
|
Net deferred tax liabilities | | $ | (1,385,410 | ) |
| |
|
|
|
The differences between income taxes calculated based on the statutory federal income tax rate of 35% and the Company’s income tax provision for the period from June 25, 2003 (inception) through December 31, 2003 are summarized as follows:
| | | |
| | 2003
|
Federal income tax at 35% | | $ | 2,642,543 |
State taxes, net of federal benefit | | | 193,616 |
Nondeductible expenses | | | 3,941 |
| |
|
|
| | $ | 2,840,100 |
| |
|
|
15
CANTERA NATURAL GAS, LLC MID CONTINENT DIVISION
(A Division of Cantera Natural Gas, LLC)
Notes to Financial Statements—(Continued)
December 31, 2004 and 2003
(6) Contingencies and Commitments
(a) Capital Leases
In conjunction with the acquisition of Field Services, the Company assumed a lease arrangement with a third party leasing agent, whereby the Company leased five compressors under noncancelable capital lease obligations, expiring in May 2004. Aggregate minimum lease payments of $104,900 under the capital leases were paid during 2004. Of that amount, $3,200 represents interest.
(b) Operating Leases
The Company has lease commitments for various compressors that expire at various times through 2005. Total rental expense charged to operations for the year ended December 31, 2004 and for the period from June 25, 2003 (inception) through December 31, 2003 was $661,600 and $347,000, respectively. At December 31, 2004, future minimum payments under noncancelable operating leases are $36,000.
(c) Other
Under various contracts the Company is committed to gather and process natural gas, and to transport NGLs. Such contracts are based on market prices and vary in duration from one month to nine years.
From time to time, the Company is involved in legal and administrative proceedings or claims, which arise in the ordinary course of its business. While such matters always contain an element of uncertainty, management believes the matters of which they are aware will not individually or in the aggregate have a material adverse effect on the Company’s financial position or results of operations.
(7) Pending Sale
On November 22, 2004, the Parent entered into a Purchase Agreement for the sale of 100% of the assets held by the Company for $191 million in cash payable at closing (the Disposition). The Parent expects consummation of the Disposition during the first quarter of 2005.
16
Report of Independent Registered Public Accounting Firm
Penn Virginia Resource Partners, L.P.:
We have audited the accompanying statements of operating loss (the Statements) for certain natural gas gathering and processing assets of Cantera Resources Holdings, LLC (Cantera) to be acquired by Penn Virginia Resource Partners, L.P. (Penn Virginia) (the Acquired Assets) for the period from January 1, 2003 through July 2, 2003 (disposition) and for the year ended December 31, 2002. The Statements are the responsibility of Cantera’s management. Our responsibility is to express an opinion on the 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 Statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying Statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the Current Report on Form 8-K/A) as described in note 1 and are not intended to be a complete presentation of the results of operations for the Acquired Assets.
In our opinion, the Statements referred to above present fairly, in all material respects, the operating loss for the Acquired Assets described in note 1 for the period from January 1, 2003 through July 2, 2003 (disposition) and for the year ended December 31, 2002 in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 18, 2005
17
PENN VIRGINIA RESOURCE PARTNERS, L.P.
Acquired Assets
Statements of Operating Loss
| | | | | | | | |
| | Period from January 1, 2003 through July 2, 2003 (disposition)
| | | Year ended December 31, 2002
| |
Revenues: | | | | | | | | |
Sale of residue gas | | $ | 87,802,015 | | | $ | 90,062,171 | |
Sale of natural gas liquids | | | 21,037,410 | | | | 42,333,185 | |
Sale of condensate and other | | | 2,159,371 | | | | 3,590,050 | |
Gathering fees and other | | | 2,249,590 | | | | 4,551,442 | |
Marketing revenue, net | | | 1,478,193 | | | | 5,435,916 | |
| |
|
|
| |
|
|
|
Total revenue | | | 114,726,579 | | | | 145,972,764 | |
| |
|
|
| |
|
|
|
Cost of gas purchased: | | | | | | | | |
Cost of gas purchased | | | 101,047,290 | | | | 119,397,693 | |
Cost of gas purchased from affiliates | | | 402,701 | | | | 959,397 | |
| |
|
|
| |
|
|
|
Total cost of gas purchased | | | 101,449,991 | | | | 120,357,090 | |
| |
|
|
| |
|
|
|
Gross margin | | | 13,276,588 | | | | 25,615,674 | |
Operating expenses | | | 6,422,574 | | | | 13,765,538 | |
| |
|
|
| |
|
|
|
Net margin | | | 6,854,014 | | | | 11,850,136 | |
| |
|
|
| |
|
|
|
General, administrative, and depreciation: | | | | | | | | |
General and administrative expense | | | 1,207,977 | | | | 4,223,534 | |
Depreciation expense | | | 6,279,218 | | | | 13,161,869 | |
| |
|
|
| |
|
|
|
Total general, administrative, and depreciation | | | 7,487,195 | | | | 17,385,403 | |
| |
|
|
| |
|
|
|
Operating loss | | $ | (633,181 | ) | | $ | (5,535,267 | ) |
| |
|
|
| |
|
|
|
See accompanying notes to statements of operating loss.
18
PENN VIRGINIA RESOURCE PARTNERS, L.P.
Acquired Assets
Notes to Statements of Operating Loss
Period from January 1, 2003 through July 2, 2003
and year ended December 31, 2002
(1) Basis of Presentation
On November 22, 2004, Penn Virginia Resource Partners, L.P. (PVR) entered into a Purchase Agreement with Cantera Resources Holdings LLC (CRH) providing for PVR’s purchase from CRH (the Acquisition) of certain assets from Cantera Natural Gas, LLC (CNG), subsidiary of CRH engaged in the natural gas gathering and processing business, for $191 million cash payable at closing.
The Acquisition includes ownership and operation of midstream assets (the Acquired Assets) that include natural gas gathering pipelines that supply natural gas processing facilities. The Acquired Assets were acquired by CNG from CMS Field Services, Inc. (CMS) on July 2, 2003. The statements of operating loss reflect the Acquired Assets’ operations for the periods from January 1, 2003 through July 2, 2003 (the CMS disposition date), and for the year ended December 31, 2002, the periods in which they were owned by CMS.
The Acquired Assets derive revenues primarily from the sharing of sales proceeds of natural gas and natural gas liquids under contracts with natural gas producers and from fees charged for gathering and treating natural gas volumes and other related services.
The Acquired Assets are located in four geographic regions, as follows:
| • | | Oklahoma and Texas Panhandles—natural gas gathering pipelines that deliver gas to the Beaver processing facility; |
| • | | North Central Oklahoma—low-pressure gathering pipelines that deliver natural gas to the Crescent gas plant; |
| • | | North Central Texas—natural gas gathering pipelines that deliver gas to the Hamlin gas plant; and |
| • | | Arkoma Basin—natural gas gathering pipelines that deliver gas to various market pipelines. |
The accompanying statements of operating loss were prepared from the historical accounting records of CMS for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the Acquired Assets’ results of operations. These statements do not include income taxes, interest income, or interest expense. These items are not included because the Acquisition represents only a portion of a business, and the costs incurred by CMS are not necessarily indicative of the costs to be incurred by PVR. Because of the omissions and future changes in the Acquired Assets and their operations, the accompanying statements of operating loss are not indicative of the future results of operations of the Acquired Assets.
Historical financial information reflecting financial position, results of operations, and cash flows of the Acquired Assets is not presented because it is not available and because the entire acquisition cost was assigned to the Acquired Assets. Accordingly, the historical statements of operating loss have been presented in lieu of the financial statements required under Rule 3-05 of Securities and Exchange Commission Regulation S-X.
(2) Marketing Revenue, Net
Marketing revenue, net is comprised of marketing revenue of $171,200,652 and $306,192,436 for the period ended July 2, 2003 and year ended December 31, 2002, respectively, less the cost of marketing gas purchases of $169,722,459 and $300,756,520, respectively.
19
PENN VIRGINIA RESOURCE PARTNERS, L.P.
Acquired Assets
Notes to Statements of Operating Loss—(Continued)
Period from January 1, 2003 through July 2, 2003
and year ended December 31, 2002
Included in marketing revenue are transactions with affiliates of $26,631,246 and $100,841,532 for the period ended July 2, 2003 and year ended December 31, 2002, respectively.
(3) Related-Party Transactions
During 2002 and 2003, operating efforts were revised to focus primarily on the sale of residue gas to unrelated third parties, rather than to affiliates. Consequently, marketing revenue from affiliates declined to $26,631,246 for the period from January 1, 2003 through July 2, 2003 from $100,841,532 for the year ended December 31, 2002 and, upon conveyance of the Acquired Assets from CMS to CNG on July 2, 2003, marketing revenue from affiliates was discontinued.
21
(b) | Pro Forma Financial Information. |
Following are these unaudited pro forma condensed consolidated financial statements of PVR:
· | Unaudited pro forma condensed combined balance sheet as of December 31, 2004, which is based on Penn Virginia Resource Partners, L.P.’s historical consolidated balance sheet as of December 31, 2004 and gives effect to PVR’s acquisition of Cantera Resources as if such acquisition had occurred on December 31, 2004. |
· | Unaudited pro forma condensed combined income statement for the year ended December 31, 2004, which has been derived from PVR’s audited consolidated statement of operations and Cantera Natural Gas LLC—Mid Continent Division’s audited consolidated statement of operations for the year ended December 31, 2004. The pro forma income statement gives effect to PVR’s acquisition of Cantera Resources as if such acquisition occurred on January 1, 2004. |
21
PENN VIRGINIA RESOURCE PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2004
(in thousands)
| | | | | | | | | | |
| | | | | | | |
| | Historical Penn Virginia
| | Cantera Acquisition Adjustments
| | | Pro Forma
|
ASSETS | | | | | | | | | | |
Current assets | | | | | | | | | | |
Cash | | $ | 20,997 | | $ | 2,000 | (A) | | $ | 22,997 |
Accounts receivable | | | 8,668 | | | 41,959 | (A) | | | 50,627 |
Other current assets | | | 541 | | | 3,164 | (A) | | | 3,705 |
| |
|
| |
|
|
| |
|
|
Total current assets | | | 30,206 | | | 47,123 | | | | 77,329 |
Property and equipment, net | | | 221,615 | | | 145,448 | (A) | | | 367,063 |
Equity investments | | | 27,881 | | | | | | | 27,881 |
Intangibles | | | — | | | 40,052 | (A) | | | 40,052 |
Goodwill | | | — | | | 8,766 | (A) | | | 8,766 |
Other long-term assets | | | 4,733 | | | 2,031 | (B) | | | 6,764 |
| |
|
| |
|
|
| |
|
|
Total assets | | $ | 284,435 | | $ | 243,420 | | | $ | 527,855 |
| |
|
| |
|
|
| |
|
|
LIABILITIES AND PARTNERS’ CAPITAL | | | | | | | | | | |
Current liabilities | | | | | | | | | | |
Accounts payable | | $ | 1,046 | | $ | 37,261 | (A) | | $ | 38,307 |
Accrued liabilities | | | 2,943 | | | 325 | (A) | | | 3,268 |
Current portion of long-term debt | | | 4,800 | | | — | | | | 4,800 |
Deferred income | | | 1,207 | | | — | | | | 1,207 |
| |
|
| |
|
|
| |
|
|
Total current liabilities | | | 9,996 | | | 37,586 | | | | 47,582 |
Deferred income | | | 8,726 | | | | | | | 8,726 |
Other liabilities | | | 2,803 | | | | | | | 2,803 |
Long-term debt | | | 112,926 | | | 205,834 | (B) | | | 318,760 |
| | | | | | | | | | |
| | | | | | | | | | |
Partners’ capital | | | 149,984 | | | | | | | 149,984 |
| | | | | | | | | | |
| | | | | | | | | | |
| |
|
| |
|
|
| |
|
|
Total liabilities and partners’ capital | | $ | 284,435 | | $ | 243,420 | | | $ | 527,855 |
| |
|
| |
|
|
| |
|
|
22
PENN VIRGINIA RESOURCE PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
DECEMBER 31, 2004
| | | | | | | | | | | | | | | | |
| | Historical Penn Virginia
| | | Historical Cantera
| | | Pro Forma Adjustments
| | | Pro Forma
| |
Revenues: | | | | | | | | | | | | | | | | |
Natural gas midstream | | $ | — | | | $ | 285,532 | | | $ | — | | | $ | 285,532 | |
Coal royalties | | | 69,643 | | | | | | | | | | | | 69,643 | |
Other | | | 5,987 | | | | | | | | | | | | 5,987 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total revenue | | | 75,630 | | | | 285,532 | | | | — | | | | 361,162 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Expenses: | | | | | | | | | | | | | | | | |
Cost of gas purchased | | | — | | | | 240,189 | | | | | | | | 240,189 | |
Operating | | | 8,172 | | | | 11,802 | | | | | | | | 19,974 | |
General and administrative | | | 8,307 | | | | 3,898 | | | | | | | | 12,205 | (F) |
Depreciation, depletion and amortization | | | 18,632 | | | | 6,027 | | | | 8,703 | (C) | | | 33,362 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total operating expenses | | | 35,111 | | | | 261,916 | | | | 8,703 | | | | 305,730 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Operating income | | | 40,519 | | | | 23,616 | | | | (8,703 | ) | | | 55,432 | |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest income | | | 1,063 | | | | | | | | | | | | 1,063 | |
Interest expense | | | (7,267 | ) | | | (534 | ) | | | (8,471 | )(D) | | | (16,272 | ) |
| | | | | | | | | | | | | | | | |
Other income | | | — | | | | 76 | | | | | | | | 76 | |
Income tax expense | | | — | | | | 981 | | | | (981 | )(E) | | | — | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net income | | $ | 34,315 | | | $ | 24,139 | | | $ | (18,155 | ) | | $ | 40,299 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
General partner’s interest in net income | | $ | 686 | | | | | | | | | | | $ | 806 | |
| |
|
|
| | | | | | | | | |
|
|
|
Limited partners’ interest in net income | | $ | 33,629 | | | | | | | | | | | $ | 39,493 | |
| |
|
|
| | | | | | | | | |
|
|
|
Basic and diluted net income per limited partner unit, common and subordinated | | $ | 1.86 | | | | | | | | | | | $ | 2.19 | |
| |
|
|
| | | | | | | | | |
|
|
|
Weighted average number of units outstanding, basic and diluted | | | 18,070 | | | | | | | | | | | | 18,070 | |
| |
|
|
| | | | | | | | | |
|
|
|
23
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation and Transactions
The unaudited pro forma condensed combined financial statements are based on certain assumptions and do not purport to be indicative of the results which actually would have been achieved if the acquisition of Cantera Natural Gas, LLC—Mid Continent Division (Cantera) had been consummated on the dates indicated or which may be achieved in the future. The purchase accounting adjustments made in connection with the development of the unaudited pro forma combined financial statements are preliminary and have been made solely for purposes of presenting such pro forma financial information.
It has been assumed that for purposes of the unaudited pro forma condensed combined balance sheet, the following transactions occurred on December 31, 2004, and for purposes of the unaudited pro forma condensed combined income statement, the following transactions occurred on January 1, 2004. The unaudited pro forma condensed combined balance sheet data adjusts the December 31, 2004 balance sheet of Penn Virginia Resource Partners, L.P. (Penn Virginia) for the acquisition of Cantera using the purchase method of accounting. The unaudited pro forma condensed combined income statement for the year ended December 31, 2004 combines the results of operations for the year ended December 31, 2004 of Penn Virginia, with the results of operations for the year ended December 31, 2004 of Cantera, after giving effect to the pro forma adjustments. The pro forma financial statements reflect the closing of the following transactions:
| • | | The acquisition of Cantera for a purchase price of $191.0 million plus working capital adjustments and acquisition fees; |
| • | | The closing of an amended credit facility of $260 million, consisting of a $150 million revolving credit facility with a $110 million term loan, which Penn Virginia used to initially fund the Cantera acquisition; |
Pro Forma Adjustments to Balance Sheet
| (A) | Reflects adjustments of the estimated preliminary pro forma allocation of the purchase price of the Cantera acquisition as of December 31, 2004 using the purchase method of accounting. The following is a calculation of the allocation of the purchase price to the assets acquired and liabilities assumed based on their relative fair values (in thousands): |
| | | | |
Cash consideration paid for Cantera | | $ | 200,303 | |
Plus: acquisition costs | | | 3,500 | |
| |
|
|
|
Total purchase price | | | 203,803 | |
Plus: current liabilities assumed | | | 37,586 | |
| |
|
|
|
Total purchase price plus liabilities assumed | | $ | 241,389 | |
| |
|
|
|
Fair value of assets acquired: | | | | |
Current assets | | $ | 47,123 | |
Property and equipment, net | | | 145,448 | |
Intangible assets | | | 40,052 | (i) |
Goodwill | | | 8,766 | (ii) |
| |
|
|
|
Total fair value of assets acquired | | $ | 241,389 | |
| |
|
|
|
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| (i) | The preliminary purchase price includes approximately $40.1 million of intangible assets that are primarily associated with assumed contracts and customer relationships. These intangible assets will be amortized over the period in which benefits are derived from the contracts and relationships assumed, and will be reviewed for impairment under Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. |
| (ii) | The preliminary purchase price includes approximately $8.8 million of goodwill. The significant factors that contributed to the recognition of goodwill include entering into the midstream gas gathering and processing business and the ability to acquire an established business with an assembled workforce. Under SFAS No. 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets,” goodwill recorded in connection with a business combination is not amortized, but tested for impairment at least annually. Accordingly, the accompanying unaudited pro forma combined income statement does not include amortization of the goodwill recorded in the acquisition. |
(B) | Represents the payment of debt financing fees of $2.0 million associated with the closing of our amended revolving credit facility and term loan and the concurrent net borrowings of $205.8 used for the acquisition of Cantera. |
Pro Forma Adjustments to Income Statement
(C) | Reflects the additional depreciation and amortization based on the fair value allocated property, plant and equipment and intangible assets, respectively. |
(D) | Reflects the pro forma adjustment to interest expense applicable to Penn Virginia for the year ended December 31, 2004 is follows (in thousands): |
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Cantera historical interest expense | | $ | (534 | ) |
Bank debt ($205.8 million drawn under amended loan facility at an assumed rate of 4.1%) | | | 8,439 | |
Additional interest rate of 0.25% on senior unsecured notes | | | 221 | |
Incremental amortization of deferred debt financing fees | | | 345 | |
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Pro forma adjustment to interest expense | | $ | 8,471 | |
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(E) | Represents the elimination of the income tax benefit of Cantera. As a partnership, Penn Virginia is not subject to federal or state income taxes; therefore, any income taxes will be the responsibility of our unitholders. |
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(F) | Reflects an additional $3.9 million of general and administrative costs which are based on Cantera’s historical operations. As a result of the Cantera acquisition, we anticipate incurring incremental general and administrative costs (e.g. accounting support services, additional management and additional professional fees) over and above our historical general and administrative expense at an annual rate of approximately $4.5-$5.0 million. The pro forma financial statements do not reflect any adjustments for estimated incremental costs. |
2. Derivative Financial Instruments
In order to mitigate commodity price risk to the economics of the Cantera acquisition, in January 2005 we entered into notional derivative contracts for approximately 75% of the net volume of natural gas liquids expected to be sold from April 2005 through December 2006. Prior to closing the Cantera acquisition, the derivative contracts did not qualify for hedge accounting. We are currently evaluating the effectiveness of the derivative contracts in relation to the underlying commodities and we expect to designate the contracts as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133) “Accounting for Derivative Instruments and Hedging Activities.” The aggregate fair value of the contracts as of March 3, 2005 was approximately $9 million favorable to the counterparty and will be recognized as a reduction of earnings in the first quarter of 2005. If the derivatives qualify for cash flow hedges, SFAS 133 requires us to continue to measure the effectiveness of the derivative contracts in relation to the underlying commodity being hedged and we will be required to record the ineffective portion of the contracts in our net income for the respective period. Any cash settlement of the derivative contracts will be paid or received over the 21 month term of the contracts.
(c) | Exhibits. The following exhibits are being furnished herewith. |
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2.01 | | Purchase Agreement, dated November 22, 2004, between Penn Virginia Resource Partners, L.P. and Cantera Resources Holdings, LLC. |
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2.02 | | Amendment No. 1, dated March 3, 2005, to the Purchase Agreement dated November 22, 2004, between Penn Virginia Resource Partners, L.P. and Cantera Resources Holdings, LLC. |
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10.1 | | First Amendment dated as of March 3, 2005 to Note Purchase Agreement dated as of March 27, 2003 and Parent Guaranty dated as of March 27, 2003 among Penn Virginia Operating Co., LLC, Penn Virginia Resource Partners, L.P. and each of the institutions party thereto. |
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10.2 | | Amended and Restated Credit Agreement, dated March 3, 2005, among Penn Virginia Operating Co., LLC, the Guarantors party thereto, PNC Bank, National Association; as Administrative Agent and the other Lenders party thereto, and in their stated capacities. |
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23.1 | | Consent of KPMG LLP. |
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99.1 | | Penn Virginia Resource Partners, L.P. press release dated March 3, 2005. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: March 9, 2005
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Penn Virginia Resource Partners, L.P. |
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| | By: | | Penn Virginia Resource GP, LLC |
| | | | its General Partner |
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| | By: | | /s/ Frank A. Pici |
| | | | Frank A. Pici |
| | | | Vice President and Chief Financial Officer |
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EXHIBIT INDEX
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2.01 | | Purchase Agreement, dated November 22, 2004, between Penn Virginia Resource Partners, L.P. and Cantera Resources Holdings, LLC. |
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2.02 | | Amendment No. 1, dated March 3, 2005, to the Purchase Agreement dated November 22, 2004 between Penn Virginia Resource Partners, L.P. and Cantera Resources Holdings, LLC. |
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10.1 | | First Amendment dated as of March 3, 2005 to Note Purchase Agreement dated as of March 27, 2003 and Parent Guaranty dated as of March 27, 2003 among Penn Virginia Operating Co., LLC, Penn Virginia Resource Partners, L.P. and each of the institutions party thereto. |
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10.2 | | Amended and Restated Credit Agreement, dated March 3, 2005, among Penn Virginia Operating Co., LLC, the Guarantors party thereto, PNC Bank, National Association; as Administrative Agent and the other Lenders party thereto, and in their stated capacities. |
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23.1 | | Consent of KPMG LLP. |
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99.1 | | Penn Virginia Resource Partners, L.P. press release dated March 3, 2005. |
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