| Summary of Significant Accounting Policies | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Our condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Transactions between us and other ATLS operations have been identified in the condensed consolidated financial statements as transactions between affiliates, where applicable. All material intercompany transactions have been eliminated. On June 5, 2015, we acquired coal-bed methane producing natural gas assets in the Arkoma Basin in eastern Oklahoma from ATLS (the “Arkoma Acquisition”) for approximately $31.5 million, net of purchase price adjustments. We funded the purchase price through the issuance of 6,500,000 common limited partner units. The Arkoma Acquisition had an effective date of January 1, 2015. We determined that the Arkoma Acquisition constituted a transaction between entities under common control. In comparison to the acquisition method of accounting, whereby the purchase price for the asset acquisition would have been allocated to identifiable Arkoma assets and liabilities based upon their fair values with any excess treated as goodwill, transfers between entities under common control require that assets and liabilities be recognized by the acquirer at historical carrying value at the date of transfer, with any difference between the purchase price and the net book value of the assets recognized as an adjustment to partners’ capital (deficit) on our condensed consolidated balance sheets. Also, in comparison to the acquisition method of accounting, whereby the results of operations and the financial position of the acquired Arkoma assets would have been included in our condensed consolidated financial statements from the date of acquisition, transfers between entities under common control require the acquirer to reflect the effect to the assets acquired and liabilities assumed and the related results of operations at the beginning of the period during which it was acquired and retrospectively adjust our prior period condensed consolidated financial statements to furnish comparative information. As such, we reflected the impact of the Arkoma Acquisition on our condensed consolidated financial statements in the following manner:
·
Recognized the assets acquired and liabilities assumed from the Arkoma Acquisition at their historical carrying value at the date of transfer, with any difference between the purchase price and the net book value of the assets recognized as an adjustment to partners’ capital (deficit);
·
Retrospectively adjusted the condensed consolidated financial statements for any date prior to June 5, 2015, the date of acquisition, to reflect our results on a consolidated basis with the results of the Arkoma assets as of or at the beginning of the respective period; and
·
Adjusted the presentation of our condensed consolidated statements of operations for the three months ended March 31, 2015, to reflect the results of operations attributable to the Arkoma assets prior to the date of acquisition to determine income attributable to common limited partners. Prior to the Arkoma Acquisition, the common limited partners did not participate in the net income (loss) of the Arkoma operations. Subsequent to the Arkoma Acquisition, the common limited partners participate in the net income (loss) of the Arkoma operations, which was determined after the deduction of the general partner’s and the preferred unitholders’ interests. In April 2015, the Financial Accounting Standards Board (“FASB”) updated the accounting guidance for earnings per unit (“EPU”) of master limited partnerships (“MLP”) applying the two-class method. The updated accounting guidance specifies that for general partner transfers (or “drop downs”) to an MLP accounted for as a transaction between entities under common control, the earnings (losses) of the transferred business before the date of the transaction should be allocated entirely to the general partner’s interest, and previously reported EPU of the limited partners should not change. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the drop down transaction occurs are also required. We adopted this accounting guidance upon its effective date of January 1, 2016, which resulted in the following retrospective restatement:
Condensed Consolidated Statement of Operations
Previously Filed
Adjustment
Restated
Three Months Ended March 31, 2015:
Common limited partners' interest
$
82,240
$
(1,896
)
$
80,344
General partner's interest
$
1,679
$
1,896
$
3,575
Net loss attributable to common limited partners per unit - basic
$
0.95
$
(0.02
)
$
0.93
Net loss attributable to common limited partners per unit - diluted
$
0.93
$
(0.02
)
$
0.91
Condensed Consolidated Balance Sheet
December 31, 2015:
Common limited partners’ interest
$
(260,276
)
$
(2,588
)
$
(262,864
)
General partners’ interest
$
(33,642
)
$
2,588
$
(31,054
) In accordance with established practice in the oil and gas industry, our condensed consolidated financial statements include our pro-rata share of assets, liabilities, income and lease operating and general and administrative costs and expenses of the Drilling Partnerships in which we have an interest. Such interests generally approximate 30%. Our condensed consolidated financial statements do not include proportional consolidation of the depletion or impairment expenses of the Drilling Partnerships. Rather, we calculate these items specific to our own economics. Use of Estimates The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of our condensed consolidated financial statements, as well as the reported amounts of revenue and costs and expenses during the reporting periods. Our condensed consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depletion, depreciation and amortization and fair value of derivative instruments. The oil and gas industry principally conducts its business by processing actual transactions as many as 60 days after the month of delivery. Consequently, the most recent two months’ financial results were recorded using estimated volumes and contract market prices. Actual results could differ from those estimates. Liquidity and Capital Resources We have historically funded our operations, acquisitions and cash distributions primarily through cash generated from operations, amounts available under our credit facilities and equity and debt offerings. Our future cash flows are subject to a number of variables, including oil and natural gas prices. Prices for oil and natural gas began to decline significantly during the fourth quarter of 2014 and have continued to decline and remain low in 2016. These lower commodity prices have negatively impacted our revenues, earnings and cash flows. Sustained low commodity prices will have a material and adverse effect on our liquidity position. On May 10, 2016, we entered into a ninth amendment (the “Ninth Amendment”) to our Second Amended and Restated Credit Agreement, dated July 31, 2013 (as amended from time to time, the “Credit Agreement”), with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, to, among other things, waive the requirement that our ratio of current assets to current liabilities (as calculated pursuant to the Credit Agreement) not be less than 1.0 to 1.0 as of March 31, 2016 and waive the requirement that our ratio of the total First Lien Debt to EBITDA (as calculated pursuant to the Credit Agreement) not be greater than 2.75 to 1.0 as of March 31, 2016, and required us to repay $2.5 million of outstanding borrowings. We are party to a Second Lien Credit Agreement, dated February 23, 2015, with certain lenders and Wilmington Trust, National Association, as administrative agent (the “Term Loan Facility”), which contains the same financial covenants as those in our Credit Agreement. Such financial covenants were automatically waived as a result of the Ninth Amendment to the Credit Agreement. Based on the terms of the Ninth Amendment to the Credit Agreement and uncertainty regarding future covenant compliance, we classified $672.0 million of our outstanding amounts under the Credit Agreement and $234.2 million of our outstanding amounts under the Term Loan Facility, net of $10.0 million deferred financing costs and $5.8 million unamortized discount, as current portion of long-term debt within our condensed consolidated balance sheet as of March 31, 2016. Our borrowing base, and thus our borrowing capacity, under the Credit Agreement is impacted by the level of our oil and natural gas reserves. Downward revisions of our oil and natural gas reserves volume and value due to low commodity prices, the impact of lower estimated capital spending in response to lower prices, performance revisions, sales of assets or the incurrence of certain types of additional debt, among other items, could cause a reduction of our borrowing base in the future, and these reductions could be significant. Our Credit Agreement is currently in the process of its semi-annual redetermination. Based on projected market conditions, continued declines in commodity prices and recent conversations with our administrative agent, we expect that our borrowing base will be redetermined to a level below our outstanding borrowings of $672.0 million under the Credit Agreement as of March 31, 2016. In the case of a borrowing base deficiency, our Credit Agreement requires us to repay the deficiency, which we are permitted to do in equal monthly installments over a four-month period, or deposit additional collateral to eliminate such deficiency. If our borrowing base is redetermined below our current outstanding borrowings and we are unable to repay the deficiency or deposit additional collateral to eliminate such deficiency, there would be substantial doubt regarding our ability to continue as a going concern. In addition, if we are unable to remain in compliance with the covenants under our credit facilities or the indentures governing our Senior Notes (as defined in Note 4), absent relief from our lenders or noteholders, as applicable, we may be forced to repay or refinance such indebtedness. Upon the occurrence of an event of default, the lenders under our credit facilities or holders or our notes, as applicable, could elect to declare all amounts outstanding immediately due and payable and the lenders could terminate all commitments to extend further credit. If an event of default occurs (including if our borrowing base is redetermined below our current outstanding borrowings and we are unable to repay the deficiency or deposit additional collateral to eliminate such deficiency), or if other debt agreements cross-default, and the lenders under the affected debt agreements accelerate the maturity of any loans or other debt outstanding, we will not have sufficient liquidity to repay all of our outstanding indebtedness, and as a result, there would be substantial doubt regarding our ability to continue as a going concern. We continually monitor the capital markets and our capital structure and may make changes to our capital structure from time to time, with the goal of maintaining financial flexibility, preserving or improving liquidity, strengthening our balance sheet, meeting our debt service obligations and/or achieving cost efficiency. Although we have a significant hedge position for the remainder of 2016 through 2018, the forecasted long-term downturn in commodity prices has had a detrimental impact on our financial position. For example, we could pursue options such as refinancing, restructuring or reorganizing our indebtedness or capital structure or seek to raise additional capital through debt or equity financing to address our liquidity concerns and high debt levels. We are evaluating various options with the lenders under our Credit Agreement and Term Loan Facility, and holders of our Senior Notes, but there is no certainty that we will be able to implement any such options, and we cannot provide any assurances that any refinancing or changes in our debt or equity capital structure would be possible or that additional equity or debt financing could be obtained on acceptable terms, if at all, and such options may result in a wide range of outcomes for our stakeholders, including cancellation of debt income (“CODI”) which would be directly allocated to our unitholders and reported on such unitholders’ separate returns (see Item 1A – Risk Factors for additional information). We also continue to implement various cost saving measures to reduce our capital, operating and general and administrative costs, including renegotiating contracts with contractors, suppliers and service providers, reducing the number of staff and contractors and deferring and eliminating discretionary costs. We will continue to be opportunistic and aggressive in managing our cost structure and, in turn, our liquidity to meet our capital and operating needs. We cannot provide any assurances that any of these efforts will be successful or will result in cost reductions or cash flows or the timing of any such cost reductions or additional cash flows. It is also possible additional adjustments to our plan and outlook may occur based on market conditions and our needs at that time, which could include selling assets, liquidating all or a portion of our hedge portfolio, seeking additional partners to develop our assets, reducing or suspending the payments of distributions to preferred unitholders and/or reducing our planned capital program. In addition, to the extent commodity prices remain low or decline further, or we experience disruptions in our longer-term access to or cost of capital, our ability to fund future capital expenditures or growth projects may be further impacted. Net Income Per Common Unit Basic net income attributable to common limited partners per unit is computed by dividing net income attributable to common limited partners, which is determined after the deduction of the general partner’s and the preferred unitholders’ interests, by the weighted average number of common limited partner units outstanding during the period. Net income attributable to common limited partners is determined by deducting net income attributable to participating securities, if applicable, income attributable to preferred limited partners and net income attributable to the general partner’s Class A units. The general partner’s interest in net income is calculated on a quarterly basis based upon its Class A units and incentive distributions to be distributed for the quarter (see Note 10), with a priority allocation of net income to the general partner’s incentive distributions, if any, in accordance with the partnership agreement, and the remaining net income allocated with respect to the general partner’s and limited partners’ ownership interests. We present net income per unit under the two-class method for master limited partnerships, which considers whether the incentive distributions of a master limited partnership represent a participating security. The two-class method considers whether the partnership agreement contains any contractual limitations concerning distributions to the incentive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. If distributions are contractually limited to the incentive distribution rights’ share of currently designated available cash for distributions as defined under the partnership agreement, undistributed earnings in excess of available cash should not be allocated to the incentive distribution rights. Under the two-class method, our management believes the partnership agreement contractually limits cash distributions to available cash; therefore, undistributed earnings are not allocated to the incentive distribution rights. Unvested unit-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per unit pursuant to the two-class method. Phantom unit awards, which consist of common units issuable under the terms of our long-term incentive plan, contain non-forfeitable rights to distribution equivalents. The participation rights would result in a non-contingent transfer of value each time we declare a distribution or distribution equivalent right during the award’s vesting period. However, unless the contractual terms of the participating securities require the holders to share in the losses of the entity, net loss is not allocated to the participating securities. As such, the net income utilized in the calculation of net income per unit must be after the allocation of only net income to the phantom units on a pro-rata basis. The following is a reconciliation of net income allocated to the common limited partners for purposes of calculating net income attributable to common limited partners per unit (in thousands, except unit data):
Three Months Ended
2016
2015
Net income
$
12,763
$
87,572
Preferred limited partner dividends
(3,648
)
(3,653
)
Net income attributable to common limited partners and the general partner
9,115
83,919
Less: General partner’s interest
182
3,575
Net income attributable to common limited partners
8,933
80,344
Less: Net income attributable to participating securities – phantom units
25
644
Net income utilized in the calculation of net income attributable to common limited partners per unit - Basic
8,908
79,700
Plus: Convertible preferred limited partner dividends (1)
—
1,928
Net income utilized in the calculation of net income attributable to common limited partners per unit - Diluted
$
8,908
$
81,628
(1)
For the three months ended March 31, 2016, distributions on our Class C convertible preferred units were excluded, because the inclusion of such preferred distributions would have been anti-dilutive. Diluted net income attributable to common limited partners per unit is calculated by dividing net income attributable to common limited partners, less income allocable to participating securities, by the sum of the weighted average number of common limited partner units outstanding and the dilutive effect of unit option awards, convertible preferred units and warrants, as calculated by the treasury stock or if converted methods, as applicable. Unit options consist of common units issuable upon payment of an exercise price by the participant under the terms of our long-term incentive plan. The following table sets forth the reconciliation of our weighted average number of common limited partner units used to compute basic net income attributable to common limited partners per unit with those used to compute diluted net income attributable to common limited partners per unit (in thousands):
Three Months Ended
2016
2015
Weighted average number of common limited partner units—basic
102,403
85,529
Add effect of dilutive incentive awards
293
691
Add effect of dilutive convertible preferred limited partner units ( 1 )
—
3,790
Weighted average number of common limited partner units—diluted
102,696
90,010
( 1 )
For the three months ended March 31, 2016, potential common limited partner units issuable upon (a) conversion of our Class C preferred units and (b) exercise of the common unit warrants issued with the Class C preferred units were excluded from the computation of diluted earnings attributable to common limited partners per unit, because the inclusion of such units would have been anti-dilutive. As the Class D and Class E preferred units are convertible only upon a change of control event, they are not considered dilutive securities for earnings per unit purposes. Recently Issued Accounting Standards In February 2016, the FASB updated the accounting guidance related to leases. The updated accounting guidance requires lessees to recognize a lease asset and liability at the commencement date of all leases (with the exception of short-term leases), initially measured at the present value of the lease payments. The updated guidance is effective for us as of January 1, 2019 and requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest period presented. We are currently in the process of determining the impact that the updated accounting guidance will have on our condensed consolidated financial statements. In August 2015, the FASB updated the accounting guidance related to the balance sheet presentation of debt issuance costs specific to line of credit arrangements. The updated accounting guidance allows the option of presenting deferred debt issuance costs related to line-of-credit arrangements as an asset, and subsequently amortizing over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. We adopted the updated accounting guidance effective January 1, 2016, and it did not have a material impact on our condensed consolidated financial statements. In February 2015, the FASB updated the accounting guidance related to consolidation under the variable interest entity and voting interest entity models. The updated accounting guidance modifies the consolidation guidance for variable interest entities, limited partnerships and similar legal entities. We adopted this accounting guidance upon its effective date of January 1, 2016, and it did not have a material impact on our condensed consolidated financial statements. In August 2014, the FASB updated the accounting guidance related to the evaluation of whether there is substantial doubt about an entity’s ability to continue as a going concern. The updated accounting guidance requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year from the date the financial statements are issued and provide footnote disclosures, if necessary. We adopted this accounting guidance on January 1, 2016, and provided enhanced disclosures, as applicable, within our condensed consolidated financial statements. In May 2014, the FASB updated the accounting guidance related to revenue recognition. The updated accounting guidance provides a single, contract-based revenue recognition model to help improve financial reporting by providing clearer guidance on when an entity should recognize revenue, and by reducing the number of standards to which an entity has to refer. In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The updated accounting guidance provides companies with alternative methods of adoption. We are currently in the process of determining the impact that the updated accounting guidance will have on our condensed consolidated financial statements and our method of adoption. |
