REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Atlas Pipeline Partners, L.P.
We have audited the accompanying balance sheets of ETC Oklahoma Pipeline,
Ltd. (a Texas limited partnership) as of August 31, 2004 and 2003, and the
related statements of income, partners' capital, and cash flows for the year
ended August 31, 2004 and the period from the beginning of operations
(October 1, 2002) through August 31, 2003. These financial statements are the
responsibility of the Partnership'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 audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Partnership is not required to have, nor were we engaged to perform an audit
of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 provides 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 ETC Oklahoma Pipeline,
Ltd. as of August 31, 2004 and 2003, and the results of its operations and its
cash flows for the year ended August 31, 2004 and the period from inception
(September 24, 2002) through August 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Cleveland, Ohio
April 25, 2005
ETC OKLAHOMA PIPELINE, LTD.
BALANCE SHEETS
August 31, 2004 and 2003
(In thousands)
ASSETS
------ 2004 2003
------- -------
CURRENT ASSETS:
Cash ..................................................... $ -- $ --
Receivables--
Trade................................................... 1,773 1,098
Related parties......................................... 22,305 7,121
Exchanges............................................... 213 730
Materials and supplies ................................... 63 63
Other current assets ..................................... -- 49
------- -------
Total current assets .................................. 24,354 9,061
PROPERTY, PLANT AND EQUIPMENT ............................. 47,492 40,305
ACCUMULATED DEPRECIATION .................................. (3,938) (1,589)
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET ........................ 43,554 38,716
------- -------
Total assets .......................................... $67,908 $47,777
======= =======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
CURRENT LIABILITIES:
Payables--
Trade exchanges......................................... $19,825 $ 7,694
Exchanges............................................... 188 576
Accrued expenses ......................................... 577 640
------- -------
Total current liabilities ............................. 20,590 8,910
COMMITMENTS AND CONTINGENCIES (See note H)
PARTNERS' CAPITAL
Limited partner .......................................... 47,271 38,828
General partner .......................................... 47 39
------- -------
Total partners' capital ............................... 47,318 38,867
------- -------
Total liabilities and partners' capital ............... $67,908 $47,777
======= =======
The accompanying notes are an integral part of these financial statements.
ETC OKLAHOMA PIPELINE, LTD.
INCOME STATEMENTS
(In thousands)
ELEVEN
YEAR ENDED MONTHS ENDED
AUGUST 31, 2004 AUGUST 31, 2003
--------------- ---------------
OPERATING REVENUES:
Third party .............................. $ 11,977 $ 7,607
Related party ............................ 123,320 84,834
-------- -------
Total revenues.......................... 135,297 92,441
COSTS AND EXPENSES:
Cost of products sold .................... 119,495 79,055
Operating ................................ 4,726 2,914
General and administrative ............... 2,664 2,887
Depreciation and amortization ............ 2,249 1,591
-------- -------
Total costs and expenses................ 129,134 86,447
-------- -------
NET INCOME ................................ $ 6,163 $ 5,994
======== =======
The accompanying notes are an integral part of these financial statements.
ETC OKLAHOMA PIPELINE, LTD.
STATEMENTS OF PARTNERS' CAPITAL
August 31, 2004 and 2003
(In thousands)
LIMITED GENERAL TOTAL
PARTNER'S PARTNER'S PARTNERS'
CAPITAL CAPITAL CAPITAL
--------- --------- ---------
Balance, October 1, 2002..................................................................... $ -- $-- $ --
Capital contribution........................................................................ 32,840 33 32,873
Net income.................................................................................. 5,988 6 5,994
------- --- -------
Balance, August 31, 2003..................................................................... 38,828 39 38,867
Capital contribution........................................................................ 2,286 2 2,288
Net income.................................................................................. 6,157 6 6,163
------- --- -------
Balance, August 31, 2004..................................................................... $47,271 $47 $47,318
======= === =======
The accompanying notes are an integral part of these financial statements.
ETC OKLAHOMA PIPELINE, LTD.
STATEMENTS OF CASH FLOWS
(In thousands)
ELEVEN
YEAR ENDED MONTHS ENDED
AUGUST 31, 2004 AUGUST 31, 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................... $ 6,163 $ 5,994
Adjustments to reconcile net income to
net cash provided by
operating activities--
Depreciation and amortization........... 2,249 1,591
Other, net.............................. 1 --
Changes in operating assets and
liabilities--
Receivables ........................... (157) (1,829)
Related party receivables ............. (7,181) (18,289)
Other current assets .................. 49 (49)
Payables .............................. 11,743 8,269
Accrued expenses ...................... (63) 380
------- --------
Net cash provided by (used in)
operating activities..................... 12,804 (3,933)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment................................ (4,873) (7,321)
Proceeds from sale of assets ............. 72 86
------- --------
Net cash used in investing activities (4,801) (7,235)
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital from (to) parent ......... (8,003) 11,168
------- --------
Net change in cash ....................... -- --
Cash beginning of year ................... -- --
------- --------
Cash end of year ......................... $ -- $ --
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Non-cash asset contribution .............. $ 2,288 $ 32,873
======= ========
Cash paid for interest ................... $ -- $ --
======= ========
Cash paid for income taxes ............... $ -- $ --
======= ========
The accompanying notes are an integral part of these financial statements.
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO FINANCIAL STATEMENTS
As of August 31, 2004 and 2003
(Dollar amounts in thousands)
A - ORGANIZATION AND BUSINESS
ETC Oklahoma Pipeline, Ltd. (Elk City or the Company) is a Texas limited
partnership, which began operations in October 2002. LG PL, LLC, a
wholly-owned subsidiary of La Grange Acquisition, L.P. (La Grange) owns a
0.1% general partner interest and La Grange Acquisition, L.P. owns a
99.9% limited partner interest. Elk City owns a natural gas gathering
pipeline system and gas processing plant in Oklahoma. La Grange acquired
the Oklahoma natural gas gathering and gas processing assets of Aquila
Gas Pipeline Corporation (Aquila), a subsidiary of Aquila, Inc., in
October 2002. These assets are referred to herein as "the Elk City
system."
The Elk City system is a 318-mile gathering system located in western
Oklahoma that gathers, compresses, treats and processes natural gas from
the Anadarko Basin. The Elk City system also includes the Elk City
processing plant and one treating facility. The Elk City system is
connected, either directly or indirectly, to six major interstate and
intrastate natural gas pipelines providing access to natural gas markets
throughout the United States. The Elk City system has a processing
capacity of approximately 130 million cubic feet per day (MMcf/d).
B - SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation
Financial statements are presented for the year ended August 31, 2004 and
for the eleven months ended August 31, 2003.
The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
2. 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.
Some of the other more significant estimates made by management include,
but are not limited to the useful lives for depreciation and amortization
and general business reserves. Actual results could differ from those
estimates.
3. Cash
La Grange provides cash to the Company for working capital and capital
expenditures. Cash transfers are recorded through related party
receivables and payables. Cash receipts of the Company are immediately
transferred to La Grange to reduce the intercompany balance with La
Grange.
4. Accounts Receivable
Elk City deals with counter parties that are typically either investment
grade (Standard & Poors BBB or higher) or are otherwise secured with a
letter of credit or other form of security (corporate guaranty or
prepayment). Management reviews accounts receivable balances each week.
Credit limits are assigned and monitored for all counter parties. The
majority of payments are due on the 25th of the month following delivery.
Management closely monitors credit exposure for potential doubtful
accounts. Management believes that an occurrence of bad debt is unlikely;
therefore, an allowance for doubtful accounts was not deemed necessary at
August 31, 2004 and 2003, respectively. Bad debt expense is recognized at
the time an
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 2004 and 2003
(Dollar amounts in thousands)
B - SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
account is deemed uncollectible. An account receivable will be written
off in the event a counter party files for bankruptcy protection or the
account is turned over for collection and the collector deems the account
uncollectible. No bad debt expense was recorded during the year ended
August 31, 2004 or the eleven months ended August 31, 2003.
5. Materials and Supplies
Materials and supplies are stated at the lower of cost (determined on a
first-in, first-out basis) or market value.
6. Inventories and Exchanges
Inventories and exchanges consist of natural gas liquids (NGLs) on hand
or natural gas and NGL delivery imbalances with others and are presented
net by customer/supplier. These amounts turn over monthly and management
believes the cost approximates market value. Accordingly, these volumes
are valued at market prices.
7. Property, Plant and Equipment
Pipeline, property, plant, and equipment are stated at cost less
accumulated depreciation. The cost of property additions includes labor
and materials, applicable overhead and payroll-related costs. Additions
and improvements that add to the productive capacity or extend the useful
life of the asset are capitalized. Expenditures for maintenance and
repairs that do not add capacity or extend the useful life are charged to
expense as incurred. Upon disposition or retirement of pipeline
components or gas plant components, any gain or loss is recorded to
accumulated depreciation. When entire pipeline systems, gas plants or
other property and equipment are retired or sold, any gain or loss is
included in operations.
Depreciation of the gathering pipeline systems, gas plants, and
processing equipment is provided using the straight-line method based on
an estimated useful life of primarily 20 years.
8. Federal and State Income Taxes
The Company is organized under the provisions of the Texas Revised
Limited Partnership Act. Accordingly, taxable income or loss, which may
vary substantially from the net income or loss reported for financial
reporting purposes is generally included in the federal and state income
tax returns of each partner.
9. Revenue Recognition
Revenue for sales of natural gas and NGLs is recognized upon delivery.
Service revenues, including transportation, treating, compression and gas
processing, are recognized at the time service is performed. Elk City
contracts consist primarily of transportation contracts and keep-whole
arrangements. Under transportation contracts, the Company receives a fee
for transporting gas through its system. The revenue earned from
transportation contracts is directly related to volume of natural gas
transported through the system and is not directly dependent on commodity
prices. Under keep-whole arrangements, the Company gathers natural gas
from the producer, processes the natural gas and sells the resulting NGLs
at market prices to an affiliated company.
10. Shipping and Handling Costs
In accordance with the Emerging Issues Task Force Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs," the Company classified fees
deducted from payments to producers for compression and treating of gas
as revenue.
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 2004 and 2003
(Dollar amounts in thousands)
B - SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
11. Asset Retirement Obligation
The Company accounts for its asset retirement obligations in accordance
with Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation for the
retirement of tangible long-lived assets, typically at the time the
assets are placed into service. A corresponding asset is also recorded
and depreciated over the life of the asset. After the initial
measurement, any changes in the amount of the liability resulting from
the passage of time and revisions to either the timing or amount of
estimated cash flows would be recognized prospectively.
The Company has determined that it is obligated by contractual
requirements to remove facilities or perform other remediation upon
retirement of certain of its assets. Determination of the amounts to be
recognized is based upon numerous estimates and assumptions, including
expected settlement dates, future retirement costs, future inflation
rates and the credit-adjusted risk-free interest rates. However, the
Company is not able to reasonably determine the fair value of the asset
retirement obligations as of August 31, 2004, because the settlement
dates are indeterminable. An asset retirement obligation will be recorded
in the periods the settlement dates can reasonably determined.
12. Impairment of Long-lived Assets
Long-lived assets, including property, plant and equipments are reviewed
for impairment whenever facts and circumstances indicate impairment may
be present. When impairment indicators are present, the Company evaluates
whether the assets in question are able to generate sufficient cash flows
to recover their carrying value on an undiscounted basis. If an asset is
deemed to be impaired, the amount of impairment is determined as the
amount by which the net carrying value exceeds discounted estimated net
cash flows.
C - ACQUISITION
In October 2002, La Grange purchased certain operating assets from
Aquila, primarily consisting of natural gas gathering, treating and
processing assets in Texas and Oklahoma, for $264 million in cash. At the
closing of the acquisition, approximately $33 million of the purchase
price was allocated to the Elk City assets based on the relative fair
value of all assets acquired.
The assets acquired and purchase price allocation were as follows:
ELK CITY ASSETS
---------------
Materials and supplies ....................................... $ 63
Property, plant and equipment ................................ 33,070
Accrued expenses ............................................. (260)
-------
$32,873
=======
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 2004 and 2003
(Dollar amounts in thousands)
D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following:
ESTIMATED BALANCE AT BALANCE AT
USEFUL AUGUST 31, AUGUST 31,
LIVES (YEARS) 2004 2003
------------- ---------- ----------
Midstream pipelines and equipment.................................................. 20 $45,445 $36,574
Midstream right of way............................................................. 20 903 103
Linepack........................................................................... N/A 48 48
Construction in progress........................................................... N/A 901 3,443
Other.............................................................................. 5 195 137
------- -------
Total.............................................................................. 47,492 40,305
Accumulated depreciation and amortization.......................................... (3,938) (1,589)
------- -------
Property, plant and equipment, net................................................. $43,554 $38,716
======= =======
E - RELATED PARTY TRANSACTIONS
The Company entered into various types of transactions with La Grange, or
its subsidiaries, for the year ended August 31, 2004 and eleven months
ended August 31, 2003. The Company sold the majority of natural gas
gathered and NGLs produced by the Company to La Grange or its
subsidiaries. La Grange purchased the gas and NGLs at an index based
price. Additionally, the Company reimbursed La Grange for certain
employees who provided services to the Company and for other costs
(primarily general and administrative expense) related to the Company's
operations. La Grange also provided working capital necessary for the
operations of the Company.
The following table summarizes transactions for the periods presented:
ELEVEN MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
2004 2003
---------- -------------
Natural gas sales to affiliated companies ........ $77,169 $ 60,380
NGLs sales to affiliated companies ............... 46,151 24,454
Compression services from affiliated company ..... 91 --
Allocated costs from affiliated companies ........ 2,663 2,887
Working capital from affiliated companies ........ (3,185) (11,168)
Transfers of property, plant and equipment from
affiliated companies ........................... 2,288 32,873
The related party receivable due from La Grange was $22,305 and $7,121 at
August 31, 2004 and August 31, 2003, respectively.
F - MAJOR CUSTOMERS AND SUPPLIERS
The Company sold 91.1% and 91.8% of natural gas and NGLs produced to ETC
Marketing, Ltd., a subsidiary of La Grange, for the year ended August 31,
2004 and for the eleven months ended August 31, 2003, respectively.
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 2004 and 2003
(Dollar amounts in thousands)
F - MAJOR CUSTOMERS AND SUPPLIERS -- (CONTINUED)
For the year ended August 31, 2004 and the eleven months ended August 31,
2003, the Company had gross purchases as a percentage of cost of sales
from nonaffiliated major suppliers as follows:
ELEVEN MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
2004 2003
---------- -------------
St. Mary Operating Company ....................... 22.8% 14.1%
Samson Resources Company ......................... 18.2% 23.4%
Stephens Production Company ...................... 12.8% 8.8%
Management believes that the diversification of suppliers is sufficient
to enable the Company to purchase all of its supply needs at market
prices without a material disruption of operations if supplies are
interrupted from any of the Company's existing sources. Although no
assurances can be given that supplies will be readily available in the
future, we expect a sufficient supply to continue to be available.
G - RETIREMENT AND BENEFITS
La Grange has a defined contribution plan for virtually all employees
with discretionary matching. Pursuant to the plan, employees of the
Company can defer a portion of their compensation and contribute it to a
deferred account. La Grange did not elect to match contributions to this
plan during the year ended August 31, 2004 and the eleven months ended
August 31, 2003. Therefore, no expense related to the plan is recorded in
the accompanying financial statements.
H - COMMITMENTS AND CONTINGENCIES
1. Lease Obligations
The Company has operating leases for compressors under noncancelable
agreements. Future annual minimum lease payments for each of the next
five years and thereafter as of August 31, 2004 are as follows:
Year ending August 31:
2005 .................................................................. $ 522
2006 .................................................................. 522
2007 .................................................................. 522
2008 .................................................................. 522
2009 .................................................................. 500
After 2009 ............................................................ 72
------
$2,660
======
Rental expense relating to operating leases was $675 and $555 for the
year ended August 31, 2004 and eleven months ended August 31, 2003,
respectively.
2. Litigation
The Company is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 2004 and 2003
(Dollar amounts in thousands)
H - COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
3. Environmental
The Company's operations are subject to extensive federal, state and
local environmental laws and regulations that require expenditures for
remediation at operating facilities and waste disposal sites. Although
the Company believes its operations are in substantial compliance with
applicable environmental laws and regulations, risks of additional costs
and liabilities are inherent in the natural gas pipeline and processing
business, and there can be no assurance that significant costs and
liabilities will not be incurred. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws,
regulations and enforcement policies thereunder, and claims for damages
to property or persons resulting from the operations, could result in
substantial costs and liabilities. Accordingly, the Company has adopted
policies, practices, and procedures in the areas of pollution control,
product safety, occupational health, and the handling, storage, use, and
disposal of hazardous materials to prevent material environmental or
other damage, and to limit the financial liability, which could result
from such events. However, some risk of environmental or other damage is
inherent in the natural gas pipeline and processing business, as it is
with other entities engaged in similar businesses.
In conjunction with the acquisition of the Texas and Oklahoma natural gas
gathering and gas processing assets from Aquila, Aquila, Inc. agreed to
indemnify La Grange Acquisition, L.P. for any environmental liabilities
from those operations prior to October 1, 2002.
Environmental exposures and liabilities are difficult to assess and
estimate due to unknown factors such as the magnitude of possible
contamination, the timing and extent of remediation, the determination of
the Company's liability in proportion to other parties, improvements in
cleanup technologies and the extent to which environmental laws and
regulations may change in the future. Although environmental costs may
have a significant impact on the results of operations for any single
period, the Company believes that such costs will not have a material
adverse effect on its financial position. Elk City did not accrue for
environmental liabilities as of August 31, 2004 or 2003.
I - SUBSEQUENT EVENT
On April 14, 2005, Elk City's parent company completed the sale of the
Company to Atlas Pipeline Partners, L.P. for $190 million in cash,
subject to certain adjustments as defined in the purchase and sale
agreement.
ETC OKLAHOMA PIPELINE, LTD.
BALANCE SHEET
February 28, 2005
(Unaudited)
(In thousands)
ASSETS
------
CURRENT ASSETS:
Cash ................................................................ $ --
Receivables--
Trade ............................................................. 2,294
Related parties ................................................... 27,671
Exchanges ......................................................... 716
Materials and supplies .............................................. 63
Other current assets ................................................ 497
-------
Total current assets ............................................. 31,241
PROPERTY, PLANT AND EQUIPMENT ........................................ 50,004
ACCUMULATED DEPRECIATION ............................................. (5,243)
-------
PROPERTY, PLANT AND EQUIPMENT, net ................................... 44,761
-------
Total assets ..................................................... $76,002
=======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
CURRENT LIABILITIES:
Payables--
Trade ............................................................. $23,206
Exchanges ......................................................... 209
Accrued expenses .................................................... 162
-------
Total current liabilities ........................................ 23,577
Commitments and contingencies (See note D)
PARTNERS' CAPITAL:
Limited partner ..................................................... 52,373
General partner ..................................................... 52
-------
Total partners' capital .......................................... 52,425
-------
Total liabilities and partners' capital .......................... $76,002
=======
The accompanying notes are an integral part of this financial statement.
ETC OKLAHOMA PIPELINE, LTD.
INCOME STATEMENTS
(Unaudited)
(In thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, 2005 FEBRUARY 29, 2004
----------------- -----------------
(UNAUDITED) (UNAUDITED)
OPERATING REVENUES:
Third party .......................... $ 6,841 $ 5,138
Related party ........................ 77,355 54,789
------- -------
Total revenues...................... 84,196 59,927
COSTS AND EXPENSES:
Cost of products sold ................. 74,330 52,757
Operating ............................. 2,624 2,297
General and administrative ............ 1,437 1,331
Depreciation and amortization ......... 1,236 1,076
------- -------
Total costs and expenses............ 79,627 57,461
------- -------
NET INCOME ............................ $ 4,569 $ 2,466
======= =======
The accompanying notes are an integral part of these financial statements.
ETC OKLAHOMA PIPELINE, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, 2005 FEBRUARY 29, 2004
----------------- -----------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................... $ 4,569 $ 2,466
Adjustments to reconcile net income
to net cash provided by
operating activities--
Depreciation and amortization....... 1,236 1,076
Loss on disposal of assets.......... -- 3
Changes in operating assets and
liabilities--
Receivables ....................... (1,024) (521)
Related party receivables ......... (12,560) (21,586)
Other current assets .............. (497) 47
Payables .......................... 3,402 11,764
Accrued expenses .................. (415) (402)
-------- --------
Net cash used in operating
activities...................... (5,289) (7,153)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment............................ (1,905) (2,545)
Proceeds from sale of assets ......... -- 72
-------- --------
Net cash used in investing
activities...................... (1,905) (2,473)
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital from parent .......... 7,194 9,626
-------- --------
Net change in cash ................... -- --
Cash beginning of year ............... -- --
-------- --------
Cash end of year ..................... $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Non-cash asset contribution .......... $ 538 $ 2,288
======== ========
Cash paid for interest ............... $ -- $ --
======== ========
Cash paid for income taxes ........... $ -- $ --
======== ========
The accompanying notes are an integral part of these financial statements.
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Six months ended February 28, 2005
A - ORGANIZATION AND BUSINESS
ETC Oklahoma Pipeline, Ltd. (Elk City or the Company) is a Texas limited
partnership. LG PL, LLC, a wholly-owned subsidiary of La Grange
Acquisition, L.P. (La Grange) owns a 0.1% general partner interest and La
Grange Acquisition, L.P. owns a 99.9% limited partner interest. Elk City
owns a natural gas gathering pipeline system and gas processing plant in
Oklahoma. These assets are referred to herein as "the Elk City system."
The Elk City system is a 318-mile gathering system located in western
Oklahoma that gathers, compresses, treats and processes natural gas from
the Anadarko Basin. The Elk City system also includes the Elk City
processing plant and one treating facility. The Elk City system is
connected, either directly or indirectly, to six major interstate and
intrastate natural gas pipelines providing access to natural gas markets
throughout the United States. The Elk City system has a processing
capacity of approximately 130 million cubic feet per day (MMcf/d).
B - SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation
The interim financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United
States ("US GAAP") and on the same basis as the audited financial
statements for the year ended August 31, 2004. Certain information and
footnote disclosures normally included in annual financial statements
prepared in accordance with US GAAP have been omitted pursuant to the
rules and regulations of the SEC. Because the interim financial
statements do not include all of the information and footnotes required
by US GAAP, they should be read in conjunction with the audited financial
statements and related notes for the year ended August 31, 2004. The
results of operations for an interim period may not give a true
indication of results for a full year. There are no other components of
comprehensive income other than net income.
2. 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. The natural
gas industry conducts its business by processing actual transactions at
the end of the month following the month of delivery. Consequently, the
most current month's financial results are estimated using volume
estimates and market prices. Any difference between estimated results and
actual results are recognized in the following month's financial
statements. Management believes that the operating results estimated for
the six months ending February 28, 2005 and February 29, 2004 represent
the actual results in all material respects.
Some of the other more significant estimates made by management include,
but are not limited to the useful lives for depreciation and
amortization, and general business reserves. Actual results could differ
from those estimates.
3. Cash
La Grange provides cash to the Company for working capital and capital
expenditures. Cash transfers are recorded through related party
receivables and payables. Cash receipts of the Company are immediately
transferred to La Grange to reduce the intercompany balance with La
Grange.
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
Six months ended February 28, 2005
B - SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
4. Accounts Receivable
Elk City deals with counter parties that are typically either investment
grade (Standard & Poors BBB or higher) or are otherwise secured with a
letter of credit or other form of security (corporate guaranty or
prepayment). Management reviews accounts receivable balances each week.
Credit limits are assigned and monitored for all counter parties. The
majority of payments are due on the 25th of the month following delivery.
Management closely monitors credit exposure for potential doubtful
accounts. Management believes that an occurrence of bad debt is unlikely;
therefore, an allowance for doubtful accounts was not deemed necessary at
February 28, 2005. Bad debt expense is recognized at the time an account
is deemed uncollectible. An account receivable will be written off in the
event a counter party files for bankruptcy protection or the account is
turned over for collection and the collector deems the account
uncollectible. No bad debt expense was recorded during the six months
ended February 28, 2005 or six months ended February 29, 2004.
C - RELATED PARTY TRANSACTIONS
The Company entered into various types of transactions with La Grange, or
its subsidiaries for the six months ended February 28, 2005 and
February 29, 2004.
The following table summarized transactions for the six month periods
February 28, 2005 and February 29, 2004:
2005 2004
------- -------
Natural gas sales to affiliated companies ................. $47,886 $33,957
NGLs sales to affiliated companies ........................ 29,469 20,832
Compression services from affiliated company .............. 207 --
Allocated costs from affiliated companies ................. 1,437 1,329
Working capital to (from) related companies ............... 4,009 (1,542)
Transfer of property, plant and equipment from related
parties .................................................. 539 2,288
The related party receivable due from La Grange was $27,671 as of
February 28, 2005.
D - COMMITMENTS AND CONTINGENCIES
1. Litigation
The Company is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
2. Environmental
The Company's operations are subject to extensive federal, state and
local environmental laws and regulations that require expenditures for
remediation at operating facilities and waste disposal sites. Although
the Company believes its operations are in substantial compliance with
applicable environmental laws and regulations, risks of additional costs
and liabilities are inherent in the natural gas pipeline and processing
business, and there can be no assurance that significant costs and
liabilities will not be incurred. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws,
regulations and enforcement policies thereunder, and claims for damages
to property
ETC OKLAHOMA PIPELINE, LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
Six months ended February 28, 2005
D - COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
or persons resulting from the operations, could result in substantial
costs and liabilities. Accordingly, the Company has adopted policies,
practices, and procedures in the areas of pollution control, product
safety, occupational health, and the handling, storage, use, and disposal
of hazardous materials to prevent material environmental or other damage,
and to limit the financial liability, which could result from such
events. However, some risk of environmental or other damage is inherent
in the natural gas pipeline and processing business, as it is with other
entities engaged in similar businesses.
In conjunction with the acquisition of the Texas and Oklahoma natural gas
gathering and gas processing assets from Aquila, Aquila, Inc. agreed to
indemnify La Grange Acquisition, L.P. for any environmental liabilities
from those operations prior to October 1, 2002.
Environmental exposures and liabilities are difficult to assess and
estimate due to unknown factors such as the magnitude of possible
contamination, the timing and extent of remediation, the determination of
the Company's liability in proportion to other parties, improvements in
cleanup technologies and the extent to which environmental laws and
regulations may change in the future. Although environmental costs may
have a significant impact on the results of operations for any single
period, the Company believes that such costs will not have a material
adverse effect on its financial position. Elk City did not accrue for
environmental liabilities as of February 28, 2005.
E - SUBSEQUENT EVENT
On April 14, 2005, Elk City's parent company completed the sale of the
Company to Atlas Pipeline Partners, L.P. for $190 million in cash,
subject to certain adjustments as defined in the purchase and sale
agreement.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Atlas Pipeline Partners, L.P.
We have audited the accompanying statements of income and changes in
parent's equity and cash flows of the Elk City System (a division of the
Aquila Gas Pipeline Corporation), for the year ended September 30, 2002. 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 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 the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of
its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of the Elk City System of
Aquila Gas Pipeline Corporation for the year ended September 30, 2002, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Grant Thornton LLP
Cleveland, Ohio
April 25, 2005
THE ELK CITY SYSTEM
STATEMENT OF INCOME AND CHANGES IN PARENT'S EQUITY IN DIVISION
For the year ended September 30, 2002
(In thousands)
OPERATING REVENUES:
Third party ........................................................ $ 5,599
Related party ...................................................... 46,643
--------
Total revenues ................................................... 52,242
COSTS AND EXPENSES:
Cost of products sold .............................................. 41,610
Operating .......................................................... 3,881
General and administrative ......................................... 1,389
Depreciation and amortization ...................................... 3,811
Asset impairment ................................................... 12,850
--------
Total costs and expenses ......................................... 63,541
--------
LOSS FROM OPERATIONS ................................................ (11,299)
OTHER INCOME:
Gain on disposal of assets ......................................... 14
--------
LOSS BEFORE INCOME TAXES ............................................ (11,285)
INCOME TAX BENEFIT .................................................. (4,439)
--------
NET LOSS ............................................................ (6,846)
--------
Parent's beginning equity in division ............................... 11,763
--------
Parent's ending equity in division .................................. $ 4,917
========
The accompanying notes are an integral part of this financial statement.
THE ELK CITY SYSTEM
STATEMENT OF CASH FLOWS
For the year ended September 30, 2002
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................ $(6,846)
Adjustments to reconcile net loss to net cash provided by operating
activities--
Depreciation and amortization ..................................... 3,811
Asset impairment .................................................. 12,850
Deferred income taxes ............................................. (4,864)
Other, net ........................................................ (15)
Changes in operating assets and liabilities--
Receivables ...................................................... (1,726)
Materials and supplies ........................................... 148
Other current assets ............................................. (34)
Payables ......................................................... 942
Related party payables ........................................... 5,167
Accrued expenses ................................................. 49
Income taxes payable ............................................. 425
-------
Net cash provided by operating activities ....................... 9,907
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .......................... (5,045)
Proceeds from sale of assets ........................................ 115
-------
Net cash used in investing activities ........................... (4,930)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital from parent ......................................... (4,977)
-------
Net cash used in financing activities ........................... (4,977)
-------
Net change in cash and cash equivalents ............................. --
Cash and cash equivalents, beginning of year ........................ --
-------
Cash and cash equivalents, end of year .............................. $ --
=======
The accompanying notes are an integral part of this financial statement.
THE ELK CITY SYSTEM
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
Year ended September 30, 2002
(Dollar amounts in thousands)
A - ORGANIZATION AND BUSINESS
Aquila Gas Processing Corporation (AGP), a Delaware Corporation and a
wholly-owned subsidiary of Aquila Gas Pipeline Corporation (Aquila),
owned the Elk City natural gas gathering pipeline system and gas
processing plant in Oklahoma. Collectively, those assets are referred to
herein as the Elk City System. The Elk City System is considered a
business as defined in the rules and regulations of the U.S. Securities
and Exchange Commission and is sometimes referred to herein as the
"Company".
The Elk City system, a 318-mile gathering system located in western
Oklahoma, gathers, compresses, treats and processes natural gas from the
Anadarko Basin. The Elk City System also includes the Elk City processing
plant and one treating facility. The Elk City System is connected, either
directly or indirectly, to six major interstate and intrastate natural
gas pipelines providing access to natural gas markets throughout the
United States. The Elk City System has a processing capacity of
approximately 130 million cubic feet per day (MMcf/d).
B - SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation
The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of
America. The accompanying financial statements present the operations and
cash flows of the Elk City System on a carve-out basis. Accordingly, the
carve-out financial statements reflect a reasonable allocation of the
costs historically incurred by AGP.
2. 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.
Significant estimates made by management include, but are not limited to
the useful lives for depreciation and amortization, and general business
reserves. Actual results could differ from those estimates.
3. Impairment of Long-lived Assets
The Company evaluates the carrying value of long-lived assets to be held
and used when events and circumstances warrant such a review. The
carrying value of long-lived assets would be considered impaired when the
projected undiscounted cash flows are less than carrying value. In that
event, a loss would be recognized based on the amount by which the
carrying value exceeds the fair value. Fair value is determined primarily
by available market valuations, or, if applicable, discounted cash flows.
As a result of the sale to La Grange (See Note H), the Company recorded
an impairment of $12,850 for the year ended on September 30, 2002, to
write down the Elk City assets to their net realizable value.
4. Revenue Recognition
Revenue for sales of natural gas and natural gas liquids (NGLs) is
recognized upon delivery. Service revenues, including transportation,
treating, compression and gas processing, are recognized at the time
service is performed. Elk City System contracts consist primarily of
transportation contracts and keep-whole arrangements. Under
transportation contracts, the Company receives a fee for transporting gas
through its system. The revenue earned from transportation contracts is
directly related to volume of natural gas transported through the system
and is not directly dependent on commodity prices. Under keep-whole
arrangements, the Company gathers natural gas from the producer,
processing the natural gas and selling the resulting NGLs at market
prices to an affiliated company.
THE ELK CITY SYSTEM
NOTES TO CARVE-OUT FINANCIAL STATEMENTS -- (CONTINUED)
Year ended September 30, 2002
(Dollar amounts in thousands)
B - SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
5. Shipping and Handling Costs
In accordance with the Emerging Issues Task Force Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs," the Company
classifies fees deducted from payments to producers for compression and
treating of gas as revenue.
6. Commodity Risk Management
In 1999, Aquila Gas Pipeline transferred all of its energy trading
operations and management thereof to Aquila Energy Market (AEM), a wholly
owned subsidiary of Aquila, Inc. AEM enters into forward physical
contracts with third parties for the benefit of Aquila and where deemed
necessary entered into intercompany financial derivative positions (e.g.,
swaps, futures and options) with Aquila and other affiliates to assist
them in managing their exposures. Thus, Aquila has forward physical
contracts with third parties and financial derivative positions with AEM
and affiliates. This activity was not pushed down to the carve-out
financial statements of Elk City.
7. Stock Compensation
Some of the Company's employees received stock options in Aquila. As
permitted under accounting principles generally accepted in the United
States of America, Aquila elected to account for the options under
Accounting Principles Board Opinion No. 25, and because the options
strike price was equal to or greater than the fair value at the date of
the grant, no compensation expense was recognized for the year ended
September 30, 2002. As these were Aquila options, the Company does not
have full access to the information necessary to disclose what
compensation expense would have been, had Aquila accounted for the
options under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, which requires compensation
expense be recognized for the fair value of the options at the date of
grant. La Grange Acquisition does not have a stock option plan in place
for its employees.
8. Federal and State Income Taxes
The Elk City System was included in the consolidated federal income tax
returns filed by Aquila. Accordingly, all tax balances were ultimately
settled through Aquila. The Company had generally accounted for its taxes
on a stand-alone or separate return basis (see Note D). Periodically,
taxes payable were settled through the intercompany accounts with Aquila
and were not funded in cash.
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
(Statement No. 109). Statement No. 109 requires that deferred tax assets
and liabilities be established for the basis differences between the
reported amounts of assets and liabilities for financial reporting
purposes and income tax purposes.
9. Asset Retirement Obligation
The Company accounts for its asset retirement obligations in accordance
with Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation for the
retirement of tangible long-lived assets, typically at the time the
assets are placed into service. A corresponding asset is also recorded
and depreciated over the life of the asset. After the initial
measurement, any changes in the amount of the liability resulting from
the passage of time and revisions to either the timing or amount of
estimated cash flows would be recognized prospectively.
The Company has determined that it is obligated by contractual
requirements to remove facilities or perform other remediation upon
retirement of certain of our assets. Determination of the amounts to be
recognized is based upon numerous estimates and assumptions, including
expected settlement dates,
THE ELK CITY SYSTEM
NOTES TO CARVE-OUT FINANCIAL STATEMENTS -- (CONTINUED)
Year ended September 30, 2002
(Dollar amounts in thousands)
B - SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
future retirement costs, future inflation rates and the credit-adjusted
risk-free interest rates. However, the Company is not able to reasonably
determine the fair value of the asset retirement obligations as of
September 30, 2002, because the settlement dates are indeterminable. An
asset retirement obligation will be recorded in the periods in which the
settlement dates can reasonably be determined.
C - RELATED PARTY TRANSACTIONS
The Company entered into various types of transactions with Aquila for
the year ended September 30, 2002. The Company sold the majority of
natural gas and NGLs produced to Aquila. Additionally, the Company
reimbursed Aquila for certain employees who provided services to the
Company and for other costs (primarily general and administrative
expense) related to the Company's operations. Aquila also provided the
working capital necessary for the operations of the Company.
The following table summarized transactions for the year ended
September 30, 2002:
Natural gas sales to affiliated companies............................ $16,391
NGLs sales to affiliated companies................................... 30,252
Allocated costs from affiliated companies............................ 1,389
Working capital to affiliated companies.............................. 3,732
D - INCOME TAXES
A reconciliation between the expected tax computed using the US federal
statutory income tax rate and the provision for income taxes is as
follows:
2002
--------
Statutory federal income tax (35%).................................. $ (3,950)
State and local income taxes -- net of federal income tax effect
(4.3%)............................................................. (489)
--------
Total............................................................... $(4,439)
========
E - RETIREMENT AND BENEFITS
For the year ended September 30, 2002, certain Aquila employees received
stock options to purchase Aquila's common stock. As permitted under
generally accepted accounting principles, Aquila elected to account for
the options under Accounting Principles Board Opinion No. 25, and because
the options strike price was equal to or greater than the fair value at
the date of grant, no compensation expense was recognized. As these were
Aquila, Inc. options, the Company does not have full access to the
information necessary to disclose what compensation would have been, had
Aquila accounted for the options under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", which
requires compensation expense be recognized for the fair value of the
options at the date of grant. The Company does not have a stock option
plan in place for its employees.
Aquila had a defined contribution plan for virtually all employees.
Pursuant to the plan, employees of the Company can defer a portion of
their compensation and contribute it to a deferred account. Aquila's
matching contribution to the plan for the Company employees was $34 for
the year ended September 30, 2002.
Aquila had a stock contribution plan under which eligible employees
received a Company contribution of 3% of their base income in Aquila's
common stock. The Company's expense associated with this plan for the
Company employees for the year ended September 30, 2002 was $19.
THE ELK CITY SYSTEM
NOTES TO CARVE-OUT FINANCIAL STATEMENTS -- (CONTINUED)
Year ended September 30, 2002
(Dollar amounts in thousands)
F - COMMITMENTS AND CONTINGENCIES
1. Litigation
The Company is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
2. Environmental
The Company's operations are subject to extensive federal, state and
local environmental laws and regulations that require expenditures for
remediation at operating facilities and waste disposal sites. Although
the Company believes its operations are in substantial compliance with
applicable environmental laws and regulations, risks of additional costs
and liabilities are inherent in the natural gas pipeline and processing
business, and there can be no assurance that significant costs and
liabilities will not be incurred. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws,
regulations and enforcement policies thereunder, and claims for damages
to property or persons resulting from the operations, could result in
substantial costs and liabilities. Accordingly, the Company has adopted
policies, practices, and procedures in the areas of pollution control,
product safety, occupational health, and the handling, storage, use, and
disposal of hazardous materials to prevent material environmental or
other damage, and to limit the financial liability, which could result
from such events. However, some risk of environmental or other damage is
inherent in the natural gas pipeline and processing business, as it is
with other entities engaged in similar businesses.
Environmental exposures and liabilities are difficult to assess and
estimate due to unknown factors such as the magnitude of possible
contamination, the timing and extent of remediation, the determination of
the Company's liability in proportion to other parties, improvements in
cleanup technologies and the extent to which environmental laws and
regulations may change in the future. Although environmental costs may
have a significant impact on the results of operations for any single
period, the Company believes that such costs will not have a material
adverse effect on its financial position. Elk City did not accrue for
environmental liabilities as of September 30, 2002.
G - MAJOR CUSTOMERS AND SUPPLIERS
The Company sold 89.3% of natural gas and NGLs produced to Aquila for the
year ended September 30, 2002.
For the year ended September 30, 2002, the Company had gross purchases as
a percentage of cost of sales from nonaffiliated major suppliers as
follows:
St. Mary Operating Company.............................................. 19.8%
Exxon Company, U.S.A.................................................... 10.7%
Management believes that the diversification of suppliers is sufficient
to enable the Company to purchase all of its supply needs at market
prices without a material disruption of operations if supplies are
interrupted from any of the Company's existing sources. Although no
assurances can be given that supplies will be readily available in the
future, we expect a sufficient supply to continue to be available.
H - SUBSEQUENT EVENT
In October 2002, La Grange Acquisition, L.P. purchased the Elk City System
from Aquila.