NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—ORGANIZATION
We are a publicly traded (OTCQX: ATLS) Delaware limited liability company formed in October 2011. Unless the context otherwise requires, references to “Atlas Energy Group, LLC,” “the Company,” “we,” “us,” “our” and “our company,” refer to Atlas Energy Group, LLC, and our consolidated subsidiaries.
Our operations primarily consist of our ownership interests in the following:
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Commencing September 1, 2016, Titan Energy, LLC (“Titan”), an independent developer and producer of natural gas, crude oil and natural gas liquids (“NGL”) with operations in basins across the United States but primarily focused on the horizontal development of resource potential from the Eagle Ford Shale in South Texas. Titan Energy Management, LLC, our wholly owned subsidiary (“Titan Management”), holds the Series A Preferred Share of Titan, which entitles us to receive 2% of the aggregate of distributions paid to shareholders (as if we held 2% of Titan’s members’ equity, subject to potential dilution in the event of future equity interests) and to appoint four of seven directors. Titan sponsors and manages tax-advantaged investment partnerships (the “Drilling Partnerships”), in which it coinvests, to finance a portion of its natural gas, crude oil and NGL production activities. As discussed further below, Titan is the successor to the business and operations of Atlas Resource Partners, L.P. (“ARP”);
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•
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Through August 31, 2016, 100% of the general partner Class A units, all of the incentive distribution rights, and an approximate 23.3% limited partner interest in ARP. As discussed further below, ARP was the predecessor to the business and operations of Titan;
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•
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All of the incentive distribution rights, an 80.0% general partner interest and a 2.1% limited partner interest in Atlas Growth Partners, L.P. (“AGP”), a Delaware limited partnership and an independent developer and producer of natural gas, crude oil and NGLs with operations primarily focused in the Eagle Ford Shale in South Texas;
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•
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A 12.0% limited partner interest in Lightfoot Capital Partners, L.P. (“Lightfoot L.P.”) and a 15.9% general partner interest in Lightfoot Capital Partners GP, LLC (“Lightfoot G.P.” and together with Lightfoot L.P., “Lightfoot”), the general partner of Lightfoot L.P., an entity for which Jonathan Cohen, Executive Chairman of the Company’s board of directors, is the Chairman of the board of directors. Lightfoot focuses its investments primarily on incubating new MLPs and providing capital to existing MLPs in need of additional equity or structured debt. On August 29, 2017, Lightfoot announced a proposed sale transaction. See Note 2 for further disclosures regarding Lightfoot; and
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•
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A membership interest in the founder shares of Osprey Sponsor, LLC (“Osprey Sponsor”) received in August 2017. Osprey Sponsor is the sponsor of Osprey Energy Acquisition Corp (“Osprey”). We received our membership interest in recognition of potential utilization, if any, of our office space, advisory services and personnel by Osprey. See Note 2 for further disclosures regarding Osprey and Osprey Sponsor.
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At September 30, 2017, we had 31,973,122 common units issued and outstanding.
ARP Restructuring and Emergence from Chapter 11 Proceedings
On July 25, 2016, we, solely with respect to certain sections thereof, along with ARP and certain of its subsidiaries, entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with certain of ARP’s and such subsidiaries’ lenders (the “Restructuring Support Parties”) to support ARP’s restructuring pursuant to a pre-packaged plan of reorganization (the “Plan”).
On July 27, 2016, ARP and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court,” and the cases commenced thereby, the “Chapter 11 Filings”). The cases commenced thereby were jointly administered under the caption “In re: ATLAS RESOURCE PARTNERS, L.P., et al.”
10
On August 26, 2016, an order confirming the Plan was entered by the Bankruptcy C
ourt. On September 1, 2016, (the “Plan Effective Date”), pursuant to the Plan, the following occurred:
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•
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ARP’s first lien lenders received cash payment of all obligations owed to them by ARP pursuant to the senior secured revolving credit facility (other than $440 million of principal and face amount of letters of credit) and became lenders under Titan’s first lien exit facility credit agreement, composed of a $410 million conforming reserve-based tranche and a $30 million non-conforming tranche.
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ARP’s second lien lenders received a pro rata share of Titan’s second lien exit facility credit agreement with an aggregate principal amount of $252.5 million. In addition, ARP’s second lien lenders received a pro rata share of 10% of Titan’s common shares, subject to dilution by a management incentive plan.
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•
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ARP’s senior note holders, in exchange for 100% of the $668 million aggregate principal amount of senior notes outstanding plus accrued but unpaid interest as of the commencement of the Chapter 11 Filings, received 90% of Titan’s common shares, subject to dilution by a management incentive plan.
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All of ARP’s preferred limited partnership units and common limited partnership units were cancelled without the receipt of any consideration or recovery.
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ARP transferred all of its assets and operations to Titan as a new holding company and ARP dissolved. As a result, Titan became the successor issuer to ARP for purposes of and pursuant to Rule 12g-3 of the Securities Exchange Act of 1934, as amended.
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Titan Management received a Series A Preferred Share of Titan, which entitles Titan Management to receive 2% of the aggregate of distributions paid to shareholders (as if it held 2% of Titan’s members’ equity, subject to potential dilution in the event of future equity interests) and to appoint four of seven directors and certain other rights. Four of the seven initial members of the board of directors of Titan are designated by Titan Management (the “Titan Class A Directors”). For so long as Titan Management holds such preferred share, the Titan Class A Directors will be appointed by a majority of the Titan Class A Directors then in office. Titan has a continuing right to purchase the preferred share at fair market value (as determined pursuant to the methodology provided for in Titan’s limited liability company agreement), subject to the receipt of certain approvals, including the holders of at least 67% of the outstanding common shares of Titan unaffiliated with Titan Management voting in favor of the exercise of the right to purchase the preferred share.
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We were not a party to ARP’s Restructuring. We remain controlled by the same ownership group and management team and thus, ARP’s Restructuring did not have a material impact on the ability of management to operate us or our other businesses.
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the applicable rules and regulations of the Securities Exchange Commission regarding interim financial reporting and include all adjustments that are necessary for a fair presentation of our consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. For a more complete discussion of our accounting policies and certain other information, refer to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
We determined that ARP (through the Plan Effective Date, as discussed further below) and AGP are variable interest entities (“VIEs”) based on their respective partnership agreements, our power, as the general partner, to direct the activities that most significantly impact each of their respective economic performance, and our ownership of each of their respective incentive distribution rights. Accordingly, we consolidated the financial statements of ARP (until the date of ARP’s Chapter 11 Filings, as discussed further below) and AGP into our condensed consolidated financial statements. Our consolidated VIEs’ operating results and asset balances are presented separately in Note 10 – Operating Segment Information. As the general partner for both ARP (through the Plan Effective Date) and AGP, we have unlimited liability for the obligations of ARP (through the Plan Effective Date) and AGP except for those contractual obligations that are expressly made without
11
recourse to the general partner. The non-controlling interests in ARP (through the date of ARP’s Chapter 11 Filings, as discussed further belo
w) and AGP are reflected as (income) loss attributable to non-controlling interests in the condensed consolidated statements of operations and as a component of unitholders’ equity on the condensed consolidated balance sheets. All material intercompany tra
nsactions have been eliminated.
In connection with ARP’s Chapter 11 Filings on July 27, 2016, we deconsolidated ARP’s financial statements from our condensed consolidated financial statements, as we no longer had the power to direct the activities that most significantly impacted ARP’s economic performance; however, we retained the ability to exercise significant influence over the operating and financial decisions of ARP and therefore applied the equity method of accounting for our investment in ARP up to the Plan Effective Date. As a result of these changes, our condensed consolidated financial statements subsequent to ARP’s Chapter 11 Filings will not be comparable to our condensed consolidated financial statements prior to ARP’s Chapter 11 Filings. Our financial results for future periods following the application of equity method accounting will be different from historical trends and the differences may be material.
Certain reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year, specifically related to ARP’s Drilling Partnerships management, which includes all of ARP’s managing and operating activities specific to ARP’s Drilling Partnerships including well construction and completion, administration and oversight, well services and gathering and processing. We previously presented these revenue and expense items separately; however, due to the deconsolidation of ARP on the date of the Chapter 11 Filings, we have aggregated these items to be presented as one combined revenue item and one combined expense item. As a result of this change, we have restated our prior year condensed consolidated statements of operations to conform to our current presentation.
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 ARP has an interest through the date of ARP’s Chapter 11 Filings. Such interests generally approximated 30%. Our condensed consolidated financial statements do not include proportional consolidation of the depletion or impairment expenses of the Drilling Partnerships through the date of ARP’s Chapter 11 Filings. Rather, ARP calculated these items specific to its own economics through the date of ARP’s Chapter 11 Filings.
On the Plan Effective Date, we determined that Titan is a VIE based on its limited liability company agreement and the delegation of management and omnibus agreements between Titan and Titan Management, which provide us the power to direct activities that most significantly impact Titan’s economic performance, but we do not have a controlling financial interest. As a result, we do not consolidate Titan but rather apply the equity method of accounting as we have the ability to exercise significant influence over Titan’s operating and financial decisions.
Liquidity, Capital Resources, and Ability to Continue as a Going Concern
Our primary sources of liquidity are cash distributions received with respect to our ownership interests in AGP, Lightfoot, and Titan and AGP’s annual management fee. However, neither Titan nor AGP are currently paying distributions. Our primary cash requirements, in addition to normal operating expenses, are for debt service and capital expenditures, which we expect to fund through operating cash flow, and cash distributions received. Accordingly, our sources of liquidity are currently not sufficient to satisfy our obligations under our credit agreements.
The significant risks and uncertainties related to our primary sources of liquidity raise substantial doubt about our ability to continue as a going concern. If we are unable to remain in compliance with the covenants under our credit agreements (as described in Note 4), absent relief from our lenders, we maybe be forced to repay or refinance such indebtedness. Upon the occurrence of an event of default, the lenders under our credit agreements could elect to declare all amounts outstanding immediately due and payable and could terminate all commitments to extend further credit. If an event of default occurs, 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.
On September 29, 2017, we entered into an agreement with our lenders to extend the maturity date of our first lien credit agreement from September 30, 2017 to December 29, 2017. In addition to the $41.2 million of indebtedness due on December 29, 2017, we classified the remaining $55.4 million of outstanding indebtedness under our credit agreements as a current liability, based on the uncertainty regarding future covenant compliance. In total, we have $95.5 million of outstanding indebtedness under our credit agreements, which is net of $0.9 million of debt discounts and $0.1 million of deferred financing costs, as current portion of long term debt, net on our condensed consolidated balance sheet as of September 30, 2017.
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We continually monitor capital markets and may make changes to our capital structures from time to time, with the goal of maintain
ing financial flexibility, preserving or improving liquidity, strengthening the balance sheet, meeting debt service obligations and/or achieving cost efficiency. For example, we could pursue options such as refinancing or reorganizing our indebtedness or c
apital structure or seek to raise additional capital through debt or equity financing to address our liquidity concerns and high debt levels. There is no certainty that we will be able to implement any such options, and we cannot provide any assurances tha
t any refinancing or changes to 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 stakeholder
s, including cancellation of debt income (“CODI”) which would be directly allocated to our unitholders and reported on such unitholders’ separate returns. It is possible additional adjustments to our strategic plan and outlook may occur based on market con
ditions and our needs at that time, which could include selling assets or seeking additional partners to develop our assets.
Our condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported amounts of income and expenses could be required and could be material.
Atlas Growth Partners – Liquidity, Capital Resources, and Ability to Continue as a Going Concern
AGP has historically funded its operations, acquisitions and cash distributions primarily through cash generated from operations and financing activities, including its private placement offering completed in 2015. AGP’s 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 continue to remain low in 2017. These lower commodity prices have negatively impacted AGP’s revenues, earnings and cash flows. Sustained low commodity prices will have a material and adverse effect on AGP’s liquidity position.
On November 2, 2016, AGP decided to suspend its current primary offering efforts in light of new regulations and the challenging fund raising environment until such time as market participants have had an opportunity to ascertain the impact of such issues. In addition, AGP’s board of directors suspended its quarterly common unit distributions, beginning with the three months ended September 30, 2016, in order to retain its cash flow. Accordingly, these decisions raise substantial doubt about AGP’s ability to continue as a going concern. Management determined that substantial doubt is alleviated through management’s plans to reduce AGP’s general and administrative expenses, the majority of which represent allocations from us.
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 of gas and oil properties, 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.
Equity Method Investments
Investment in Titan
. At September 30, 2017, we had a 2% Series A Preferred interest in Titan. We account for our investment under the equity method of accounting due to our ability to exercise significant influence over Titan’s operating and financial decisions. As of September 30, 2017 and December 31, 2016, the net carrying amount of our investment in Titan was $0.2 million and zero, respectively, which was included in other assets, net on our condensed consolidated balance sheets. During the three and nine months ended September 30, 2017 and for the period from the Plan Effective Date to September 30, 2016, we recognized equity method loss of $0.3 million, equity method income of $0.2 million, and equity method loss of $0.2 million, respectively, within other, net on our condensed consolidated statements of operations. On the Plan Effective Date, we recorded our equity method investment of Titan at fair value of $0.6 million, which was recorded in gain on deconsolidation of ARP on our condensed consolidated statements of operations for each of the three and nine months ended September 30, 2016.
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Investment
in Lightfoot.
At September 30, 2017, we had an approximate 12.0% interest in Lightfoot L.P. and an approximate 15.9% interest in Lightfoot G.P., the general partner of Lightfoot L.P. We account for our investment in Lightfoot under the equity method of ac
counting due to our ability to exercise significant influence over Lightfoot’s operating and financial decisions. As of September 30, 2017 and December 31, 2016, the net carrying amount of our investment in Lightfoot was $18.3 million and $18.7 million, re
spectively, which was included in other assets, net on our condensed consolidated balance sheets. During the three months ended September 30, 2017 and 2016, we recognized equity method income of $0.2 million and $0.1 million, respectively, within other, ne
t on our condensed consolidated statements of operations. For the nine months ended September 30, 2017 and 2016, we recognized equity method income of $0.7 million and $0.8 million, respectively, within other, net on our condensed consolidated statement of
operations. During the three months ended September 30, 2017 and 2016, we received net cash distributions of approximately $0.4 million and $0.5 million, respectively. For the nine months ended September 30, 2017 and 2016, we received net cash distributio
ns of approximately $1.2 million and $1.4 million, respectively.
On August 29, 2017, Lightfoot G.P., Lightfoot L.P. and Lightfoot’s subsidiary, Arc Logistics Partners LP (NYSE: ARCX) (“Arc Logistics”), announced that they entered into a Purchase Agreement and Plan of Merger (the “Merger Agreement”) with Zenith Energy U.S., L.P. (together with its affiliates, “Zenith”), a portfolio company of Warburg Pincus, pursuant to which Zenith will acquire Arc Logistics GP LLC (“Arc GP”), the general partner of Arc Logistics (the “GP Transfer”), and all of the outstanding common units of Arc Logistics (the “Merger” and, together with the GP Transfer, the “Proposed Transaction”). Under the terms of the Merger Agreement, Lightfoot L.P. will receive $14.50 per common unit of Arc Logistics in cash for the approximately 5.2 million common units held by it. Lightfoot G.P. will receive $94.5 million for 100% of the membership interests in Arc GP. We anticipate receiving net proceeds of approximately $21.2 million.
The completion of the Proposed Transaction is subject to a number of closing conditions, including, among others, approval by a majority of the outstanding Arc Logistics common unitholders and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Lightfoot, the owner of Arc GP and approximately 26.8% of the outstanding common units of Arc Logistics, has executed an agreement to vote in support of the Proposed Transaction. Additionally, the Proposed Transaction is subject to (i) the closing of the purchase by Zenith and Lightfoot from EFS Midstream Holdings LLC of certain of the interests in Arc Terminals Joliet Holdings, LLC, which indirectly owns, among other things, a crude oil unloading facility and a 4-mile crude oil pipeline in Joliet, Illinois, and (ii) the closing of the purchase by Zenith of a 5.51646 % interest (and, subject to certain conditions, an additional 4.16154% interest) in Gulf LNG Holdings Group, LLC (“Gulf LNG”), which owns a liquefied natural gas regasification and storage facility in Pascagoula, Mississippi, from LCP LNG Holdings, LLC, a subsidiary of Lightfoot L.P. (“LCP’).
As a result of Lightfoot’s purchase of certain interests in Arc Terminals Joliet Holdings, LLC, we are expected to own 1.8% in Arc Terminals Joliet Holdings, LLC. We anticipate receiving net proceeds of approximately $3.0 million from LCP selling its interest in Gulf LNG, which is subject to certain closing conditions.
The Proposed Transaction is not subject to a financing condition and closing is targeted at the end of the fourth quarter of 2017 or early in the first quarter of 2018. We anticipate that the net proceeds from the Proposed Transaction will be used to repay borrowings under our first lien credit agreement.
In accordance with accounting standards related to the presentation of long-lived assets to be classified as held for sale, we continue to classify Lightfoot as held and used in our condensed financial statements and will continue to do so until the various closing conditions have been satisfied, including approval by a majority of the outstanding Arc Logistics common unitholders and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Investment in ARP
.
As a result of deconsolidating ARP and recording our equity method investment in ARP a fair value of zero on the date of the Chapter 11 Filings, we recognized a $46.4 million non-cash gain, which is recorded in gain on deconsolidation of ARP on our condensed combined consolidated statements of operations for the three and nine months ended September 30, 2016, and includes a $61.7 million gain related to the remeasurement of our retained noncontrolling investment to fair value. During the period after the Chapter 11 Filings through August 31, 2016, ARP generated a net loss and therefore we did not record any equity method income/(loss) based on our 25% proportionate share because such loss exceeded our investment. Due to the cancellation of ARP’s preferred limited partnership units and common limited partnership units without the receipt of any consideration or recovery on the Plan Effective Date, we no longer hold an equity method investment in ARP.
Interest in Osprey Sponsor
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At September 30, 2017, we have a
membership
interest in Osprey Sponsor, which is the sponsor of Osprey. We received our
membership
interest in
recognition of
pote
ntial utilization, if any, of our office space, advisory services and personnel by Osprey. On July 26, 2017, Osprey, for which certain of our executives, namely Jonathan Cohen, Edward Cohen and Daniel Herz, serve as CEO, Executive Chairman and President, r
espectively
,
c
onsummated its initial public offering
.
Osprey was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business transaction, one or more operating
businesses or assets (a “Business Combination”) that Osprey has not yet identified. The initial public offering, including the overallotment exercised by the underwriters, generated net proceeds of $275 million through the issuance of 27.5 million units, w
hich were contributed to a trust account and are intended to be applied generally toward consum
mating a Business Combination. Our membership interest in Osprey Sponsor is an allocation of 1,250,000 founder shares, consisting of 1,250,000 shares of Class B
common stock of Osprey that are automatically convertible into Class A common stock of Osprey upon the consummation of a Business Combination on a one-for-one basis. Additionally, another 125,000 founder shares have been allocated
to our employees other th
an Messrs. Cohen, Cohen and Herz
.
Pursuant to the Osprey Sponsor limited liability company agreement, owners of the founder shares agree to (i) vote their shares in favor of approving a Business Combination, (ii) waive their redemption rights in connection with the consummation of a Business Combination, and (iii) waive their rights to liquidating distributions from the trust account if Osprey fails to consummate a Business Combination. In addition, Osprey Sponsor has agreed to not to transfer, assign or sell any of the founder shares until the earlier of (i) one year after the date of the consummation of a Business Combination, or (ii) the date on which the last sales price of Osprey’s common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing 150 days after a Business Combination, or earlier, in each case, if subsequent to a Business Combination, Osprey consummates a subsequent liquidation, merger, stock exchange, reorganization or other similar transaction which results in all of Osprey’s stockholders having the right to exchange their common stock for cash, securities or other property.
We have determined that Osprey Sponsor is a VIE based on its limited liability company agreement. Through our direct interest and indirectly through the interests of our related parties, we have certain characteristics of a controlling financial interest and the power to direct activities that most significantly impact Osprey Sponsor’s economic performance; however, we are not the primary beneficiary. As a result, we do not consolidate Osprey Sponsor but rather apply the equity method of accounting as we, through our direct interest and indirectly through the interests of our related parties, have the ability to exercise significant influence over Osprey Sponsor’s operating and financial decisions. As of September 30, 2017, the net carrying amount of our interest in Osprey Sponsor was zero as our membership interest was received in recognition of potential utilization, if any, of our office space, advisory services and personnel by Osprey, and we have provided a nominal amount of services to Osprey as of September 30, 2017. During the three and nine months ended September 30, 2017, we did not recognize any equity method income as Osprey Sponsor has no operations.
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Rabbi Trust
In 2011, we established an excess 401(k) plan relating to certain executives. In connection with the plan, we established a “rabbi” trust for the contributed amounts. At September 30, 2017 and December 31, 2016, we reflected $2.3 million and $4.1 million, respectively, related to the value of the rabbi trust within other assets, net on our condensed consolidated balance sheets, and recorded corresponding liabilities of $2.3 million and $4.1 million, respectively, as of those same dates, within asset retirement obligations and other on our condensed consolidated balance sheets. During the nine months ended September 30, 2017 and 2016, we distributed $2.1 million and $2.3 million, respectively, to certain executives related to the rabbi trust.
Accrued Liabilities
We had $7.7 million and $10.6 million of accrued payroll and benefit items at September 30, 2017 and December 31, 2016, respectively, which were included within accrued liabilities on our condensed consolidated balance sheets.
Share Based Compensation Plans
For the nine months ended September 30, 2017, 764,900 phantom units under the 2015 Long-Term Incentive Plan (“2015 LTIP”) were forfeited, primarily due to Titan’s completion of the majority of the sale of its Appalachian assets and reductions in workforce, which resulted in a $2.4 million reversal of previously recognized stock compensation expense recorded in general and administrative expenses on our condensed consolidated statements of operation for the nine months ended September 30, 2017.
Conversion of Series A Preferred Units
On May 5, 2017, the holders of all 1.9 million of our outstanding Series A Preferred Units elected to convert their units into 5.9 million common units.
Net Income (Loss) Per Common Unit
Basic net income (loss) attributable to common unitholders per unit is computed by dividing net income (loss) attributable to common unitholders, which is determined after the deduction of net income attributable to participating securities and the preferred unitholders’ interests, if applicable, by the weighted average number of common units outstanding during the period.
The following is a reconciliation of net income (loss) allocated to the common unitholders for purposes of calculating net income (loss) attributable to common unitholders per unit (in thousands):
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Three Months Ended
September 30
|
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Nine Months Ended
September 30
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
$
|
(7,341
|
)
|
|
$
|
13,568
|
|
|
$
|
(15,669
|
)
|
|
$
|
(138,421
|
)
|
Preferred unitholders’ dividends
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
(339
|
)
|
Loss attributable to non-controlling interests
|
|
|
1,022
|
|
|
|
23,619
|
|
|
|
1,646
|
|
|
|
132,916
|
|
Net income (loss) attributable to common
unitholders
|
|
|
(6,319
|
)
|
|
|
37,187
|
|
|
|
(14,023
|
)
|
|
|
(5,844
|
)
|
Less: Net income attributable to participating securities – phantom units
(1)
|
|
|
—
|
|
|
|
(496
|
)
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) utilized in the calculation of net loss attributable to common unitholders per unit – diluted
(1)
|
|
$
|
(6,319
|
)
|
|
$
|
36,691
|
|
|
$
|
(14,023
|
)
|
|
$
|
(5,844
|
)
|
(1)
|
For the three months ended September 30, 2017, net loss attributable to common unitholder’s ownership interest was not allocated to approximately 34,000 phantom units, because the contractual terms of the phantom units as participating securities do not require the holders to share in the losses of the entity. For the nine months ended September 30, 2017 and 2016, net loss attributable common unitholder’s ownership interest was not allocated to approximately 82,000 and 322,000 phantom units, respectively, because the contractual terms of the phantom units as participating securities do not require the holders to share in the losses of the entity.
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Diluted net income (loss) attributable to common unitholders per unit is calculated by dividing net income (loss) attributable to common unitholders, less income allocable to participating securities, by the sum of the weighted average
16
number of common
unitholder units outstanding and the dilutive effect of unit option awards and convertible preferred units, as calculated by the treasury stock or if converted methods, as applicable. Unit options consist of common units issuable upon payment of an exerci
se 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 units used to compute basic net loss attributable to common unitholders per unit with those used to compute diluted net loss attributable to common unitholders per unit (in thousands):
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|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Weighted average number of common units—basic
|
|
|
31,973
|
|
|
|
26,038
|
|
|
|
29,288
|
|
|
|
26,032
|
|
Add effect of dilutive incentive awards
(1)
|
|
|
—
|
|
|
|
2,490
|
|
|
|
—
|
|
|
|
—
|
|
Add effect of dilutive convertible preferred units and warrants
(2)
|
|
|
—
|
|
|
|
8,300
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of common units—diluted
|
|
|
31,973
|
|
|
|
36,828
|
|
|
|
29,288
|
|
|
|
26,032
|
|
(1)
|
For the three months ended September 30, 2017, approximately 2,926,000 phantom units were excluded from the computation of diluted net income (loss) attributable to common unitholders per unit, because the inclusion of such units would have been anti-dilutive. For the nine months ended September 30, 2017, and 2016, approximately 3,195,000 and 2,623,000 phantom units, respectively, were excluded from the computation of diluted net income (loss) attributable to common unitholders per unit, because the inclusion of such units would have been anti-dilutive.
|
(2)
|
For each of the three and nine months ended September 30, 2017, and the nine months ended September 30, 2016, our warrants issued in connection with the Second Lien Credit Agreement were excluded from the computation of diluted earnings attributable to common unitholders per unit because the inclusion of such warrants and units would have been anti-dilutive. For each of the three and nine months ended September 30, 2016, our convertible Series A Preferred Units were excluded from the computation of diluted earnings attributable to common unitholders per unit, because the inclusion of such warrants and units would have been anti-dilutive.
|
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“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 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. We
have made progress on our contract reviews and documentation.
Substantially all of our revenue is earned pursuant to agreements under which we have currently interpreted one performance obligation, which is satisfied at a point-in-time. We are currently unable to reasonably estimate the expected financial statement impact; however, we do not believe the new accounting guidance will have a material impact on our financial position, results of operations or cash flows. We intend to adopt the new accounting guidance using the modified retrospective method. The new accounting guidance will require that our revenue recognition policy disclosures include further detail regarding our performance obligations as to the nature, amount, timing, and estimates of revenue and cash flows generated from our contracts with customers.
17
NOTE 3—PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at the dates indicated (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Natural gas and oil properties:
|
|
|
|
|
|
|
|
|
Proved properties
|
|
$
|
84,619
|
|
|
$
|
84,631
|
|
Unproved properties
|
|
|
63,325
|
|
|
|
63,314
|
|
Support equipment and other
|
|
|
3,188
|
|
|
|
3,188
|
|
Total natural gas and oil properties
|
|
|
151,132
|
|
|
|
151,133
|
|
Less – accumulated depreciation, depletion and amortization
|
|
|
(85,078
|
)
|
|
|
(82,234
|
)
|
|
|
$
|
66,054
|
|
|
$
|
68,899
|
|
As of September 30, 2017, we did not have any non-cash investing activity capital expenditures. During the nine months ended September 30, 2016, we recognized $20.6 million of non-cash investing activities capital expenditures, which were reflected within the changes in accounts payable and accrued liabilities on our condensed consolidated statement of cash flows.
We capitalized interest on ARP’s borrowed funds related to capital projects only for periods that activities were in progress to bring these projects to their intended use. The weighted average interest rates used to capitalize interest on combined borrowed funds by ARP were 6.3% and 6.6% for the three and nine months ended September 30, 2016, respectively. The aggregate amount of interest capitalized by ARP was $0.6 million and $5.4 million for the three and nine months ended September 30, 2016, respectively.
For the three and nine months ended September 30, 2016, we recorded $0.6 million and $4.0 million, respectively, of ARP’s accretion expense related to asset retirement obligations within depreciation, depletion and amortization in our condensed consolidated statements of operations.
NOTE 4—DEBT
Total debt consists of the following at the dates indicated (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
First Lien Credit Agreement
|
|
$
|
41,172
|
|
|
$
|
37,962
|
|
Second Lien Credit Agreement
|
|
|
55,366
|
|
|
|
44,593
|
|
Debt discount, net of accumulated amortization of $934 and $623
|
|
|
(934
|
)
|
|
|
(1,244
|
)
|
Deferred financing costs, net of accumulated amortization of $2,677 and $2,538, respectively
|
|
|
(113
|
)
|
|
|
(211
|
)
|
Total debt, net
|
|
|
95,491
|
|
|
|
81,100
|
|
Less current maturities
|
|
|
(95,491
|
)
|
|
|
(81,100
|
)
|
Total long-term debt, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash Interest.
Cash payments for interest were $0.3 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.7 million and $55.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Credit Agreements
First Lien Credit Agreement
. On March 30, 2016, we, together with New Atlas Holdings, LLC (the “Borrower”) and Atlas Lightfoot, LLC, entered into a third amendment (the “Third Amendment”) to our credit agreement with Riverstone Credit Partners, L.P., as administrative agent (“Riverstone”), and the lenders (the “Lenders”) from time to time party thereto (the “First Lien Credit Agreement”).
18
The outstanding loans under the First Lien Credit Agreement were bifurcated between the existing First Lien Credit Agreement and the new Second Lie
n Credit Agreement (defined below), with $35.0 million and $35.8 million (including $2.4 million in deemed prepayment premium) in borrowings outstanding, respectively. As a result of these transactions, we recognized $6.1 million as a loss on early extingu
ishment of debt, consisting of the $2.4 million prepayment penalty and $3.7 million of accelerated amortization of deferring financing costs, on our condensed consolidated statement of operations for the nine months ended September 30, 2016. The Third Amen
dment amended the First Lien Credit Agreement to, among other things:
|
•
|
provide the ability for us and the Borrower to enter into the new Second Lien Credit Agreement (defined below);
|
|
•
|
shorten the maturity date of the First Lien Credit Agreement to September 30, 2017, subject to an optional extension to September 30, 2018 by the Borrower, assuming certain conditions are met, including a First Lien Leverage Ratio (as defined in the First Lien Credit Agreement) of not more than 6:00 to 1:00 and a 5% extension fee. On September 29, 2017, we entered into a further amendment to extend the maturity date of our First Lien Credit Agreement to December 29, 2017;
|
|
•
|
modify the applicable cash interest rate margin for ABR Loans and Eurodollar Loans to 0.50% and 1.50%, respectively, and add a pay-in-kind interest payment of 11% of the principal balance per annum;
|
|
•
|
allow the Borrower to make mandatory pre-payments under the First Lien Credit Agreement or the new Second Lien Credit Agreement, in its discretion, and add additional mandatory pre-payment events, including a monthly cash sweep for balances in excess of $4 million;
|
|
•
|
provide that the First Lien Credit Agreement may be prepaid without premium;
|
|
•
|
replace the existing financial covenants with (i) the requirement that we maintain a minimum of $2 million in EBITDA on a trailing twelve-month basis, beginning with the quarter ending June 30, 2016, and (ii) the incorporation into the First Lien Credit Agreement of the financial covenants included in ARP’s credit agreement, beginning with the quarter ending June 30, 2016;
|
|
•
|
prohibit the payment of cash distributions on our common and preferred units;
|
|
•
|
require the receipt of quarterly distributions from Atlas Growth Partners, GP, LLC and Lightfoot; and
|
|
•
|
add a cross-default provision for defaults by ARP.
|
On October 6, 2016, we entered into a fourth amendment to the First Lien Credit Agreement with Riverstone and the Lenders, effective as of September 1, 2016, that makes conforming changes to reflect the status of Titan as the successor to ARP following the consummation of the Chapter 11 Filings and also removed the financial covenants and related cross-defaults that had previously been incorporated from ARP’s credit agreement.
Second Lien Credit Agreement.
Also on March 30, 2016, we and the Borrower entered into a new second lien credit agreement (the “Second Lien Credit Agreement”) with Riverstone and the Lenders. As described above, $35.8 million of the indebtedness previously outstanding under the First Lien Credit Agreement was moved under the Second Lien Credit Agreement. The Second Lien Credit Agreement also has an unamortized discount of $0.9 million as of September 30, 2017, related to the 4,668,044 warrants issued in connection with the Second Lien Credit Agreement.
The Second Lien Credit Agreement matures on March 30, 2019, subject to an optional extension (the “Extension Option”) to March 30, 2020, assuming certain conditions are met, including a Total Leverage Ratio (as defined in the Second Lien Credit Agreement) of not more than 6:00 to 1:00 and a 5% extension fee. Borrowings under the Second Lien Credit Agreement are secured on a second priority basis by security interests in the same collateral that secures borrowings under the First Lien Credit Agreement.
Borrowings under the Second Lien Credit Agreement bear interest at a rate of 30%, payable in-kind through an increase in the outstanding principal. If the First Lien Credit Agreement is repaid in full prior to March 30, 2018, the rate will be reduced to 20%. If the Extension Option is exercised, the rate will again be increased to 30%. If our market capitalization is greater than $75 million, we can issue common units in lieu of increasing the principal to satisfy the interest obligation.
19
The Borrower may prepay the borrowings under the Second Lien Credit Agreement without premium at any time. The Second Lien Credit Agreement includes the same mand
atory prepayment events as the First Lien Credit Agreement, subject to the Borrower’s discretion to prepay either the First Lien Credit Agreement or the Second Lien Credit Agreement.
The Second Lien Credit Agreement contains the same negative and affirmative covenants and events of default as the First Lien Credit Agreement, including customary covenants that limit the Borrower’s ability to incur additional indebtedness, grant liens, make loans or investments, make distributions if a default exists or would result from the distribution, merge into or consolidate with other persons, enter into swap agreements that do not conform to specified terms or that exceed specified amounts, or engage in certain asset dispositions. In addition, the Second Lien Credit Agreement requires that we maintain an Asset Coverage Ratio (as defined in the Second Lien Credit Agreement) of not less than 2.00 to 1.00 as of September 30, 2017 and each fiscal quarter ending thereafter.
In connection with the First Lien Credit Agreement and Second Lien Credit Agreement, the lenders thereunder continued their syndicated participation in the underlying loans consistent with the original term loan facilities and therefore certain of the Company’s current and former officers participated in approximately 12% of the loan syndication and warrants and a foundation affiliated with a 5% or more unitholder participated in approximately 12% of the loan syndication.
On October 6, 2016, we entered into a first amendment to the Second Lien Credit Agreement with Riverstone and the Lenders, effective as of September 1, 2016, that makes conforming changes to reflect the status of Titan as the successor to ARP following the consummation of the Chapter 11 Filings and also removes the financial covenants and related cross-defaults that had previously been incorporated from ARP’s credit agreement.
In addition to the $41.2 million of amounts outstanding under our First Lien Credit Agreement due on December 29, 2017, we classified the $55.4 million of amounts outstanding our Second Lien Credit Agreement as a current liability, based on the uncertainty regarding future covenant compliance. In total, we have $95.5 million of outstanding indebtedness under our credit agreements, which is net of $0.9 million of debt discounts and $0.1 million of deferred financing costs, as current portion of long term debt, net on our condensed consolidated balance sheet as of September 30, 2017.
NOTE 5—DERIVATIVE INSTRUMENTS
We use a number of different derivative instruments, principally swaps and options, in connection with our commodity price risk management activities. We do not apply hedge accounting to any of our derivative instruments. As a result, gains and losses associated with derivative instruments are recognized in earnings.
We enter into commodity future option contracts to achieve more predictable cash flows by hedging our exposure to changes in commodity prices. At any point in time, such contracts may include regulated New York Mercantile Exchange (“NYMEX”) futures and options contracts and non-regulated over-the-counter futures contracts with qualified counterparties. NYMEX contracts are generally settled with offsetting positions, but may be settled by the physical delivery of the commodity. Crude oil contracts are based on a West Texas Intermediate (“WTI”) index. Natural gas liquids fixed price swaps are priced based on a WTI crude oil index, while ethane, propane, butane and iso butane contracts are based on the respective Mt. Belvieu price. These contracts were recorded at fair value.
20
On the date of the Chapter 11 Filings, we deconsolidated ARP for financial reporting purposes (see Note 2). The following table summarizes the commodity derivative activity and presentat
ion in our condensed consolidated statement of operations for the periods indicated (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Portion of settlements associated with gains previously recognized within accumulated other comprehensive income, net of prior year offsets
(1)
|
|
$
|
—
|
|
|
$
|
1,470
|
|
|
$
|
—
|
|
|
$
|
10,540
|
|
Portion of settlements attributable to subsequent mark—to—market gains
(2)
|
|
|
137
|
|
|
|
3,610
|
|
|
|
292
|
|
|
|
88,875
|
|
Total cash settlements on commodity derivative contracts
|
|
$
|
137
|
|
|
$
|
5,080
|
|
|
$
|
292
|
|
|
$
|
99,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized on cash settlement
(3)
|
|
$
|
(53
|
)
|
|
$
|
9,510
|
|
|
$
|
489
|
|
|
$
|
(17,846
|
)
|
Gain (loss) recognized on open derivative
contracts
(3)
|
|
|
(396
|
)
|
|
|
(61
|
)
|
|
|
453
|
|
|
|
(342
|
)
|
Gain (loss) on mark-to-market derivatives
|
|
$
|
(449
|
)
|
|
$
|
9,449
|
|
|
$
|
942
|
|
|
$
|
(18,188
|
)
|
|
(1)
|
Recognized in gas and oil production revenue.
|
|
(2)
|
Excludes the effects of the $235.3 million, net of $8.2 million in ARP’s hedge monetization fees, paid directly to ARP’s First Lien Credit Facility lenders upon the sale of substantially all of ARP’s commodity hedge positions on July 25, 2016 and July 26, 2016.
|
|
(3)
|
Recognized in gain (loss) on mark-to-market derivatives.
|
The following table summarizes the gross fair values of AGP’s derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on our condensed consolidated balance sheets as of the dates indicated (in thousands):
Offsetting Derivatives as of September 30, 2017
|
|
Gross
Amounts
Recognized
|
|
|
Gross
Amounts
Offset
|
|
|
Net Amount
Presented
|
|
Current portion of derivative assets
|
|
$
|
170
|
|
|
$
|
(102
|
)
|
|
$
|
68
|
|
Long-term portion of derivative assets
|
|
|
33
|
|
|
|
(15
|
)
|
|
|
18
|
|
Total derivative assets
|
|
$
|
203
|
|
|
$
|
(117
|
)
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative liabilities
|
|
$
|
(102
|
)
|
|
$
|
102
|
|
|
$
|
—
|
|
Long-term portion of derivative liabilities
|
|
|
(15
|
)
|
|
|
15
|
|
|
|
—
|
|
Total derivative liabilities
|
|
$
|
(117
|
)
|
|
$
|
117
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting Derivatives as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative assets
|
|
$
|
97
|
|
|
$
|
(97
|
)
|
|
$
|
—
|
|
Long-term portion of derivative assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total derivative assets
|
|
$
|
97
|
|
|
$
|
(97
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of derivative liabilities
|
|
$
|
(381
|
)
|
|
$
|
97
|
|
|
$
|
(284
|
)
|
Long-term portion of derivative liabilities
|
|
|
(280
|
)
|
|
|
—
|
|
|
|
(280
|
)
|
Total derivative liabilities
|
|
$
|
(661
|
)
|
|
$
|
97
|
|
|
$
|
(564
|
)
|
21
At September 30, 2017, AGP had the following commodity derivatives:
Type
|
|
Production
Period
Ending
December 31,
|
|
|
|
Volumes
(1)
|
|
|
Average Fixed
Price
(1)
|
|
|
Fair Value
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
(2)
|
|
Crude Oil – Fixed Price Swaps
|
|
2017
(3)
|
|
|
|
26,100
|
|
|
$
|
53.517
|
|
|
$
|
46
|
|
|
|
2018
|
|
|
|
74,500
|
|
|
$
|
52.510
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
AGP’s net assets
|
|
|
|
86
|
|
(1)
|
Volumes for crude oil are stated in barrels.
|
(2)
|
Fair value of crude oil fixed price swaps are based on forward West Texas Intermediate (“WTI”) crude oil prices, as applicable.
|
(3)
|
The production volumes for 2017 include the remaining three months of 2017 beginning October 1, 2017.
|
NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
We use a market approach fair value methodology to value our outstanding derivative contracts and financial instruments. The fair value of a financial instrument depends on a number of factors, including the availability of observable market data over the contractual term of the underlying instrument. We separate the fair value of our financial instruments into the three level hierarchy (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. As of September 30, 2017 and December 31, 2016, all of our derivative financial instruments were classified as Level 2.
Information for our financial instruments measured at fair value were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets, gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi trust
|
|
$
|
2,312
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,312
|
|
AGP Commodity swaps
|
|
|
—
|
|
|
|
203
|
|
|
|
—
|
|
|
|
203
|
|
Total assets, gross
|
|
|
2,312
|
|
|
|
203
|
|
|
|
—
|
|
|
|
2,515
|
|
Liabilities, gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGP Commodity swaps
|
|
|
—
|
|
|
|
(117
|
)
|
|
|
—
|
|
|
|
(117
|
)
|
Total derivative liabilities, gross
|
|
|
—
|
|
|
|
(117
|
)
|
|
|
—
|
|
|
|
(117
|
)
|
Total assets, fair value, net
|
|
$
|
2,312
|
|
|
$
|
86
|
|
|
$
|
—
|
|
|
$
|
2,398
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets, gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabbi trust
|
|
$
|
4,208
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,208
|
|
AGP Commodity swaps
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
|
|
97
|
|
Total assets, gross
|
|
|
4,208
|
|
|
|
97
|
|
|
|
—
|
|
|
|
4,305
|
|
Liabilities, gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGP Commodity swaps
|
|
|
—
|
|
|
|
(661
|
)
|
|
|
—
|
|
|
|
(661
|
)
|
Total derivative liabilities, gross
|
|
$
|
—
|
|
|
|
(661
|
)
|
|
|
—
|
|
|
|
(661
|
)
|
Total assets, fair value, net
|
|
$
|
4,208
|
|
|
$
|
(564
|
)
|
|
$
|
—
|
|
|
$
|
3,644
|
|
Other Financial Instruments
Our other current assets and liabilities on our condensed consolidated balance sheets are considered to be financial instruments. The estimated fair values of these instruments approximate their carrying amounts due to their short-term nature and thus are categorized as Level 1. The estimated fair value of our debt at September 30, 2017 approximated its carrying value of $96.5 million, which consisted of our First Lien Credit Agreement and Second Lien Credit Agreement that bear interest at variable rates and are categorized as Level 1 values.
22
Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis
Management estimated the fair values of ARP’s natural gas and oil properties transferred to ARP in June 2016 upon consolidation of certain Drilling Partnerships (see Note 7) based on a discounted cash flow model, which considered the estimated remaining lives of the wells based on reserve estimates, ARP’s future operating and development costs of the assets, the respective natural gas, oil and natural gas liquids forward price curves, and estimated salvage values using ARP’s historical experience and external estimates of recovery values. These estimates of fair value were Level 3 measurements as they were based on unobservable inputs.
Management estimated the fair value of asset retirement obligations transferred to ARP in June 2016 upon consolidation of certain Drilling Partnerships (see Note 7) based on discounted cash flow projections using ARP’s historical experience in plugging and abandoning wells, the estimated remaining lives of those wells based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future considering inflation rates, federal and state regulatory requirements, and ARP’s assumed credit-adjusted risk-free interest rate. These estimates of fair value were Level 3 measurements as they were based on unobservable inputs.
Management estimated the fair value of our equity method investment in ARP based on market data including ARP’s unit price and announcement of restructuring, which are Level 1 measurements as they are based on observable inputs. Management estimated the fair value of our equity method investment in Titan based on its estimated enterprise value and reorganizational value of assets and liabilities upon emergence from bankruptcy through fresh-start accounting utilizing the discounted cash flow method for both its gas and oil production business and its partnership management business based on the financial projections in ARP’s disclosure statement. The resulting fair value of Titan’s equity was used to value our equity method investment. These estimates of fair value are Level 3 measurements as they are based on unobservable inputs.
NOTE 7—CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship with ARP
. ARP did not directly employ any persons to manage or operate its business. These functions were provided by employees of us and/or our affiliates. On the date of the Chapter 11 Filings, we deconsolidated ARP for financial reporting purposes (see Note 2).
Relationship with Titan
. Other than its named executive officers, Titan does not directly employ any persons to manage or operate its business. These functions were provided by employees of us and/or our affiliates. On September 1, 2016, Titan entered into a Delegation of Management Agreement (the “Delegation Agreement”) with Titan Management, our wholly owned subsidiary. Pursuant to the Delegation Agreement, Titan has delegated to Titan Management all of Titan’s rights and powers to manage and control the business and affairs of Titan Energy Operating, LLC (“Titan Operating”), a wholly owned subsidiary of Titan. However, Titan’s board of directors retains management and control over certain non-delegated duties. In addition, Titan also entered into an Omnibus Agreement (the “Omnibus Agreement”) dated September 1, 2016 with Titan Management, Atlas Energy Resource Services, Inc. (“AERS”), our wholly owned subsidiary, and Titan Operating. Pursuant to the Omnibus Agreement, Titan Management and AERS will provide Titan and Titan Operating with certain financial, legal, accounting, tax advisory, financial advisory and engineering services (including cash management services) and Titan and Titan Operating will reimburse Titan Management and AERS for their direct and allocable indirect expenses incurred in connection with the provision of the services, subject to certain approval rights in favor of Titan’s Conflicts Committee. As of September 30, 2017 and December 31, 2016, we had payables of $13.3 million and $3.3 million to Titan related to the timing of funding cash accounts related to general and administrative expenses, such as payroll and benefits, which was recorded in advances from affiliates in our condensed consolidated balance sheets.
Relationship with AGP
. AGP does not directly employ any persons to manage or operate its business. These functions are provided by employees of us and/or our affiliates. Atlas Growth Partners, GP, LLC (“AGP GP”) receives an annual management fee in connection with its management of AGP equivalent to 1% of capital contributions per annum. During each of the three months ended September 30, 2017 and 2016, AGP paid a management fee of $0.6 million, and during each of the nine months ended September 30, 2017 and 2016, AGP paid a management fee of $1.7 million. We charge direct costs, such as salary and wages, and allocate indirect costs, such as rent for offices, to AGP by us based on the number of its employees who devoted their time to activities on its behalf. AGP reimburses us at cost for direct costs incurred on its behalf. AGP reimburses all necessary and reasonable indirect costs allocated by the general partner.
Relationship with Osprey Sponsor
. We received our membership interest in Osprey Sponsor in recognition of potential utilization, if any, of our office space, advisory services and personnel by Osprey, for which we will be reimbursed at cost. We have provided a nominal amount of services to Osprey as of September 30, 2017.
23
Relationship with Drilling Partnerships
. ARP conducted certain
activities through, and a portion of its revenues were attributable to, sponsorship of the Drilling Partnerships. Through the Plan Effective Date, ARP served as the ultimate general partner and operator of the Drilling Partnerships and assumed customary ri
ghts and obligations for the Drilling Partnerships. As the ultimate general partner, ARP was liable for the Drilling Partnerships’ liabilities and could have been liable to limited partners of the Drilling Partnerships if it breached its responsibilities w
ith respect to the operations of the Drilling Partnerships. ARP was entitled to receive management fees, reimbursement for administrative costs incurred, and to share in the Drilling Partnership’s revenue and costs and expenses according to the respective
partnership agreements.
In March 2016, ARP transferred $36.7 million of investor capital raised and $13.3 million of accrued well drilling and completion costs incurred by ARP to the Atlas Eagle Ford 2015 L.P. private drilling partnership for activities directly related to their program. In June 2016, ARP transferred $5.2 million of funds to certain of the Drilling Partnerships that were projected to make monthly or quarterly distributions to their limited partners over the next several months and/or quarter to ensure accessible distribution funding coverage in accordance with the respective Drilling Partnerships’ operations and partnership agreements in the event ARP experienced a prolonged restructuring period as ARP performed all administrative and management functions for the Drilling Partnerships.
During the quarter ended June 30, 2016, ARP recorded $7.2 million and $12.4 million of gas and oil properties and asset retirement obligations, respectively, transferred to ARP as a result of certain Drilling Partnership liquidations. The gas and oil properties and asset retirement obligations were recorded at their fair values on the respective dates of the Drilling Partnerships’ liquidation and transfer to ARP (see Note 6) and resulted in a non-cash loss of $6.2 million, net of liquidation and transfer adjustments, for the three and nine months ended September 30, 2016, which was recorded in other income/(loss) in the condensed consolidated statements of operations.
AGP’s Relationship with Titan
. At our direction, AGP reimburses Titan for direct costs, such as salaries and wages, charged to AGP based on our employees who incurred time to activities on AGP’s behalf and indirect costs, such as rent and other general and administrative costs, allocated to AGP based on the number of our employees who devoted their time to activities on AGP’s behalf. As of September 30, 2017 and December 31, 2016, AGP had payables of $0.1 million and $0.8 million, respectively to Titan related to the direct costs, indirect cost allocation, and timing of funding of cash accounts, which was recorded in advances from affiliates in the condensed consolidated balance sheets.
Other Relationships.
We have other related party transactions with regard to our First Lien Credit Agreement and Second Lien Credit Agreement (see Note 4), our Series A preferred units and our general partner and limited partner interest in Lightfoot (see Notes 1 and 2).
NOTE 8—COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are parties to various routine legal proceedings arising out of the ordinary course of business. Our management and our subsidiaries believe that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
Environmental Matters
We are subject to various federal, state and local laws and regulations relating to the protection of the environment. We have established procedures for the ongoing evaluation of our and our subsidiaries’ operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. We maintain insurance which may cover in whole or in part certain environmental expenditures. We had no environmental matters requiring specific disclosure or requiring the recognition of a liability as of September 30, 2017 and December 31, 2016.
NOTE 9—CASH DISTRIBUTIONS
Our Cash Distributions
. We have a cash distribution policy under which we distribute, within 50 days following the end of each calendar quarter, all of our available cash (as defined in our limited liability company agreement) for that quarter to our unitholders. However, as a result of the First Lien Credit Agreement and Second Lien Credit Agreement entered into on March 30, 2016 (see Note 4), we are prohibited from paying cash distributions on our units. Prior to these amendments,
24
during the nine months ended September 30, 2
016, we paid a distribution of $1.0 million to our Class A preferred unitholders.
ARP Cash Distributions
. ARP had a monthly cash distribution program whereby ARP distributed all of its available cash (as defined in the partnership agreement) for that month to its unitholders within 45 days from the month end. If ARP’s common unit distributions in any quarter exceeded specified target levels, we received between 13% and 48% of such distributions in excess of the specified target levels.
During the nine months ended September 30, 2016, ARP paid four monthly cash distributions totaling $5.1 million to common limited partners ($0.0125 per unit per month); $2.5 million to Preferred Class C limited partners ($0.0125 per unit per month); and $0.2 million to the General Partner Class A holder ($0.0125 per unit per month).
During the nine months ended September 30, 2016, ARP paid two distributions totaling $4.4 million to Class D Preferred units ($0.5390625 per unit) for the period October 15, 2015 through April 14, 2016.
During the nine months ended September 30, 2016, ARP paid two distributions totaling $0.3 million to Class E Preferred units ($0.671875 per unit) for the period October 15, 2015 through April 14, 2016.
AGP Cash Distributions.
During the nine months ended September 30, 2016, AGP paid a distribution of $12.2 million to common limited partners ($0.1750 per unit per quarter) and $0.3 million to the general partner’s Class A units ($0.1750 per unit per quarter). On November 2, 2016, AGP’s Board of Directors determined to suspend its quarterly common unit distributions, beginning with the three months ended September 30, 2016, in order to retain its cash flow.
25
NOTE 10—OPERATING SEGMENT INFORMATION
Our operations included three reportable operating segments: ARP (through the date of the Chapter 11 Filings), AGP, and corporate and other. These operating segments reflected the way we managed our operations and made business decisions. Corporate and other includes our equity investments in Lightfoot (see Note 2) and Titan (see Note 2), as well as our general and administrative and interest expenses. Operating segment data for the periods indicated were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
|
2016
|
|
Atlas Resource Partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(1)
|
|
$
|
—
|
|
$
|
39,198
|
|
|
$
|
—
|
|
|
$
|
125,582
|
|
Operating costs and expenses
|
|
|
—
|
|
|
(18,391
|
)
|
|
|
—
|
|
|
|
(134,718
|
)
|
Depreciation, depletion and amortization
expense
|
|
|
—
|
|
|
(8,460
|
)
|
|
|
—
|
|
|
|
(67,513
|
)
|
Interest expense
|
|
|
—
|
|
|
(9,224
|
)
|
|
|
—
|
|
|
|
(68,883
|
)
|
Gain on early extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
26,498
|
|
Reorganization items, net
|
|
|
—
|
|
|
(21,649
|
)
|
|
|
—
|
|
|
|
(21,649
|
)
|
Other income (loss)
|
|
|
—
|
|
|
24
|
|
|
|
—
|
|
|
|
(6,625
|
)
|
Segment loss
|
|
$
|
—
|
|
$
|
(18,502
|
)
|
|
$
|
—
|
|
|
$
|
(147,308
|
)
|
Atlas Growth Partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(1)
|
|
$
|
1,282
|
|
$
|
2,918
|
|
|
$
|
6,943
|
|
|
$
|
8,911
|
|
Operating costs and expenses
|
|
|
(1,518
|
)
|
|
(3,274
|
)
|
|
|
(5,830
|
)
|
|
|
(10,198
|
)
|
Depreciation, depletion and amortization
expense
|
|
|
(825
|
)
|
|
(3,898
|
)
|
|
|
(2,823
|
)
|
|
|
(11,424
|
)
|
Other loss
|
|
|
—
|
|
|
(5,297
|
)
|
|
|
—
|
|
|
|
(5,297
|
)
|
Segment loss
|
|
$
|
(1,061
|
)
|
$
|
(9,551
|
)
|
|
$
|
(1,710
|
)
|
|
$
|
(18,008
|
)
|
Corporate and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16
|
|
$
|
121
|
|
|
$
|
879
|
|
|
$
|
793
|
|
General and administrative
(2)
|
|
|
(818
|
)
|
|
(963
|
)
|
|
|
363
|
|
|
|
(4,648
|
)
|
Interest expense
|
|
|
(5,478
|
)
|
|
(4,488
|
)
|
|
|
(15,201
|
)
|
|
|
(10,121
|
)
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,080
|
)
|
Gain on deconsolidation of Atlas Resource
Partners, L.P.
|
|
|
—
|
|
|
46,951
|
|
|
|
—
|
|
|
|
46,951
|
|
Segment income (loss)
|
|
$
|
(6,280
|
)
|
$
|
41,621
|
|
|
$
|
(13,959
|
)
|
|
$
|
26,895
|
|
Reconciliation of segment income (loss) to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlas Resource Partners
|
|
$
|
—
|
|
$
|
(18,502
|
)
|
|
$
|
—
|
|
|
$
|
(147,308
|
)
|
Atlas Growth Partners
|
|
|
(1,061
|
)
|
|
(9,551
|
)
|
|
|
(1,710
|
)
|
|
|
(18,008
|
)
|
Corporate and other
|
|
|
(6,280
|
)
|
|
41,621
|
|
|
|
(13,959
|
)
|
|
|
26,895
|
|
Net income (loss)
|
|
$
|
(7,341
|
)
|
$
|
13,568
|
|
|
$
|
(15,669
|
)
|
|
$
|
(138,421
|
)
|
Reconciliation of segment revenues to total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlas Resource Partners
(1)
|
|
$
|
—
|
|
$
|
39,198
|
|
|
$
|
—
|
|
|
$
|
125,582
|
|
Atlas Growth Partners
(1)
|
|
|
1,282
|
|
|
2,918
|
|
|
|
6,943
|
|
|
|
8,911
|
|
Corporate and other
|
|
|
16
|
|
|
121
|
|
|
|
879
|
|
|
|
793
|
|
Total revenues
|
|
$
|
1,298
|
|
$
|
42,237
|
|
|
$
|
7,822
|
|
|
$
|
135,286
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlas Resource Partners
|
|
$
|
—
|
|
$
|
2,335
|
|
|
$
|
—
|
|
|
$
|
21,155
|
|
Atlas Growth Partners
|
|
|
—
|
|
|
248
|
|
|
|
—
|
|
|
|
6,575
|
|
Total capital expenditures
|
|
$
|
—
|
|
$
|
2,583
|
|
|
$
|
—
|
|
|
$
|
27,730
|
|
26
|
|
September 30,
|
|
|
December 31
,
|
|
|
|
2017
|
|
|
2016
|
|
Balance sheet:
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Atlas Growth Partners
|
|
$
|
74,976
|
|
|
$
|
78,500
|
|
Corporate and other
|
|
|
30,454
|
|
|
|
26,576
|
|
Total assets
|
|
$
|
105,430
|
|
|
$
|
105,076
|
|
|
1)
|
Revenues include respective portions of gains (losses) on mark—to—market derivatives.
|
|
|
2)
|
As disclosed in Note 2, for the nine months ended September 30, 2017, 764,900 phantom units under the 2015 LTIP were forfeited, primarily due to Titan’s completion of the majority of the sale of its Appalachian assets and reductions in workforce, which resulted in a $2.4 million reversal of previously recognized stock compensation expense recorded in general and administrative expenses on our condensed consolidated statements of operations for the nine months ended September 30, 2017.
|
|
27