UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-K
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36635
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CONE MIDSTREAM PARTNERS LP
(Exact name of registrant as specified in its charter)
Delaware | 47-1054194 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1000 CONSOL Energy Drive
Canonsburg, PA 15317-6506
(724) 485-4000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of exchange on which registered | |
Common Units Representing Limited Partner Interests | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of common units held by non-affiliates of the registrant as of June 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, was $356.2 million. This is based on the closing price of common units on the New York Stock Exchange on such date.
As of February 17, 2016, CONE Midstream Partners LP had 29,180,217 of common units and 29,163,121 of subordinated units outstanding.
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PART I | ||
Mine Safety and Disclosures | ||
PART II | ||
Market for Registrant's Common Units, Related Unitholder Matters and Issuer Purchases of Equity Securities | ||
PART III | ||
Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters | ||
PART IV | ||
GLOSSARY OF CERTAIN OIL AND GAS MEASUREMENT TERMS
/d: Any abbreviation with this suffix signifies that the metric is per day.
Bbl or barrel: One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil, NGLs or other liquid hydrocarbons.
BBtu: One billion British thermal units.
Bcfe: One billion cubic feet of natural gas equivalent, determined using a ratio of six thousand cubic feet of natural gas to one barrel of oil.
Btu: British thermal units.
condensate: A natural gas liquid with a low vapor pressure compared with natural gasoline and liquefied petroleum gas. Condensate is mainly composed of propane, butane, pentane and heavier hydrocarbon fractions. The condensate is not only generated into the reservoir, it is also formed when liquid drops out, or condenses, from a natural gas stream in pipelines or surface facilities.
DOT: The U.S. Department of Transportation.
dry gas: Natural gas that occurs in the absence of condensate or liquid hydrocarbons, or natural gas that has had condensable hydrocarbons removed.
EPA: The U.S. Environmental Protection Agency.
FERC: The U.S. Federal Energy Regulatory Commission.
field: The general area encompassed by one or more oil or gas reservoirs or pools that are located on a single geologic feature, that are otherwise closely related to the same geologic feature (either structural or stratigraphic).
high-pressure pipelines: Pipelines gathering or transporting natural gas that has been dehydrated and compressed to the pressure of the downstream pipelines or processing plants.
hydrocarbon: An organic compound containing only carbon and hydrogen.
low-pressure pipelines: Pipelines gathering natural gas at or near wellhead pressure that has yet to be compressed (other than by well pad gas lift compression or dedicated well pad compressors) and dehydrated.
MBbl: One thousand Bbls.
Mcf: One thousand cubic feet of natural gas.
MMBtu: One million British thermal units.
MMcf: One million cubic feet of natural gas.
MMcfe: One million cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
natural gas: Hydrocarbon gas found in the earth, composed of methane, ethane, butane, propane and other gases.
NGLs: Natural gas liquids, which consist primarily of ethane, propane, isobutane, normal butane and natural gasoline.
oil: Crude oil and condensate.
SEC: The U.S. Securities and Exchange Commission.
Tcfe: One trillion cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
throughput: The volume of product transported or passing through a pipeline, plant, terminal or other facility.
wet gas: Natural gas that contains less methane (typically less than 85% methane) and more ethane and other more complex hydrocarbons.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, the costs of being a publicly traded partnership and our capital programs.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
• | the effects of changes in market prices of natural gas, NGLs and crude oil on our Sponsors’ drilling and development plan on our dedicated acreage and the volumes of natural gas and condensate that are produced on our dedicated acreage; |
• | changes in our Sponsors’ drilling and development plan in the Marcellus Shale; |
• | our Sponsors’ ability to meet their drilling and development plan in the Marcellus Shale; |
• | the demand for natural gas and condensate gathering services; |
• | changes in general economic conditions; |
• | competitive conditions in our industry; |
• | actions taken by third-party operators, gatherers, processors and transporters; |
• | our ability to successfully implement our business plan; |
• | our ability to complete internal growth projects on time and on budget; |
• | the price and availability of debt and equity financing; |
• | the availability and price of oil and natural gas to the consumer compared to the price of alternative and competing fuels; |
• | competition from the same and alternative energy sources; |
• | energy efficiency and technology trends; |
• | operating hazards and other risks incidental to our midstream services; |
• | natural disasters, weather-related delays, casualty losses and other matters beyond our control; |
• | interest rates; |
• | labor relations; |
• | defaults by our Sponsors under our gathering agreements; |
• | changes in availability and cost of capital; |
• | changes in our tax status; |
• | the effect of existing and future laws and government regulations; |
• | the effects of future litigation; and |
• | certain factors discussed elsewhere in this report. |
You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors” of Item 1A of Part I in this report, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.
PART I
ITEM 1. | BUSINESS |
Overview
CONE Midstream Partners LP (the “Partnership”, “we”, “our”, or “us”) is a master limited partnership formed in May 2014 by CONSOL Energy Inc. (NYSE: CNX) (“CONSOL”) and Noble Energy, Inc. (NYSE: NBL) (“Noble Energy”), whom we refer to collectively as our Sponsors, primarily to own, operate, develop and acquire natural gas gathering and other midstream energy assets to service our Sponsors’ production in the Marcellus Shale in Pennsylvania and West Virginia. Our assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities. We currently generate all of our revenues under long-term, fixed-fee gathering agreements that we have entered into with each of our Sponsors that are intended to mitigate our direct commodity price exposure and enhance the stability of our cash flows. Our gathering agreements with the Sponsors also include substantial acreage dedications currently totaling approximately 515,000 net acres in the Marcellus Shale. In the future, we may seek to supplement our growth by performing gathering services for unrelated third parties. In addition, we will also consider accretive acquisitions, including drop downs of additional interests in our existing consolidated assets, as well as other unaffiliated opportunities.
Since January 1, 2011, our Sponsors have drilled 539 gross horizontal wells, which has contributed to an average combined daily gross wellhead production of approximately 1,099 Bcfe/d on our dedicated acreage in 2015. Our Sponsors also had approximately 6,000 potential drilling locations (with approximately 36% in wet gas locations) as of December 31, 2015. Please read “Item 1. Business - Our Acreage Dedication” for more information. Our Sponsors believe that their existing contractual commitments for Marcellus Shale processing capacity and long-haul firm transportation will help minimize disruptions to their drilling and development plan that might otherwise exist as a result of insufficient outlets for growing production.
The following charts illustrate our Sponsors’ production trends and the number of wells they have drilled with respect to our dedicated acreage for the periods indicated:
(1) Represents gross wellhead production attributable to wells drilled on our dedicated acreage.
(2) Represents total gross wells drilled on our dedicated acreage, of which 122 remain uncompleted. As of December 31, 2015, neither of our Sponsors were running active drilling rigs on our dedicated acreage.
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Organizational Structure
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Initial Public Offering
On September 30, 2014, we closed our initial public offering (“IPO” or “offering”) of 20,125,000 common units, which represent limited partner interests, at a price to the public of $22.00 per unit. Our common units are listed on the New York Stock Exchange under the ticker symbol “CNNX.” The Partnership's general partner is CONE Midstream GP LLC (“general partner”), a wholly owned subsidiary of CONE Gathering LLC (“CONE Gathering”), which is a joint venture formed by our Sponsors in September 2011. CONE Gathering represents our predecessor for accounting purposes (the “Predecessor”). References in our consolidated financial statements to “our partnership,” “we,” “our,” “us” or like terms, when used for periods prior to the IPO, refer to CONE Gathering. References in our consolidated financial statements to “our partnership,” “we,” “our,” “us” or like terms, when used for periods beginning at or following the IPO, refer collectively to CONE Midstream Partners LP and its consolidated subsidiaries. For periods prior to the IPO, our consolidated financial statements and related notes include the assets, liabilities and results of operations of CONE Gathering.
We received net proceeds of approximately $413.0 million from the IPO, after deducting underwriting discounts and commissions, structuring fees and estimated offering expenses (the “Offering Costs”) of approximately $29.7 million.
Our Midstream Assets
In order to effectively manage our growth, capital expenditure requirements and leverage profile, we have divided our current midstream assets among three separate categories that we refer to as our “Anchor Systems,” “Growth Systems” and “Additional Systems” based on their relative current cash flows, growth profiles, capital expenditure requirements and the timing of their development.
• | Our Anchor Systems include our midstream systems that generate the substantial majority of our current cash flows and that we expect to drive our growth over the near term as we increase average throughput on these systems from our Sponsors’ growing production. Our Anchor Systems are comprised of three primary midstream systems (the McQuay System, the Majorsville System and the Mamont System) and related assets. |
• | Our Growth Systems include our high-growth, developing gathering systems that would require substantial expansion capital expenditures to materially increase production, the substantial majority of which would be funded by our Sponsors in proportion to their 95% retained ownership interest. Our Growth Systems are comprised of three primary midstream systems (the Fink System, the Tygart Valley system and the Tygart Valley West System) and related assets. |
• | Our Additional Systems include several gathering systems primarily located in the wet gas regions of our dedicated acreage that we expect will generate stable cash flows and require lower levels of expansion capital investment over the next several years. Our Additional Systems are comprised of several midstream systems and related assets primarily located in the wet gas regions of our dedicated acreage. |
In connection with the completion of our IPO, our Sponsors, through CONE Gathering, contributed to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems.
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The following map details our existing assets:
Gathering Assets
As of December 31, 2015, our gathering assets comprised a network of 244 miles of gathering pipelines with an average daily throughput of approximately 1,099 Bcfe/d.
The following table provides information regarding our gathering assets as of December 31, 2015:
System | Our Ownership Interest | Gas Type | Pipelines (in miles) as of December 31, 2015 | Average Daily Throughput for the Year Ended December 31, 2015(Bcfe/d) | Maximum Interconnect Capacity(1)(2) as of December 31, 2015 (BBtu/d) | Compression as of December 31, 2015 (horsepower) | ||||||
Anchor Systems | 75% | Dry/Wet | 166 | 821 | 1,329 | 72,780 | ||||||
Growth Systems | 5% | Dry/Wet | 31 | 89 | 860 | 8,040 | ||||||
Additional Systems | 5% | Dry/Wet | 47 | 189 | 545 | 9,480 | ||||||
(1) Maximum interconnect capacity is the maximum throughput that can be delivered from the system through physical interconnections to third-party facilities or pipelines.
(2) Our midstream systems currently have interconnects with the following interstate pipelines: Columbia Gas Transmission, Texas Eastern Transmission and Dominion Transmission, Inc.
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Compression and Dehydration Facilities
We operate 15 main facilities to provide our compression and/or dehydration services, the capacities of which are summarized in the following table as of December 31, 2015:
System | Our Ownership Interest | Compression (horsepower) | Compression Capacity (Bcf/d) | |||
Anchor Systems | 75% | 72,780 | 1,185 | |||
Growth Systems | 5% | 8,040 | 100 | |||
Additional Systems | 5% | 9,480 | 160 | |||
Condensate Handling Facilities
Our Anchor Systems include two condensate handling facilities - in Majorsville, Pennsylvania and Moundsville, West Virginia - that provide condensate gathering, collection, separation and stabilization services. Each facility has nominal handling capacities of 2,500 Bbl/d.
Other Partnership Assets
Our Anchor Systems include two coalbed methane stations: the Fallowfield Station, located in Washington County, Pennsylvania, and the Marshall Station, located in Marshall County, West Virginia. The maximum design capacities for the Fallowfield Station and the Marshall Station are approximately 13 MMcf/d and approximately 20 MMcf/d, respectively. Average throughput for these systems was approximately 5 MMcf/d and approximately 3 MMcf/d, respectively, during the year ended December 31, 2015. These facilities are located in and around our Sponsors’ upstream acreage, and we anticipate that they will serve to facilitate future and early exploration and development in their jointly owned Marcellus Shale acreage. In addition, the leaner, low-Btu natural gas produced at our coalbed methane systems can be blended with richer, high-Btu natural gas to meet takeaway pipeline specifications.
Our Relationship with Our Sponsors and CONE Gathering
One of our principal strengths is our relationship with our Sponsors and CONE Gathering.
CONSOL is a Pittsburgh-based energy company with a focus on natural gas exploration, development and production and coal production. CONSOL's natural gas operations are focused on the major shale formations of the Appalachian Basin, including the Marcellus Shale. CONSOL deploys an organic growth strategy focused on developing its resource base. CONSOL’s premium coals are sold to electricity generators and steel makers, both domestically and internationally. CONSOL is listed on the NYSE under the symbol “CNX”.
Noble Energy is a global independent oil and natural gas exploration and production company company with a diverse resource base. In addition to its operations in the Marcellus Shale, Noble Energy has positions in three other premier unconventional U.S. onshore plays: the Denver-Julesburg Basin in Colorado; the Eagle Ford Shale in South Texas; and the Delaware Basin in West Texas. In addition to these onshore plays, Noble Energy also holds positions in three premier conventional offshore plays: the U.S. Gulf of Mexico; the Eastern Mediterranean; and in West Africa. Noble Energy is listed on the NYSE under the symbol “NBL”.
CONSOL and Noble Energy each own a 50% interest in CONE Gathering, which owns our general partner and non-controlling limited partner interests in our operating subsidiaries. Through our ownership of all of the outstanding general partner interests in our operating subsidiaries, the Partnership has voting control over, and the exclusive right to manage, the day-to-day operations, business and affairs of our midstream systems. CONE Gathering retained non-controlling interests in our operating subsidiaries that are subject to our right of first offer. CONE Gathering’s contribution to us of a 75% controlling interest in the Anchor Systems, which include our most developed systems, provides us with a substantial initial base of earnings and distributable cash flow. CONE Gathering’s contribution to us of a 5% controlling interest in each of the Growth Systems and the Additional Systems allows us to integrate the development and operation of these systems into our existing operations while allowing our Sponsors, through their ownership of CONE Gathering, to bear responsibility for funding the substantial majority of the initial development of these systems, thereby reducing our share of capital expenditures and borrowings associated with expansion of these systems in the short term.
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CONE Gathering’s retention of ownership interests in the Anchor Systems, the Growth Systems and the Additional Systems, combined with our right of first offer on those interests, may provide opportunities for us to grow our distributable cash flow through a series of acquisitions of these retained interests over time. However, CONE Gathering is under no obligation to offer to sell us any assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), and we are under no obligation to buy any assets from CONE Gathering. In addition, we do not know when or if CONE Gathering will make any offers to sell assets to us. Please read “Business - Right of First Offer Assets.”
Our Sponsors’ Upstream Joint Venture
In 2011, CONSOL and Noble Energy entered into a Joint Development Agreement (“JDA”) and related ancillary agreements governing their joint exploration and development of their acreage in the Marcellus Shale. As of December 31, 2015, each of our Sponsors owned an undivided 50% working interest in over 699,000 net acres in the Marcellus Shale and approximately 20,000 acres in the Utica Shale, which we refer to as their “upstream acreage.”
To provide for the coordinated drilling and development of the upstream acreage, the JDA includes, among other things, our Sponsors’ obligations as operators of their respective areas, the allocation of costs between our Sponsors, an area of mutual interest and the establishment of a drilling and development program. The JDA provides that CONSOL will operate and develop the eastern, or the dry gas, portion of the upstream acreage, and Noble Energy will operate and develop the western, or the wet gas, portion of the upstream acreage.
In addition to paying drilling and development costs for Noble Energy’s 50% working interest share of the upstream acreage, Noble Energy must also pay on behalf of CONSOL one-third of the drilling and development costs for CONSOL’s 50% working interest share of the upstream acreage with certain restrictions. These restrictions include the suspension of “carry” if average Henry Hub natural gas prices are below $4.00 per MMbtu for three consecutive months. Accordingly, as long as Noble Energy is required to carry CONSOL, for every well drilled on the upstream acreage, Noble Energy is responsible for two-thirds of the drilling and development costs and CONSOL is responsible for one-third of the drilling and development costs. Noble Energy’s carry obligation is capped at $400 million with respect to each calendar year and may be temporarily suspended in certain situations. At December 31, 2015, approximately $1.6 billion remains on Noble Energy's original $2.1 billion carry obligation as provided in the JDA.
Our Sponsors’ upstream area of mutual interest (“AMI”) covers 28 counties in West Virginia and 19 counties in Pennsylvania and includes over 26,000 square miles. Under the JDA, any other oil and natural gas interests covering the Marcellus Shale within the upstream AMI that become jointly owned by CONSOL and Noble Energy will automatically become part of the upstream acreage. In addition, prior to September 2036, both CONSOL and Noble Energy must offer to the other party the right to participate in any acquisition of oil and natural gas interests within the upstream AMI that covers at least the Marcellus Shale.
Our Sponsors’ joint venture agreements also set forth how our Sponsors undertake their drilling and development programs. Each year, each of our Sponsors proposes a drilling and development plan for operations to be undertaken, including the number of wells to be drilled, in its operated area the following year. Our Sponsors then collaborate to create a detailed drilling and development plan for the following year based upon a number of assumptions, such as expected drilling and completion costs, expected production and expected commodity prices. The Sponsors can revise the drilling and development plan upon mutual agreement at any time during the year at their discretion.
If our Sponsors mutually agree, a revised drilling plan for the following year may provide for a greater or lesser number of wells to be drilled than the number of wells that was provided for in the multi-year drilling and development plan set forth in our Sponsors’ JDA, which we refer to as the “default plan.” During the period following the IPO, we have had reduced drilling activity compared to the default plan, which was completed in 2011, yet our historical results have improved relative to expectations, due primarily to better than anticipated well performance. Considering the better than expected well performance, our Sponsors' uncompleted well inventory and suspension of all drilling activity as of December 31, 2015, our Sponsors' annual plan for 2016 has a mutually agreed level of activity that provides for significantly fewer wells to be drilled than the 377 wells that was provided for in the default plan for 2016. Although the default plan also provides for our Sponsors to drill 377 wells in each of the four years following 2016, due to commodity price conditions likely being lower than that which was considered when completing the default plan and well performance that has exceeded our expectations, as referenced above, drilling fewer than 377 wells in those years could enable us to achieve similar results to what the default plan intended.
If our Sponsors cannot agree on a revised drilling plan for the following year, then, unless in the event of a force majeure affecting a Sponsor or a Sponsor exercises the non-consent right described below, our Sponsors will be obligated to drill the number of wells set forth in the default plan for the following year. If our Sponsors cannot agree on a revised drilling plan for
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the following year, and must operate under the default plan for the following year, each Sponsor may elect to exercise its “non-consent right,” which is the right to elect not to participate in all (but not less than all) of the operations provided for in the default plan for the following year. If one of our Sponsors elects to exercise its non-consent right, then the other Sponsor, in its sole discretion, may determine the number of wells, if any, it will drill the following year. Each Sponsor can exercise this non-consent right twice (in non-consecutive years) prior to the termination of the default plan at the end of 2020. As of December 31, 2015, neither Sponsor had exercised its non-consent right. Please read “Risk Factors — Risks Related to Our Business — Under our Sponsors’ JDA, our Sponsors’ drilling and development plan with respect to their upstream joint venture is subject to annual agreement of our Sponsors and is subject to each Sponsor’s non-consent rights. Accordingly, we can provide no assurance as to the number of wells, if any, that will be drilled by our Sponsors in any given year.”
The default plan only runs through the end of 2020, after which all drilling operations on the upstream acreage will be governed by a joint operating agreement. Under the joint operating agreement, either Sponsor may propose drilling operations; however, neither Sponsor is obligated to participate in any drilling operations and may elect not to participate in any or all of the operations proposed on our dedicated acreage or our Right of First Offer (“ROFO”) acreage. Including wells that were drilled prior to the formation of the Sponsor joint venture and other acquired wells, our Sponsors had 287 dry gas and 164 wet gas producing wells connected to the Partnership's midstream systems as of December 31, 2015.
The provisions of our Sponsors’ JDA allow for either Sponsor to transfer its leasehold, working and mineral fee interests or grant an overriding royalty interest, production payment, net profits interest or other similar interest in those interests that are subject to their JDA, which we call their joint development interests, subject to certain limitations, including (i) the obligation to transfer all of, or a uniform interest in all of, its joint development interests, (ii) the other Sponsor’s rights of first offer, (iii) restrictions on the financial and technical capabilities of permitted transferees and (iv) with respect to transfers by Noble Energy, prior to Noble Energy’s payment of certain drilling and development costs, the prior written consent of CONSOL, which may be granted or withheld in CONSOL’s sole discretion. Each of our Sponsors continually evaluates how to enhance its upstream portfolio, including its joint development interests and, subject to the limitations in the JDA, could sell, exchange, farm-out or otherwise dispose of all of, or an undivided interest in, its joint development interests as part of these enhancement efforts. Our Sponsor’s JDA is a covenant running with the land, so if a Sponsor transfers any of its joint development interests, then the transferee will be bound by the terms of our Sponsors’ JDA, including with respect to the default plan. Also, except for 25,000 net acres that each Sponsor is permitted to transfer free from the dedication under our gathering agreements, any joint development interest transferred by a Sponsor will remain subject to our gathering agreements. Please read “Our Gathering Agreements.”
Although neither Sponsor has committed to transfer its interests in the dedicated acreage, any such transfer may decrease the transferring Sponsor’s economic interest in developing the dedicated acreage. Please read “Risk Factors–Risks Related to Our Business — Under our Sponsors’ JDA, subject to certain limitations, our Sponsors may transfer their leasehold, working and mineral fee interests in the dedicated acreage.”
To support the growth of their upstream joint venture options in the Marcellus Shale, our Sponsors have invested over $825 million in our midstream assets since September 2011, which includes their portion of spending as a limited partner in CONE Midstream Partners LP. In addition, each of our Sponsors maintains significant freshwater infrastructure and systems that distribute freshwater from regional water sources for its well completion operations in the Marcellus Shale. These systems consist of a combination of permanent buried pipelines, portable surface pipelines and freshwater storage facilities, as well as pumping stations to transport the freshwater throughout the pipeline networks. Our Sponsors believe that their existing long-term contractual commitments for Marcellus Shale processing capacity and long-haul firm transportation will help minimize disruptions to their drilling and development plan that might otherwise exist as a result of insufficient outlets for growing production.
Our Acreage Dedication
As of December 31, 2015, our existing dedicated acreage covered approximately 515,000 net acres in the Marcellus Shale and approximately 20,000 acres in the Utica Shale, all of which was located within the core area of our Sponsors’ operations in the Marcellus and Utica Shales. As discussed above, our Sponsors had approximately 6,000 potential drilling locations (with approximately 36% in wet gas locations) and have drilled 539 gross horizontal wells, of which 122 remain uncompleted, on such acreage since January 1, 2011. Our Sponsors determine potential drilling locations in the Marcellus Shale based on the assumption that each well is drilled with a 5,000 foot lateral within an 86-acre spacing unit. Accordingly, our Sponsors divided the total net acres in our dedicated acreage by the number of acres in each spacing unit (86 acres) to determine the number of potential drilling locations. The number of, and timing with respect to, the potential locations that our Sponsors may drill will depend on numerous factors (some of which are beyond their control), including anticipated lateral length, geologic conditions and economic factors.
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Our gathering agreements provide that, in addition to our existing dedicated acreage, any future acreage covering the Marcellus Shale formation that is jointly acquired by our Sponsors in an area that covers over 7,700 square miles in West Virginia and Pennsylvania, which we refer to as the “dedication area,” and that is not subject to a pre-existing third-party commitment will automatically be dedicated to us for natural gas midstream services. Since the formation of the upstream joint venture in 2011, our Sponsors have made several key acquisitions in the dedication area which have increased our existing dedicated acreage. For example, our Sponsors entered into farmout agreements for approximately 88,000 contiguous net acres in the Central West Virginia area and acquired approximately 9,000 contiguous net acres in the Pittsburgh International Airport area, all of which have been dedicated to us.
In addition to our existing dedication acreage and any potential future dedicated acreage, we will have the right of first offer to provide midstream services to our Sponsors on our ROFO acreage, which currently includes approximately 186,000 net acres of our Sponsors existing jointly owned Marcellus Shale acreage that is not currently dedicated to us, along with any future acreage covering the Marcellus Shale formation that is jointly acquired by our Sponsors in an area that covers over 18,300 square miles in West Virginia and Pennsylvania, which we refer to as the “ROFO area,” and that is not subject to a pre-existing third-party commitment.
Our Gathering Agreements
Pursuant to our 20-year, fixed-fee gathering agreements that we entered into with each of our Sponsors in connection with the closing of the IPO, our Sponsors have agreed to dedicate all of their existing acres in the dedication area to us for natural gas midstream services and to dedicate their existing acreage in the Moundsville area (Marshall County, West Virginia) and the Majorsville area (Marshall County, West Virginia and Greene and Washington Counties, Pennsylvania) to us for condensate gathering and handling services. In addition, our Sponsors have dedicated certain coal bed methane wells, certain horizontal wells drilled to the Upper Devonian formation and the acreage associated with such wells to us for natural gas midstream services.
Each of our Sponsors has also agreed that any acreage located in the dedication area covering the Marcellus Shale formation that is jointly acquired by our Sponsors and that is not subject to a pre-existing third-party commitment will be automatically dedicated to us for natural gas midstream services. We also have an option to provide natural gas midstream services to our Sponsors on their existing acres in the ROFO area and on any future acreage in the ROFO area covering the Marcellus Shale formation that is jointly acquired by our Sponsors and that is not subject to a pre-existing third-party commitment. For more information regarding our dedication area and ROFO area, please read “Our Acreage Dedication.”
Under our gathering agreements, we receive a fee based on the type and scope of the midstream services we provide. Unless the Sponsors mutually agree to a reset rate with the Partnership, the fees per the gathering agreements will escalate by 2.5% on January 1 each year beginning in 2016. For the services we provide with respect to natural gas that does not require downstream processing, or dry gas, we received a fee of $0.40 per MMBtu in 2015 (which increased to $0.41 per MMBtu effective January 1, 2016.) For the services we provide with respect to the natural gas that requires downstream processing, or wet gas, we received a fee of $0.275 per MMBtu in the Moundsville (Marshall County, West Virginia) and Pittsburgh International Airport areas and $0.55 per MMBtu for all other areas in the dedication area throughout 2015. The wet gas fees increased to $0.282 per MMBtu and $0.564 per MMBtu for each of these areas, respectively on January 1, 2016. Our 2015 fee for condensate services was $5.00 per Bbl in the Majorsville area and $2.50 per Bbl in the Moundsville area, each of which increased by 2.5% on January 1, 2016. Notwithstanding the aforementioned gathering agreement rates, from time to time our Sponsors may request rate reductions under certain circumstances, which are reviewed with our Board of Directors. For example, we made two such short-term rate concessions in the fourth quarter of 2015. The first related to three pads in the Majorsville field that were temporarily given a dry rate, despite being upstream of processing, while facilities were in the process of being built to facilitate the volume to a dry gas outlet. The second instance related to a Moundsville Utica test well that flows dry gas into our wet gathering system, which may help to facilitate future Utica development. The rate concessions did not materially impact our results of operations.
We have agreed to gather, compress, dehydrate and redeliver all of our Sponsors’ jointly owned dedicated natural gas on a firm commitment, first-priority basis. We have agreed to gather, inject, stabilize and store all of our Sponsors’ dedicated condensate on a firm commitment, first-priority basis. Our Sponsors regularly provide us an update on their drilling and development operations, which typically include detailed descriptions of the drilling plans and well locations for the following 36 months and a long-term plan that includes drilling plans and production forecasts. In addition, we meet monthly with our Sponsors to discuss our current plans to timely construct the necessary facilities to be able to provide midstream services to our Sponsors on our dedicated acreage. In the event that we do not perform our obligations under the gathering agreements, our
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Sponsors will be entitled to certain rights and procedural remedies thereunder, including the temporary and/or permanent release from dedication discussed below and indemnification from us.
In addition to the jointly owned natural gas and condensate that is produced from the dedicated acreage, each of our Sponsors may elect to dedicate properties located in the dedication area to us in which the Sponsor has an interest. If a Sponsor elects to dedicate any such property, which we refer to as “solely owned property,” then that Sponsor will propose a fee for the associated midstream services we would provide. So long as the proposed fee is consistent with the terms outlined in our gathering agreements on both incremental capital and operating expense associated with any expenditures necessary to gather gas from the solely owned property, any midstream services that we agree to provide will be on a second priority basis; second only to the first priority basis afforded our Sponsors’ jointly owned dedicated production. We have entered into two such agreements with one of our Sponsors since the IPO related to deep Utica wells in southwestern Pennsylvania, both of which were within the aforementioned rate of return range.
Our gathering agreements provide that if we fail to timely complete the construction of the facilities necessary to provide midstream services to our Sponsors’ dedicated acreage or have an uncured default of any of our material obligations that has caused an interruption in our services for more than 90 days, the affected acreage will be permanently released from our dedication. Also, after the fifth anniversary of our gathering agreement, if our Sponsors drill a well that is located more than a certain distance from our current gathering system (and is not included in the detailed drilling plan provided by our Sponsors) and a third-party gatherer offers a lower cost of service, our Sponsors may elect to utilize the third-party gatherer, at which point the acreage associated with the related well will be permanently released from our dedication. Any permanent releases of our Sponsors’ acreage from our dedication could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our gathering agreements also provide that in certain situations, such as an uncured default of any of our material obligations under the gathering agreement for more than 45 days but less than 90 days, our dedicated acreage can be temporarily released from our dedication. In addition, if we interrupt or curtail the receipt of our Sponsors' gas for a period of five consecutive days or more than seven days within any consecutive two week period, then our Sponsors can temporarily release from the dedication under the gathering agreements the affected volumes for a period lasting until the first day of the month following 30 days after our notice to our Sponsors that the interruption or curtailment has ended. Although there have not been any such instances to date, any temporary releases of acreage from our dedication could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our gathering agreements run with the land and are binding on a transferee of any of our dedicated acreage; however, each of our Sponsors may transfer 25,000 net acres of the dedicated acreage free of the dedication to us. The amount of net acreage that may be transferred free of the dedication will be increased by the amount, if any, of the net acreage acquired by our Sponsors in the dedication area that will become automatically dedicated to us. There are no restrictions under our gathering agreements on our Sponsors’ ability to transfer acreage in the ROFO area, and any transferee of any of our Sponsors’ acreage in the ROFO area will not be subject to our right of first offer.
Upon completion of its initial 20-year term, each of our gathering agreements will continue in effect from year to year until such time as the agreement is terminated by either us or the Sponsor party to such agreement on or before 180 days prior written notice.
Right of First Offer Assets
In addition to the initial assets that our Sponsors, through CONE Gathering, contributed to us in connection with our IPO, CONE Gathering has granted us a right of first offer:
• | to acquire (i) CONE Gathering’s retained interests in each of our Anchor Systems, Growth Systems and Additional Systems, (ii) CONE Gathering’s other ancillary midstream assets and (iii) any additional midstream assets that CONE Gathering develops, before CONE Gathering sells any of those interests to any third party during the ten-year period following the completion of the IPO (the “right of first offer period”); and |
• | to provide midstream services to our Sponsors on our right of first offer acreage, or our ROFO acreage, which currently includes approximately 186,000 net acres of our Sponsors’ existing upstream acreage that is not currently dedicated to us, as well as any acreage that becomes jointly owned by our Sponsors in the future within their upstream area of mutual interest, or our Sponsors’ upstream AMI, that is not subject to become automatically dedicated to us or to a pre-existing third-party commitment. |
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CONE Gathering is under no obligation to offer to sell us any assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), and we are under no obligation to buy any assets from CONE Gathering. In addition, we do not know when or if CONE Gathering will make any offers to sell assets to us. While we believe our rights of first offer are significant positive attributes, they may also be sources of conflicts of interest. CONE Gathering owns our general partner, and there is substantial overlap between of the officers and directors of our general partner and the officers and directors of our Sponsors. Please read “Risk Factors — Risks Inherent in an Investment in Us.”
Third-Party Services and Commitments
Our Sponsors have entered into certain agreements that impact the scope of services we provide and the fees we charge under our gathering agreements with our Sponsors. Although we provide all field gathering in the following areas, we do not provide compression, dehydration and condensate stabilization services with respect to (i) approximately 3,500 net acres in the Moundsville area (Marshall County, West Virginia) and (ii) approximately 9,000 net acres in the Pittsburgh International Airport area (Allegheny County, Pennsylvania). With respect to these areas, our Sponsors have contracted with third parties for the provision of such services. Accordingly, under the gathering agreements with our Sponsors, we charge a reduced fee for the services we provide with respect to all natural gas and condensate produced from these areas.
Title to Our Properties
Our real property interests are acquired pursuant to easements, rights-of-way, permits, surface use agreements, deeds or licenses from landowners, lessors, easement holders, governmental authorities, or other parties controlling surface estate (collectively, “surface agreements”). These surface agreements allow us to use such land for our operations. Thus, the real estate interests on which our pipelines and facilities are located are held by us as grantee, and the party who owns or controls the surface lands, as grantor. We have acquired these surface agreements without any material challenge known to us relating to the title to the land upon which the assets are located, and we believe that we have satisfactory rights and interests to conduct our operations on such lands. We have no knowledge of any challenge to the underlying title of any material surface agreements held by us or to our title to any material surface agreements, and we believe that we have satisfactory title to all of our material surface agreements.
Some of the surface agreements that were transferred to us from CONE Gathering required the consent of the grantor or other holder of such rights. CONE Gathering obtained sufficient third-party consents and authorizations and provided notices required for the transfer of the assets necessary to enable us to operate our business in all material respects. With respect to any remaining consents, authorizations or notices that have not been obtained or provided, we have determined these will not have a material adverse effect on the operation of our business should we fail or CONE Gathering fails to obtain or provide such consents, authorizations or notices in a reasonable time frame.
Under our omnibus agreement, CONE Gathering will indemnify us for any failure to have certain surface agreements necessary to own and operate our assets in substantially the same manner that they were owned and operated prior to the IPO. CONE Gathering’s indemnification obligation is limited to losses for which we notify CONE Gathering prior to the third anniversary of the closing of the IPO and is subject to a $0.5 million aggregate deductible before we are entitled to indemnification.
Seasonality
Demand for natural gas generally decreases during the spring and fall months and increases during the summer and winter months. However, seasonal anomalies such as mild winters or mild summers sometimes lessen this fluctuation. In addition, certain natural gas users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can also lessen seasonal demand fluctuations. These seasonal anomalies can increase demand for natural gas during the summer and winter months and decrease demand for natural gas during the spring and fall months. With respect to our completed midstream systems, we do not expect seasonal conditions to have a material impact on our throughput volumes. Severe or prolonged winters may, however, impact our ability to complete additional well connections or complete construction projects, which may impact the rate of our growth. In addition, severe winter weather may also impact or delay the execution of our Sponsors' drilling and development plans.
Competition
As a result of our relationship with the Sponsors, we do not compete for the portion of the existing operations of our Sponsors’ upstream joint venture for which we currently provide midstream services, and we will not compete for future portions of their upstream joint venture’s operations that will be dedicated to us pursuant to our gathering agreements. Please
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read “Our Gathering Agreements.” Nonetheless, our Sponsors have entered into agreements with third parties for the provision of certain midstream services. Please read “Third-Party Services and Commitments.” In addition, we will face competition in attracting third-party volumes to our midstream systems, and these third parties may develop their own midstream systems in lieu of employing our assets.
Regulation of Operations
Regulation of pipeline gathering services may affect certain aspects of our business and the market for our services.
Gathering Pipeline Regulation
Section 1(b) of the Natural Gas Act ("NGA") exempts natural gas gathering facilities from regulation by the Federal Energy Regulatory Commission ("FERC") under the NGA and the Interstate Commerce Act ("ICA") only governs liquids transportation service in interstate commerce. Although FERC has not made any formal determinations with respect to any of our facilities we consider to be gathering facilities, we believe that the natural gas pipelines in our midstream systems meet the traditional tests FERC has used to establish that a natural gas pipeline is a gathering pipeline not subject to FERC NGA jurisdiction. We believe that the condensate pipelines in our gathering systems meet the traditional tests FERC has used to determine that a condensate pipeline is not providing transportation service in interstate commerce subject to FERC ICA jurisdiction. The distinction between FERC-regulated transmission services and federally unregulated gathering services or intrastate transportation services, however, has been the subject of substantial litigation, and FERC determines whether facilities are gas gathering facilities or whether condensate shipments are made in intrastate commerce on a case-by-case basis, so the classification and regulation of some our gas gathering facilities and some of our transportation of condensate may be subject to change based on future determinations by FERC, the courts, or Congress. If FERC were to consider the status of an individual facility and determine that the facility is not a gas gathering pipeline or intrastate condensate pipeline, as applicable, and the pipeline provides interstate service, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by FERC under the NGA and/or the Natural Gas Policy Act ("NGPA") or under the ICA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, could adversely affect our results of operations and cash flows. In addition, if any of our facilities were found to have provided services or otherwise operated in violation of the NGA or NGPA, this could result in the imposition of administrative and criminal remedies and civil penalties, as well as a requirement to disgorge charges collected for such service in excess of the rate established by FERC.
State regulation of natural gas gathering facilities and intrastate transportation pipelines generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and complaint-based rate regulation. States in which we operate may adopt ratable take and common purchaser statutes, which would require our gathering pipelines to take natural gas without undue discrimination in favor of one producer over another producer or one source of supply over another similarly situated source of supply. The regulations under these statutes may have the effect of imposing some restrictions on our ability as an owner of gathering facilities to decide with whom we contract to gather natural gas. States in which we operate may also adopt a complaint-based regulation of natural gas gathering activities, which allows natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to gathering access and rate discrimination. We cannot predict whether such regulation will be adopted and whether such a complaint will be filed against us in the future. Failure to comply with state regulations can result in the imposition of administrative, civil and criminal remedies. To date, there has been no adverse effect to our midstream systems due to state regulations.
Our gathering operations could be adversely affected should they be subject in the future to more stringent application of state regulation of rates and services. Our gathering operations also may be or become subject to additional safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. We cannot predict what effect, if any, such changes might have on our operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.
Pipeline Safety Regulation
Some of our natural gas pipelines are subject to regulation by the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration ("PHMSA") pursuant to the Natural Gas Pipeline Safety Act of 1968, ("NGPSA"), as amended by the Pipeline Safety Act of 1992 ("PSA"), the Accountable Pipeline Safety and Partnership Act of 1996 ("APSA"), the Pipeline Safety Improvement Act of 2002 ("PSIA"), the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 ("PIPES Act"), and the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (the "2011 Pipeline Safety Act"). The NGPSA regulates safety requirements in the design, construction, operation and maintenance of natural gas
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pipeline facilities, while the PSIA establishes mandatory inspections for all U.S. oil and natural gas transmission pipelines in high-consequence areas ("HCAs").
PHMSA has developed regulations that require pipeline operators to implement integrity management programs, including more frequent inspections and other measures to ensure pipeline safety in HCAs. The regulations require operators, including us, to:
• | perform ongoing assessments of pipeline integrity; |
• | identify and characterize applicable threats to pipeline segments that could impact a HCA; |
• | improve data collection, integration and analysis; |
• | repair and remediate pipelines as necessary; and |
• | implement preventive and mitigating actions. |
The 2011 Pipeline Safety Act reauthorized funding for federal pipeline safety programs, increased penalties for safety violations, established additional safety requirements for newly constructed pipelines, and required studies of certain safety issues that could result in the adoption of new regulatory requirements for existing pipelines. The 2011 Pipeline Safety Act, among other things, increased the maximum civil penalty for pipeline safety violations and directed the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in HCAs. Effective October 25, 2013, PHMSA adopted new rules increasing the maximum administrative civil penalties for violation of the pipeline safety laws and regulations after January 3, 2012 to $200,000 per violation per day, with a maximum of $2,000,000 for a related series of violations. In addition, PHMSA has published advanced notice of proposed rulemakings to solicit comments on the need for changes to its natural gas and liquid pipeline safety regulations, including whether to extend the integrity management program requirements to gathering lines. In October 2015, PHMSA proposed changes to its hazardous liquid pipeline safety regulations that would significantly extend the integrity management requirements to previously exempt pipelines and would impose additional obligations on hazardous liquid pipeline operators that are already subject to the integrity management requirements. PHMSA’s proposed rule would also require annual reporting of safety-related conditions and incident reports for all hazardous liquid gathering lines and gravity lines, including pipelines that are currently exempt from PHMSA regulations. PHMSA issued a separate regulatory proposal in July 2015 that would impose pipeline incident prevention and response measures on natural gas and hazardous liquid pipeline operators. PHMSA also issued an advisory bulletin providing guidance on the verification of records related to pipeline maximum allowable operating pressure.
The National Transportation Safety Board has recommended that PHMSA make a number of changes to its rules, including removing an exemption from most safety inspections for natural gas pipelines installed before 1970. While we cannot predict the outcome of legislative or regulatory initiatives, such legislative and regulatory changes could have a material effect on our operations, particularly by extending more stringent and comprehensive safety regulations (such as integrity management requirements) to pipelines and gathering lines not previously subject to such requirements. While we expect any legislative or regulatory changes to allow us time to become compliant with new requirements, costs associated with compliance may have a material effect on our operations.
States are largely preempted by federal law from regulating pipeline safety for interstate lines but most are certified by the Department of Transportation, or DOT, to assume responsibility for enforcing federal intrastate pipeline regulations and inspection of intrastate pipelines. States may adopt stricter standards for intrastate pipelines than those imposed by the federal government for interstate lines; however, states vary considerably in their authority and capacity to address pipeline safety. State standards may include more stringent requirements for facility design and management in addition to requirements for pipelines. We do not anticipate any significant difficulty in complying with applicable state laws and regulations. Our natural gas pipelines have continuous inspection and compliance programs designed to keep the facilities in compliance with pipeline safety and pollution control requirements.
We have incorporated all existing requirements into our programs by the required regulatory deadlines and are continually incorporating the new requirements into procedures and budgets. We expect to incur increasing regulatory compliance costs based on the intensification of the regulatory environment and upcoming changes to regulations as outlined above. In addition to regulatory changes, costs may be incurred when there is an accidental release of a commodity transported by our midstream systems, or a regulatory inspection identifies a deficiency in our required programs.
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Regulation of Environmental and Occupational Safety and Health Matters
General
Our natural gas gathering and compression activities are subject to stringent and complex federal, state and local laws and regulations relating to the protection of the environment and worker health and safety. As an owner or operator of these facilities, we must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many ways, such as:
• | requiring the installation of pollution-control equipment, imposing emission or discharge limits or otherwise restricting the way we operate; |
• | limiting or prohibiting construction activities in areas, such as air quality non-attainment areas, wetlands, endangered species habitat and other protected areas; |
• | delaying system modification or upgrades during review of permit applications and revisions; |
• | requiring investigatory and remedial actions to mitigate discharges, releases or pollution conditions associated with our operations or attributable to former operations; and |
• | enjoining operations deemed to be in non-compliance with permits issued pursuant to or regulatory requirements imposed by such environmental laws and regulations. |
Failure to comply with these laws and regulations may trigger a variety of administrative, civil and/or criminal enforcement measures, including the assessment of monetary penalties and natural resource damages. Certain environmental statutes impose strict or joint and several liability for costs required to clean up and restore sites where hazardous substances, hydrocarbons or solid wastes have been disposed or otherwise released. Moreover, neighboring landowners and other third parties may file common law claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other pollutants into the environment.
The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment and thus, there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation and actual future expenditures may be different from the amounts we currently anticipate. As with the midstream industry in general, complying with current and anticipated environmental laws and regulations can increase our capital costs to construct, maintain and operate equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we do not believe they will have a material adverse effect on our business, financial position or results of operations or cash flows. In addition, we believe that the various activities in which we are presently engaged that are subject to environmental laws and regulations are not expected to materially interrupt or diminish our operational ability to gather natural gas. We cannot assure, however, that future events, such as changes in existing laws or enforcement policies, the promulgation of new laws or regulations, or the development or discovery of new facts or conditions will not cause us to incur significant costs. Below is a discussion of the material environmental laws and regulations that relate to our business.
Hydraulic Fracturing Activities
Although we do not conduct hydraulic fracturing operations, substantially all of our Sponsors’ natural gas production on our dedicated acreage is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing is an essential and common practice in the oil and natural gas industry used to stimulate production of natural gas and/or oil from dense subsurface rock formations. The process is typically regulated by state oil and natural gas commissions, but the U.S. Environmental Protection Agency (“EPA”) has asserted certain regulatory authority over hydraulic fracturing and has moved forward with various regulatory actions, including, the issuance of new regulations requiring green completions for hydraulically fractured wells, emission requirements for certain midstream equipment, and an Advanced Notice of Proposed Rulemaking seeking comment on its intent to develop regulations under the Toxic Substances and Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing.
Scrutiny of hydraulic fracturing activities continues in other ways. In June 2015, the EPA issued its draft report on the potential impacts of hydraulic fracturing on drinking water and groundwater. The report found no systemic impacts from hydraulic fracturing, and the U.S. Department of Energy evaluated practices it could recommend to ensure the safety of hydraulic fracturing activities. The Bureau of Land Management also has a rule that regulates hydraulic fracturing on federal and Indian lands, although implementation of the rule is currently stayed pending resolution of a number of legal challenges.
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Some states, including states in which we operate have adopted, and other states are considering adopting, laws and/or regulations that could impose more stringent permitting, disclosure and well construction requirements on natural gas drilling activities. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular, or otherwise seek to ban some or all of these activities.
We cannot predict whether any other legislation or regulations will be enacted and if so, what its provisions will be. Additional levels of regulation and/or permits required through the adoption of new laws and regulations at the federal, state or local level could lead to delays, increased operating costs and prohibitions for producers who drill near our pipelines, reduce the volumes of natural gas available to move through our midstream systems and materially adversely affect our revenue and results of operations.
Hazardous Waste
Our operations generate solid wastes, including some hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act, or RCRA, and comparable state laws, which impose requirements for the handling, storage, treatment and disposal of non-hazardous and hazardous waste. RCRA currently exempts certain wastes associated with the exploration, development or production of natural gas, which we handle in the course of our operation, including produced water. However, these exploration and production wastes may still be regulated by the EPA or state agencies under RCRA’s less stringent non-hazardous solid waste provisions, state laws or other federal laws, and it is possible that certain exploration and production wastes now classified as non-hazardous could be classified as hazardous in the future.
Site Remediation
The Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, also known as the Superfund law, and comparable state laws impose liability without regard to fault or the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the environment. Under CERCLA, such classes of persons include the current and past owners or operators of sites where a hazardous substance was released, and companies that disposed or arranged for disposal of hazardous substances at offsite locations, such as landfills. Although natural gas (and petroleum) is excluded from CERCLA’s definition of “hazardous substance,” in the course of our ordinary operations, we generate wastes that may be designated as hazardous substances. CERCLA authorizes the EPA, states, and, in some cases, third parties to take actions in response to releases or threatened releases of hazardous substances into the environment and to seek to recover from the classes of responsible persons the costs they incur to address the release. Under CERCLA, we could be subject to strict joint and several liability for the costs of cleaning up and restoring sites where hazardous substances have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In some states, including those in which we operate, site remediation of oil and natural gas facilities is regulated by state agencies with jurisdiction over oil and natural gas operations. The regulated releases and remediation activities, including the classes of persons that may be held responsible for releases of hazardous substances, may be broader than those regulated under CERCLA or RCRA.
We currently own, lease or operate, and may have in the past owned, leased or operated, properties that have been used for the gathering and compression of natural gas. Although we have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such substances have been taken for disposal. Such hydrocarbons or other wastes may have migrated to property adjacent to our owned and leased sites or the disposal sites. In addition, some of the properties may have been operated by third parties or by previous owners whose treatment and disposal or release of hydrocarbons or wastes was not under our control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed wastes, including waste disposed of by prior owners or operators; remediate contaminated property, including groundwater contamination, whether from prior owners or operators or other historic activities or spills; or perform remedial operations to prevent future contamination. We are not currently a potentially responsible party in any federal or state Superfund site remediation and there are no current, pending or anticipated Superfund response or remedial activities at our facilities.
Air Emissions
The Clean Air Act and comparable state laws, including those states in which we operate, impose various pre-construction and operational permit requirements, noise and emission limits, operational limits, and monitoring, reporting and record-keeping requirements on air emission sources, including on our compressor stations. Failure to comply with these requirements
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could result in monetary penalties, injunctions, conditions or restrictions on operations, and/or criminal enforcement actions. Such laws and regulations, for example, require permit limits to address the impacts of noise from our compression operations, and pre-construction permits for the construction or modification of certain projects or facilities with the potential to emit air emissions above certain thresholds. Pre-construction permits generally require use of best available control technology, or BACT, to limit air pollutants.
On September 18, 2015, the EPA proposed two new regulations. The first was to provide an update to the NSPS to create new standards for the regulation of methane and volatile organic compounds ("VOCs") emission sources. This proposed rule includes requirements for new fugitive emission and leak detection and reporting requirements. The second was to propose the Source Determination Rule which would clarify the use of the term “adjacent” in determining Title V air permitting requirements as they apply to the oil and natural gas industry for major sources of air emissions. In October 2015, the EPA lowered the primary and secondary National Ambient Air Quality Standards ("NAASQ") for ozone. This rule has resulted in additional areas being in non-attainment with federal standards, which could result in us being required to install additional control equipment and restrict operations. Several federal new source performance standards, or NSPS, and national emission standards for hazardous air pollutants, or NESHAP, and analogous state law requirements, also apply to our facilities and operations. These applicable federal and state standards impose emission limits and operations limits as well as detailed testing, recordkeeping and reporting requirements on the facilities subject to these regulations. Additionally, on December 29, 2015 the Pennsylvania Environmental Hearing Board rendered a decision regarding an appeal filed by National Fuel Gas Midstream Corp of an air permit issued by the PA Department of Environmental Protection ("PADEP"). In that decision, the EHB found that the PADEP had properly aggregated emission sources from NFG’s midstream facilities and wells of Seneca Resources Corp. The decision also expanded the definition of “common control”, as well as broadened the notion of “contiguous and adjacent”. We expect that the decision will have impacts on our pending permit applications and could result in determinations that facilities are major sources of air pollution which could trigger additional permitting and controls.
We may incur capital expenditures in the future for air pollution control equipment in connection with complying with existing and recently proposed rules, or with obtaining or maintaining operating or preconstruction permits and complying with federal, state and local regulations related to air emissions (including air emission reporting requirements). However, we do not believe that such requirements will have a material adverse effect on our operations.
Climate Change
In response to findings that emissions of greenhouse gases, or GHGs, present an endangerment to public health and the environment, the EPA has adopted regulations under existing provisions of the Clean Air Act that establish Prevention of Significant Deterioration, or PSD, pre-construction permits, and Title V operating permits for GHG emissions from certain large stationary sources. Under these regulations, facilities required to obtain PSD permits must meet BACT standards for their GHG emissions established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain onshore oil and natural gas processing and fractionating facilities, which was recently amended to include gathering and boosting systems and blowdowns of natural gas transmission pipelines.
Additionally, while Congress has from time to time considered legislation to reduce emissions of GHGs, the prospect for adoption of significant legislation at the federal level to reduce GHG emissions is perceived to be low at this time. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations that limit emissions of GHGs could adversely affect demand for the oil and natural gas that exploration and production operators produce, some of whom are our customers, which could thereby reduce demand for our midstream services. In December 2015, the United National Climate Change Conference was held and an agreement was reached between the countries participating in the conference, including the United States, to limit global warming to less than 2 degrees Celsius compared to pre-industrial levels. This agreement, known as the Paris Agreement, calls for zero net anthropogenic greenhouse gas emissions to be reached during the second half of the 21st century. To the extent that the United States and other countries implement this agreement or impose other climate change regulations on the oil and gas industry, it could have an adverse effect on our business.
Water Discharges
The Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including sediment, and spills and releases of oil, brine and other substances into waters of the United States. The discharge of pollutants into jurisdictional waters is prohibited, except in accordance with the terms of a permit issued by the EPA, Army Corps of Engineers, or a delegated state agency. Federal and state regulatory
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agencies can impose administrative, civil and/or criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.
The primary federal law related specifically to oil spill liability is the Oil Pollution Act ("OPA"), which amends and augments the oil spill provisions of the Clean Water Act and imposes certain duties and liabilities on certain “responsible parties” related to the prevention of oil spills and damages resulting from such spills, or threatened spills, in waters of the United States or adjoining shorelines. The OPA applies joint and several liability, without regard to fault, to each liable party for oil removal costs and a variety of public and private damages. Although defenses exist, they are limited. As such, a violation of the OPA has the potential to adversely affect our operations.
Endangered Species
The Endangered Species Act ("ESA") and analogous state laws protect species threatened with extinction restricting activities that may affect endangered or threatened species or their habitats. Some of our pipelines are located in areas that are or may be designated as protected habitats for endangered or threatened species, including the Northern Long-Eared and Indiana bats, which has a seasonal impact on our construction activities and operations. However, based on species that have been identified and the current application of endangered species laws and regulations, we do not believe that there are any additional species protected under the ESA or state laws that would materially and adversely affect our ability to operate. Other species that are being considered by the U.S. Fish and Wildlife Service ("UFWS") for listing and that are found in our and our Sponsors' operational area are the Big Sandy Crayfish, the Guyandotte River Crayfish and the Rusty Patched Bumble Bee, all of which have the potential to interfere with operational planning if listed. The future listing of previously unprotected species in areas where we conduct or may conduct operations, or the designation of critical habitat in these areas, could cause us to incur increased costs arising from species protection measures or could result in limitations on our operating activities, which could have an adverse impact on our results of operations.
Occupational Safety and Health Act
We are also subject to the requirements of the federal Occupational Safety and Health Act, as amended ("OSHA"), and comparable state laws that regulate the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard, the Emergency Planning and Community Right-to-Know Act and implementing regulations and similar state statutes and regulations require that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. Certain of our operations are also subject to OSHA Process Safety Management regulations, which are designed to prevent or minimize the consequences of catastrophic releases of toxic, reactive, flammable or explosive material.
Employees
The officers of our general partner manage our operations and activities. All of the employees required to conduct and support our operations are employed by CONSOL and are subject to the operational services agreement between us, our general partner and CONSOL. As of December 31, 2015, CONSOL employed approximately 95 people that provide direct support to our operations pursuant to the operational services agreement.
Offices
The principal offices of our partnership are located at 1000 CONSOL Energy Drive, Canonsburg, Pennsylvania 15317.
Insurance
We maintain insurance policies with insurers in amounts and with coverage and deductibles that we believe are reasonable and prudent. We cannot, however, assure that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.
Financial Information about Segments
Please read “Note 12. Segment Information” for financial information by business segment including, but not limited to, gathering revenue - related party, operating income and total assets, which information is incorporated herein by reference.
Legal Proceedings
Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. However, we are not currently subject to any material litigation.
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Available Information
Our website is www.conemidstream.com. Available on this website under “Investor Relations – View SEC Filings,” free of charge, are our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC. Alternatively, you may access these reports at the SEC’s website at www.sec.gov.
Also posted on our website under “Corporate Governance”, and available in print upon request made by any unitholder to the Investor Relations Department, are charters for our Audit Committee, copies of the Code of Ethics, Corporate Governance Guidelines and our Whistle Blower policy. Within the time period required by the SEC and the NYSE, as applicable, we will post on our website any modifications to the Codes and any waivers applicable to senior officers as defined in the applicable Code, as required by the Sarbanes-Oxley Act of 2002.
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ITEM 1A. | RISK FACTORS |
Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information set forth in this annual report on Form 10-K, including the matters addressed under “Forward-Looking Statements,” in evaluating an investment in our common units.
If any of the following risks were to occur, our business, financial condition, results of operations, cash flows and ability to make cash distributions could be materially adversely affected. In that case, we may not be able to pay the minimum quarterly distribution on our common units, the trading price of our common units could decline and you could lose all or part of your investment. In addition, the current economic and political environment intensifies many of these risks.
Risks Related to Our Business
Our Sponsors account for all of our revenue. If our Sponsors change their business strategy, alter their current drilling and development plan on our dedicated acreage, or otherwise significantly reduce the volumes of natural gas and condensate transported through our gathering systems, our revenue would decline and our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be materially and adversely affected.
As we currently derive all of our revenue from our gathering agreements with our Sponsors, any event, whether in our dedicated acreage or elsewhere, that materially and adversely affects either or both of CONSOL’s or Noble Energy’s business strategies with respect to drilling on and development of our dedicated acreage or their financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of our Sponsors, the most significant of which include the following:
• | a reduction in or slowing of our Sponsors’ drilling and development plan on our dedicated acreage; |
• | a reduction in, or curtailment of, production from existing wells on our dedicated acreage; |
• | the extreme volatility of natural gas, NGL and crude oil prices, which declined substantially throughout 2015 and which could have a negative effect on our Sponsors’ drilling and development plan on, or levels of existing production from, our dedicated acreage or our Sponsors' ability to finance their operations and drilling and exploration costs on our dedicated acreage; |
• | the availability of capital on an economic basis to fund the exploration and development activities of our Sponsors’ upstream joint venture; |
• | drilling and operating risks, including potential environmental liabilities, associated with our Sponsors’ operations on our dedicated acreage; |
• | downstream processing and transportation capacity constraints and interruptions, including the failure of our Sponsors to have sufficient contracted processing or transportation capacity; and |
• | adverse effects of increased or changed governmental and environmental regulation. |
In addition, we are indirectly subject to the business risks of our Sponsors generally and other factors, including:
• | our Sponsors’ financial condition, credit ratings, leverage, market reputation, liquidity and cash flows; |
• | the ability of our Sponsors to maintain or replace their reserves; |
• | adverse effects of governmental and environmental regulation on our Sponsors’ upstream operations; and |
• | losses from pending or future litigation. |
Further, we have no control over our Sponsors’ business decisions and operations, and our Sponsors are under no obligation to adopt a business strategy that is favorable to us. We are subject to the risk of non-payment or non-performance by our Sponsors, including with respect to our gathering agreements, which do not contain minimum volume commitments. We cannot predict the extent to which our Sponsors’ businesses will be impacted if conditions in the energy industry continue to deteriorate nor can we estimate the impact such conditions will have on the ability of our Sponsors to execute their drilling and development plan on our dedicated acreage or to perform under our gathering agreements. Recently, global energy commodity prices have declined precipitously as a result of several factors, including increased worldwide crude oil supplies, a stronger U.S. dollar, weather factors and strong competition among oil producing countries for market share. Specifically, prices for WTI have declined from approximately $60.00 per Bbl in June 2015 to approximately $30.00 per Bbl in January 2016. Henry Hub natural gas has traded around $2.50 per MMBtu in January 2016 compared to prices a year ago in January 2015 of around $3.00 per MMBtu. Lower commodity prices reduce our Sponsors’ cash flows and may affect their borrowing ability. Our Sponsors may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a decline in their reserves as existing reserves are depleted. Lower commodity prices may also reduce the amount of natural gas, NGLs and oil
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that our Sponsors can produce economically. If commodity prices further decrease, a significant portion of our Sponsors’ exploitation, development and exploration projects on our dedicated acreage could become uneconomic. This may result in our Sponsors having to make significant downward adjustments to their estimated proved reserves on our dedicated acreage. As a result, a substantial or extended decline in commodity prices may materially and adversely affect our Sponsors’ future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures.
Any material non-payment or non-performance by either CONSOL or Noble Energy under our gathering agreements would have a significant adverse impact on our business, financial condition, results of operations and cash flows and could therefore materially adversely affect our ability to make cash distributions to our unitholders at the expected rate or at all. Each of our gathering agreements with our Sponsors has an initial term of 20 years, and there is no guarantee that we will be able to renew or replace those gathering agreements on equal or better terms upon their expiration. Our ability to renew or replace our gathering agreements with our Sponsors following their expiration at rates sufficient to maintain our current revenues and cash flows could be adversely affected by activities beyond our control, including the activities of our competitors and our Sponsors.
Under our Sponsors’ JDA, our Sponsors’ drilling and development plan with respect to their upstream joint venture is subject to annual agreement of our Sponsors and is subject to each Sponsor’s non-consent rights. Accordingly, we can provide no assurance as to the number of wells, if any, that will be drilled by our Sponsors in any given year.
Each year, our Sponsors collaborate to create a drilling and development plan for the following year, based upon a number of assumptions, such as expected drilling and completion costs, expected production and expected commodity prices, and which includes the number of wells, if any, to be drilled on our dedicated acreage and our ROFO acreage. If our Sponsors mutually agree, the annual plan for a given year can provide for more or fewer wells to be drilled than the number of wells that was provided for in the multi-year drilling and development plan set forth in our Sponsors’ JDA, which we refer to as the “default plan.” Historically, our Sponsors have been able to mutually agree on an annual plan for a given year, several of which, including the plan for 2016, provided for fewer wells to be drilled during the applicable year than the number of wells that was set forth in the default plan for such year. If our Sponsors agree on an annual plan for any year that provides for significantly fewer wells to be drilled than would have been drilled under the default plan, our business, financial condition, results of operations, cash flows and ability to make cash distributions may be materially and adversely affected.
If our Sponsors cannot agree on a drilling plan in the Marcellus Shale for a given year, then, unless in the event of a force majeure affecting a Sponsor or a Sponsor exercises the non-consent right, our Sponsors will be obligated to drill the number of wells set forth in the default plan for such year as described in Item 1. “Business - Our Sponsors' Upstream Joint Venture.” If one of our Sponsors elects to exercise its non-consent right, then the other Sponsor, in its sole discretion, may determine the number of wells, if any, it will drill in such year, which may be significantly less than the number of wells that was provided for in the default plan, or none at all. Under our Sponsors’ JDA, this non-consent right may be exercised by each Sponsor twice (in non-consecutive years) prior to the termination of the default plan at the end of 2020. Neither of our Sponsors has exercised its non-consent right , and thus, each Sponsor may still elect to exercise its non-consent right twice prior to the end of 2020. If a Sponsor exercises its non-consent right for any year, our business, financial condition, results of operations, cash flows and ability to make cash distributions will be materially and adversely affected.
The default plan ends at the end of 2020. Following the end of the default plan, all drilling operations on our dedicated acreage and our ROFO acreage will be governed by the applicable joint operating agreement. Under the joint operating agreements, either Sponsor may propose drilling operations; however, neither Sponsor is obligated to participate in any drilling operations and may elect not to participate in any or all of the operations proposed on our dedicated acreage or our ROFO acreage. If either or both of our Sponsors elect not to participate in any or all of the operations proposed on our dedicated acreage or our ROFO acreage, our business, financial condition, results of operations, cash flows and ability to make cash distributions will be materially and adversely affected.
Under our Sponsors’ JDA, subject to certain limitations, our Sponsors may transfer their leasehold, working and mineral fee interests in the dedicated acreage.
So long as our Sponsors comply with certain transfer restrictions set forth in their JDA, they may transfer their leasehold, working and mineral fee interests in, or grant an overriding royalty interest, production payment, net profits interest or other similar interest in the dedicated acreage. Each of our Sponsors continually evaluates how to enhance its upstream portfolio, including its holdings in the Marcellus Shale and, subject to the limitations in the JDA, could sell, exchange, farm-out or otherwise dispose of all of, or an undivided interest in, its Marcellus Shale holdings as part of these enhancement efforts. If either of our Sponsors transfers all or an undivided portion of their interests in the future, their economic interest in developing the dedicated acreage could decrease, which could materially adversely affect our business, financial condition, results of
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operations, cash flows and ability to make cash distributions. Please read “Business — Our Sponsors’ Upstream Joint Venture” under Item 1 Part I of this annual report.
We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to our unitholders.
In order to support the payment of the minimum quarterly distribution of $0.2125 per unit per quarter, or $0.85 per unit on an annualized basis, we must generate distributable cash flow of approximately $12.7 million per quarter, or approximately $50.6 million per year, based on the current number of common units and subordinated units and the general partner interest outstanding as of December 31, 2015. We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to our unitholders.
The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
• | the volume of natural gas we gather, compress and dehydrate, the volume of condensate we gather and treat and the fees we are paid for performing such services; |
• | the effects of changes in market prices of natural gas, NGLs and crude oil on our Sponsors’ drilling and development plan on our dedicated acreage and the volumes of natural gas and condensate that are produced on our dedicated acreage; |
• | our Sponsors’ ability to fund their drilling and development plan on our dedicated acreage; |
• | capital expenditures necessary for us to maintain and build out our midstream systems to gather natural gas and condensate from our Sponsors’ new well completions on our dedicated acreage; |
• | the levels of our operating expenses, maintenance expenses and general and administrative expenses; |
• | regulatory action affecting: (i) the supply of, or demand for, natural gas and condensate, (ii) the rates we can charge for our midstream services, (iii) the terms upon which we are able to contract to provide our midstream services, (iv) our existing gathering and other commercial agreements or (v) our operating costs or our operating flexibility; |
• | the rates we charge third parties, if any, for our midstream services; |
• | prevailing economic conditions; and |
• | favorable or adverse weather conditions. |
In addition, the actual amount of distributable cash flow that we generate will also depend on other factors, some of which are beyond our control, including:
• | the level and timing of our capital expenditures; |
• | our debt service requirements and other liabilities; |
• | our ability to borrow under our debt agreements to fund our capital expenditures and operating expenditures and to pay distributions; |
• | fluctuations in our working capital needs; |
• | restrictions on distributions contained in any of our debt agreements; |
• | the cost of acquisitions, if any; |
• | the fees and expenses of our general partner and its affiliates (including our Sponsors) that we are required to reimburse; |
• | the amount of cash reserves established by our general partner; and |
• | other business risks affecting our cash levels. |
Because of the natural decline in production from existing wells, our success, in part, depends on our ability to maintain or increase natural gas and condensate throughput volumes on our midstream systems, which depends on our Sponsors’ levels of development and completion activity on acreage dedicated to us.
The level of natural gas and condensate volumes handled by our midstream systems depends on the level of production from natural gas wells dedicated to our midstream systems, which may be less than expected and which will naturally decline over time. In order to maintain or increase throughput levels on our midstream systems, we must obtain production from new wells completed by our Sponsors and/or third parties on acreage dedicated to our midstream systems.
We have no control over our Sponsors’ or other producers’ levels of development and completion activity in our area of operation, the amount of reserves associated with wells connected to our systems or the rate at which production from a well declines. In addition, we have no control over our Sponsors or other producers or their exploration and development decisions, which may be affected by, among other things:
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• | prevailing and projected natural gas, NGL and crude oil prices, which are extremely volatile and declined substantially throughout 2015 in response to changing supply and demand dynamics; |
• | demand for natural gas, NGLs and crude oil; |
• | changes in the strategic importance our Sponsors assign to development in the Marcellus Shale area as opposed to other plays they may consider core to their business, which could adversely affect the financial and operational resources either or both of our Sponsors are willing to devote to development in our areas of operations; |
• | the availability and cost of capital; |
• | levels of reserves; |
• | geologic considerations; |
• | increased levels of taxation related to the exploration and production of natural gas in our areas of operation; |
• | environmental or other governmental regulations, including the availability of drilling permits and the regulation of hydraulic fracturing; and |
• | the costs of producing natural gas and the availability and costs of drilling rigs and other equipment and services. |
Due to these and other factors, even if reserves are known to exist in areas served by our midstream systems, producers may choose not to develop those reserves. If producers choose not to develop their reserves, or they choose to slow their development rate, in our areas of operation, they will have no need to dedicate such additional acreage and associated reserves to our midstream systems and the pace of such additional dedications will be below anticipated levels. Our inability to obtain additional dedications of acreage resulting from reductions in development activity, coupled with the natural decline in production from our current dedicated acreage, would result in our inability to maintain the then current levels of throughput on our midstream systems, which could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our gathering agreements do not include minimum volume commitments.
Although we have obtained acreage dedications from our Sponsors, our gathering agreements do not include minimum volume commitments that would protect us against volumetric risks associated with lower-than-forecast volumes flowing through our gathering systems. Our Sponsors do not have contractual obligations to us to develop their properties in the areas covered by our acreage dedications, and they may determine that it is more attractive to direct their capital spending and resources to other areas. A decrease in our Sponsors' capital spending and development of reserves in the areas covered by our acreage dedications with our Sponsors could result in reduced volumes serviced by us and a material decline in our revenues and cash flows. Any decrease in the current levels of throughput on our gathering systems could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our gathering agreements with our Sponsors provide for the release of our Sponsors’ dedicated acreage in certain situations and provide our Sponsors the ability to transfer certain of the dedicated acreage free of the dedication to us.
Our gathering agreements provide that if we fail to timely complete the construction of the facilities necessary to provide midstream services to our Sponsors on our dedicated acreage or have an uncured default of any of our material obligations that has caused an interruption in our services for more than 90 days, the affected acreage will be permanently released from our dedication. Also, after the fifth anniversary of our gathering agreements, if our Sponsors drill a well that is located a certain distance from our current gathering system (and is not included in the detailed drilling plan provided by our Sponsors) and a third-party gatherer offers a lower cost of service, and our sponsors elect to utilize this third-party gatherer, then the acreage associated with such well will be permanently released from our dedication. Any permanent releases of our Sponsors’ acreage from our dedication could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our gathering agreements also provide that in certain situations, such as an uncured default of any of our material obligations that has caused an interruption in our services for less than 90 days, our dedicated acreage can be temporarily released from our dedication. Any temporary releases of acreage from our dedication could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our gathering agreements will run with the land and be binding on a transferee of any of our dedicated acreage; however, each of our Sponsors may transfer 25,000 net acres of the dedicated acreage free of the dedication to us. This amount of net acres that can be transferred free of the dedication will be increased by the amount, if any, of net acres acquired by our Sponsors in the dedication area that will become automatically dedicated to us. Any transfer of acreage free from the dedication to us could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
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Certain of our dedicated acreage is either not held by production by our Sponsors or has not yet been earned by our Sponsors.
Certain of our dedicated acreage is either not held by production or has yet to be earned by our Sponsors under farmout agreements to which they are parties. As of December 31, 2015, approximately 22% of our dedicated acreage was not held by production or was yet to be earned by our Sponsors. With respect to the dedicated acreage that is not held by production, if our Sponsors do not timely meet the drilling obligations specified in the underlying leases, then the leases will terminate and will no longer be subject to our dedication. With respect to the dedicated acreage that is yet to be earned by our Sponsors under certain farmout agreements, if our Sponsors do not meet their drilling obligations to earn the acreage subject to the farmout agreements prior to the termination of the farmout agreements, then they will have no further rights to earn any acreage that they have not previously earned under the farmout agreements. Also, if the counterparty to the farmout agreements becomes insolvent or bankrupt, then the farmout agreements may be deemed an executory contract that may be discharged in a bankruptcy proceeding. If our Sponsors do not timely meet the drilling obligations specified in the leases not held by production or do not earn all of the acreage subject to the farmout agreements prior to the termination of the farmout agreement or if our Sponsor’s farmout agreements are discharged, the affected acreage will no longer be dedicated to us, which could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
We may not be able to attract dedications of third-party volumes, in part because our industry is highly competitive, which could limit our ability to grow and increase our dependence on our Sponsors.
Part of our long-term growth strategy includes diversifying our customer base by identifying opportunities to offer services to third parties in our areas of operation. To date and over the near term, all of our revenues have been and will be earned from our Sponsors relating to production they own or control on our dedicated acreage. Our ability to increase throughput on our midstream systems and any related revenue from third parties is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when requested by third parties. Any lack of available capacity on our systems for third-party volumes will detrimentally affect our ability to compete effectively with third-party systems for natural gas and condensate produced from reserves associated with acreage other than our then current dedicated acreage in our area of operation. In addition, some of our competitors for third-party volumes have greater financial resources and access to larger supplies of natural gas than those available to us, which could allow those competitors to price their services more aggressively than we do.
Our efforts to attract new third parties as customers may be adversely affected by (i) our relationship with our Sponsors and the fact that a substantial majority of the capacity of our midstream systems will be necessary to service their production on our dedicated acreage and that, under our gathering agreements with our Sponsors, our Sponsors will receive priority of service for the provision of our midstream services over third parties and (ii) our desire to provide services pursuant to fee-based agreements. As a result, we may not have the capacity to provide services to third parties and/or potential third-party customers may prefer to obtain services pursuant to other forms of contractual arrangements under which we would be required to assume direct commodity exposure. In addition, potential third-party customers who are significant producers of natural gas and condensate may develop their own midstream systems in lieu of using our systems. All of these competitive pressures could have a material adverse effect on our business, results of operations, financial condition, cash flows and ability to make cash distributions to our unitholders.
We may not be able to make an attractive offer to our Sponsors on our ROFO acreage.
Our Sponsors are required to allow us to make a first offer to provide midstream services on existing upstream acreage that is not currently dedicated to us or a third party, which, as of December 31, 2015, covered approximately 186,000 net acres, and any future acreage that our Sponsors jointly acquire in the ROFO area. Our Sponsors are under no obligation to accept any offer we make on this acreage, even if we submit the most attractive bid they receive. In addition, another midstream service provider may be able to make a more attractive offer to our Sponsors, whether because they have existing infrastructure on or around this acreage or otherwise. Any rejection by our Sponsors of any offer on this acreage could adversely affect our organic growth strategy or our ability to maintain or increase our cash distribution level.
If our Sponsors elect not to jointly acquire acreage in their upstream AMI, they are under no obligation to dedicate or otherwise offer the acquired acreage to us for midstream services.
Pursuant to our Sponsors’ upstream joint venture agreement, if either of our Sponsors decides to acquire acreage in their upstream areas of mutual interest ("AMI"), prior to 2036 they are required to offer the other Sponsor the right to participate in
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the joint acquisition of that acreage. Any acreage that is jointly acquired in the dedication area, and that is not subject to an existing third-party commitment, will automatically be dedicated to us. Any acreage that is jointly acquired in the ROFO area, and that is not subject to an existing third-party commitment, will be subject to our right of first offer for midstream services. However, if either of our Sponsors elects not to participate in an acquisition in their upstream AMI, the other Sponsor is under no obligation to dedicate such solely acquired acreage or allow us to make an offer to provide midstream services on that acreage, even if the acreage is not subject to any third-party commitment. A failure of one of our Sponsors to participate in an acquisition in their upstream AMI will limit the acreage that is either automatically dedicated to us (in the dedication area) or subject to our right of first offer (in the ROFO area) and could adversely affect our organic growth strategy or our ability to maintain or increase our cash distribution level.
Our only assets are controlling ownership interests in our operating subsidiaries. Because our interests in our operating subsidiaries represent our only cash-generating assets, our cash flow will depend entirely on the performance of our operating subsidiaries and their ability to distribute cash to us.
We have a holding company structure, meaning the sole source of our earnings and cash flow consists exclusively of the earnings of and cash distributions from our operating subsidiaries. Therefore, our ability to make quarterly distributions to our unitholders will be completely dependent upon the performance of our operating subsidiaries and their ability to distribute funds to us. We are the sole member of the general partner of each of our operating subsidiaries, and we control and manage our operating subsidiaries through our ownership of our operating subsidiaries’ respective general partners.
The limited partnership agreement governing each operating company requires that the general partner of such operating company cause such operating company to distribute all of its available cash each quarter, less the amounts of cash reserves that such general partner determines are necessary or appropriate in its reasonable discretion to provide for the proper conduct of such operating company’s business.
The amount of cash each operating company generates from its operations will fluctuate from quarter to quarter based on events and circumstances and the actual amount of cash each operating company will have available for distribution to its partners, including us, also will depend on certain factors. For a description of the events, circumstances and factors that may affect the cash distributions from our operating subsidiaries please read “Risk Factors - We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to our unitholders.”
We may be responsible for mine subsidence costs in the future.
Portions of our gathering systems pass over coal mines. Activities related to the use and expansion of our gathering systems have historically, and may continue to, be affected by mine subsidence. Under the terms of the omnibus agreement between us, our general partner, CONE Gathering and our Sponsors, CONE Gathering has agreed to indemnify us for a period of four years following our IPO against costs or losses arising out of mine subsidence. However, after the four-year period, we may be liable for any costs or losses arising out of or attributable to mine subsidence. For the twelve months ended December 31, 2015, we incurred mine subsidence costs related to the expansion of our systems of approximately $1.7 million that were reimbursed to us by CONE Gathering. We cannot predict the amount of any costs or losses associated with mine subsidence that may impact our assets after the term of the indemnification provided in the omnibus agreement. Mine subsidence costs and losses that we incur and for which we cannot seek indemnification could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
Our midstream systems are exclusively located in the Appalachian Basin, making us vulnerable to risks associated with operating in a single geographic area.
We currently rely exclusively on revenues generated from our midstream systems that are located in the Appalachian Basin. As a result of this concentration, we will be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, market limitations, water shortages or other drought related conditions or interruption of the processing or transportation of natural gas, NGLs or condensate. If any of these factors were to impact the Appalachian Basin more than other producing regions, our business, financial condition, results of operations and ability to make cash distributions will be adversely affected relative to other midstream companies that have a more geographically diversified asset portfolio.
We may be unable to grow by acquiring the non-controlling interests in our operating subsidiaries owned by CONE Gathering, which could limit our ability to increase our distributable cash flow.
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Part of our strategy for growing our business and increasing distributions to our unitholders is dependent upon our ability to make acquisitions that increase our distributable cash flow. Part of the acquisition component of our growth strategy is based upon our expectation of future divestitures by CONE Gathering to us of portions of its remaining, non-controlling interests in our operating subsidiaries. We have only a right of first offer pursuant to our omnibus agreement to purchase the non-controlling interests in our operating subsidiaries retained by CONE Gathering and that CONE Gathering elects to sell. CONE Gathering is under no obligation to offer to sell us additional assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), we are under no obligation to buy any additional assets from CONE Gathering and we do not know when or if CONE Gathering will make any offers to sell assets to us. We may never purchase all or a portion of the non-controlling interests in our operating subsidiaries for several reasons, including the following:
• | CONE Gathering may choose not to sell these non-controlling interests; |
• | we may not make offers for these non-controlling interests; |
• | we and CONE Gathering may be unable to agree to terms acceptable to both parties; |
• | we may be unable to obtain financing to purchase these non-controlling interests on acceptable terms or at all; or |
• | we may be prohibited by the terms of our debt agreements (including our credit facility) or other contracts from purchasing some or all of these non-controlling interests, and CONE Gathering may be prohibited by the terms of its debt agreements or other contracts from selling some or all of such non-controlling interests. If we or CONE Gathering must seek waivers of such provisions or refinance debt governed by such provisions in order to consummate a sale of these non-controlling interests, we or CONE Gathering may be unable to do so in a timely manner or at all. |
We do not know when or if all or any portion of such non-controlling interests will be offered to us for purchase, and we can provide no assurance that we will be able to successfully consummate any future acquisition of all or any portion of such non-controlling interests in our operating subsidiaries. Furthermore, if CONE Gathering reduces its ownership interest in us, it may be less willing to sell to us its remaining non-controlling interests in our operating subsidiaries. In addition, except for our rights of first offer, there are no restrictions on CONE Gathering’s ability to transfer its non-controlling interests in our operating subsidiaries to a third party. If we do not acquire all or a significant portion of the non-controlling interests in our operating subsidiaries held by CONE Gathering, our ability to grow our business and increase our cash distributions to our unitholders may be significantly limited.
If third-party pipelines or other midstream facilities interconnected to our gathering systems become partially or fully unavailable, our operating margin, cash flow and ability to make cash distributions to our unitholders could be adversely affected.
Our assets connect to other pipelines or facilities owned and operated by unaffiliated third parties. The continuing operation of third-party pipelines, processing and fractionation plants, compressor stations and other midstream facilities is not within our control. These third-party pipelines, processing and fractionation plants, compressor stations and other midstream facilities may become unavailable because of testing, turnarounds, line repair, maintenance, reduced operating pressure, lack of operating capacity, force majeure events, regulatory requirements and curtailments of receipt or deliveries due to insufficient capacity or because of damage from severe weather conditions or other operational issues. If any such increase in costs occurs or if any of these pipelines or other midstream facilities becomes unable to receive or transport natural gas, our operating margin, cash flow and ability to make cash distributions to our unitholders could be adversely affected.
To maintain and grow our business, we will be required to make substantial capital expenditures. If we are unable to obtain needed capital or financing on satisfactory terms, our ability to make cash distributions may be diminished or our financial leverage could increase.
In order to maintain and grow our business, we will need to make substantial capital expenditures to fund our share of growth capital expenditures associated with our 75%, 5% and 5% controlling interests in our Anchor Systems, Growth Systems and Additional Systems, respectively, or to purchase or construct new midstream systems. If we do not make sufficient or effective capital expenditures, we will be unable to maintain and grow our business and, as a result, we may be unable to maintain or raise the level of our future cash distributions over the long term. To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell additional common units or other equity securities. Using cash from our operations will reduce cash available for distribution to our unitholders. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control. Also, due to our relationships with our Sponsors, our ability to access the capital markets, or the pricing or other terms of any capital markets transactions, may be adversely affected by any impairment to the financial condition of our Sponsors or adverse changes in the credit ratings of our Sponsors. Any material
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limitation on our ability to access capital as a result of such adverse changes to a Sponsor could limit our ability to obtain future financing under favorable terms, or at all, or could result in increased financing costs in the future. Similarly, material adverse changes affecting one or both of our Sponsors could negatively impact our unit price, limiting our ability to raise capital through equity issuances or debt financing, or could negatively affect our ability to engage in, expand or pursue our business activities, or could also prevent us from engaging in certain transactions that might otherwise be considered beneficial to us.
Even if we are successful in obtaining the necessary funds to support our growth plan, the terms of such financings could limit our ability to pay distributions to our unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain the then current distribution rate, which could materially decrease our ability to pay distributions at the then prevailing distribution rate. While we have historically received funding from our Sponsors, none of our Sponsors, CONE Gathering, our general partner or any of their respective affiliates is committed to providing any direct or indirect financial support to fund our growth.
The amount of cash we have available for distribution to our unitholders depends primarily on our cash flow and not solely on our profitability, which may prevent us from making distributions, even during periods in which we record net income.
The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on our profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record a net loss for financial accounting purposes, and conversely, we might fail to make cash distributions during periods when we record net income for financial accounting purposes.
Our construction of new gathering, compression, dehydration, treating or other midstream assets may not result in revenue increases and may be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our cash flows, results of operations and financial condition and, as a result, our ability to distribute cash to our unitholders.
The construction of additions or modifications to our existing systems involves numerous regulatory, environmental, political and legal uncertainties beyond our control and may require the expenditure of significant amounts of capital. Financing may not be available on economically acceptable terms or at all. If we undertake these projects, we may not be able to complete them on schedule, at the budgeted cost or at all.
Our revenues may not increase immediately (or at all) upon the expenditure of funds on a particular project. For instance, if we build a processing facility, the construction may occur over an extended period of time, and we may not receive any material increases in revenues until the project is completed. Additionally, we may construct facilities to capture anticipated future production growth in an area in which such growth does not materialize. As a result, new gathering, compression, dehydration, treating or other midstream assets may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.
The construction of additions to our existing assets may require us to obtain new rights-of-way prior to constructing new pipelines or facilities. We may be unable to timely obtain such rights-of-way to connect new natural gas supplies to our existing gathering pipelines or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to expand or renew existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases, our cash flows could be adversely affected.
Certain plant or animal species are or could be designated as endangered or threatened, which could have a material impact on our and our Sponsors’ operations.
The Federal Endangered Species Act ("ESA") and similar state laws protect species threatened with extinction. Protection of endangered and threatened species may cause us to modify gas well pad siting or pipeline right of ways, or develop and implement species-specific protection and enhancement plans to avoid or minimize impacts to endangered species or their habitats. A number of species indigenous to the areas where we operate are protected under the ESA, including the Northern Long-Earned and Indiana bats. Other species that are being considered for listing as endangered include the Big Sandy Crayfish, the Guyandotte River Crayfish and the Rusty Patched Bumble Bee, all of which if listed, have the potential to interfere with our and our Sponsors’ operations. Based on species that have been identified and the current application of endangered species laws and regulations, we do not believe that there are any species protected under the ESA or state laws that would materially and adversely affect our ability to gather gas.
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Our exposure to commodity price risk may change over time and we cannot guarantee the terms of any agreements for our midstream services with third parties or with our Sponsors.
We currently generate all of our revenues pursuant to fee-based gathering agreements under which we are paid based on the volumes that we gather and compress, rather than the underlying value of the commodity. Consequently, our existing operations and cash flows do not have significant direct exposure to commodity price risk. However, the producers that are customers of our midstream services are exposed to commodity price risk, and extended reduction in commodity prices could adversely reduce the production volumes available for our midstream services in the future below expected levels. Although we intend to enter into fee-based gathering agreements with existing or new customers in the future, our efforts to negotiate such terms may not be successful.
Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.
Our $250.0 million revolving credit facility limits our ability to, among other things:
• | incur or guarantee additional debt; |
• | redeem or repurchase units or make distributions under certain circumstances; |
• | make certain investments and acquisitions; |
• | incur certain liens or permit them to exist; |
• | enter into certain types of transactions with affiliates; |
• | merge or consolidate with another company; and |
• | transfer, sell or otherwise dispose of assets. |
Our revolving credit facility also contains covenants requiring us to maintain certain financial ratios. For example, we may not permit the ratio of (i) consolidated total funded debt (as defined in the agreement governing our revolving credit facility) as of the last day of each fiscal quarter to (ii) consolidated EBITDA (as defined in the agreement governing our revolving credit facility) for the four consecutive fiscal quarters ending on the last day of such fiscal quarter to exceed (A) at any time other than during a qualified acquisition period (as defined in the agreement governing our revolving credit facility), 5.00 to 1.00 and (B) during a qualified acquisition period (as defined in the agreement governing our revolving credit facility), 5.50 to 1.00. In addition, we may not permit the ratio of (i) consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of each fiscal quarter to (ii) consolidated interest expense (as defined in the agreement governing our revolving credit facility) for such four consecutive fiscal quarters to be less than 3.00 to 1.00. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet any such ratios and tests.
The provisions of our revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity” under Item 7 of Part I of this annual report.
A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of such assets, which may cause our revenues to decline and our operating expenses to increase.
Our gathering and transportation operations are exempt from regulation by FERC, under the NGA and the ICA. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC under the NGA, and the ICA only governs liquids transportation service in interstate commerce. Although FERC has not made any formal determinations with respect to any of our facilities we consider to be gathering facilities, we believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish that a natural gas pipeline is a gathering pipeline not subject to FERC or NGA jurisdiction. We believe that the condensate pipelines in our gathering systems meet the traditional tests FERC has used to determine that a condensate pipeline is not providing transportation service in interstate commerce subject to FERC ICA jurisdiction. The distinction between FERC-regulated transmission services and federally unregulated gathering services, or intrastate transportation services, however, has been the subject of substantial litigation. FERC determines whether facilities are gas gathering facilities or whether condensate shipments are made in intrastate commerce on a case-by-case basis, so the classification and regulation of some of our gathering facilities and some of our transportation of condensate may be subject to
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change based on future determinations by FERC, the courts, or Congress. If FERC were to consider the status of an individual facility and determine that the facility or services provided by it are not exempt from FERC regulation under the NGA or under the ICA, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by FERC under the NGA and/or the NGPA, or the ICA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, could adversely affect our results of operations and cash flows.
Other FERC regulations may indirectly impact our businesses and the markets for products derived from these businesses. FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on open access transportation, market manipulation, ratemaking, gas quality, capacity release and market center promotion, may indirectly affect the intrastate natural gas market. Should we fail to comply with any applicable FERC administered statutes, rules, regulations and orders, we could be subject to substantial penalties and fines, which could have a material adverse effect on our results of operations and cash flows. Under the Energy Policy Act of 2005, FERC has civil penalty authority under the NGA and the NGPA to impose penalties for current violations of up to $1,000,000 per day for each violation. Violations of the NGA or the NGPA could also result in administrative and criminal remedies and the disgorgement of any profits associated with the violation.
State regulation of natural gas gathering facilities and intrastate transportation pipelines generally includes various safety, environmental and, in some circumstances, nondiscriminatory take and common purchaser requirements, as well as complaint-based rate regulation. Other state regulations may not directly apply to our business, but may nonetheless affect the availability of natural gas for purchase, compression and sale.
For more information regarding federal and state regulation of our operations, please read “Business — Regulation of Operations” under Item 1 of Part I of this annual report.
We may incur significant costs and liabilities as a result of pipeline and related facility integrity management program testing and any related pipeline repair or preventative or remedial measures.
PHMSA has adopted regulations requiring pipeline operators to develop integrity management programs for transportation pipelines and related facilities located where a leak or rupture could do the most harm, i.e., in “high consequence areas.” The regulations require operators to:
• | perform ongoing assessments of pipeline and related facility integrity; |
• | identify and characterize applicable threats to pipeline segments that could impact a high consequence area; |
• | improve data collection, integration and analysis; |
• | repair and remediate the pipeline as necessary; and |
• | implement preventive and mitigating actions. |
The 2011 Pipeline Safety Act, among other things, increases the maximum civil penalty for pipeline safety violations and directed the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation, and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas. Effective October 25, 2013, PHMSA adopted new rules increasing the maximum administrative civil penalties for violation of the pipeline safety laws and regulations after January 3, 2012 to $200,000 per violation per day, with a maximum of $2.0 million for a related series of violations. Should our operations fail to comply with PHMSA or comparable state regulations, we could be subject to substantial penalties and fines. PHMSA has also published advanced notices of proposed rulemaking to solicit comments on the need for changes to its safety regulations, including whether to extend the integrity management program requirements to additional types of facilities, such as gathering pipelines and related facilities. In October 2015, PHMSA proposed changes to its hazardous liquid pipeline safety regulations that would significantly extend the integrity management requirements to previously exempt pipelines and would impose additional obligations on hazardous liquid pipeline operators that are already subject to the integrity management requirements. PHMSA’s proposed rule would also require annual reporting of safety-related conditions and incident reports for all hazardous liquid gathering lines and gravity lines, including pipelines that are currently exempt from PHMSA regulations. PHMSA issued a separate regulatory proposal in July 2015 that would impose pipeline incident prevention and response measures on natural gas and hazardous liquid pipeline operators. Additionally, in 2012, PHMSA issued an advisory bulletin providing guidance on the verification of records related to pipeline maximum allowable operating pressure, which could result in additional requirements for the pressure testing of pipelines or the reduction of maximum operating pressures to verifiable pressures. The adoption of regulations that apply more comprehensive or stringent safety standards could require us to install new or modified safety controls, pursue new capital projects, or conduct maintenance programs on an accelerated basis, all of which could require us to incur increased operational costs that could be significant. While we cannot predict the outcome of legislative or regulatory initiatives, such legislative and
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regulatory changes could have a material effect on our cash flow. Please read “Business — Regulation of Operations — Pipeline Safety Regulation” under Item 1 of Part I of this annual report.
Increased regulation of hydraulic fracturing could result in reductions or delays in natural gas, NGL and crude oil production by our customers, which could reduce the throughput on our gathering and other midstream systems, which could adversely impact our revenues.
We do not conduct hydraulic fracturing operations, but substantially all of our Sponsors’ natural gas production on our dedicated acreage is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. All of the natural gas, NGL and crude oil production from our Sponsors’ upstream joint venture is being developed from an unconventional source, the Marcellus Shale formation. Hydraulic fracturing is a well stimulation process that utilizes large volumes of water and sand combined with fracturing chemical additives that are pumped at high pressure to crack open previously impenetrable rock to release hydrocarbons. Hydraulic fracturing is typically regulated by state oil and gas commissions and similar agencies. Some states, including those in which we operate, have adopted, and other states are considering adopting, regulations that could impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations, or otherwise seek to ban some or all of these activities. However, the EPA, has asserted certain regulatory authority over hydraulic fracturing and has moved forward with various regulatory actions, including, the issuance of new regulations requiring green completions for hydraulically fractured wells, emission requirements for certain midstream equipment, proposed pretreatment standards that would prohibit the indirect discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned treatment works, and an Advanced Notice of Proposed Rulemaking seeking comment on its intent to develop regulations under the Toxic Substances and Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Certain environmental groups have also suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation. We cannot predict whether any such legislation will be enacted and if so, what its provisions would be. Additional levels of regulation and permits required through the adoption of new laws and regulations at the federal, state or local level could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of natural gas and liquids that move through our gathering systems, which in turn could materially adversely affect operations.
We, our Sponsors or any third-party customers may incur significant liability under, or costs and expenditures to comply with, environmental and worker health and safety regulations, which are complex and subject to frequent change.
As an owner and operator of gathering and compressing systems, we are subject to various stringent federal, state and local laws and regulations relating to the discharge of materials into, and protection of, the environment and worker health and safety. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly response actions. These laws and regulations may impose numerous obligations that are applicable to our and our customers' operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our or our customers’ operations, the imposition of specific standards addressing worker protection, and the imposition of substantial liabilities and remedial obligations for pollution or contamination resulting from our and our customers' operations. Failure to comply with these laws, regulations and permits may result in joint and several or strict liability or the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and/or the issuance of injunctions limiting or preventing some or all of our operations. Private parties, including the owners of the properties through which our gathering systems pass, may also have the right to pursue legal actions to enforce compliance, as well as to seek damages for non-compliance, with environmental laws and regulations or for personal injury or property damage. We may not be able to recover all or any of these costs from insurance. In addition, we may experience a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt our operations and limit our growth and revenues, which in turn could affect our profitability. There is no assurance that changes in or additions to public policy regarding the protection of the environment and worker health and safety will not have a significant impact on our operations and profitability.
Our operations also pose risks of environmental liability due to leakage, migration, releases or spills from our operations to surface or subsurface soils, surface water or groundwater. Certain environmental laws impose strict as well as joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. We may be required to remediate contaminated properties currently or formerly operated by us regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations.
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In 2013, the EPA issued a draft report entitled Connectivity of Streams and Wetlands to Downstream Waters, which affects a proposed rulemaking that would expand the scope of the Clean Water Act ("CWA") to include previously non-jurisdictional streams, wetlands, and waters, making these areas jurisdictional inter-coastal Waters of the U.S ("WotUS"). On June 29, 2015 EPA published the final WotUS rule but a federal appeals court stayed implementation of the rule in October 2015 as legal challenges to the rule are considered. If the EPA is allowed to move forward with implementation of the final rule, or if states make any similar changes to their regulatory programs, this could lead to additional mitigation costs and severely limit our and our Sponsors’ operations.
Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the crude oil and natural gas industry could continue, potentially resulting in increased costs of doing business and consequently affecting profitability. Please read “Business — Regulation of Environmental and Occupational Safety and Health Matters” under Item 1 of Part I of this annual report.
Climate change laws and regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the natural gas that we gather while potential physical effects of climate change could disrupt our production and cause us to incur significant costs in preparing for or responding to those effects.
In response to findings that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment, the EPA has adopted regulations under existing provisions of the Clean Air Act that, among other things, establish Prevention of Significant Deterioration, or PSD, construction and Title V operating permit reviews for certain large stationary sources that emit GHGs. Facilities required to obtain PSD permits for their GHG emissions also will be required to meet “best available control technology” standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. These EPA rulemakings could adversely affect our operations and restrict or delay our ability to obtain air permits for new or modified sources. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified onshore oil and gas production sources in the U.S. on an annual basis, which was expanded in October 2015 to include, amongst other equipment, certain gathering and boosting activities and transmission pipelines. We are monitoring and file annual required reports for the GHG emissions from our operations in accordance with the GHG emissions reporting rule.
While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions. Further, in December 2015, more than 190 countries, including the United States, reached an agreement to reduce greenhouse gas emissions. To the extent that the United States adopts regulations in accordance with this agreement, these regulations could adversely affect our business and the businesses of our Sponsors and customers.
The current Administration announced its Climate Action Plan in 2013, which, among other things, directs federal agencies to develop a strategy for the reduction of methane emissions, including emissions from the oil and gas industry. As part of the Climate Action Plan, the Administration announced that it intends to adopt additional regulations to reduce emissions of GHGs and to encourage greater use of low carbon technologies in the coming years, and in March 2014, the Administration announced several components of its methane reduction strategy that apply to the oil and gas industry, which include an EPA assessment of methane and other emissions from the oil and gas industry that could lead to additional regulations by the end of 2016. As part of this initiative, in August 2015, the EPA released proposed regulations that would control emissions of methane and volatile organic compounds from the oil and gas sector. The Bureau of Land Management also released proposed regulations intended to update standards to reduce venting and flaring from oil and gas production on public lands. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. Substantial limitations on GHG emissions could also adversely affect demand for the natural gas we gather.
Finally, increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our Sponsors’ exploration and production operations.
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Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. The occurrence of a significant accident or other event that is not fully insured could curtail our operations and have a material adverse effect on our ability to distribute cash and, accordingly, the market price for our common units.
Our operations are subject to all of the hazards inherent in the gathering and compression of natural gas, including:
• | damage to pipelines, compressor stations, pump stations, related equipment and surrounding properties caused by design, installation, construction materials or operational flaws, natural disasters, acts of terrorism and acts of third parties; |
• | leaks of natural gas or condensate or losses of natural gas or condensate as a result of the malfunction of, or other disruptions associated with, equipment or facilities; |
• | fires, ruptures, landslides, mine subsidence and explosions; and |
• | other hazards that could also result in personal injury and loss of life, pollution and suspension of operations. |
Any of these risks could adversely affect our ability to conduct operations or result in substantial loss to us as a result of claims for:
• | injury or loss of life; |
• | damage to and destruction of property, natural resources and equipment; |
• | pollution and other environmental damage; |
• | regulatory investigations and penalties; |
• | suspension of our operations; and |
• | repair and remediation costs. |
Although we maintain insurance for a number of risks and hazards, we may not be insured or fully insured against the losses or liabilities that could arise from a significant accident in our operations, as we may elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.
We may not own in fee the land on which our pipelines and facilities are located, which could result in disruptions to our operations.
We own in fee approximately 23% of the land on which our midstream systems have been constructed, with the remainder held by surface use agreement, rights-of-way or other easement rights. We are, therefore, subject to the possibility of more onerous terms or increased costs to retain necessary land use if we do not have valid rights-of-way or if such rights-of-way lapse or terminate. We may obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way or otherwise, could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.
A shortage of equipment and skilled labor in the Appalachian Basin could reduce equipment availability and labor productivity and increase labor and equipment costs, which could have a material adverse effect on our business and results of operations.
Our gathering and other midstream services require special equipment and laborers who are skilled in multiple disciplines, such as equipment operators, mechanics and engineers, among others. If we experience shortages of necessary equipment or skilled labor in the future, our labor and equipment costs and overall productivity could be materially and adversely affected. If our equipment or labor prices increase or if we experience materially increased health and benefit costs for employees, our business and results of operations could be materially and adversely affected.
The loss of key personnel could adversely affect our ability to operate.
We depend on the services of a relatively small group of our general partner’s senior management and technical personnel. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals. The loss of the services of our general partner’s senior management or technical personnel, including John Lewis, our Chief Executive Officer, David Khani, our Chief Financial Officer, Joseph Fink, our Chief Operating Officer, Brian Rich, our Chief Accounting Officer, and Kirk Moore, our General Counsel and Secretary, could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.
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We do not have any officers or employees and rely on officers of our general partner and employees of CONSOL.
We are managed and operated by the board of directors and executive officers of our general partner. Our general partner has no employees and relies on the employees of CONSOL to conduct our business and activities.
CONSOL and Noble Energy each conducts businesses and activities of its own in which we have no economic interest. As a result, there could be material competition for the time and effort of the officers and employees who provide services to both our general partner and to either CONSOL or Noble Energy. If our general partner and the officers and employees of CONSOL and Noble Energy do not devote sufficient attention to the management and operation of our business and activities, our business, financial condition, results of operations, cash flows and ability to make cash distributions could be materially adversely effected.
Debt we incur may limit our flexibility to obtain financing and to pursue other business opportunities.
Our level of debt could have important consequences to us, including the following:
• | our ability to obtain additional financing, if necessary, for working capital, capital expenditures (including building additional gathering pipelines needed for required connections and building additional compression and treating facilities pursuant to our gathering agreements) or other purposes may be impaired or such financing may not be available on favorable terms; |
• | our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt; |
• | we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and |
• | our flexibility in responding to changing business and economic conditions may be limited. |
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all.
Increases in interest rates could adversely impact our business, common unit price, our ability to issue equity or incur debt for acquisitions, capital expenditures or other purposes and our ability to make cash distributions at our intended levels.
Interest rates may increase in the future. As a result, interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Rising interest rates could reduce the amount of cash we generate and materially adversely affect our liquidity and our ability to pay cash distributions. Moreover, the trading price of our units is sensitive to changes in interest rates and could be materially adversely affected by any increase in interest rates. As with other yield-oriented securities, our common unit price will be impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have an adverse impact on our common unit price and our ability to issue equity or incur debt for acquisitions or other purposes and to make cash distributions at our intended levels.
Assuming an outstanding balance on the revolving credit facility of $73.5 million, an increase of one percentage point in the interest rates would have resulted in an increase in interest expense during 2015 of $0.7 million. Accordingly, our results of operations, cash flows and financial condition, all of which affect our ability to make cash distributions to our unitholders, could be materially adversely affected by significant increases in interest rates.
Terrorist attacks or cyber-attacks could have a material adverse effect on our business, financial condition or results of operations.
Terrorist attacks or cyber-attacks may significantly affect the energy industry, and economic conditions, including our operations and those of our customers, as well as general economic conditions, consumer confidence and spending and market liquidity. Strategic targets, such as energy-related assets, may be at greater risk of future attacks than other targets in the United States due to coordinated physical and cyberattacks intended to disable elements of the power grid or deny electricity and energy resources to specific targets, such as government or business centers, military installations or other infrastructure. The
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increased computerization of control rooms, substations and other equipment and devices used to manage power grids, oil and natural gas plants, refineries and pipelines has increased the risk of cyber-attacks on energy-related infrastructure. At the same time, attempts to infiltrate the energy sector are growing more frequent. During the period from October 2011 through May 2012, the U.S. Department of Homeland Security’s Industrial Control Systems Cyber Emergency Response Team (the “ICS-CERT”) responded to 198 cyber incidents across all critical infrastructure sectors, of which 41% occurred in the energy sector. During the period from October 2012 through May 2013, the ICS-CERT responded to over 200 incidents across all critical infrastructure sectors, of which 53% occurred in the energy sector. Our insurance may not protect us against such occurrences.
Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.
Risks Inherent in an Investment in Us
Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of our Sponsors, and neither CONSOL nor Noble Energy is under any obligation to adopt a business strategy that favors us.
As of December 31, 2015, our Sponsors owned an aggregate 64.2% limited partner interest in us. Our Sponsors, through their ownership of CONE Gathering, also collectively own a 2% general partner interest and own and control our general partner. In addition, CONE Gathering owns 25%, 95% and 95% non-controlling equity interests in our Anchor Systems, Growth Systems and Additional Systems, respectively. Although our general partner has a duty to manage us in a manner that is in the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is in the best interests of its owner, CONE Gathering, which is owned by our Sponsors. Conflicts of interest may arise between our Sponsors and their respective affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including our Sponsors, over the interests of our common unitholders. These conflicts include, among others, the following situations:
• | neither our partnership agreement nor any other agreement requires our Sponsors to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by our Sponsors to increase or decrease natural gas production on our dedicated acreage, pursue and grow particular markets or undertake acquisition opportunities for themselves. Each of CONSOL’s and Noble Energy’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of CONSOL and Noble Energy, respectively; |
• | our Sponsors may be constrained by the terms of their respective debt instruments from taking actions, or refraining from taking actions, that may be in our best interests; |
• | our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties and limits our general partner’s liabilities and the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty under applicable Delaware law; |
• | except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval; |
• | our general partner determines the amount and timing of, among other things, cash expenditures, borrowings and repayments of indebtedness, the issuance of additional partnership interests, the creation, increase or reduction in cash reserves in any quarter and asset purchases and sales, each of which can affect the amount of cash that is available for distribution to unitholders; |
• | our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period and the ability of the subordinated units to convert into common units; |
• | our general partner determines which costs incurred by it are reimbursable by us; |
• | our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period; |
• | our partnership agreement permits us to classify up to $50.0 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or the incentive distribution rights; |
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• | our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf; |
• | our general partner intends to limit its liability regarding our contractual and other obligations; |
• | our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80% of the common units; |
• | our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including our gathering agreements with our Sponsors; |
• | our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and |
• | our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner interests to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our common unitholders. This election could result in lower distributions to our common unitholders in certain situations. |
Neither our partnership agreement nor our omnibus agreement prohibits our Sponsors or any other affiliates of our general partner from owning assets or engaging in businesses that compete directly or indirectly with us. Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including our Sponsors and executive officers and directors of our general partner. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us does not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. Consequently, our Sponsors and other affiliates of our general partner, including CONE Gathering, may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from our Sponsors and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders.
Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.
Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional partnership interests in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional partnership interests may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional partnership interests, including partnership interests ranking senior to our common units as to distributions or in liquidation or that have special voting rights and other rights, and our common unitholders have no preemptive or other rights (solely as a result of their status as common unitholders) to purchase any such additional partnership interests. The incurrence of additional commercial bank borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash that we have available to distribute to our unitholders.
Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.
Delaware law provides that a Delaware limited partnership may, in its partnership agreement, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership, provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing. This implied covenant is a judicial doctrine utilized by Delaware courts in connection with interpreting ambiguities in partnership agreements and other contracts, and does not form the basis of any separate or independent fiduciary duty in addition to the express contractual duties set forth in our partnership agreement. Under the implied contractual covenant of good faith and fair dealing, a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action.
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As permitted by Delaware law, our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above.
Our partnership agreement restricts the remedies available to holders of our common units and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:
• | provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the determination or the decision to take or decline to take such action was in the best interests of our partnership, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity; |
• | provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith; |
• | provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and |
• | provides that our general partner will not be in breach of its obligations under our partnership agreement or its fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our partnership agreement. |
In connection with a situation involving a transaction with an affiliate or a conflict of interest, our partnership agreement provides that any determination by our general partner must be made in good faith, and that our conflicts committee and the board of directors of our general partner are entitled to a presumption that they acted in good faith. In any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
Cost reimbursements, which will be determined in our general partner’s sole discretion, and fees due our general partner and its affiliates for services provided will be substantial and will reduce the amount of cash we have available for distribution to you.
Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement and operational services agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we are required to reimburse our Sponsors for the provision of certain administrative support services to us. Under our operational services agreement, we are required to reimburse CONSOL for the provision of certain maintenance, operating, administrative and construction services in support of our operations. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner. The costs and expenses for which we will reimburse our general partner and its affiliates may include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. The costs and expenses for which we are required to reimburse our general partner and its affiliates are not subject to any caps or other limits. Payments to our general partner and its affiliates will be substantial and will reduce the amount of cash we have available to distribute to unitholders.
Unitholders have very limited voting rights and, even if they are dissatisfied, they will have limited ability to remove our general partner.
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Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders have no “say-on-pay” advisory voting rights. Unitholders have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by its sole member, CONE Gathering, which is owned by our Sponsors. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they have little ability to remove our general partner. As a result of these limitations, the price at which our common units trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
Our general partner may not be removed unless such removal is both (i) for cause and (ii) approved by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. “Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable to us or any limited partner for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business. As of December 31, 2015, our Sponsors collectively owned approximately 65.5% of our total outstanding common units and subordinated units on an aggregate basis. As a result, our public unitholders have limited ability to remove our general partner.
Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.
Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of CONE Gathering to transfer its membership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices.
The incentive distribution rights held by our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights.
We may issue an unlimited number of additional partnership interests without unitholder approval, which would dilute unitholder interests.
At any time, we may issue an unlimited number of general partner interests or limited partner interests of any type without the approval of our unitholders, and our unitholders have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such general partner interests or limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our common units as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:
• | our unitholders’ proportionate ownership interest in us will decrease; |
• | the amount of cash we have available to distribute on each unit may decrease; |
• | because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase; |
• | the ratio of taxable income to distributions may increase; |
• | the relative voting strength of each previously outstanding unit may be diminished; and |
• | the market price of our common units may decline. |
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The issuance by us of additional general partner interests may have the following effects, among others, if such general partner interests are issued to a person who is not an affiliate of our Sponsors:
• | management of our business may no longer reside solely with our current general partner; and |
• | affiliates of the newly admitted general partner may compete with us, and neither that general partner nor such affiliates will have any obligation to present business opportunities to us except with respect to rights of first offer contained in our omnibus agreement. |
Our Sponsors may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.
As of December 31, 2015, our Sponsors collectively hold 9,038,121 common units and 29,163,121 subordinated units. All of the subordinated units will convert into common units at the end of the subordination period. Additionally, our partnership agreement provides our Sponsors with certain registration rights under applicable securities laws. The sale of these units in the public or private markets could have an adverse impact on the market for and price of our common units.
Our general partner’s discretion in establishing cash reserves may reduce the amount of cash we have available to distribute to unitholders.
Our partnership agreement requires our general partner to deduct from operating surplus the cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash we have available to distribute to unitholders.
Affiliates of our general partner, including CONSOL, Noble Energy and CONE Gathering, may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us except with respect to rights of first offer contained in our omnibus agreement.
Neither our partnership agreement nor our omnibus agreement prohibit our Sponsors or any other affiliates of our general partner, including CONE Gathering, from owning assets or engaging in businesses that compete directly or indirectly with us. Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including our Sponsors and executive officers and directors of our general partner. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. Consequently, our Sponsors and other affiliates of our general partner, including CONE Gathering, may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from our Sponsors and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow.
Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 80% of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. As of December 31, 2015, our Sponsors collectively owned approximately 31.0% of our common units. At the end of the subordination period (which could occur at any time in the future), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units), our Sponsors will own approximately 65.5% of our outstanding common units.
Our general partner intends to limit its liability regarding our contractual and other obligations.
Our general partner intends to limit its liability under contractual arrangements and other obligations between us and third parties so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets (or against any affiliate of our general partner or its assets). Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any
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action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
Unitholders may have to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”), we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
Our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner interests to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or our common unitholders. This election could result in lower distributions to our common unitholders in certain situations.
Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48%, in addition to distributions paid on its 2% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.
If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and a general partner interest. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in such two quarters. Our general partner will also be issued an additional general partner interest necessary to maintain our general partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units and general partner interests in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled.
Units held by persons who our general partner determines are not “eligible holders” at the time of any requested certification in the future may be subject to redemption.
As a result of certain laws and regulations to which we are or may in the future become subject, we may require owners of our common units to certify that they are both U.S. citizens and subject to U.S. federal income taxation on our income. Units held by persons who our general partner determines are not “eligible holders” at the time of any requested certification in the future may be subject to redemption. “Eligible holders” are limited partners whose (or whose owners’) (i) U.S. federal income tax status or lack of proof of U.S. federal income tax status does not have and is not reasonably likely to have, as determined by our general partner, a material adverse effect on the rates that can be charged to customers by us or our subsidiaries with respect to assets that are subject to regulation by the Federal Energy Regulatory Commission or similar regulatory body and (ii) nationality, citizenship or other related status does not create and is not reasonably likely to create, as determined by our general
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partner, a substantial risk of cancellation or forfeiture of any property in which we have an interest. The aggregate redemption price for redeemable interests will be an amount equal to the current market price (the date of determination of which will be the date fixed for redemption) of limited partner interests of the class to be so redeemed multiplied by the number of limited partner interests of each such class included among the redeemable interests. For these purposes, the “current market price” means, as of any date for any class of limited partner interests, the average of the daily closing prices per limited partner interest of such class for the 20 consecutive trading days immediately prior to such date. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. The units held by any person the general partner determines is not an eligible holder will not be entitled to voting rights.
Our partnership agreement designates the Court of Chancery of the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our unitholders, which limits our unitholders’ ability to choose the judicial forum for disputes with us or our general partner’s directors, officers or other employees. Our partnership agreement also provides that any unitholder bringing an unsuccessful action will be obligated to reimburse us for any costs we have incurred in connection with such unsuccessful action.
Our partnership agreement provides that, with certain limited exceptions, the Court of Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with subject matter jurisdiction) shall be the exclusive forum for any claims, suits, actions or proceedings (i) arising out of or relating in any way to our partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of our partnership agreement or the duties, obligations or liabilities among our partners, or obligations or liabilities of our partners to us, or the rights or powers of, or restrictions on, our partners or us), (ii) brought in a derivative manner on our behalf, (iii) asserting a claim of breach of a duty owed by any of our, or our general partner’s, directors, officers, or other employees, or owed by our general partner, to us or our partners, (iv) asserting a claim against us arising pursuant to any provision of the Delaware Act or (v) asserting a claim against us governed by the internal affairs doctrine.
If any person brings any of the aforementioned claims, suits, actions or proceedings and such person does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then such person shall be obligated to reimburse us and our affiliates for all fees, costs and expenses of every kind and description, including but not limited to all reasonable attorneys’ fees and other litigation expenses, that the parties may incur in connection with such claim, suit, action or proceeding. In addition, our partnership agreement provides that each limited partner irrevocably waives the right to trial by jury in any such claim, suit, action or proceeding. By purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware (or such other court) in connection with any such claims, suits, actions or proceedings. These provisions may have the effect of discouraging lawsuits against us and our general partner’s directors and officers.
The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
Our common units are listed on the NYSE under the symbol “CNNX.” Because we are a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders do not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.
Our unitholders’ liability may not be limited if a court finds that unitholder action constitutes control of our business.
Our partnership is organized under Delaware law. Assuming that a limited partner does not participate in the control of our business within the meaning of the Delaware Act and that it otherwise acts in conformity with the provisions of our partnership agreement, its liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital it is obligated to contribute to us for its common units plus its share of any undistributed profits and assets. If it were determined, however, that the right, or exercise of the right of, by the limited partners as a group to:
• | remove or replace our general partner for cause; |
• | approve some amendments to our partnership agreement; or |
• | take other action under our partnership agreement; |
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constituted “participation in the control” of our business for the purposes of the Delaware Act, then the limited partners could be held personally liable for our obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us who reasonably believe that a limited partner is a general partner. Neither our partnership agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner. While this does not mean that a limited partner could not seek legal recourse, we know of no precedent for this type of a claim in Delaware case law.
Our operating subsidiaries conduct business in Pennsylvania and West Virginia. We may have subsidiaries that conduct business in other states in the future. Maintenance of our limited liability as a partner or member of our subsidiaries may require compliance with legal requirements in the jurisdictions in which such subsidiaries conduct business, including qualifying such entities to do business there. Limitations on the liability of members or limited partners for the obligations of a limited liability company or limited partnership, respectively, have not been clearly established in many jurisdictions. If, by virtue of our ownership interests in our operating subsidiaries or otherwise, it were determined that we were conducting business in any state without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace our general partner for cause, to approve some amendments to our partnership agreement, or to take other action under our partnership agreement constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent as our general partner under the circumstances.
If we are deemed an “investment company” under the Investment Company Act of 1940, it would adversely affect the price of our common units and could have a material adverse effect on our business.
Our initial assets consist of direct and indirect ownership interests in our operating subsidiaries. If a sufficient amount of our assets, such as our ownership interests in these subsidiaries or other assets acquired in the future, are deemed to be “investment securities” within the meaning of the Investment Company Act of 1940 (the “Investment Company Act”), we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights to fall outside the definition of an investment company. In that event, it is possible that our ownership of these interests, combined with our assets acquired in the future, could result in our being required to register under the Investment Company Act if we were not successful in obtaining exemptive relief or otherwise modifying our organizational structure or applicable contract rights. Treatment of us as an investment company would prevent our qualification as a partnership for federal income tax purposes, in which case we would be treated as a corporation for federal income tax purposes. As a result, we would pay federal income tax on our taxable income at the corporate tax rate, distributions to you would generally be taxed again as corporate distributions and none of our income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as an investment company would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.
Moreover, registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase of additional interests in our midstream systems from our Sponsors, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates. The occurrence of some or all of these events would adversely affect the price of our common units and could have a material adverse effect on our business.
We incur increased costs as a result of being a publicly-traded partnership.
We had no history operating as a publicly traded partnership prior to our initial public offering in September 2014. As a publicly traded partnership, we now incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and the NYSE have required changes in the corporate governance practices of publicly traded companies. These rules and regulations will increase our legal and financial compliance costs and make activities more time-consuming and costly. In addition, we incur additional costs associated with our publicly traded partnership reporting requirements, and our general partner maintains director and officer liability insurance. The amount of cash we have available for distribution to our unitholders will be reduced by the costs associated with being a publicly traded partnership.
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Tax Risks
Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. In addition, changes in current state law may subject us to additional entity-level taxation by individual states. Because of state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to you. Therefore, if we were treated as a corporation for U.S. federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress and the President have periodically considered substantive changes to the existing U.S. federal income tax laws that would affect the tax treatment of certain publicly traded partnerships, including the elimination of partnership tax treatment for publicly traded partnerships. Moreover, on May 6, 2015, the IRS and the U.S. Department of Treasury published proposed regulations (the "Proposed Regulations") that provide industry-specific guidance regarding whether income earned from certain activities will constitute qualifying income for the purposes of the qualifying income exception upon which we rely for our treatment as a partnership for federal income tax purposes. Although the Proposed Regulations adopt a narrow interpretation of the activities that generate qualifying income, we believe the income that we treat as qualifying income satisfies the requirements for qualifying income under the Proposed Regulations.
Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to satisfy the requirements of the exception pursuant to which we are treated as a partnership for U.S. federal income tax purposes. We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.
Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.
Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on its share of our taxable income even if
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it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our distributable cash flow.
If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it
may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit
adjustment directly from us, in which case our cash available for distribution to our unitholders might be
substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax returns, it may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. Generally, we expect to elect to have our general partner and our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under audit, but there can be no assurance that such election will be effective in all circumstances. If we are unable to have our general partner and our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under audit, our current unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties and interest, our cash available for distribution to our unitholders might be substantially reduced. These rules are not applicable to us for tax years beginning on or prior to December 31, 2017.
Tax gain or loss on the disposition of our common units could be more or less than expected.
If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of cash received from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income.
We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units and because of other reasons, we adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of
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these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first business day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge aspects of our proration method, and, if successful, we would be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first business day of each month, instead of on the basis of the date a particular unit is transferred. The U.S. Department of Treasury and the IRS recently issued Treasury Regulations that permit publicly traded partnerships to use a monthly simplifying convention that is similar to ours, but they do not specifically authorize all aspects of the proration method we have adopted. If the IRS were to successfully challenge this method, we could be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.
Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income.
We have adopted certain valuation methodologies in determining a unitholder's allocations of income, gain, loss and deduction. The IRS may challenge these methodologies or the resulting allocations, and such a challenge could adversely affect the value of the common units.
In determining the items of income, gain, loss and deduction allocable to our unitholders, in certain circumstances, including when we issue additional units, we must determine the fair market value of our assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we make many fair market value estimates using a methodology based on the market value of our common units as a means to measure the fair market value of our assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction.
A successful IRS challenge to these methods or allocations could adversely affect the amount, character and timing of taxable income or loss allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have technically terminated our partnership for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for U.S. federal income tax purposes, but instead we would be treated as a new partnership for U.S. federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years.
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As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.
In addition to federal income taxes, our unitholders are likely subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders are likely required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We currently conduct business in Pennsylvania and West Virginia. Both Pennsylvania and West Virginia currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
For a description of the Partnership's properties, see Item 1. “Business”, which is incorporated herein by reference.
ITEM 3. | LEGAL PROCEEDINGS |
Refer to Item 8. “Financial Statements and Supplementary Data - Note 10 - Commitments and Contingencies,” which is incorporated herein by reference.
ITEM 4. | MINE SAFETY AND DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Partnership’s common units have been listed on the New York Stock Exchange ("NYSE") under the symbol “CNNX” since September 25, 2014. Prior to that, the Partnership’s equity securities were not listed on any exchange or traded on any public trading market. The following table sets forth the range of high and low sales prices per common unit as reported on the NYSE and the cash distributions per unit declared on the common units from the closing of the IPO through December 31, 2015:
High | Low | Distributions | |||||||||||
Year Ended December 31, 2015: | |||||||||||||
Quarter Ended March 31, 2015 | $ | 26.02 | $ | 17.25 | $ | 0.2148 | |||||||
Quarter Ended June 30, 2015 | $ | 20.99 | $ | 17.05 | $ | 0.2125 | |||||||
Quarter Ended September 30, 2015 | $ | 18.15 | $ | 9.02 | $ | 0.2200 | |||||||
Quarter Ended December 31, 2015 | $ | 14.28 | $ | 8.58 | $ | 0.2280 | |||||||
Year Ended December 31, 2014: | |||||||||||||
Period Ended September 30, 2014 (*) | $ | 30.40 | $ | 26.80 | $ | — | |||||||
Quarter Ended December 31, 2014 | $ | 32.40 | $ | 22.20 | $ | — | |||||||
(*) The first trade date of CNNX units was September 25, 2014.
Transfer Agent and Registrar
The transfer agent and registrar for our common limited partnership units is Wells Fargo Bank N.A. Shareowner Services, 161 North Concord Exchange, South St. Paul, MN 55075-1139.
Unitholders Profile
As of as of January 20, 2016 the approximate number of our common unitholders was 4,500. A cash distribution of$0.2362 per common unit was declared on January 22, 2016 and paid on February 12, 2016 to unitholders of record as of the close of business on February 4, 2016.
Equity Compensation Plan Information
Please read “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters - Securities Authorized for Issuance Under Equity Compensation Plans.”
Market Repurchases
The Partnership did not repurchase any of its common units during 2015.
Distributions of Available Cash
General
Beginning with the quarter ended December 31, 2014, our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date.
Definition of Available Cash
Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:
• | less, the amount of cash reserves established by our general partner to: |
◦ | provide for the proper conduct of our business (including reserves for our future capital expenditures, future acquisitions and anticipated future debt service requirements); |
◦ | comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which we or any of our subsidiaries is a party or by which we or such subsidiary is bound or we or such subsidiary’s assets are subject; or |
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◦ | provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions pursuant to this bullet point if the effect of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter); |
• | plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter. |
The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings incurred under a credit facility, commercial paper facility or similar financing arrangement that are used solely for working capital purposes or to pay distributions to our partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.
Intent to Distribute the Minimum Quarterly Distribution
Under the Partnership's current cash distribution policy, the Partnership intends to make a minimum quarterly distribution to the holders of common units and subordinated units of $0.2125 per unit, or $0.85 per unit on an annualized basis, to the extent the Partnership has sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that the Partnership will pay the minimum quarterly distribution on those units in any quarter. The amount of distributions paid under the Partnership's cash distribution policy and the decision to make any distribution will be determined by our general partner, taking into consideration the terms of the partnership agreement. Please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity.”
General Partner Interest and Incentive Distribution Rights
Initially, our general partner will be entitled to 2% of all quarterly distributions from inception that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2% general partner interest in these distributions will be reduced if we issue additional limited partner interests in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest.
Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48%, of the available cash we distribute from operating surplus (as defined below) in excess of $0.24438 per unit per quarter. The maximum distribution of 48% does not include any distributions that our general partner or its affiliates may receive on common units, subordinated units or the general partner interest that they own.
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ITEM 6. | SELECTED FINANCIAL DATA |
The following table presents selected historical financial data of our Predecessor and selected financial data of CONE Midstream Partners LP for the periods indicated. The following selected historical financial data of our Predecessor consists of all of the assets and operations of our Predecessor on a 100% basis. In connection with the closing of the Partnership's IPO on September 30, 2014, our Sponsors contributed to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. However, as required by GAAP, we continue to consolidate 100% of the assets and operations of our operating subsidiaries in our financial statements.
The selected historical financial data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited financial statements of our Predecessor. The following table should be read together with, and is qualified in its entirety by reference to, the historical financial statements and the accompanying notes included in this Form 10-K. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
As of and for the Years Ended December 31, | ||||||||||||||||
2015 | 2014 | 2013 | 2012 | |||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS: | (in thousands, except per share amounts) | |||||||||||||||
Total Gathering Revenue — Related Party | $ | 203,423 | $ | 130,087 | $ | 65,626 | $ | 42,597 | ||||||||
Net Income | $ | 115,531 | $ | 64,827 | $ | 28,124 | $ | 19,944 | ||||||||
Net Income Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP (1) | $ | 71,247 | $ | 15,378 | N/A | N/A | ||||||||||
Net Income per Limited Partner Unit (basic and diluted): | ||||||||||||||||
Common Units | $ | 1.20 | $ | 0.26 | N/A | N/A | ||||||||||
Subordinated Units | $ | 1.20 | $ | 0.26 | N/A | N/A | ||||||||||
As of and for the Years Ended December 31, | ||||||||||||
2015 | 2014 | 2013 | ||||||||||
CONSOLIDATED BALANCE SHEETS: | (in thousands) | |||||||||||
Property and Equipment, Net | $ | 866,309 | $ | 622,746 | $ | 388,116 | ||||||
Total Assets | $ | 924,425 | $ | 686,804 | $ | 409,264 | ||||||
Total Partners' Capital and Parent Net Investment | $ | 803,142 | $ | 582,763 | $ | 368,074 | ||||||
As of and for the Years Ended December 31, | ||||||||||||||||
2015 | 2014 | 2013 | 2012 | |||||||||||||
CASH FLOW STATEMENT DATA: | (in thousands, except per share amounts) | |||||||||||||||
Net Cash Provided by Operating Activities | $ | 116,017 | $ | 84,694 | $ | 34,514 | $ | 25,607 | ||||||||
Net Cash Used in Investing Activities | $ | (291,211 | ) | $ | (269,601 | ) | $ | (130,924 | ) | $ | (121,173 | ) | ||||
Net Cash Provided by Financing Activities | $ | 172,159 | $ | 182,183 | $ | 95,000 | $ | 81,800 | ||||||||
OTHER DATA: | ||||||||||||||||
Capital Expenditures | $ | (291,211 | ) | $ | (269,686 | ) | $ | (130,924 | ) | $ | (121,173 | ) | ||||
EBITDA(2) | $ | 131,419 | $ | 72,181 | $ | 33,949 | $ | 23,382 | ||||||||
Adjusted EBITDA(2) | $ | 131,821 | $ | 72,181 | $ | 33,949 | $ | 23,382 | ||||||||
Adjusted EBITDA attributable to CONE Midstream Partners LP(2) | $ | 80,310 | $ | 63,460 | $ | 33,949 | $ | 23,382 | ||||||||
Distributable Cash Flow(2) | $ | 70,919 | $ | 57,452 | $ | 30,509 | $ | 20,810 | ||||||||
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(1) In 2014, the amount reflects only the general and limited partner interest in net income since the closing of the IPO on September 30, 2014. See Item 8, Note 1 - Description of Business, Initial Public Offering and Basis of Presentation.
(2) | We define adjusted EBITDA as net income (loss) before net interest expense, depreciation and amortization, as adjusted for non-cash items which should not be included in the calculation of distributable cash flow. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: |
• | our operating performance as compared to those of other companies in the midstream energy industry, without regard to financing methods, historical cost basis or capital structure; |
• | the ability of our assets to generate sufficient cash flow to make distributions to our partners; |
• | our ability to incur and service debt and fund capital expenditures; and |
• | the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. |
We believe that the presentation of adjusted EBITDA provides information that is useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to adjusted EBITDA are net income and net cash provided by operating activities. Adjusted EBITDA should not be considered an alternative to net income, net cash provided by (used in) operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income or net cash, and these measures may vary from those of other companies. As a result, adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.
We define distributable cash flow as adjusted EBITDA less net income attributable to noncontrolling interest, net cash interest paid and maintenance capital expenditures. Distributable cash flow does not reflect changes in working capital balances.
Distributable cash flow is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
• | the ability of our assets to generate cash sufficient to support our indebtedness and make future cash distributions to our unitholders; and |
• | the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities. |
We believe that the presentation of distributable cash flow in this report provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to distributable cash flow are net income and net cash provided by operating activities. Distributable cash flow should not be considered an alternative to net income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Distributable cash flow excludes some, but not all, items that affect net income or net cash, and these measures may vary from those of other companies. As a result, our distributable cash flow may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of the non-GAAP measures of EBITDA, adjusted EBITDA, adjusted EBITDA attributable to CONE Midstream Partners LP and distributable cash flow to the most directly comparable GAAP financial measure of net income.
Twelve Months Ended December 31, | ||||||||||||||||
(in thousands) | 2015 | 2014 | 2013 | 2012 | ||||||||||||
Net Income | $ | 115,531 | $ | 64,827 | $ | 28,124 | $ | 19,944 | ||||||||
Interest Expense | 835 | 24 | — | — | ||||||||||||
Depreciation Expense | 15,053 | 7,330 | 5,825 | 3,438 | ||||||||||||
EBITDA | 131,419 | 72,181 | 33,949 | 23,382 | ||||||||||||
Non-Cash Unit-Based Compensation Expense | 402 | — | — | — | ||||||||||||
Adjusted EBITDA | 131,821 | 72,181 | 33,949 | 23,382 | ||||||||||||
Less: | ||||||||||||||||
Net Income Attributable to Noncontrolling Interest | 44,284 | 7,858 | — | — | ||||||||||||
Interest Expense Attributable to Noncontrolling Interest | 428 | — | — | — | ||||||||||||
Depreciation Expense Attributable to Noncontrolling Interest | 6,799 | 863 | — | — | ||||||||||||
Adjusted EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP | $ | 80,310 | $ | 63,460 | $ | 33,949 | $ | 23,382 | ||||||||
Less: Cash Interest Paid, Net | 407 | — | — | — | ||||||||||||
Less: Ongoing Maintenance Capital Expenditures, Net of Expected Reimbursements | 8,984 | 6,008 | 3,440 | 2,572 | ||||||||||||
Distributable Cash Flow | $ | 70,919 | $ | 57,452 | $ | 30,509 | $ | 20,810 | ||||||||
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ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE OVERVIEW
We are a master limited partnership formed in May 2014 by CONSOL Energy Inc. ("CONSOL") and Noble Energy, Inc. ("Noble Energy") whom we refer to collectively as our Sponsors, to own, operate, develop and acquire natural gas gathering and other midstream energy assets to service our Sponsors’ production in the Marcellus Shale in Pennsylvania and West Virginia. Our assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities.
To date, we have generated all of our revenues under long-term, fixed-fee gathering agreements that we have entered into with each of our Sponsors that are intended to mitigate our direct commodity price exposure and enhance the stability of our cash flows. Our gathering agreements also include substantial acreage dedications currently totaling approximately 515,000 net acres in the Marcellus Shale. In the future, we may seek to supplement our growth by performing gathering services for unrelated third parties. We will also consider accretive acquisitions, including drop downs of additional interests in our existing consolidated assets, as well as other unaffiliated opportunities.
Initial Public Offering
On September 30, 2014, the Partnership closed its initial public offering ("IPO") of common units representing limited partner interests. References in this report to the “Company,” “our Partnership,” “we,” “our,” “us” or like terms, when used for periods prior to the IPO, refer to CONE Gathering LLC ("CONE Gathering"), our predecessor for accounting purposes. References in this report to the “Company,” “our Partnership,” “we,” “our,” “us” or like terms, when used for periods beginning at or following the IPO, refer collectively to the Partnership and its consolidated subsidiaries. See Item 8, Note 1 - Description of Business, Initial Public Offering and Basis of Presentation.
Ownership of Our Assets
Our Predecessor’s historical results of operations include the earnings of CONE Gathering on a 100% basis, which includes 100% of the results of our Anchor Systems, Growth Systems and Additional Systems, as well as 100% of the results of certain ancillary midstream assets that CONE Gathering owns. In connection with the completion of the IPO, our Sponsors contributed to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. Consequently, our net income attributable to general and limited partner ownership interests in CONE Midstream Partners LP after the completion of the IPO reflect less than 100% of the results of our Anchor Systems, Growth Systems and Additional Systems and do not include any results of certain ancillary midstream assets that CONE Gathering owns.
Although we own only 5% of the Growth and Additional Systems, we consolidate them fully with our results following the IPO. Accordingly, all income statement line items following our IPO, including net income, reflect the results of these Systems on a 100% basis.
2015 Highlights
We continued to build out our network of pipeline and gathering facilities in the current year, adding approximately 64 miles of pipeline and opening four new facilities, which added 21,000 horsepower of compression. The current year build out included Greenfield infrastructure projects and gathering system extensions to new fields and new pads, along with expansion projects designed to remove certain bottlenecks that existed within our systems. As a result of these investments, our average daily throughput increased nearly 60% to 1,099 BBtu per day for 2015 (or 629 BBtu/d net to the Partnership) compared to 695 BBtu per day for 2014 (or 452 BBtu/d net to the Partnership).
Our 2015 financial results included (unless otherwise indicated, the measures discussed below reflect the unallocated total activity of the three development companies jointly owned by the Partnership and CONE Gathering):
• | 90 new well connects |
• | gathering revenues of $203.4 million in 2015, as compared to $130.1 million in 2014; |
• | net income of $115.5 million for 2015, as compared to $64.8 million in 2014; |
• | net income attributable to limited partner ownership interests in CONE Midstream Partners LP of $69.8 million for 2015, as compared to $15.1 million in 2014 (which only reflected earnings from September 30, 2014 to December 31, 2014); |
• | cash flows provided by operating activities of $116.0 million for 2015, as compared to $84.7 million for 2014; |
• | capital expenditures, on a cash basis, of $291.2 million for 2015, as compared to $269.7 million for 2014. |
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Outlook
Although the Partnership does not have significant direct exposure to commodity price risk, our Sponsors, from which we received all of our revenues in 2015, are significantly exposed to commodity price risk. Global energy commodity prices have declined significantly since our IPO. Crude oil prices have declined as a result of several factors, including increased worldwide crude oil supplies, a stronger U.S. dollar, and strong competition among oil producing countries for market share. Specifically, West Texas Intermediate crude oil traded between $40 and $60 per barrel for most of calendar 2015, and ended below $40 per barrel at December 31, 2015, as compared to prices at the time of our IPO of over $90 per barrel. US Natural gas prices have also declined on continued strong supply growth versus new demand and despite record cold winter weather in key natural gas consuming regions. Specifically, Henry Hub natural gas traded for less than $3.00 per MMBtu throughout calendar 2015, which is below the $3.92 per MMBtu price that existed at the time of our IPO, and has continued to be below $3.00 per MMBtu during the early months of 2016.
Although recent well performance on our dedicated acreage has improved and throughput volumes since our IPO have been strong, our Sponsors were not running any drilling rigs on our dedicated acreage as of December 31, 2015. Our Sponsors have mutually agreed to a 2016 level of activity that is significantly below that which is described in the default plan under their joint development agreement. A prolonged continuance of depressed commodity prices could result in decreased throughput volumes in the future as a result of decreased drilling and completion activity by our Sponsors.
We continue to remain committed to delivering distribution growth to our investors over the long term. In fact, our Board of Directors approves all cash distributions on a quarter by quarter basis with a view that whatever level is set is sustainable over the long term. Their decision is framed with the primary objective of maximizing long term value and total returns for unitholders, and they may choose to either boost or temper distribution growth by weighing various factors. In order to adapt to the uncertain current environment, we will continue to manage our costs and intend to continue to generate distributable cash flows through depressed commodity cycles. The co-ownership structure of our operating subsidiaries is designed to reduce up front capital expenditure burdens on us while also facilitating future drop downs of additional interests in our Anchor, Growth and Additional Systems. Although we expect that our Sponsors will present to us drop down opportunities in the future, we do not know when or if such opportunities may be presented. Please read Item 1A. “Risk Factors - We may be unable to grow by acquiring non-controlling interests in our operating subsidiaries owned by CONE Gathering, which could limit our ability to increase our distributable cash flow.”
In 2016, we anticipate capital expenditures attributable to the Partnership to be between $30.0 million and $35.0 million, which includes approximately $11 million of maintenance capital. Our Sponsors are responsible for making capital contributions representing their 25%, 95% and 95% ownership interests in the Anchor, Growth and Additional Systems, respectively. The Board of Directors may approve additional growth capital during the year at their discretion.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) throughput volumes; (ii) EBITDA and adjusted EBITDA; (iii) distributable cash flow and (iv) operating expenses.
Throughput Volumes
The amount of revenue we generate primarily depends on the volumes of natural gas and condensate that we gather for our Sponsors. The volumes of natural gas and condensate that we gather are primarily affected by upstream development drilling and production volumes from the natural gas wells connected to our gathering pipelines. Our Sponsors’ willingness to engage in new drilling is determined by a number of factors, the most important of which are the prevailing and projected prices of natural gas and NGLs, the cost to drill and operate a well, the availability and cost of capital and environmental and government regulations. We generally expect the level of drilling to positively correlate with long-term trends in commodity prices and national and regional production levels to positively correlate with drilling activity.
In order to meet our contractual obligations under our gathering agreements with our Sponsors in respect of new wells drilled on our dedicated acreage, we will be required to incur capital expenditures to extend our gathering systems and facilities to the new wells they drill. Our Sponsors will be responsible for their proportionate share of the total capital expenditures associated with the ongoing build-out of our midstream systems representing their 25%, 95% and 95% ownership interests in the Anchor, Growth and Additional Systems, respectively.
We have secured significant acreage dedications from our Sponsors, which have dedicated to us approximately 515,000 net acres and 20,000 net acres of their jointly owned Marcellus and Utica Shales acreage, respectively, for an initial term of 20 years. In addition to our existing dedicated acreage, our gathering agreements provide that any additional acreage covering the Marcellus Shale that is jointly acquired by our Sponsors in a “dedication area” covering over 7,700 square miles in West
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Virginia and Pennsylvania will be automatically dedicated to us. We also have the right of first offer (“ROFO”) to provide midstream services to our Sponsors on our ROFO acreage, which currently includes approximately 186,000 net acres of our Sponsors’ jointly owned Marcellus Shale acreage and any additional acreage covering the Marcellus Shale that is jointly acquired by our Sponsors in a “ROFO area” covering over 18,300 square miles in West Virginia and Pennsylvania.
Because the production rate of a natural gas well declines over time, we must continually obtain new supplies of natural gas and condensate to maintain or increase the throughput volumes on our midstream systems. Our ability to maintain or increase existing throughput volumes and obtain new supplies of natural gas and condensate are impacted by:
• | successful drilling activity by our Sponsors on our dedicated acreage and our ability to fund the capital costs required to connect our gathering systems to new wells; |
• | our ability to utilize the remaining uncommitted capacity on, or add additional capacity to, our gathering systems; |
• | the level of work-overs and re-completions of wells on existing pad sites to which our gathering systems are connected; |
• | our ability to increase throughput volumes on our gathering systems by making outlet connections to existing or new third-party pipelines or other facilities, primarily driven by the anticipated supply of and demand for natural gas; |
• | the number of new pad sites on our dedicated acreage awaiting lateral connections; |
• | our ability to identify and execute organic expansion projects to capture incremental volumes from our Sponsors and third parties; |
• | our ability to compete for volumes from successful new wells in the areas in which we operate outside of our dedicated acreage; and |
• | our ability to gather natural gas and condensate that has been released from commitments with our competitors. |
We actively monitor producer activity in the areas served by our gathering systems to pursue new supply opportunities.
Adjusted EBITDA & Distributable Cash Flow
Adjusted EBITDA and distributable cash flow are non-GAAP measures that we believe provide information useful to investors in assessing our financial condition and results of operations. For a discussion on how we define adjusted EBITDA and distributable cash flow and the supporting reconciliations to their most directly comparable GAAP financial measures, please read “Non-GAAP Financial Measures”.
Operating Expense
Operating expense is comprised of costs directly associated with gathering natural gas at the wellhead and transporting it to interstate and intrastate pipelines, natural gas processing facilities or other delivery points. These costs include electrically-powered compression, direct labor, repairs and maintenance, supplies, ad valorem and property taxes, utilities and contract services. These expenses generally remain stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses.
Factors Affecting the Comparability of Our Financial Results
Our results of operations may not be comparable to our Predecessor’s historical results of operations for the reasons described below:
Ownership of Our Assets
See "Ownership of Our Assets" above.
Revenues
Our Predecessor’s results of operations reflect gathering revenues based on the same fixed fee per unit of throughput of natural gas it gathered, regardless of the liquids-content of the natural gas, as well as reimbursements for electrically-powered compression costs. They also reflect the remittance of a net condensate price to our Sponsors for the condensate gathering and handling services provided by our Predecessor.
Under the gathering agreements with our Sponsors, we receive separate fixed fees for wet gas and dry gas that we gather and another fixed fee per unit of throughput for the condensate gathering and handling services at the applicable receipt points.
General and Administrative Expenses
Our Predecessor’s general and administrative expense included only direct charges for the management and operation of our assets by CONSOL for general and administrative services, such as information technology, engineering, legal, human resources and other financial and administrative services that was not governed by a formal cost-sharing agreement.
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Since the completion of the IPO, we incur charges for a combination of direct and allocated charges for general and administrative services with our Sponsors that has been formalized by an Omnibus Agreement. We also incur costs that are associated with being a publicly traded company.
Financing
Historically, our Predecessor’s operations were financed as part of our Sponsors’ midstream joint venture operations, and our Predecessor did not record any separate costs associated with financing its operations. In addition, our Predecessor largely relied on internally generated cash flows and capital contributions from our Sponsors to satisfy its capital expenditure requirements.
Following the completion of the IPO, our partnership agreement requires that we distribute all available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. At December 31, 2015, we had an outstanding balance of $73.5 million and available borrowing capacity of $176.5 million under our $250.0 million revolving credit facility.
Other Factors Impacting Our Business
We expect our business to continue to be affected by the following key factors. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.
Our Sponsors’ Drilling and Development Plan
Our operations are primarily dependent upon our Sponsors’ natural gas production on our dedicated acreage in the Marcellus Shale. Our Sponsors have established a drilling and development program on their upstream acreage, including on our dedicated acreage, and primarily rely on us to deliver the midstream infrastructure necessary to accommodate their continuing production growth in the Marcellus Shale and Utica Shale. Although we anticipate our Sponsors’ continued exploration and production activities in our areas of operation in the Marcellus Shale and Utica Shale over the long term, we have no control over the level or timing of their activity. In fact, the joint development agreement ("JDA") with our Sponsors contains certain mechanisms that may cause their production on our dedicated acreage to be less than we anticipate. For example, our Sponsors were not running any drilling rigs on our dedicated acreage as of December 31, 2015 and have recently mutually agreed to a 2016 drilling level of activity that is significantly below the drilling activity per the default plan described in the JDA.
Fluctuations in natural gas prices could affect production rates over time and levels of investment by our Sponsors and third parties in exploration for and development of new natural gas reserves. Throughout 2015, persistent low commodity prices caused and may continue to cause our Sponsors or potential third-party customers to delay drilling or shut in production, which would reduce the volumes of natural gas and condensate available for gathering by our midstream systems. If our Sponsors delay drilling or temporarily shut in production due to persistently low commodity prices or for any other reason, we are not assured a certain amount of revenue as our gathering agreements with our Sponsors do not contain minimum volume commitments.
Regulatory Compliance
The regulation of natural gas and condensate gathering and transportation activities by federal and state regulatory agencies has a significant impact on our business. For example, the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration has developed regulations that require pipeline operators to implement integrity management programs, including more frequent inspections and other measures to ensure pipeline safety in high-consequence areas. Our operations are also impacted by new regulations, which have increased the time that it takes to obtain required permits.
Additionally, increased regulation of oil and natural gas producers in our areas of operation, including regulation associated with hydraulic fracturing, could reduce regional supply of oil and natural gas and therefore throughput on our gathering systems.
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RESULTS OF OPERATIONS
Twelve Months Ended December 31, 2015 Compared to the Twelve Months Ended December 31, 2014
For the Years Ended December 31 | ||||||||||||||
(in thousands) | 2015 | 2014 | $ Change | % Change | ||||||||||
Revenue | ||||||||||||||
Gathering Revenue — Related Party | $ | 203,423 | $ | 130,087 | $ | 73,336 | 56.4 | % | ||||||
Other Income | — | 85 | (85 | ) | 100.0 | % | ||||||||
Total Revenue | 203,423 | 130,172 | 73,251 | 56.3 | % | |||||||||
Expenses | ||||||||||||||
Operating Expense — Third Party | 28,987 | 27,371 | 1,616 | 5.9 | % | |||||||||
Operating Expense — Related Party | 29,937 | 24,072 | 5,865 | 24.4 | % | |||||||||
General and Administrative Expense — Third Party | 4,444 | 1,822 | 2,622 | 143.9 | % | |||||||||
General and Administrative Expense — Related Party | 8,636 | 4,726 | 3,910 | 82.7 | % | |||||||||
Depreciation Expense | 15,053 | 7,330 | 7,723 | 105.4 | % | |||||||||
Interest Expense | 835 | 24 | 811 | 3,379.2 | % | |||||||||
Total Expense | 87,892 | 65,345 | 22,547 | 34.5 | % | |||||||||
Net Income | $ | 115,531 | $ | 64,827 | $ | 50,704 | 78.2 | % | ||||||
Less: Net Income Attributable to Noncontrolling Interest | 44,284 | 7,858 | 36,426 | 463.6 | % | |||||||||
Net Income Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP | $ | 71,247 | $ | 56,969 | $ | 14,278 | 25.1 | % | ||||||
Operating Statistics - Gathered Volumes for the Twelve Months Ended December 31, 2015
Anchor | Growth | Additional | TOTAL | NET TOTAL (*) | ||||||||||
Dry Gas (BBtu/d) | 468 | 81 | 9 | 558 | 355 | |||||||||
Wet Gas (BBtu/d) | 345 | 8 | 169 | 522 | 267 | |||||||||
Condensate (MMcfe/d) | 8 | — | 11 | 19 | 7 | |||||||||
Total Gathered Volumes | 821 | 89 | 189 | 1,099 | 629 | |||||||||
Operating Statistics - Gathered Volumes for the Twelve Months Ended December 31, 2014
Anchor | Growth | Additional | Other | TOTAL | NET TOTAL (*) | ||||||||||||
Dry Gas (BBtu/d) | 357 | 57 | 4 | 5 | 423 | 270 | |||||||||||
Wet Gas (BBtu/d) | 234 | — | 28 | 4 | 266 | 177 | |||||||||||
Condensate (MMcfe/d) | 6 | — | — | — | 6 | 5 | |||||||||||
Total Gathered Volumes | 597 | 57 | 32 | 9 | 695 | 452 | |||||||||||
(*) In each table, represents throughput volumes net of the noncontrolling interests owned by the Sponsors.
Revenue
Because our Sponsors have established a drilling and development program on our dedicated acreage, our revenue generally increases as our Sponsors’ production on our dedicated acreage increases.
Gathering revenue — related party was approximately $203.4 million for the twelve months ended December 31, 2015 compared to approximately $130.1 million for the twelve months ended December 31, 2014. The $73.3 million increase was primarily due to a 404 BBtu/d increase in throughput volumes, which was primarily due to a 140 BBtu/d increase in natural gas volumes in our Sponsors’ dry gas production areas and 273 BBtu/d increase in natural gas volumes in our Sponsors’ wet gas and condensate production areas. Of the dry gas change, 111 BBtu/d was related to the Anchor Systems and 29 BBtu/d was
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related to the Growth Systems and Additional Systems. Of the wet gas and condensate change, 113 BBtu/d was related to our Anchor Systems and 160 BBtu/d was related to our Growth and Additional Systems. The remaining volumes were related to assets retained by our Predecessor.
Gathering revenue also included an electrically-powered compression reimbursement of $15.9 million and $12.3 million for the years ended December 31, 2015 and 2014, respectively.
Operating Expense
Total operating expense was approximately $58.9 million for the twelve months ended December 31, 2015 compared to approximately $51.4 million for the twelve months ended December 31, 2014. The approximate $7.5 million increase in operating expense was primarily due to the increase in repairs and maintenance and electrically-powered compression associated with increased throughput. Electrically-powered compression was $15.9 million and $12.3 million for the years ended December 31, 2015 and 2014, respectively, which was reimbursed by the Sponsors pursuant to their respective Gathering Agreements.
General and Administrative Expense
General and administrative expense is primarily comprised of direct and allocated charges for the management and operation of our assets by CONSOL, which includes executive compensation, accounting and finance, information technology, engineering, legal, human resources and other financial and administrative services. We also incur third party costs for coverage under separate insurance policies and for services associated with being a public company such as external legal and professional fees.
Total general and administrative expense was approximately $13.1 million for the twelve months ended December 31, 2015 compared to approximately $6.5 million for the twelve months ended December 31, 2014. The $6.6 million increase was primarily a result of increased staffing levels and related salary and benefit expenses in order to support the growth of our midstream systems, as well as additional expenses incurred associated with being a publicly traded partnership.
Depreciation
We recognize depreciation on our gathering and other equipment on a straight-line basis, with useful lives ranging from 25-40 years. Total depreciation expense was approximately $15.1 million for the twelve months ended December 31, 2015 compared to approximately $7.3 million for the twelve months ended December 31, 2014. The increase of $7.8 million was primarily related to our capital spending since since the IPO and resulting assets placed into service.
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Twelve Months Ended December 31, 2014 Compared to the Twelve Months Ended December 31, 2013
For the Years Ended December 31 | ||||||||||||||
(in thousands) | 2014 | 2013 | Change | Percent Change | ||||||||||
Revenue | ||||||||||||||
Gathering Revenue — Related Party | $ | 130,087 | $ | 65,626 | $ | 64,461 | 98.2 | % | ||||||
Other Income | 85 | — | 85 | 100.0 | % | |||||||||
Total Revenue | 130,172 | 65,626 | 64,546 | 98.4 | % | |||||||||
Expenses | ||||||||||||||
Operating Expense — Third Party | 27,371 | 13,175 | 14,196 | 107.7 | % | |||||||||
Operating Expense — Related Party | 24,072 | 16,669 | 7,403 | 44.4 | % | |||||||||
General and Administrative Expense — Third Party | 1,822 | 219 | 1,603 | 732.0 | % | |||||||||
General and Administrative Expense — Related Party | 4,726 | 1,614 | 3,112 | 192.8 | % | |||||||||
Depreciation Expense | 7,330 | 5,825 | 1,505 | 25.8 | % | |||||||||
Interest Expense | 24 | — | 24 | 100.0 | % | |||||||||
Total Expense | 65,345 | 37,502 | 27,843 | 74.2 | % | |||||||||
Net Income | 64,827 | 28,124 | 36,703 | 130.5 | % | |||||||||
Less: Net Income Attributable to Noncontrolling Interest | 7,858 | — | 7,858 | 100.0 | % | |||||||||
Net Income Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP | $ | 56,969 | $ | 28,124 | $ | 28,845 | 102.6 | % | ||||||
Operating Statistics - Gathered Volumes for the Twelve Months Ended December 31, 2014
Anchor | Growth | Additional | Other | TOTAL | NET TOTAL (*) | ||||||||||||
Dry Gas (BBtu/d) | 357 | 57 | 4 | 5 | 423 | 270 | |||||||||||
Wet Gas (BBtu/d) | 234 | — | 28 | 4 | 266 | 177 | |||||||||||
Condensate (MMcfe/d) | 6 | — | — | — | 6 | 5 | |||||||||||
Total Gathered Volumes | 597 | 57 | 32 | 9 | 695 | 452 | |||||||||||
Operating Statistics - Gathered Volumes for the Twelve Months Ended December 31, 2013
Anchor | Growth | Additional | Other | TOTAL | NET TOTAL (*) | ||||||||||||
Dry Gas (BBtu/d) | 252 | 8 | — | 2 | 262 | 189 | |||||||||||
Wet Gas (BBtu/d) | 89 | — | — | — | 89 | 67 | |||||||||||
Condensate (MMcfe/d) | 1 | — | — | — | 1 | 1 | |||||||||||
Total Gathered Volumes | 342 | 8 | — | 2 | 352 | 257 | |||||||||||
(*) In each table, represents throughput volumes net of the noncontrolling interests owned by the Sponsors.
Revenue
Gathering revenue — related party was approximately $130.1 million for the twelve months ended December 31, 2014 compared to approximately $65.6 million for the twelve months ended December 31, 2013. The approximate $64.5 million increase was primarily due to a 343 BBtu/d increase in throughput volumes. The increase in throughput volumes was due to a 158 BBtu/d increase in natural gas volumes in our Sponsors’ dry gas production areas and 178 BBtu/d increase in natural gas volumes in our Sponsors’ wet gas and condensate production areas, which is primarily contained within our Anchor Systems. Of the dry gas change, 105 BBtu/d was related to the Anchor Systems and 53 BBtu/d was related to the Growth and Additional Systems. Of the wet gas and condensate change, 150 BBtu/d was related to our Anchor Systems and 28 BBtu/d was related to the Growth and Additional Systems. The remaining volumes were related to assets retained by our Predecessor. Our revenue increases with increases in our Sponsors’ production on our dedicated acreage.
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Gathering revenue also included an electrically-powered compression reimbursement of $12.3 million and $6.7 million for the years ended December 31, 2014 and 2013, respectively, as per the Gathering Agreements with our Sponsors.
Operating Expense
Total operating expense was approximately $51.4 million for the twelve months ended December 31, 2014 compared to approximately $29.8 million for the twelve months ended December 31, 2013. The approximate $21.6 million increase in operating expense was primarily due to the increase in repairs and maintenance and electrically-powered compression associated with increased throughput. Electrically-powered compression was $12.3 million and $6.7 million for the years ended December 31, 2014 and 2013, respectively, which was reimbursed by the Sponsors pursuant to their respective Gathering Agreements.
General and Administrative Expense
General and administrative expense is primarily comprised of direct and allocated charges for the management and operation of our assets by CONSOL, which includes executive compensation, accounting and finance, information technology, engineering, legal, human resources and other financial and administrative services. We also incur third party costs for coverage under separate insurance policies and for services associated with being a public company such as external legal and professional fees.
Total general and administrative expense was approximately $6.5 million for the twelve months ended December 31, 2014 compared to approximately $1.8 million for the twelve months ended December 31, 2013. The $4.7 million increase was primarily a result of increased staffing levels and related salary and benefit expenses in order to support the growth of our midstream systems, as well as additional expenses incurred associated with being a publicly traded partnership.
Depreciation
We recognize depreciation on our gathering and other equipment on a straight-line basis, with useful lives ranging from 25-40 years. Total depreciation expense was approximately $7.3 million for the twelve months ended December 31, 2014 compared to approximately $5.8 million for the twelve months ended December 31, 2013. The increase of $1.5 million was primarily related to continued capital spending and the resulting assets placed into service.
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NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
We define adjusted EBITDA as net income (loss) before net interest expense, depreciation and amortization, as adjusted for non-cash items which should not be included in the calculation of distributable cash flow. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
• | our operating performance as compared to those of other companies in the midstream energy industry, without regard to financing methods, historical cost basis or capital structure; |
• | the ability of our assets to generate sufficient cash flow to make distributions to our partners; |
• | our ability to incur and service debt and fund capital expenditures; and |
• | the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. |
We believe that the presentation of adjusted EBITDA provides information that is useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to adjusted EBITDA are net income and net cash provided by operating activities. Adjusted EBITDA should not be considered an alternative to net income, net cash provided by (used in) operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income or net cash, and these measures may vary from those of other companies. As a result, adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.
Distributable Cash Flow
We define distributable cash flow as adjusted EBITDA less net income attributable to noncontrolling interest, net cash interest paid and maintenance capital expenditures. Distributable cash flow does not reflect changes in working capital balances.
Distributable cash flow is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
• | the ability of our assets to generate cash sufficient to support our indebtedness and make future cash distributions to our unitholders; and |
• | the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities. |
We believe that the presentation of distributable cash flow in this report provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to distributable cash flow are net income and net cash provided by operating activities. Distributable cash flow should not be considered an alternative to net income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Distributable cash flow excludes some, but not all, items that affect net income or net cash, and these measures may vary from those of other companies. As a result, our distributable cash flow may not be comparable to similarly titled measures of other companies.
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The following table presents a reconciliation of the non-GAAP measures of EBITDA, adjusted EBITDA and distributable cash flow to the most directly comparable GAAP financial measures of net income and net cash provided by operating activities.
Twelve Months Ended December 31, | ||||||||||||
(in thousands) | 2015 | 2014 | 2013 | |||||||||
Net Income | $ | 115,531 | $ | 64,827 | $ | 28,124 | ||||||
Interest Expense | 835 | 24 | — | |||||||||
Depreciation Expense | 15,053 | 7,330 | 5,825 | |||||||||
EBITDA | 131,419 | 72,181 | 33,949 | |||||||||
Non-Cash Unit-Based Compensation Expense | 402 | — | — | |||||||||
Adjusted EBITDA | 131,821 | 72,181 | 33,949 | |||||||||
Less: | ||||||||||||
Net Income Attributable to Noncontrolling Interest | 44,284 | 7,858 | — | |||||||||
Interest Expense Attributable to Noncontrolling Interest | 428 | — | — | |||||||||
Depreciation Expense Attributable to Noncontrolling Interest | 6,799 | 863 | — | |||||||||
Adjusted EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP | $ | 80,310 | $ | 63,460 | $ | 33,949 | ||||||
Less: Cash Interest Paid, Net | 407 | — | — | |||||||||
Less: Ongoing Maintenance Capital Expenditures, Net of Expected Reimbursements | 8,984 | 6,008 | 3,440 | |||||||||
Distributable Cash Flow | $ | 70,919 | $ | 57,452 | $ | 30,509 | ||||||
Net Cash Provided by Operating Activities | $ | 116,017 | $ | 84,694 | $ | 34,514 | ||||||
Interest Expense | 835 | 24 | — | |||||||||
Other, Including Changes in Working Capital | 14,969 | (12,537 | ) | (565 | ) | |||||||
Adjusted EBITDA | 131,821 | 72,181 | 33,949 | |||||||||
Less: | ||||||||||||
Net Income Attributable to Noncontrolling Interest | 44,284 | 7,858 | — | |||||||||
Interest Expense Attributable to Noncontrolling Interest | 428 | — | — | |||||||||
Depreciation Expense Attributable to Noncontrolling Interest | 6,799 | 863 | — | |||||||||
Adjusted EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP | $ | 80,310 | $ | 63,460 | $ | 33,949 | ||||||
Less: Cash Interest Paid, Net | 407 | — | — | |||||||||
Less: Ongoing Maintenance Capital Expenditures, Net of Expected Reimbursements | 8,984 | 6,008 | 3,440 | |||||||||
Distributable Cash Flow | $ | 70,919 | $ | 57,452 | $ | 30,509 | ||||||
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Financing Arrangements
Our principal liquidity requirements are to finance our operations, fund capital expenditures and acquisitions, make cash distributions and satisfy any indebtedness obligations. Our ability to meet these liquidity requirements will depend on our ability to generate cash in the future.
Historically, our principal sources of liquidity have been cash from operations and funding from our Sponsors. While we have historically received funding from our Sponsors, we do not have any commitment from our Sponsors, CONE Gathering, our general partner or any of their respective affiliates to fund our cash flow deficits or provide other direct or indirect financial assistance to us following the IPO. We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and, if necessary, the issuance of additional equity or debt securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions.
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Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures.
We intend to pay a minimum quarterly distribution of $0.2125 per unit per quarter, which equates to an aggregate distribution of approximately $12.7 million per quarter, or approximately $50.6 million per year, based on the general partner interest and the number of common and subordinated units outstanding as of December 31, 2015. We do not have a legal or contractual obligation to pay distributions quarterly or on any other basis at our minimum quarterly distribution rate or at any other rate.
Revolving Credit Facility
At the closing of the IPO on September 30, 2014, we entered into a $250.0 million revolving credit facility, which is available for working capital, capital expenditures, certain acquisitions, distributions, unit repurchases and other lawful partnership purposes. As of December 31, 2015, we had an outstanding balance on our credit facility of $73.5 million. In addition, we incurred $0.8 million of interest expense for the year ended December 31, 2015.
Borrowings under our revolving credit facility bear interest at our option at either:
• | the base rate, which will be defined as the highest of (i) the federal funds rate plus 0.50%; (ii) JP Morgan’s prime rate; or (iii) the daily LIBOR rate for a one month interest period plus 1.00%; in each case, plus a margin varying from 0.125% to 1.00% depending on our most recent consolidated total leverage ratio or our credit rating; or |
• | the LIBOR rate plus a margin varying from 1.125% to 2.00%, in each case, depending on our most recent consolidated leverage ratio (as defined in the agreement governing our revolving credit facility) or our credit rating, as the case may be. |
Interest on base rate loans is payable quarterly. Interest on LIBOR loans is payable on the last day of each interest period or, in the case of interest periods longer than three months, every three months. The unused portion of our revolving credit facility is subject to a commitment fee ranging from 0.15% to 0.35% per annum depending on our most recent consolidated leverage ratio or our credit rating, as the case may be.
Our revolving credit facility contains covenants and conditions that, among other things, limit our ability to incur or guarantee additional debt, make cash distributions (though there will be an exception for distributions permitted under the partnership agreement, subject to certain customary conditions), incur certain liens or permit them to exist, make certain investments and acquisitions, enter into certain types of transactions with affiliates, merge or consolidate with another company, and transfer, sell or otherwise dispose of assets.
We are also subject to covenants that require us to maintain certain financial ratios, as follows:
• | we may not permit the ratio of (i) consolidated total funded debt (as defined in the agreement governing our revolving credit facility) as of the last day of each fiscal quarter to (ii) consolidated EBITDA (as defined in the agreement governing our revolving credit facility) for the four consecutive fiscal quarters ending on the last day of such fiscal quarter to exceed (A) at any time other than during a qualified acquisition period (as defined in the agreement governing our revolving credit facility), 5.0 to 1.0 and (B) during a qualified acquisition period, 5.5 to 1.0. We define this as our consolidated leverage ratio which is calculated as the total amount outstanding on our credit facility divided by EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP. The consolidated leverage ratio was 0.9 to 1.0 at December 31, 2015. |
• | we may not permit the ratio of (i) consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of each fiscal quarter to (ii) consolidated interest expense (as defined in the agreement governing our revolving credit facility) for such four consecutive fiscal quarters to be less than 3.0 to 1.0. We define this as our consolidated interest coverage ratio which is calculated as EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP divided by total interest charges. The consolidated interest coverage ratio was 197.5 to 1.0 at December 31, 2015. |
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Cash Flows
Net cash provided by operating activities, investing activities and financing activities for the years ended December 31, 2015 and 2014 were as follows:
Twelve Months Ended December 31, | ||||||||||||
2015 | 2014 | Change | ||||||||||
Net cash provided by operating activities: | $ | 116,017 | $ | 84,694 | $ | 31,323 | ||||||
Net cash used in investing activities: | $ | (291,211 | ) | $ | (269,601 | ) | $ | (21,610 | ) | |||
Net cash provided by financing activities: | $ | 172,159 | $ | 182,183 | $ | (10,024 | ) | |||||
Net cash provided by operating activities increased $31.3 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was primarily due to an improvement in CONE Midstream Partners LP's consolidated year over year EBITDA of $59.2 million, which was partially offset by our net spend on payables in the current year compared to the prior year.
Cash used in investing activities increased due primarily to capital expenditures related to the expansion of our midstream systems, which was in direct response to our Sponsors’ production on our dedicated acreage in the Marcellus Shale and Utica Shale plays.
Generally, our cash provided by financing activities are a function of noncontrolling interest holders' (our Sponsors) investments in the Partnership's gross property, plant and equipment less the difference between our cash distributions to unitholders and net proceeds from the revolving credit facility during a given year. In the current year, our noncontrolling interest holders contributed $182.1 million to the Partnership, substantially all of which related to their continued investment in their noncontrolling interests of the Anchor, Growth and Additional Systems. Other financing activities included four quarterly distributions (relating to the period September 30, 2014 through September 30, 2015) to unitholders totaling $52.1 million and $42.2 million in net proceeds from our revolver. Current year financing activities are not comparable to the prior year, during which we completed our IPO and changed the way we finance our operations. See Overview - "Factors Affecting the Comparability of Our Financial Results" above.
Capital Expenditures
The midstream energy business is capital intensive and requires maintenance of existing gathering systems and other midstream assets and facilities, as well as the acquisition or construction and development of new gathering systems and other midstream assets and facilities. Our partnership agreement requires that we categorize our capital expenditures as either:
• | Maintenance capital expenditures, which are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, our operating capacity, operating income or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations. In addition, we designate a portion of our capital expenditures to connect new wells to maintain gathering throughput as maintenance capital to the extent such capital expenditures are necessary to maintain, over the long term, our operating capacity, operating income or revenue; or |
• | Expansion capital expenditures, which are cash expenditures to construct new midstream infrastructure and those expenditures incurred in order to extend the useful lives of our assets, reduce costs, increase revenues or increase system throughput or capacity from current levels, including well connections that increase existing system throughput. Examples of expansion capital expenditures include the construction, development or acquisition of additional gathering pipelines and compressor stations, in each case to the extent such capital expenditures are expected to expand our operating capacity, operating income or revenue. In the future, if we make acquisitions that increase system throughput or capacity, the associated capital expenditures may also be considered expansion capital expenditures. |
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Capital Expenditures for the Twelve Months Ended December 31, 2015
Anchor | Growth | Additional | TOTAL (*) | ||||||||||||
Capital Investment | |||||||||||||||
Maintenance Capital | $ | 11,755 | $ | 1,275 | $ | 2,074 | $ | 15,104 | |||||||
Expansion Capital | 137,763 | 20,783 | 117,561 | 276,107 | |||||||||||
Total Capital Investment | $ | 149,518 | $ | 22,058 | $ | 119,635 | $ | 291,211 | |||||||
Capital Investment Net to CNNX | |||||||||||||||
Maintenance Capital | $ | 8,816 | $ | 64 | $ | 104 | $ | 8,984 | |||||||
Expansion Capital | 103,322 | 1,039 | 5,878 | 110,239 | |||||||||||
Total Capital Investment Net to CNNX | $ | 112,138 | $ | 1,103 | $ | 5,982 | $ | 119,223 | |||||||
Capital Expenditures for the Twelve Months Ended December 31, 2014
Anchor | Growth | Additional | TOTAL (*) | ||||||||||||
Capital Investment | |||||||||||||||
Maintenance Capital | $ | 7,957 | $ | 609 | $ | 198 | $ | 8,764 | |||||||
Expansion Capital | 111,992 | 32,889 | 105,539 | 250,420 | |||||||||||
Total Capital Investment | $ | 119,949 | $ | 33,498 | $ | 105,737 | $ | 259,184 | |||||||
Capital Investment Net to CNNX | |||||||||||||||
Maintenance Capital | $ | 5,968 | $ | 30 | $ | 10 | $ | 6,008 | |||||||
Expansion Capital | 83,994 | 1,644 | 5,277 | 90,915 | |||||||||||
Total Capital Investment Net to CNNX | $ | 89,962 | $ | 1,674 | $ | 5,287 | $ | 96,923 | |||||||
(*) | Total gross amounts consist of only the 100% activity of the three Development Companies (Anchor, Growth and Additional), on which CONE Midstream Partners LP owns a controlling interest of 75%, 5% and 5%, respectively. Other systems that are included in the Predecessor's historical financial statements are excluded from the tables above, as these systems are not included in the current consolidated operations of the Partnership. |
We anticipate that we will continue to make expansion capital expenditures in the future. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives. We expect that any significant future expansion capital expenditures will be funded by borrowings under our revolving credit facility and the issuance of debt and equity securities.
Insurance Program
We maintain insurance policies with insurers in amounts and with coverage and deductibles that we believe are reasonable and prudent. We cannot, however, assure that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.
Off-Balance Sheet Arrangements
At December 31, 2015, CONE Gathering has $2.9 million of surety bonds outstanding that secure financial obligations for environmental, road maintenance and various other items which are not reflected on the consolidated balance sheet. Since we intend to satisfy the obligations to which the surety bonds relate in the normal course of business, management believes they will expire without being funded.
We do not maintain any other off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the notes to the unaudited consolidated financial statements of this Annual Report on Form 10-K.
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CONTRACTUAL OBLIGATIONS
The following table details the future projected payments associated with our contractual obligations as of December 31, 2015:
Payments Due by Year | |||||||||||||||||||
(thousands) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||
Operating lease obligations (1) | $ | 4,909 | 3,768 | $ | — | $ | — | $ | 8,677 | ||||||||||
Credit Facility (2) | — | — | 73,500 | — | 73,500 | ||||||||||||||
Total Contractual Obligations | $ | 4,909 | $ | 3,768 | $ | 73,500 | $ | — | $ | 82,177 | |||||||||
(1) We lease various equipment under non-cancelable operating leases (primarily related to compression facilities) for various periods. See Item 8, Note 11.
(2) Our credit facility matures on September 30, 2019.
Critical Accounting Policies
The Partnership’s accounting policies and any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the Notes to the Audited Consolidated Financial Statements of this Form 10-K for the period ended December 31, 2015. The application of the Partnership’s accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. If applicable, management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
As of December 31, 2015, the Partnership does not have any accounting policies that we deem to be critical or that would require significant judgment. Accordingly, we have not included any accounting policies below.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Commodity Price Risk
To date, we have generated all of our revenues pursuant to fee-based gathering agreements based on acreage dedications and do not have minimum volume commitments. We are paid based on the volumes of natural gas and condensate that we gather and handle, rather than the underlying value of the commodity. Consequently, our existing operations and cash flows do not have significant direct exposure to commodity price risk. However, we are indirectly exposed to commodity price risks through our Sponsors, who may reduce or shut in production due to depressed commodity prices. Although we intend to enter into similar fee-based gathering agreements with new customers in the future, our efforts to negotiate terms with third parties may not be successful.
In the future, we may acquire or develop additional midstream assets in a manner that increases our exposure to commodity price risk. Such exposure to the volatility of natural gas, NGL and crude oil prices could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions to our unitholders.
Interest Rate Risk
At the closing of our IPO on September 30, 2014, we entered into a $250.0 million revolving credit facility. Assuming our outstanding balance on the revolving credit facility of $73.5 million, an increase of one percentage point in the interest rates would have resulted in an increase in interest expense during 2015 of $0.7 million. Accordingly, our results of operations, cash flows and financial condition, all of which affect our ability to make cash distributions to our unitholders, could be materially adversely affected by significant increases in interest rates.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | ||
Page | ||
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Report of Independent Registered Public Accounting Firm
The Board of Directors of CONE Midstream GP LLC and
Unitholders of CONE Midstream Partners LP
We have audited the accompanying consolidated balance sheets of CONE Midstream Partners LP (including its Predecessor as defined in Note 1), as of December 31, 2015 and 2014, and the related consolidated statements of operations, partners’ capital and parent net investment and cash flows for each of the three years in the period ended December 31, 2015. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CONE Midstream Partners, LP at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 17, 2016
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CONE MIDSTREAM PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per unit data)
For the Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Revenue | |||||||||||
Gathering Revenue — Related Party | $ | 203,423 | $ | 130,087 | $ | 65,626 | |||||
Other Income | — | 85 | — | ||||||||
Total Revenue | 203,423 | 130,172 | 65,626 | ||||||||
Expenses | |||||||||||
Operating Expense — Third Party | 28,987 | 27,371 | 13,175 | ||||||||
Operating Expense — Related Party | 29,937 | 24,072 | 16,669 | ||||||||
General and Administrative Expense — Third Party | 4,444 | 1,822 | 219 | ||||||||
General and Administrative Expense — Related Party | 8,636 | 4,726 | 1,614 | ||||||||
Depreciation Expense | 15,053 | 7,330 | 5,825 | ||||||||
Interest Expense | 835 | 24 | — | ||||||||
Total Expense | 87,892 | 65,345 | 37,502 | ||||||||
Net Income | 115,531 | 64,827 | 28,124 | ||||||||
Less: Net Income Attributable to Noncontrolling Interest | 44,284 | 7,858 | — | ||||||||
Net Income Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP | $ | 71,247 | $ | 56,969 | $ | 28,124 | |||||
Calculation of Limited Partner Interest in Net Income: | |||||||||||
Net Income Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP (*) | $ | 71,247 | $ | 15,378 | N/A | ||||||
Less: General Partner Interest in Net Income | 1,425 | 308 | N/A | ||||||||
Limited Partner Interest in Net Income | $ | 69,822 | $ | 15,070 | N/A | ||||||
Net Income per Limited Partner Unit - Basic | $ | 1.20 | $ | 0.26 | N/A | ||||||
Net Income per Limited Partner Unit - Diluted | $ | 1.20 | $ | 0.26 | N/A | ||||||
Limited Partner Units Outstanding - Basic | 58,326 | 58,326 | N/A | ||||||||
Limited Partner Unit Outstanding - Diluted | 58,340 | 58,326 | N/A | ||||||||
(*) In 2014, the amount reflects only the general and limited partner interest in net income since the closing of the IPO. See Note 1 - Description of Business, Initial Public Offering and Basis of Presentation
The accompanying notes are an integral part of these consolidated financial statements.
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CONE MIDSTREAM PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except number of units)
December 31, 2015 | December 31, 2014 | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash | $ | 217 | $ | 3,252 | |||
Receivables — Related Party (Note 6) | 36,418 | 58,749 | |||||
Inventory | 18,916 | — | |||||
Prepaid Expenses | 1,873 | 1,280 | |||||
Other Current Assets | 164 | 164 | |||||
Total Current Assets | 57,588 | 63,445 | |||||
Property and Equipment: | |||||||
Property and Equipment (Note 7) | 897,918 | 639,735 | |||||
Less — Accumulated Depreciation | 31,609 | 16,989 | |||||
Property and Equipment — Net | 866,309 | 622,746 | |||||
Other Non-Current Assets | 528 | 613 | |||||
TOTAL ASSETS | $ | 924,425 | $ | 686,804 | |||
LIABILITIES AND EQUITY | |||||||
Current Liabilities: | |||||||
Accounts Payable | $ | 46,155 | $ | 70,635 | |||
Accounts Payable — Related Party (Note 8) | 1,628 | 2,106 | |||||
Total Current Liabilities | 47,783 | 72,741 | |||||
Other Liabilities: | |||||||
Revolving Credit Facility (Note 9) | 73,500 | 31,300 | |||||
Total Liabilities | 121,283 | 104,041 | |||||
Partners' Capital: | |||||||
Common Units - (29,163,121 Units Issued and Outstanding at December 31, 2015 and 2014) | 399,399 | 389,612 | |||||
Subordinated Units (29,163,121 Units Issued and Outstanding at December 31, 2015 and 2014) | (82,900 | ) | (92,285 | ) | |||
General Partner Interest | (3,389 | ) | (3,772 | ) | |||
Capital Attributable to CONE Midstream Partners LP | 313,110 | 293,555 | |||||
Noncontrolling Interest | 490,032 | 289,208 | |||||
Total Partners' Capital | 803,142 | 582,763 | |||||
TOTAL LIABILITIES AND PARTNERS' CAPITAL | $ | 924,425 | $ | 686,804 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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CONE MIDSTREAM PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND PARENT NET INVESTMENT
(Dollars in thousands)
Partners' Capital | ||||||||||||||||||||||||||||
Limited Partners | ||||||||||||||||||||||||||||
Capital | ||||||||||||||||||||||||||||
Parent Net | General | Attributable | Noncontrolling | |||||||||||||||||||||||||
Investment | Common | Subordinated | Partner | to Partners | Interest | Total | ||||||||||||||||||||||
Balance at December 31, 2013 | $ | 368,074 | $ | — | $ | — | $ | — | $ | 368,074 | $ | — | $ | 368,074 | ||||||||||||||
Net Income Attributable to the period from January 1, 2014 through September 29, 2014 | 41,591 | — | — | — | 41,591 | — | 41,591 | |||||||||||||||||||||
Investment by Partners | 138,626 | — | — | — | 138,626 | — | 138,626 | |||||||||||||||||||||
Distribution of Assets to CONE Gathering LLC | (34,033 | ) | — | — | — | (34,033 | ) | — | (34,033 | ) | ||||||||||||||||||
Contribution of Net Assets to CONE Midstream Partners LP | (514,258 | ) | 59,915 | 193,329 | 7,899 | (253,115 | ) | 253,115 | — | |||||||||||||||||||
Issuance of Common Units to Public, Net of Offering Costs | — | 413,005 | — | — | 413,005 | — | 413,005 | |||||||||||||||||||||
Distribution of Proceeds | — | (93,603 | ) | (302,029 | ) | (12,339 | ) | (407,971 | ) | — | (407,971 | ) | ||||||||||||||||
Net Income Attributable to the period from September 30, 2014 through December 31, 2014 (1) | — | 7,535 | 7,535 | 308 | 15,378 | 7,858 | 23,236 | |||||||||||||||||||||
Investment by Sponsors, Partners and Noncontrolling Interest Holders (2) | — | 2,760 | 8,880 | 360 | 12,000 | 28,235 | 40,235 | |||||||||||||||||||||
Balance at December 31, 2014 | $ | — | $ | 389,612 | $ | (92,285 | ) | $ | (3,772 | ) | $ | 293,555 | $ | 289,208 | $ | 582,763 | ||||||||||||
Net Income | — | 34,911 | 34,911 | 1,425 | 71,247 | 44,284 | 115,531 | |||||||||||||||||||||
Investments by Partners and Noncontrolling Interest Holders (2) | — | — | — | — | — | 156,540 | 156,540 | |||||||||||||||||||||
Distribution to Unitholders | — | (25,526 | ) | (25,526 | ) | (1,042 | ) | (52,094 | ) | — | (52,094 | ) | ||||||||||||||||
Unit Based Compensation | — | 402 | — | — | 402 | — | 402 | |||||||||||||||||||||
Balance at December 31, 2015 | $ | — | $ | 399,399 | $ | (82,900 | ) | $ | (3,389 | ) | $ | 313,110 | $ | 490,032 | $ | 803,142 | ||||||||||||
(1) Reflective of net income since the closing of the IPO. See Note 1 — Description of Business, Initial Public Offering and Basis of Presentation.
(2) Investment includes an outstanding cash calls as of December 31, 2015 and 2014. See Note 6 — Receivables - Related Party.
The accompanying notes are an integral part of these consolidated financial statements.
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CONE MIDSTREAM PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Cash Flows from Operating Activities: | |||||||||||
Net Income | $ | 115,531 | $ | 64,827 | $ | 28,124 | |||||
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: | |||||||||||
Depreciation Expense and Amortization of Debt Issuance Costs | 15,217 | 7,330 | 5,825 | ||||||||
Gain on Disposition of Equipment | — | (85 | ) | — | |||||||
Unit Based Compensation | 402 | — | — | ||||||||
Changes in Operating Assets: | |||||||||||
Receivables — Related Party | (3,148 | ) | (9,029 | ) | (5,654 | ) | |||||
Inventory | (2,284 | ) | — | — | |||||||
Prepaid Expenses | (663 | ) | (1,280 | ) | 50 | ||||||
Non-Current Assets | (10 | ) | — | — | |||||||
Changes in Operating Liabilities: | |||||||||||
Accounts Payable | (8,670 | ) | 23,806 | 5,760 | |||||||
Accounts Payable — Related Party | (358 | ) | (875 | ) | 409 | ||||||
Net Cash Provided by Operating Activities | 116,017 | 84,694 | 34,514 | ||||||||
Cash Flows from Investing Activities: | |||||||||||
Capital Expenditures | (291,211 | ) | (269,686 | ) | (130,924 | ) | |||||
Proceeds on Sale of Equipment | — | 85 | — | ||||||||
Net Cash Used in Investing Activities | (291,211 | ) | (269,601 | ) | (130,924 | ) | |||||
Cash Flows from Financing Activities: | |||||||||||
Investments by Partners and Noncontrolling Interest Holders | 182,053 | 146,626 | 95,000 | ||||||||
Proceeds from Issuance of Common Units, Net of Offering Costs | — | 413,005 | — | ||||||||
Distribution of Proceeds | — | (407,971 | ) | — | |||||||
Distribution to Unitholders | (52,094 | ) | — | — | |||||||
Payment of Revolver Fees | — | (777 | ) | — | |||||||
Proceeds from Revolver | 42,200 | 31,300 | — | ||||||||
Net Cash Provided by Financing Activities | 172,159 | 182,183 | 95,000 | ||||||||
Net Decrease in Cash | (3,035 | ) | (2,724 | ) | (1,410 | ) | |||||
Cash at Beginning of Period | 3,252 | 5,976 | 7,386 | ||||||||
Cash at End of Period | $ | 217 | $ | 3,252 | $ | 5,976 | |||||
Cash paid during the period for: | |||||||||||
Interest | $ | 572 | $ | — | $ | — | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONE MIDSTREAM PARTNERS LP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF BUSINESS AND INITIAL PUBLIC OFFERING
Description of Business
CONE Midstream Partners LP (the "Partnership") is a master limited partnership formed in May 2014 by CONSOL Energy Inc. (NYSE: CNX) ("CONSOL") and Noble Energy, Inc. (NYSE: NBL) ("Noble Energy"), whom we refer to collectively as our Sponsors, to own, operate, develop and acquire natural gas gathering and other midstream energy assets to service our Sponsors’ production in the Marcellus Shale in Pennsylvania and West Virginia. Our assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities.
In order to effectively manage our business we have divided our current midstream assets among three operating segments that we refer to as our “Anchor Systems,” “Growth Systems” and “Additional Systems” based on their relative current cash flows, growth profiles, capital expenditure requirements and the timing of their development.
• | Our Anchor Systems include our midstream systems that generate the substantial majority of our current cash flows and that we expect to drive our growth over the near term as we increase average throughput on these systems from our Sponsors’ growing production. |
• | Our Growth Systems include our high-growth, developing gathering systems that would require substantial expansion capital expenditures to materially increase production, the substantial majority of which would be funded by our Sponsors in proportion to their 95% retained ownership interest. |
• | Our Additional Systems include several gathering systems primarily located in the wet gas regions of our Sponsors dedicated acreage that we expect will generate stable cash flows and require lower levels of expansion capital investment over the next several years. |
The Partnership's general partner is CONE Midstream GP LLC, a wholly owned subsidiary of CONE Gathering LLC ("CONE Gathering"). CONE Gathering, a Delaware limited liability company, is a joint venture formed by our Sponsors in September 2011. CONE Gathering represents the predecessor for accounting purposes (the "Predecessor") of CONE Midstream Partners LP. References in these consolidated financial statements to the “Company,” “our partnership,” “we,” “our,” “us” or like terms, when used for periods prior to the IPO, refer to CONE Gathering. References in these consolidated financial statements to the “Company,” “our partnership,” “we,” “our,” “us” or like terms, when used for periods beginning at or following the IPO, refer collectively to the Partnership and its consolidated subsidiaries. For periods prior to the IPO, the accompanying consolidated financial statements and related notes include the assets, liabilities and results of operations of CONE Gathering.
In order to maintain operational flexibility, our operations are conducted through, and our operating assets are owned by, our operating subsidiaries. However, neither we nor our operating subsidiaries have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by our Sponsors or others. All of the personnel that conduct our business are employed or contracted by our general partner and its affiliates, including our Sponsors, but we sometimes refer to these individuals as our employees because they provide services directly to us.
Initial Public Offering
On September 30, 2014, the Partnership closed its IPO of 20,125,000 common units at a price to the public of $22.00 per unit, which included all 2,625,000 common units of the underwriters' over-allotment option. The Partnership’s common units are listed on the New York Stock Exchange under the ticker symbol “CNNX.”
Concurrent with the closing of the IPO, CONE Gathering contributed to the Partnership a 75% controlling interest in the Anchor Systems, a 5% controlling interest in the Growth Systems and a 5% controlling interest in the Additional Systems. In exchange for CONE Gathering's contribution of assets and liabilities to the Partnership, CONE Gathering received:
• | through its ownership of our general partner, a continuation of a 2% general partner interest in the partnership; |
• | 9,038,121 common units and 29,163,121 subordinated units, representing an aggregate 64.2% limited partner interest in the Partnership (the common and subordinated units were subsequently distributed to the Sponsors); |
• | through its ownership of our general partner, all of the Partnerships' incentive distribution rights ("IDRs"); and |
• | an aggregate cash distribution of $408.0 million. |
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NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Reporting Requirements
The accompanying audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). To conform to these accounting principles, management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and the notes thereto. These estimates are evaluated on an ongoing basis, utilizing historical experience and other methods considered reasonable under the particular circumstances. Although these estimates are based on management’s best available knowledge at the time, changes in facts and circumstances or discovery of new facts or circumstances may result in revised estimates and actual results may differ from these estimates. Effects on the Partnership’s business, financial position and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known.
Under the Jumpstart Our Business Startups Act ("JOBS Act"), for as long as the Partnership remains an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from the Securities and Exchange Commission's ("SEC") reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of its system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and seeking unitholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.
The Partnership will remain an emerging growth company for up to five years from the date of our initial public offering, although we will lose that status sooner if:
• | we have more than $1.0 billion of revenues in a fiscal year; |
• | the limited partner interests held by non-affiliates have a market value of more than $700 million; or |
• | we issue more than $1.0 billion of non-convertible debt over a three-year period. |
The JOBS Act also provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Partnership has irrevocably elected to “opt out” of this exemption and, therefore, is and will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Principles of Consolidation
The consolidated financial statements include the accounts of CONE Midstream Partners LP and all of its controlled subsidiaries. Transactions between the Partnership and its Sponsors have been identified in the consolidated financial statements as transactions between related parties and are discussed in Note 4.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and various disclosures. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized for the transportation of natural gas and other hydrocarbons based on the delivery of actual volumes transported at a contracted throughput rate. Operating fees received are recorded in gathering revenue — related party in the period the service is performed.
Cash
Cash includes cash on hand and on deposit at banking institutions.
Receivables
Receivables are recorded at the invoiced amount and do not bear interest. When applicable, we reserve for specific accounts receivable when it is probable that all or a part of an outstanding balance will not be collected, such as customer bankruptcies. Collectability is determined based on terms of sale, credit status of customers and various other circumstances. We regularly review collectability and establish or adjust the allowance as necessary using the specific identification method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. There were no reserves for uncollectible amounts in the periods presented.
Inventory
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Inventory is stated at the lower of cost or market and consists entirely of pipe purchased for a delayed pipeline project in the Growth System, in which our Sponsors maintain a 95% noncontrolling interest. Cost was determined primarily under the specific identification method. The Partnership expects the pipe will either be used in an alternative project or sold to a third party.
Fair Value Measurement
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance also relates to all nonfinancial assets and liabilities that are not recognized or disclosed on a recurring basis (e.g., the initial recognition of asset retirement obligations and impairments of long‑lived assets). The fair value is the price that we estimate would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize input to valuation techniques used to estimate fair value. An asset or liability subject to the fair value requirements is categorized within the hierarchy based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The highest priority (Level 1) is given to unadjusted quoted market prices in active markets for identical assets or liabilities, and the lowest priority (Level 3) is given to unobservable inputs. Level 2 inputs are data, other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
The carrying values on our balance sheet of our current assets, current liabilities and revolving credit facility approximate fair values due to their short maturities.
Property and Equipment
Property and equipment is recorded at cost upon acquisition. Expenditures which extend the useful lives of existing property and equipment are capitalized.
Property and equipment is depreciated using the straight-line method over the estimated useful lives or lease terms of the assets.
When properties are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposition is recognized as a gain or loss. The Partnership did not retire or dispose of any assets during the periods presented.
The Partnership evaluates whether long-lived assets have been impaired and determines if the carrying amount of its assets may not be recoverable. For such long-lived assets, impairment exists when the carrying amount of an asset exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount of the long-lived asset is not recoverable, based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying amount over its estimated fair value.
Fair value represents the estimated price between market participants to sell an asset in the principal or most advantageous market for the asset, based on assumptions a market participant would make. When warranted, management assesses the fair value of long-lived assets using commonly accepted techniques and may use more than one source in making such assessments. Sources used to determine fair value include, but are not limited to, recent third-party comparable sales, internally developed discounted cash flow analyses and analyses from outside advisors. Significant changes, such as the condition of an asset or management’s intent to utilize the asset generally require management to reassess the cash flows related to long-lived assets. The Partnership did not record any impairments during the periods presented.
Environmental Matters
We are subject to various federal, state and local laws and regulations relating to the protection of the environment. 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 related costs can be reasonably estimated. At this time, we are unable to assess the timing and/or effect of potential liabilities related to greenhouse gas emissions or other environmental issues.
Asset Retirement Obligations
We perform an ongoing analysis of asset removal and site restoration costs that we may be required to perform under law or contract once an asset has been permanently taken out of service. We have property and equipment at locations that we own and at sites leased or under right of way agreements. We are under no contractual obligation to remove the assets at locations we own. In evaluating our asset retirement obligation, we review lease agreements, right of way agreements, easements and permits to determine which agreements, if any, require an asset removal and restoration obligation. Determination of the
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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. We operate and maintain our midstream systems and intend to do so as long as supply and demand for natural gas exists, which we expect for the foreseeable future. Therefore, we believe that we cannot reasonably estimate the asset retirement obligations for our midstream system assets as these assets have indeterminate lives.
Variable Interest Entities
The Anchor, Growth and Additional Limited Partnerships (the "Limited Partnerships"), which are variable interest entities, are consolidated by CONE Midstream Partners LP through its ownership of CONE Midstream Operating Company LLC. CONE Midstream Operating Company LLC, through its general partner ownership interest in each of the Anchor, Growth and Additional Limited Partnerships, has the power to direct all substantive strategic and day-to-day operational decisions of the Limited Partnerships. CONE Midstream Operating Company LLC is considered to be the primary beneficiary for accounting purposes.
Equity Compensation
Equity compensation expense for all unit-based compensation awards is based on the grant date fair value estimated in accordance with the provisions of the Stock Compensation Topic of the FASB Accounting Standards Codification. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the award's vesting term. See Note 14–Long Term Incentive Plan for further discussion.
Income Taxes
Our operations as a limited partnership, and our Predecessor, as a limited liability company, are treated as partnerships for federal and state income tax purposes, with each partner being separately taxed on its share of the taxable income. Accordingly, no provision for federal or state income taxes has been recorded in the consolidated financial statements.
Cash Distributions
Our partnership agreement requires that we distribute all of our available cash within 45 days after the end of each quarterly period to unitholders of record on the applicable record date. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $0.2125 per unit, or $0.85 per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and the board of directors of our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, the board of directors of our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly.
Generally, our available cash is the sum of (i) all cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) if the board of directors of our general partner so determines, all or any portion of additional cash on hand resulting from working capital borrowings made after the end of the quarter.
The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.
The percentage interests set forth below for our general partner include its 2% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2% general partner interest, our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.
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Marginal Percentage Interest in Distributions | ||||||||
Distribution Targets | Total Quarterly Distribution Per Unit Target Amount | Unitholders | General Partner | |||||
Minimum Quarterly Distribution | $0.2125 | 98% | 2% | |||||
First Target Distribution | Above $0.2125 | up to $0.24438 | 98% | 2% | ||||
Second Target Distribution | Above $0.24438 | up to $0.26563 | 85% | 15% | ||||
Third Target Distribution | Above $0.26563 | up to $0.31875 | 75% | 25% | ||||
Thereafter | Above $0.31875 | 50% | 50% | |||||
Subordinated Units
Our partnership agreement provides that, during the subordination period, the common unitholders will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $0.2125 per unit, which is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, during the subordination period, there will be available cash to be distributed on the common units. The subordination period will end, and the subordinated units will convert to common units, on a one-for-one basis, when certain distribution requirements, as defined in the partnership agreement, have been met.
Subordination Period
Except as described below, the subordination period began on the closing date of the IPO and will extend until the first business day following the distribution of available cash in respect of any quarter beginning after September 30, 2017, that each of the following tests are met:
• | distributions of available cash from operating surplus on each of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest equaled or exceeded $0.85 (the annualized minimum quarterly distribution), for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date; |
• | the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $0.85 (the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest during those periods on a fully diluted basis; and |
• | there are no arrearages in payment of the minimum quarterly distribution on the common units. |
Early Termination of the Subordination Period
The subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter that each of the following tests are met:
• | distributions of available cash from operating surplus on each of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest equaled or exceeded $1.275 (150% of the annualized minimum quarterly distribution), plus the related distributions on the incentive distribution rights, for the four-quarter period immediately preceding that date; |
• | the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (i) $1.275 (150% of the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest during that period on a fully diluted basis and (ii) the corresponding distributions on the incentive distribution rights; and |
• | there are no arrearages in payment of the minimum quarterly distribution on the common units. |
Expiration of the Subordination Period
When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.
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Adjusted Operating Surplus
Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:
• | operating surplus generated with respect to that period; less |
• | any net increase in working capital borrowings with respect to that period; less |
• | any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus |
• | any net decrease in working capital borrowings with respect to that period; plus |
• | any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods; plus |
• | any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium. |
Incentive Distribution Rights ("IDRs")
All of the IDRs are currently held by CONE Midstream GP LLC, our general partner. Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels described below have been achieved. Our general partner may transfer the IDRs separately from its general partner interest.
The following discussion assumes that our general partner maintains its 2% general partner interest and that our general partner continues to own the IDRs. If for any quarter:
• | we have distributed available cash from operating surplus to the common unitholders and subordinated unitholders in an amount equal to the minimum quarterly distribution; and |
• | we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution; |
then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:
• | first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives a total of $0.24438 per unit for that quarter (the “first target distribution”); |
• | second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives a total of $0.26563 per unit for that quarter (the “second target distribution”); |
• | third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives a total of $0.31875 per unit for that quarter (the “third target distribution”); and |
• | thereafter, 50% to all unitholders, pro rata, and 50% to our general partner. |
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current reporting classifications with no effect on previously reported net income or partners' capital.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)". The objective of the amendments in this update is to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards ("IFRS"). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information, both qualitative and quantitative, to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued a standard to delay the effective date by one year. In accordance with this delay, the new standard is effective for annual reporting periods beginning after December 15, 2018, with the option to adopt as early as annual reporting periods beginning after December 15, 2016. We are currently evaluating the method of adoption and impact that this new standard will have on our financial statements.
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In February 2015, the FASB issued ASU 2015-02, "Consolidation: Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The ASU will be effective for annual reporting periods beginning after December 15, 2015, including interim periods therein. The Partnership believes adoption of this new standard will not have a material impact on the Partnership's financial statements.
In April 2015, the FASB issued ASU 2015-06 "Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions". ASU 2015-06 specifies that for purposes of calculating historical earnings per unit under the two-class method, the earnings or losses of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners, which is typically the earnings per unit measure presented in the financial statements, would not change as a result of the dropdown transaction. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015 and is required to be applied retrospectively. The Partnership believes adoption of this new standard will not have a material impact on the Partnership's financial statements.
In April 2015, the FASB issued ASU 2015-03 "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which attempted to simplify the presentation of debt issuance costs by requiring that such costs be presented as a deduction from the corresponding debt liability. In August 2015, the FASB issued ASU No. 2015-15 "Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements", which clarified ASU 2015-03 as it relates to line-of-credit arrangements. ASU 2015-15 states that the SEC staff would not object to an entity's decision to continue to present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Because this is how the Partnership has historically accounted for debt issuance costs, adoption of this standard will not have any impact on reported results or disclosures.
In July 2015, the FASB issued ASU 2015-11 "Simplifying the Measurement of Inventory (Topic 330)". The guidance is part of the “Simplification Initiative” to identify and re-evaluate areas where the generally accepted accounting principles may be complex and cumbersome to apply. The guidance will require that inventory be stated at the lower of cost and net realizable value as opposed to the lower of cost or market. Net realizable value is the estimated selling price for the inventory less completion, disposal and transportation costs. The guidance becomes effective for fiscal years beginning after December 15, 2016; however, the Partnership early adopted this new standard in the current year, which had no impact on the Partnership's financial statements.
NOTE 3 — NET INCOME PER LIMITED PARTNER AND GENERAL PARTNER INTEREST
We allocate net income among our general partner and limited partners using the two-class method in accordance with applicable authoritative accounting guidance. Under the two-class method, we allocate net income to our limited partners, our general partner and the holders of our IDRs in accordance with the terms of our partnership agreement. We also allocate any earnings in excess of distributions to our limited partners, our general partner and the holders of the IDRs in accordance with the terms of our partnership agreement. We allocate any distributions in excess of earnings for the period to our general partner and our limited partners based on their respective proportionate ownership interests in us, after taking into account distributions to be paid with respect to the IDRs, as set forth in our partnership agreement.
Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units, such as awards under the long-term incentive plan, were exercised, settled or converted into common units. When it is determined that potential common units resulting from an award subject to performance or market conditions should be included in the diluted net income per limited partner unit calculation, the impact is reflected by applying the treasury stock method. There were 20,055 phantom units that were not included in the calculation for the twelve months ended December 31, 2015 because the effect would have been antidilutive.
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The following table illustrates the Partnership’s calculation of net income per unit for common and subordinated partner units:
December 31, | |||||||
(all amounts in thousands, except per unit information) | 2015 | 2014 | |||||
Net Income Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP (*) | $ | 71,247 | $ | 15,378 | |||
Less: General Partner Interest in Net Income | 1,425 | 308 | |||||
Limited Partner Interest in Net Income | $ | 69,822 | $ | 15,070 | |||
Net Income Allocable to Common Units | $ | 34,911 | $ | 7,535 | |||
Net Income Allocable to Subordinated Units | 34,911 | 7,535 | |||||
Limited Partner Interest in Net Income | $ | 69,822 | $ | 15,070 | |||
Weighted Average Limited Partner Units Outstanding — Basic | |||||||
Common Units | 29,163 | 29,163 | |||||
Subordinated Units | 29,163 | 29,163 | |||||
Total | 58,326 | 58,326 | |||||
Weighted Average Limited Partner Units Outstanding — Diluted | |||||||
Common Units | 29,177 | 29,163 | |||||
Subordinated Units | 29,163 | 29,163 | |||||
Total | 58,340 | 58,326 | |||||
Net Income Per Limited Partner Unit — Basic and Diluted | |||||||
Common Units | $ | 1.20 | $ | 0.26 | |||
Subordinated Units | $ | 1.20 | $ | 0.26 | |||
(*) | Includes general and limited partner interest in net income since closing of the IPO. See Note 1 - Description of Business, Initial Public Offering and Basis of Presentation. |
NOTE 4 — RELATED PARTY
In the ordinary course of business, the Partnership has transactions with related parties that result in affiliate transactions. Related parties during each of the periods presented included CONSOL and certain of its subsidiaries and Noble Energy, to whom we provide natural gas gathering and compression services.
Transactions with related parties, other than certain transactions with CONSOL and Noble Energy related to administrative services, were conducted on terms which management believes are comparable to those with unrelated parties. We believe that these costs would not have been materially different had they been calculated on a stand-alone basis.
Charges for services from CONSOL included in operating expenses — related party were $14.0 million, $11.8 million and $10.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. Additionally, included in operating expense - related party were $15.9 million, $12.3 million, and $6.7 million of electrically-powered compression, which was reimbursed from the Sponsors pursuant to their respective Gathering Agreements for the years ended December 31, 2015, 2014 and 2013, respectively.
During the year ended December 31, 2015, the Partnership sold $2.2 million of supply inventory to CONSOL. The Partnership purchased supply inventory from a CONSOL subsidiary, which totaled $3.9 million, and $4.3 million for the years ended December 31, 2014, and 2013, respectively, and were included in operating expenses - related party.
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Sponsor-related charges within general and administrative expense - related party consisted of the following:
For the Years Ended December 31, | |||||||||||
(dollars in thousands) | 2015 | 2014 | 2013 | ||||||||
CONSOL | $ | 8,083 | $ | 4,629 | $ | 1,614 | |||||
Noble Energy | 553 | 97 | — | ||||||||
Total General and Administrative Expense — Related Party | $ | 8,636 | $ | 4,726 | $ | 1,614 | |||||
Omnibus Agreement
Concurrent with closing the IPO, we entered into an omnibus agreement with CONSOL, Noble Energy, CONE Gathering and our general partner that addresses the following matters:
• | our payment of an annual administrative support fee, initially in the amount of $0.6 million (prorated for the first year of service), for the provision of certain services by CONSOL and its affiliates; |
• | our payment of an annual administrative support fee, initially in the amount of approximately $0.6 million (pro rated for the first year of service), for the provision of certain executive services by CONSOL and its affiliates; |
• | our payment of an annual administrative support fee, initially in the amount of approximately $0.2 million (pro rated for the first year of service), for the provision of certain executive services by Noble Energy and its affiliates; |
• | our obligation to reimburse our Sponsors for all other direct or allocated costs and expenses incurred by our Sponsors in providing general and administrative services (which reimbursement is in addition to certain expenses of our general partner and its affiliates that are reimbursed under our partnership agreement); |
• | our right of first offer to acquire (i) CONE Gathering’s retained interests in each of our Anchor Systems, Growth Systems and Additional Systems, (ii) CONE Gathering’s other ancillary midstream assets and (iii) any additional midstream assets that CONE Gathering develops; and |
• | an indemnity from CONE Gathering for liabilities associated with the use, ownership or operation of our assets, including environmental liabilities, to the extent relating to the period of time prior to the closing of the IPO; and our obligation to indemnify CONE Gathering for events and conditions associated with the use, ownership or operation of our assets that occur after the closing of the IPO, including environmental liabilities. |
So long as CONE Gathering controls our general partner, the omnibus agreement will remain in full force and effect. If CONE Gathering ceases to control our general partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.
Operational Services Agreement
Concurrent with closing of the IPO, we entered into an operational services agreement with CONSOL under which CONSOL provides certain operational services to us in support of our gathering pipelines and dehydration, treating and compressor stations and facilities, including routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and CONSOL may mutually agree upon from time to time. CONSOL prepares and submits for our approval a maintenance, operating and capital budget on an annual basis. CONSOL submits actual expenditures for reimbursement on a monthly basis, and we reimburse CONSOL for any direct third-party costs incurred by CONSOL in providing these services.
The operational services agreement has an initial term of 20 years and will continue in full force and effect unless terminated by either party at the end of the initial term or any time thereafter by giving not less than six months’ prior notice to the other party of such termination. CONSOL may terminate the operational services agreement if (1) we become insolvent, declare bankruptcy or take any action in furtherance of, or indicating our consent to, approval of, or acquiescence in, a similar proceeding or (2) upon not less than 180 days notice. We may immediately terminate the agreement (1) if CONSOL becomes insolvent, declares bankruptcy or takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, a similar proceeding, (2) upon a finding of CONSOL’s willful misconduct or gross negligence that has had a material adverse effect on any of our gathering pipelines and dehydration, treating and compressor stations and facilities or our business or (3) CONSOL is in material breach of the operational services agreement and fails to cure such default within 45 days.
Under the operational services agreement, CONSOL will indemnify us from any claims, losses or liabilities incurred by us, including third-party claims, arising from CONSOL’s performance of the agreement to the extent caused by CONSOL’s gross negligence or willful misconduct. We will indemnify CONSOL from any claims, losses or liabilities incurred by
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CONSOL, including any third-party claims, arising from CONSOL’s performance of the agreement, except to the extent such claims, losses or liabilities are caused by CONSOL’s gross negligence or willful misconduct.
Gathering Agreements
CNX Gas Gathering Agreement
On September 30, 2014, in connection with the closing of the IPO, the Partnership entered into a Gathering Agreement (the "CNX Gas Gathering Agreement") by and between the Partnership, as gatherer, and CNX Gas Company LLC ("CNX Gas"), a wholly owned subsidiary of CONSOL, as shipper. Under the CNX Gas Gathering Agreement, which has an initial term of 20 years, CNX Gas (i) dedicated to the Partnership for natural gas midstream services all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with Noble Energy to the extent covering the Marcellus Shale in the dedication area and (ii) granted the Partnership a right of first offer to provide natural gas midstream services with respect to all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with Noble Energy to the extent covering the Marcellus Shale in the right of first offer area.
Under the CNX Gas Gathering Agreement, the Partnership charges a fee based on the type and scope of midstream services provided that is subject to either annual mutually-agreed recalculated rates or a 2.5% escalation beginning January 1, 2016. During the periods following the IPO, for the services provided (a) with respect to natural gas that does not require downstream processing, the Partnership received a fee of $0.40 per MMBtu, (b) with respect to the natural gas that requires downstream processing, the Partnership received a fee of $0.55 per MMBtu, except in the Pittsburgh International Airport and Moundsville (Marshall County, West Virginia) areas, where the fee was $0.275 per MMBtu and (c) with respect to condensate, the Partnership received a fee of $5.00 per Bbl in the Majorsville area and $2.50 per Bbl in the Moundsville area. Each of these rates increased by 2.5% on January 1, 2016.
Under the CNX Gas Gathering Agreement, if the Partnership fails to timely complete the construction of the facilities necessary to provide midstream services to CNX Gas’ dedicated acreage or has an uncured default of any of the Partnership’s material obligations that has caused an interruption in the Partnership’s services for more than 90 days, the affected acreage will be permanently released from the Partnership’s dedication. Also, effective September 30, 2019, if CNX Gas drills a well that is located more than a certain distance from the Partnership’s current gathering system (and not included in the detailed drilling plan provided by CNX Gas and Noble Energy) and a third-party gatherer offers a lower cost of services, then the acreage associated with such well will be permanently released from the Partnership’s dedication.
NBL Gas Gathering Agreement
On September 30, 2014, in connection with the closing of the IPO, the Partnership entered into a Gathering Agreement (the “NBL Gas Gathering Agreement”) by and between the Partnership, as gatherer, and Noble Energy, as shipper. Under the NBL Gas Gathering Agreement, which has an initial term of 20 years, Noble Energy (i) dedicated to the Partnership for natural gas midstream services all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with CNX Gas to the extent covering the Marcellus Shale in the dedication area and (ii) granted the Partnership a right of first offer to provide natural gas midstream services with respect to all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with CNX Gas to the extent covering the Marcellus Shale in the right of first offer area.
Under the NBL Gas Gathering Agreement, the Partnership charges a fee based on the type and scope of midstream services provided that is subject to either annual mutually-agreed recalculated rates or a 2.5%% escalation beginning January 1, 2016. For the services provided (a) with respect to natural gas that does not require downstream processing, the Partnership receives a fee of $0.40 per MMBtu, (b) with respect to the natural gas that requires downstream processing, the Partnership receives a fee of $0.55 per MMBtu, except in the Pittsburgh International Airport and Moundsville (Marshall County, West Virginia) areas, where the fee is $0.275 per MMBtu and (c) with respect to condensate, the Partnership receives a fee of $5.00 per Bbl in the Majorsville area and $2.50 per Bbl in the Moundsville area. Each of these rates increased by 2.5% on January 1, 2016.
Under the NBL Gas Gathering Agreement, if the Partnership fails to timely complete the construction of the facilities necessary to provide midstream services to Noble Energy’s dedicated acreage or has an uncured default of any of the Partnership’s material obligations that has caused an interruption in the Partnership’s services for more than 90 days, the affected acreage will be permanently released from the Partnership’s dedication. Also, effective September 30, 2019, if Noble Energy drills a well that is located more than a certain distance from the Partnership’s current gathering system (and not included in the detailed drilling plan provided by CNX Gas and Noble Energy) and a third-party gatherer offers a lower cost of services, then the acreage associated with such well will be permanently released from the Partnership’s dedication.
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Employee Secondment Agreement
We entered into an employee secondment agreement, effective September 8, 2014, with Noble Energy. Pursuant to the employee secondment agreement, an employee of Noble Energy is seconded to us to provide investor relations and similar functions, for which we will reimburse them for allocable salary, benefits, insurance, payroll taxes and other employment expenses related to the seconded employee.
NOTE 5 — CONCENTRATION OF CREDIT RISK
The Sponsors accounted for all of the Partnership’s gathering revenue in the years ended December 31, 2015, 2014 and 2013. Revenues attributable to each Sponsor were as follows (in thousands):
For the Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
CONSOL | $ | 103,678 | $ | 66,133 | $ | 33,538 | |||||
Noble Energy | 99,745 | 63,954 | 32,088 | ||||||||
Total Gathering Revenue | $ | 203,423 | $ | 130,087 | $ | 65,626 | |||||
NOTE 6 — RECEIVABLES - RELATED PARTY
Receivables are comprised of related party receivables related to gathering fees and contribution activities which consisted of the following at December 31 (in thousands):
2015 | 2014 | ||||||
Gathering Fees: | |||||||
CONSOL | $ | 10,221 | $ | 7,732 | |||
Noble Energy | 19,246 | 13,697 | |||||
Contributions Receivable: | |||||||
CONSOL | 3,360 | 16,141 | |||||
Noble Energy | 3,360 | 18,866 | |||||
Other: | |||||||
CONE Gathering LLC | 231 | 2,313 | |||||
Total Receivables — Related Party | $ | 36,418 | $ | 58,749 | |||
NOTE 7 — PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in thousands):
2015 | 2014 | Estimated Useful Lives in Years | |||||||
Land | $ | 76,755 | $ | 47,701 | N/A | ||||
Gathering equipment | 561,642 | 298,897 | 25 — 40 | ||||||
Compression equipment | 122,705 | 91,585 | 30 — 40 | ||||||
Processing equipment | 30,979 | 30,979 | 40 | ||||||
Assets under construction | 105,837 | 170,573 | N/A | ||||||
Total Property and Equipment | $ | 897,918 | $ | 639,735 | |||||
Less: Accumulated Depreciation | |||||||||
Gathering equipment | $ | 21,130 | $ | 9,848 | |||||
Compression equipment | 6,998 | 4,486 | |||||||
Processing equipment | 3,481 | 2,655 | |||||||
Total Accumulated Depreciation | $ | 31,609 | $ | 16,989 | |||||
Property and Equipment, Net | $ | 866,309 | $ | 622,746 | |||||
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NOTE 8 — ACCOUNTS PAYABLE - RELATED PARTY
Related party payables consisted of the following at December 31 (in thousands):
2015 | 2014 | ||||||
Accounts Payable — Related Party | |||||||
Expense Reimbursement to CONSOL | $ | 1,173 | $ | 1,016 | |||
Capital Expenditure Reimbursement to CNX Gas | 2 | 561 | |||||
Services Provided by CONSOL | 402 | 432 | |||||
Services Provided by Noble Energy | 51 | 97 | |||||
Total Accounts Payable — Related Party | $ | 1,628 | $ | 2,106 | |||
NOTE 9 — REVOLVING CREDIT FACILITY
In connection with the closing of our IPO on September 30, 2014, we entered into a credit facility agreement which provides for a $250 million unsecured five year revolving credit facility that matures on September 30, 2019. Our revolving credit facility is available for working capital, capital expenditures, certain acquisitions, distributions, unit repurchases and other lawful partnership purposes. Borrowings under our revolving credit facility will bear interest at our option at either:
• | the base rate, which is defined as the highest of (i) the federal funds rate plus 0.50%; (ii) JP Morgan’s prime rate; or (iii) the daily LIBOR rate for a one month interest period plus 1.00%; in each case, plus a margin varying from 0.125% to 1.00% depending on our most recent consolidated total leverage ratio or our credit rating; or |
• | the LIBOR rate plus a margin varying from 1.125% to 2.00%, in each case, depending on our most recent consolidated leverage ratio (as defined in the agreement governing our revolving credit facility) or our credit rating, as the case may be. |
Interest on base rate loans is payable quarterly. Interest on LIBOR loans is payable on the last day of each interest period or, in the case of interest periods longer than three months, every three months. The unused portion of our revolving credit facility is subject to a commitment fee ranging from 0.15% to 0.35% per annum depending on our most recent consolidated leverage ratio or our credit rating, as the case may be.
Our revolving credit facility contains covenants and conditions that, among other things, limit our ability to incur or guarantee additional debt, make cash distributions (though there will be an exception for distributions permitted under the partnership agreement, subject to certain customary conditions), incur certain liens or permit them to exist, make certain investments and acquisitions, enter into certain types of transactions with affiliates, merge or consolidate with another company, and transfer, sell or otherwise dispose of assets. We are also subject to covenants that require us to maintain certain financial ratios, the most important of which are as follows:
• | we may not permit the ratio of (i) consolidated total funded debt (as defined in the agreement governing our revolving credit facility) as of the last day of each fiscal quarter to (ii) consolidated EBITDA (as defined in the agreement governing our revolving credit facility) for the four consecutive fiscal quarters ending on the last day of such fiscal quarter to exceed (A) at any time other than during a qualified acquisition period (as defined in the agreement governing our revolving credit facility), 5.0 to 1.0 and (B) during a qualified acquisition period, 5.5 to 1.0 We define this as our consolidated leverage ratio which is calculated as the total amount outstanding on our credit facility divided by EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP. The Partnership met the requirements of this financial covenant for the year ended December 31, 2015. |
• | we may not permit the ratio of (i) consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of each fiscal quarter to (ii) consolidated interest expense (as defined in the agreement governing our revolving credit facility) for such four consecutive fiscal quarters to be less than 3.0 to 1.0. We define this as our consolidated interest coverage ratio which is calculated as EBITDA Attributable to General and Limited Partner Ownership Interest in CONE Midstream Partners LP divided by total interest charges. The Partnership met the requirements of this financial covenant for the year ended December 31, 2015. |
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The outstanding balance of our revolving credit facility and interest rates on the amounts drawn from our revolver consist of the following (dollars in thousands):
December 31, | December 31, | |||||||||||||
2015 | 2014 | |||||||||||||
Debt | Interest Rate (1) | Debt | Interest Rate (2) | |||||||||||
Credit Facility, Due September 30, 2019 | $ | 73,500 | 2.18 | % | $ | 31,300 | 3.75 | % | ||||||
(1) The weighted average annual interest rate consists of JP Morgan's prime rate and LIBOR rate, plus a margin as described above.
(2) Borrowings accrued interest at JP Morgan’s prime rate, plus a margin as described above.
As of December 31, 2015, we had outstanding debt issuance costs of $0.6 million, net of accumulated amortization, which were incurred in connection with the issuance of our credit facility. The debt issuance costs are being amortized in interest expense through September 30, 2019, which is the maturity date of the credit facility.
NOTE 10 — SUPPLEMENTAL CASH FLOW INFORMATION
As of December 31, 2015, we had a receivable of $6.7 million related to Sponsor partners' investments.
As of December 31, 2014, we had receivables of $16.1 million and $18.9 million related to partners' investments from CONSOL and Noble Energy, respectively. Additionally, we had a receivable from CONE Gathering LLC related to capital expenditures of $2.3 million as of December 31, 2014.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
At December 31, 2015, CONE Gathering has $2.9 million of surety bonds outstanding that secure financial obligations for environmental, road maintenance and various other items which are not reflected on the consolidated balance sheet. Since we intend to satisfy the obligations to which the surety bonds relate in the normal course of business, management believes they will expire without being funded.
We may become involved in claims and other legal matters arising in the ordinary course of business. Although claims are inherently unpredictable, we are not aware of any matters that may have a material adverse effect on our business, financial position, results of operations or cash flows.
NOTE 12 — LEASES
We have entered into various non-cancelable operating leases primarily related to compression facilities. Future minimum lease payments under operating leases as of December 31, 2015 are as follows (in thousands):
(thousands) | Minimum Lease Payments | ||
2016 | $ | 4,909 | |
2017 | 3,032 | ||
2018 | 736 | ||
$ | 8,677 | ||
Rental expense under operating leases was $9.2 million, $6.6 million and $2.5 million for the years ended December 31, 2015, 2014, and 2013 respectively. These expenses are included within operating expense - third party on our consolidated statement of operations.
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NOTE 13 — SEGMENT INFORMATION
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources. The Partnership has three operating segments, which are also its reportable segments - the Anchor Systems, Growth Systems and Additional Systems. See Note 1 - Description of Business and Initial Public Offering
All of the Partnership’s operating revenues, income from operations and assets are generated or located in the United States.
For the Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Gathering Revenue - Related Party: | |||||||||||
Anchor Systems | $ | 156,274 | $ | 112,904 | $ | 63,761 | |||||
Growth Systems | 13,435 | 9,745 | 1,492 | ||||||||
Additional Systems | 33,714 | 6,202 | — | ||||||||
Other (*) | — | 1,236 | 373 | ||||||||
Total Gathering Revenue - Related Party | $ | 203,423 | $ | 130,087 | $ | 65,626 | |||||
Net Income (Loss): | |||||||||||
Anchor Systems | $ | 93,529 | $ | 58,870 | $ | 29,243 | |||||
Growth Systems | 4,854 | 2,956 | (969 | ) | |||||||
Additional Systems | 17,148 | 2,504 | (279 | ) | |||||||
Other (*) | — | 497 | 129 | ||||||||
Total Net Income | $ | 115,531 | $ | 64,827 | $ | 28,124 | |||||
(*) | Consists of assets that are retained by our Predecessor, CONE Gathering, and are thus not part of the transactions that occurred in connection with the closing of the IPO. See Note 1 - Description of Business, Initial Public Offering and Basis of Presentation. |
For the Years Ended December 31, | |||||||||||
2015 | 2014 | 2013 | |||||||||
Depreciation Expense: | |||||||||||
Anchor Systems | $ | 10,717 | $ | 5,238 | $ | 4,173 | |||||
Growth Systems | 1,948 | 1,952 | 1,616 | ||||||||
Additional Systems | 2,388 | 1 | — | ||||||||
Other (*) | — | 139 | 36 | ||||||||
Total Depreciation Expense | $ | 15,053 | $ | 7,330 | $ | 5,825 | |||||
Capital Expenditures for Segment Assets: | |||||||||||
Anchor Systems | $ | 149,518 | $ | 119,949 | $ | 101,175 | |||||
Growth Systems | 22,058 | 33,498 | 20,069 | ||||||||
Additional Systems | 119,635 | 105,737 | 824 | ||||||||
Other (*) | — | 10,502 | 8,856 | ||||||||
Total Capital Expenditures | $ | 291,211 | $ | 269,686 | $ | 130,924 | |||||
(*) | Consists of assets that are retained by our Predecessor, CONE Gathering, and are thus not part of the transactions that occurred in connection with the closing of the IPO. See Note 1 - Description of Business, Initial Public Offering and Basis of Presentation. |
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December 31, 2015 | December 31, 2014 | ||||||
Segment Assets: | |||||||
Anchor Systems | $ | 567,132 | $ | 430,350 | |||
Growth Systems | 102,249 | 119,550 | |||||
Additional Systems | 255,044 | 136,904 | |||||
Total Segment Assets | $ | 924,425 | $ | 686,804 | |||
NOTE 14 — LONG-TERM INCENTIVE PLAN
Under the CONE Midstream Partners LP 2014 Long-Term Incentive Plan (our “LTIP”), the Partnership's general partner may issue long-term equity based awards to directors, officers and employees of the general partner or its affiliates, or to any consultants, affiliates of our general partner or other individuals who perform services on behalf of the Partnership. Such awards are intended to compensate the recipients thereof for their continued service during the vesting period based on the market performance of the Partnership's common units and align their long-term interests with those of unitholders. The Partnership is responsible for the cost of awards granted under the LTIP.
All determinations with respect to awards to be made under the LTIP will be made by the board of directors of the general partner or any committee thereof that may be established for such purpose or by any delegate of the board of directors or such committee, subject to applicable law, which we refer to as the plan administrator. To the extent that phantom units are awarded, which are similar to restricted stock grants by a C-corporation, the value of vested phantom units may be paid in common units or an amount of cash equal to the fair market value of a unit based on the grant date. It is currently management's intent to settle any vested phantom units in common units.
The LTIP limits the number of units that may be delivered pursuant to vested awards to 5,800,000 common units, subject to proportionate adjustment in the event of unit splits and similar events. Common units subject to awards that are canceled, forfeited, withheld to satisfy exercise prices or tax withholding obligations or otherwise terminated without delivery of the common units will be available for delivery pursuant to other awards.
No awards were granted during 2014. During 2015, the Partnership's general partner granted 33,697 equity-based phantom units, of which 32,070 equity-based phantom units were still outstanding on December 31, 2015, to independent directors, an officer of the Partnership and to several employees of CONSOL who dedicate a substantial portion of their time to the Partnership at a weighted average fair value of $19.98. The awards issued to the independent directors vest over a period of one year, and the awards granted to the officer and employees of the general partner vest 33% per year over a period of three years.
The Partnership accounts for phantom units as equity awards and records compensation expense based on the fair value of the awards at their grant date fair value. Based on the vesting schedules of all awards, the Partnership recognized $0.4 million of compensation expense for the twelve months ended December 31, 2015, which is included in general and administrative expense - related party in the consolidated statements of operations. No awards vested during the year ended December 31, 2015.
NOTE 15 — SUBSEQUENT EVENTS
On January 22, 2016, the Board of Directors of CONE Midstream GP LLC, the general partner of CONE Midstream Partners, LP, declared a cash distribution to the Partnership’s unitholders for the fourth quarter of 2015 of $0.2362 per common and subordinated unit. The cash distribution was paid on February 12, 2016 to unitholders of record at the close of business on February 4, 2016.
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SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three Months Ended | |||||||||||||||
March 31, 2015 | June 30, 2015 | September 30, 2015 | December 31, 2015 | ||||||||||||
Revenue | |||||||||||||||
Gathering Revenue | $ | 43,168 | $ | 47,717 | $ | 53,753 | $ | 58,785 | |||||||
Other Income | — | — | — | — | |||||||||||
Total Revenue | 43,168 | 47,717 | 53,753 | 58,785 | |||||||||||
Expenses | |||||||||||||||
Operating Expense | 15,574 | 15,880 | 12,831 | 14,639 | |||||||||||
General and Administrative Expense | 3,319 | 3,218 | 3,381 | 3,162 | |||||||||||
Depreciation Expense | 2,994 | 3,667 | 3,769 | 4,623 | |||||||||||
Interest Expense | 65 | 47 | 158 | 565 | |||||||||||
Total Expense | 21,952 | 22,812 | 20,139 | 22,989 | |||||||||||
Net Income | $ | 21,216 | $ | 24,905 | $ | 33,614 | $ | 35,796 | |||||||
Net income per limited partner unit: | |||||||||||||||
Basic | $ | 0.24 | $ | 0.25 | $ | 0.33 | $ | 0.38 | |||||||
Diluted | $ | 0.24 | $ | 0.25 | $ | 0.33 | $ | 0.38 | |||||||
Three Months Ended | |||||||||||||||
March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | ||||||||||||
Revenue | |||||||||||||||
Gathering Revenue | $ | 24,106 | $ | 27,811 | $ | 35,770 | $ | 42,400 | |||||||
Other Income | — | — | — | 85 | |||||||||||
Total Revenue | 24,106 | 27,811 | 35,770 | 42,485 | |||||||||||
Expenses | |||||||||||||||
Operating Expense | 11,976 | 11,975 | 12,938 | 14,554 | |||||||||||
General and Administrative Expense | 1,062 | 1,125 | 1,706 | 2,655 | |||||||||||
Depreciation Expense | 1,618 | 1,679 | 1,808 | 2,225 | |||||||||||
Interest Expense | — | — | — | 24 | |||||||||||
Total Expense | 14,656 | 14,779 | 16,452 | 19,458 | |||||||||||
Net Income | $ | 9,450 | $ | 13,032 | $ | 19,318 | $ | 23,027 | |||||||
Net income per limited partner unit: | |||||||||||||||
Basic | N/A | N/A | $ | — | $ | 0.26 | |||||||||
Diluted | N/A | N/A | $ | — | $ | 0.26 | |||||||||
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management of the Partnership’s general partner, including the general partner’s Principal Executive Officer and Principal Financial Officer, an evaluation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")), was conducted as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer of the Partnership’s general partner have concluded that the Partnership’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
The Partnership's management is responsible for establishing and maintaining adequate internal control over financial reporting, which is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Partnership's internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Partnership; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership's assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Accordingly, even effective controls can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Partnership's internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) ("COSO") in Internal Control-Integrated Framework. Based on our assessment and those criteria, management has concluded that the Partnership maintained effective internal control over financial reporting as of December 31, 2015.
This annual report on Form 10-K for the fiscal year ended December 31, 2015 does not include an attestation report of the Partnership's independent accounting firm due to a transition period established by rules of the Securities and Exchange Commission for recently public companies.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Management of CONE Midstream Partners LP
We are managed by the directors and executive officers of our general partner, CONE Midstream GP LLC. Our general partner is not elected by our unitholders and will not be subject to re-election by our unitholders in the future. CONE Gathering, in which each of CONSOL and Noble Energy own a 50% membership interest, owns all of the membership interests in our general partner and has the right to appoint the entire board of directors of our general partner, including our independent directors. Our unitholders are not entitled to elect the directors of our general partner’s board of directors or to directly or indirectly participate in our management or operations. Our general partner will be liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made specifically nonrecourse to it. Whenever possible, we intend to incur indebtedness that is nonrecourse to our general partner.
In evaluating director candidates, CONE Gathering will assess whether a candidate possesses the integrity, judgment, knowledge, experience, skill and expertise that are likely to enhance the ability of our board of directors to manage and direct our affairs and business, including, when applicable, to enhance the ability of committees of the board of directors of our general partner to fulfill their duties.
Neither we nor our subsidiaries have any employees. Our general partner has the sole responsibility for providing the employees and other personnel necessary to conduct our operations. All of the employees that conduct our business are employed by our general partner or its affiliates, but we sometimes refer to these individuals in this prospectus as our employees.
Director Independence
As a publicly traded partnership, we qualify for, and are relying on, certain exemptions from the New York Stock Exchange's ("NYSE") corporate governance requirements, including:
• | the requirement that a majority of the board of directors of our general partner consist of independent directors; |
• | the requirement that the board of directors of our general partner have a nominating/corporate governance committee that is composed entirely of independent directors; and |
• | the requirement that the board of directors of our general partner have a compensation committee that is composed entirely of independent directors. |
As a result of these exemptions, our general partner’s board of directors is not comprised of a majority of independent directors. Our board of directors does not currently intend to establish a nominating/corporate governance committee or a compensation committee. Accordingly, unitholders will not have the same protections afforded to equityholders of companies that are subject to all of the corporate governance requirements of the NYSE.
We are, however, required to have an audit committee of at least three members, and all of its members are required to meet the independence and experience standards established by the NYSE and the Exchange Act, subject to certain transitional relief during the one-year period following the IPO.
Committees of the Board of Directors
The board of directors of our general partner has an audit committee, and may have such other committees (including a conflicts committee) as the board of directors shall determine from time to time.
Audit Committee
We are required to have an audit committee of at least three members, and all of its members are required to meet the independence and experience standards established by the NYSE and the Exchange Act, subject to certain transitional relief during the one-year period following the IPO. The audit committee of the board of directors of our general partner assists the board of directors in its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and partnership policies and controls. The audit committee has the sole authority to (1) retain and terminate our independent registered public accounting firm, (2) approve all auditing services and related fees and the terms thereof performed by our independent registered public accounting firm and (3) pre-approve any non-audit services and tax services to
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be rendered by our independent registered public accounting firm. The audit committee is also responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm will be given unrestricted access to the audit committee and our management, as necessary. Ms. Angela A. Minas (Chairperson) and Messrs. John D. Chandler and John E. Jackson comprise the members of the audit committee. Each of Ms. Minas and Messrs. Chandler and Jackson satisfy the definition of audit committee financial expert for purposes of the SEC’s rules.
Conflicts Committee
The board of directors of our general partner has the ability to establish a conflicts committee under our partnership agreement. If established, at least two members of the board of directors of our general partner will serve on the conflicts committee to review specific matters that may involve conflicts of interest in accordance with the terms of our partnership agreement. The board of directors of our general partner will determine whether to refer a matter to the conflicts committee on a case-by-case basis. The members of our conflicts committee may not be officers or employees of our general partner or directors, officers or employees of its affiliates (including our Sponsors), and must meet the independence and experience standards established by the NYSE and the Exchange Act to serve on an audit committee of a board of directors. In addition, the members of our conflicts committee may not own any interest in our general partner or any interest in us or our subsidiaries other than common units or awards under our long-term incentive plan. If our general partner seeks approval from the conflicts committee, then it will be presumed that, in making its decision, the conflicts committee acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
Board Leadership Structure
Mr. Lewis, our Chief Executive Officer of our general partner, currently serves as the chairman of the board of directors. The board of directors of our general partner has no policy with respect to the separation of the offices of chairman of the board of directors and chief executive officer. Instead, that relationship is defined and governed by the amended and restated limited liability company agreement of our general partner, which permits the same person to hold both offices. Directors of the board of directors of our general partner are designated or appointed by CONE Gathering, in which each of CONSOL and Noble Energy own a 50% membership interest. Accordingly, unlike holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business or governance, subject in all cases to any specific unitholder rights contained in our partnership agreement.
Board Role in Risk Oversight
Our corporate governance guidelines provide that the board of directors of our general partner is responsible for reviewing the process for assessing the major risks facing us and the options for their mitigation. This responsibility is largely satisfied by our audit committee, which is responsible for reviewing and discussing with management and our independent registered public accounting firm our major risk exposures and the policies management has implemented to monitor such exposures, including our financial risk exposures and risk management policies.
Non-Management Executive Sessions and Unitholder Communications
During the last fiscal year, the non-management directors met twice in executive session. Angela Minas, as Chair of the Audit Committee, acted as presiding director in such sessions.
Unitholders and interested parties can communicate directly with non-management directors by mail in care of the General Counsel and Secretary at CONE Midstream Partners LP, 1000 CONSOL Energy Drive, Canonsburg, Pennsylvania 15317. Such communications should specify the intended recipient or recipients. Commercial solicitations or communications will not be forwarded.
Meetings and Other Information
During the last fiscal year, our board of directors had nine meetings of which four were "Regularly Scheduled Meetings" and five were "Special Meetings". Our audit committee had eight meetings of which four were "Regularly Scheduled Meetings" and four were "Special Meetings". All directors have access to members of management, and a substantial amount of information transfer and informal communication occurs between meetings. One non-management director did not attend one of the board meetings and one of the audit committee meetings.
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Our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Whistleblower Policy and Audit Committee Charter are available on our website (www.conemidstream.com) under the Corporate Governance tab. Our Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to disclose any amendment to or waiver of our Code of Business Conduct and Ethics either on our website or in a Current Report on Form 8-K filed with the SEC.
Audit Committee Report
The audit committee of the board of directors of our general partner oversees the Partnership’s financial reporting process on behalf of the board of directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls.
In fulfilling its oversight responsibilities, the audit committee reviewed and discussed with management the audited financial statements contained in this Annual Report on Form 10-K.
The Partnership’s independent registered public accounting firm, Ernst & Young LLP, is responsible for expressing an opinion on the conformity of the audited financial statements with accounting principles generally accepted in the United States of America. The audit committee reviewed with Ernst & Young LLP the firm’s judgment as to the quality, not just the acceptability, of the Partnership’s accounting principles and such other matters as are required to be discussed with the audit committee under generally accepted auditing standards. The audit committee also discussed with Ernst & Young LLP the matters required to be discussed by Public Company Accounting Oversight Board Auditing Standard No. 16, Communications with Audit Committees.
Based on the reviews and discussions referred to above, the audit committee recommended to the board of directors that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2015 for filing with the SEC.
Directors and Executive Officers of CONE Midstream GP LLC
Directors are appointed by CONE Gathering, the sole member of our general partner, and hold office until their successors have been appointed or qualified or until their earlier death, resignation, removal or disqualification. Executive officers are appointed by, and serve at the discretion of, the board of directors. The following table presents information for the directors, director nominee and executive officers of CONE Midstream GP LLC as of December 31, 2015.
Name | Age | Position with Our General Partner |
John T. Lewis | 59 | Director and Chief Executive Officer; Chairman of the Board |
David M. Khani | 52 | Director and Chief Financial Officer |
Joseph M. Fink | 36 | Chief Operating Officer |
Brian R. Rich | 39 | Chief Accounting Officer |
Kirk A. Moore | 59 | General Counsel and Secretary |
Kenneth M. Fisher | 54 | Director |
Stephen W. Johnson | 57 | Director |
Angela A. Minas | 51 | Director and Audit Committee Chair |
John Chandler | 46 | Director and Audit Committee Member |
John Jackson | 57 | Director and Audit Committee Member |
John T. Lewis was appointed a director, Chairman of the Board and Chief Executive Officer of our general partner effective May 30, 2014. Mr. Lewis has served as Senior Vice President of Noble Energy since April 2013 and is currently responsible for Corporate Development at Noble Energy. He previously served as Vice President of the Southern Region of Noble Energy’s North America division from 2008 and was Director of Asset Development and Reserves at Noble Energy from 2006. Prior to joining Noble Energy, he held various positions with BP America, Vastar and ARCO. We believe that Mr. Lewis’s substantial
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prior experience with Noble Energy and other companies engaged in energy-related businesses will provide the board of directors with valuable insight.
David M. Khani was appointed a director and Chief Financial Officer of our general partner effective May 30, 2014. Mr. Khani joined CONSOL on September 1, 2011 as its Vice President — Finance, and was promoted to Executive Vice President and Chief Financial Officer of CONSOL effective March 1, 2013. Prior to joining CONSOL, Mr. Khani was with FBR Capital Markets & Co., an investment banking and advisory firm and held the following positions: Director of Research from February 2007 through October 2010, and then Co-Director of Research from November 2010 through August 2011. Prior to that time he served as the Managing Director and Co-Head of FBR’s Energy and Natural Resources Group. We believe Mr. Khani’s energy industry and financial experience provides the board of directors with valuable experience in our financial and investor relations matters.
Joseph M. Fink was appointed Chief Operating Officer of our general partner effective May 30, 2014. Mr. Fink is Vice President of CONSOL’s Midstream Operations and President of CONE Gathering. He started at CONSOL’s Virginia CBM operations in 2001. In 2006, he was appointed to lead CONSOL’s Nittany CBM operations in central Pennsylvania from exploration through development. Mr. Fink was promoted to CONSOL’s General Manager of SWPA Gas Operations in 2008 and has been in the forefront of the exploration and development of the Marcellus Shale play for CONSOL. He was appointed General Manager of CONSOL’s Midstream Operations in 2010 where he was charged with standardizing midstream activity across all regions. In 2012, he was promoted to his current position of Vice President of CONSOL’s Midstream Operations. Mr. Fink has been president of CONE Gathering since its inception in 2011.
Brian R. Rich was appointed Chief Accounting Officer of our general partner effective November 4, 2015. Prior to his appointment as Chief Accounting Officer of our general partner, Mr. Rich served as an Accounting Senior Manager at CONSOL. Mr. Rich joined CONSOL’s accounting department in November 2014 where he served in positions of increasing responsibility. Prior to joining CONSOL, Mr. Rich was employed by Education Management Corporation from March 2007 through November 2014, where he held various accounting positions, including Vice President and Assistant Controller, a position he held upon his departure. Prior to his time at Education Management Corporation, Mr. Rich served in various positions (from associate through manager) with PricewaterhouseCoopers LLP from October 1999 through March 2007, primarily serving the energy sector. Mr. Rich holds a Bachelor of Science degree from Lehigh University and is a Certified Public Accountant licensed in Pennsylvania.
Kirk A. Moore was appointed General Counsel and Secretary of our general partner effective May 30, 2014. Mr. Moore has served as an Associate General Counsel of Noble Energy since September 2007, previously serving as an Assistant General Counsel from May 2001. He has served as an Assistant Secretary of Noble Energy since July 2002. Prior to joining Noble Energy, he served as an attorney with several companies engaged in energy-related businesses and in private practice.
Kenneth M. Fisher was appointed a director of our general partner effective May 30, 2014. Mr. Fisher was elected Executive Vice President and Chief Financial Officer of Noble Energy in April 2013, previously serving as Senior Vice President and Chief Financial Officer of Noble Energy from November 2009. Before joining Noble Energy, Mr. Fisher served as Executive Vice President of Finance for Upstream Americas for Shell from July 2009 to November 2009 and served as Director of Strategy & Business Development for Royal Dutch Shell plc in The Hague from August 2007 to July 2009. Prior to joining Shell in 2002, Mr. Fisher held senior finance positions within business units of General Electric Company. We believe Mr. Fisher’s energy industry and financial experience provides the board of directors with valuable experience in our financial and accounting matters.
Stephen W. Johnson was appointed a director of our general partner effective May 30, 2014. Mr. Johnson has served as Executive Vice President and Chief Legal and Corporate Affairs Officer of CONSOL and CNX Gas Corporation since January 1, 2013. Prior to that time, Mr. Johnson served as Senior Vice President and General Counsel of CONSOL and CNX Gas Corporation from 2009 through 2012. He served as Executive Vice President and General Counsel for CNX Gas from 2007 to 2009 and as Senior Vice President and General Counsel for CNX Gas from 2005 to 2007. Prior to joining CONSOL, Mr. Johnson was a partner with Reed Smith LLP and a shareholder with Buchanan Ingersoll & Rooney PC. We believe Mr. Johnson’s extensive knowledge of our industry and our operations gained during his years of service with CONSOL in positions of increasing responsibility, as well as his legal knowledge and experience provide the board of directors with valuable experience.
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Angela A. Minas was appointed a director of our general partner and chairperson of our audit committee effective September 25, 2014. Ms. Minas also currently serves on the board of directors of the general partner of Ciner Resources LP, a public master limited partnership, where she also serves as Audit Committee Chair and Conflicts Committee Chair. Ms. Minas previously served as Vice President and Chief Financial Officer of Nemaha Oil and Gas, LLC, a private exploration and production portfolio company backed by Pine Brook Road Partners, a private equity firm. From 2008 to 2012, Ms. Minas served as Vice President and Chief Financial Officer of the general partner of DCP Midstream Partners, LP, a public master limited partnership. From 2006 to 2008, Ms. Minas served as Chief Financial Officer, Chief Accounting Officer and Treasurer of Constellation Energy Partners LLC, a public master limited liability company. Ms. Minas received both a Bachelor of Arts in Managerial Studies and a Master of Business Administration from Rice University. Ms. Minas’ previous experience with public master limited partnerships and the natural resource industry, as well as her knowledge of financial statements, provide her with the necessary skills to be a member of the board of directors of our general partner.
John Chandler was appointed a director of our general partner and member of our audit committee effective October 14, 2014. Mr. Chandler also serves on the board of directors of the general partners of USA Compression Partners, L.P. where he also chairs the Audit Committee. From 2002 to 2014, Mr. Chandler served as the Chief Financial Officer and Treasurer of Magellan Midstream Holdings, GP. Prior to joining Magellan, Mr. Chandler served in various senior financial planning, strategic development and accounting positions with Williams Energy Services, LLC from 1998 to 2002 and with Mapco, Inc. from 1992 to 1998. We believe that Mr. Chandler's career in the energy industry and experience in financial matters allows him to provide important insight and perspective to the Board.
John Jackson was appointed a director of our general partner and member of our audit committee effective January 20, 2015. Mr. Jackson is the President and CEO of Spartan Energy Partners, LP (“Spartan”), a privately owned gas gathering, treating & processing company. He has been with Spartan since its formation in March, 2010. Mr. Jackson was Chairman, CEO and President of Price Gregory Services, Inc., a pipeline-related infrastructure service provider from February 2008 until its sale in October of 2009. He served as a director of Hanover Compressor Company (“Hanover”), now known as Exterran Holdings, Inc. (NYSE: EXH), from July 2004 until May 2010. Mr. Jackson served as Hanover’s President and CEO from October 2004 to August 2007 and as Chief Financial Officer from January 2002 to October 2004. Mr. Jackson is a director of Seitel, Inc., a privately owned provider of seismic data to the oil & gas industry in North America, since August 2007, Select Energy Services, LLC, a privately owned total water management company for oil and gas companies, since January 2012 & Main Street Capital Corporation (NYSE: MAIN) a publicly traded BDC, since August 2013. Previously, Mr. Jackson served as a director of Encore Energy Partners (NYSE: ENP) from January 2009 until its sale in December 2011 & RSH Energy, LLC, a privately owned engineering firm, from September 2013 to March 2014. He also serves on the board of several non-profit organizations. We believe that Mr. Jackson's background in the energy industry and experience in financial matters, along with the leadership attributes indicated by his executive experience, provide an important source of insight and perspective to the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities (collectively, “Insiders”) to file with the SEC initial reports of ownership and reports of changes in ownership of such equity securities. Insiders are also required to furnish us with copies of all Section 16(a) forms that they file. Such reports are accessible on or through our website at www.conemidstream.com.
Based solely upon a review of the copies of Forms 3 and 4 furnished to us, or written representations from certain reporting persons that no Forms 5 were required, we believe that the Insiders complied with all filing requirements with respect to transactions in our equity securities during 2015.
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ITEM 11. | EXECUTIVE COMPENSATION |
Executive Compensation
Neither we nor our general partner employ any of the individuals who serve as executive officers of our general partner and are responsible for managing our business. We are managed by our general partner, the executive officers of which are employees of CONSOL and Noble Energy. We and our general partner have entered into an omnibus agreement with CONSOL and Noble Energy pursuant to which, among other matters:
• | CONSOL and Noble Energy make available to our general partner the services of their employees who act as the executive officers of our general partner; |
• | our general partner pays a fixed administrative fee to each of CONSOL and Noble Energy to cover the services provided to us by the executive officers of our general partner who are employees of CONSOL and Noble Energy, respectively. |
For 2015, our “Named Executive Officers” (NEOs) were:
• | John T. Lewis, Chairman of the Board of Directors and Chief Executive Officer; |
• | David M. Khani, Chief Financial Officer; and |
• | Joseph M. Fink, Chief Operating Officer. |
Messrs. Lewis and Khani, who are also executive officers of Noble Energy and CONSOL, respectively, devote the majority of their time to their respective roles at Noble Energy and CONSOL and also spend time, as needed, directly managing our business and affairs. Mr. Fink, who is an employee of CONSOL, also performs responsibilities for CONSOL unrelated to our business; however, Mr. Fink devotes substantially all of his working time to us and our general partner. Pursuant to the terms of the omnibus agreement, we pay a fixed administrative fee to Noble Energy and CONSOL, which covers the services provided to us by all of our executive officers. Except with respect to awards that were granted beginning in 2015 and in the future under our equity compensation plans, our executive officers do not receive any separate amounts of compensation for their services to our business or as executive officers of our general partner and, except for the fixed administrative fee we pay to Noble Energy and CONSOL, we do not otherwise pay or reimburse any compensation amounts to our executive officers.
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Summary Compensation Table
The following summarizes the total compensation paid to our named executive officers for their services in relation to our business for 2015, 2014 and 2013:
Name and Principal Position | Year | Salary | Equity Awards (2) | Non-Equity Incentive Compensation (3) | Change in Pension Value and Nonqualified Deferred Compensation Earnings (4) | All Other Compensation (5) | Total | |||||||||||||||||||
John T Lewis (Chairman of the Board and Chief Executive Officer) (1) | 2015 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
2014 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
2013 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
David Khani (Chief Financial Officer) (1) | 2015 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
2014 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
2013 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Joseph M. Fink (Chief Operating Officer) | 2015 | $ | 223,161 | $ | 100,000 | $ | 103,848 | $ | — | $ | 34,567 | $ | 461,576 | |||||||||||||
2014 | $ | 217,366 | $ | 75,000 | $ | 118,556 | $ | 58,272 | $ | 26,372 | $ | 495,566 | ||||||||||||||
2013 | $ | 202,192 | $ | 80,620 | $ | 101,709 | $ | — | $ | 18,120 | $ | 402,641 | ||||||||||||||
(1) Messrs. Lewis and Khani devote approximately 10% of their overall working time to our business and the compensation Messrs. Lewis and Khani receive from Noble Energy and CONSOL, respectively, in relation to their services for us do not comprise a material amount of their total compensation.
(2) In 2013 and 2014, the values set forth reflect awards of restricted/performance stock units in CONSOL and are based on the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718 (disregarding the impact of estimated forfeitures related to service-based vesting conditions). The grant date fair value is computed based upon the closing price of CONSOL’s stock on the date of grant, except that for performance share units, there is an adjustment based on estimated probability that the performance conditions required for vesting will be achieved and an adjustment for the valuation of the market condition which is in accordance with FASB ASC Topic 718. In 2015, the values reflect awards of CONE Midstream Partners LP phantom units, which are similar to restricted stock units. All values do not correspond to the actual value that will be recognized by the named executive at the time such units vest.
(3) Includes cash incentives earned in the applicable year under the CONSOL Short-Term Incentive Compensation Plan. The relevant performance measures
underlying the cash awards were satisfied in the applicable annual performance period.
(4) Amount reflects the actuarial increase in the present value of the named executive’s benefits under the CONSOL Employee Retirement Plan and the Defined Contribution Restoration Plan. For Mr. Fink, zero is shown for 2015 because the actual change in pension value was a decrease in the amount of $4,909. This was primarily due to the qualified pension plan being frozen as of 12/31/2014 and the change in interest rates.
(5) Mr. Fink’s personal benefits for 2015 include an annual vehicle allowance of $13,000, an annual physical exam, and $19,722 in matching contributions made by CONSOL under its 401(k) plan.
Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure
CONSOL provides compensation to its executives in the form of base salaries, annual cash incentive awards, long-term equity incentive awards and participation in various employee benefits plans and arrangements, as further described in the section titled “Retirement, Health, Welfare and Additional Benefits” below.
As explained above, Messrs. Lewis and Khani currently devote a portion of their overall working time to our business and the compensation these named executives receive in relation to their services for us does not comprise a material amount of their total compensation. In addition, except for a fixed administrative support fee that our general partner pays to CONSOL and Noble Energy pursuant to the terms of the omnibus agreement, and any awards that may be granted in the
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future to Messrs. Lewis and Khani under our equity compensation plans, we do not pay or reimburse any compensation amounts to or for Messrs. Lewis and Khani. During 2015, Mr. Fink devoted substantially all of his working time to matters relating to our business, and all of our other executive officers devoted substantially less than a majority of their working time to matters relating to our business. The following sets forth a more detailed explanation of the elements of CONSOL's compensation programs as they relate to Mr. Fink.
Base Salary.
Base salary is designed to provide a competitive fixed rate of pay recognizing employees’ different levels of responsibility and performance. In setting an executive’s base salary, CONSOL considers factors including, but not limited to, external market data, the internal worth and value assigned to the executive’s role and responsibilities at CONSOL, and the named executive’s skills and performance. As of December 31, 2015, Mr. Fink’s current annual base salary was $225,000.
Annual Cash Incentives.
CONSOL’s annual cash incentive program provides participants with an opportunity to earn performance based annual cash bonus awards. Target annual bonus levels are established at the beginning of each year and are based on a percentage of the executive’s base salary. For 2015, Mr. Fink had a target bonus of 35% of his annual base salary, with a potential payout up to 300% of target based on company performance metrics, which for 2015 included metrics relating to employee and contractor safety, environmental compliance, continuous improvement, and production. For 2014, CONSOL paid a cash bonus to Mr. Fink at a level of approximately 150% of his target award level in recognition of CONSOL’s performance at above target levels for several of the above-specified criteria. This payout level also reflected an above target individual performance rating, based on a holistic and qualitative, rather than a quantitative, assessment.
Long-Term Equity-Based Compensation Awards.
Beginning in 2015, Mr. Fink’s long-term incentive awards include phantom units granted under CONE Midstream's 2014 Long-Term Incentive Plan (the “LTIP”).
The following provides additional information about Mr. Fink’s outstanding equity awards in CONE Midstream as of December 31, 2015.
Outstanding Equity Awards for CONE Midstream Partners LP at December 31, 2015 | |||||||||||||||||||||
Option Awards | Stock Awards | ||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options | Number of Securities Underlying Unexercised Options | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested | |||||||||||||
(Exercisable) | (Unexercisable) | ||||||||||||||||||||
(#) | (#) | ($) | (#) | ($) | (#) | ($) | |||||||||||||||
Joseph M. Fink, Chief Operating Officer | — | — | — | N/A | 5,290 (1) | 52,106 (2) | — | — | |||||||||||||
(1) Phantom units granted on January 20, 2015, which vest in three equal annual installments (subject to rounding) beginning on the first anniversary of the grant date.
(2) The market value for the phantom units was determined by multiplying the closing market price for CONE Midstream common units on December 31, 2015 ($9.85) by the number of shares underlying the phantom unit.
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Our executive officers have received and may continue to receive equity or equity-based awards in CONSOL and Noble Energy, as applicable, under their respective equity compensation programs. The following provides additional information about Mr. Fink’s outstanding equity awards in CONSOL as of December 31, 2015.
Outstanding Equity Awards for CONSOL at December 31, 2015 | ||||||||||||||||||||||||
Option Awards | Stock Awards | |||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options | Number of Securities Underlying Unexercised Options | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested | ||||||||||||||||
(Exercisable) | (Unexercisable) | |||||||||||||||||||||||
(#) | (#) | ($) | (#) | ($) | (#) | ($) | ||||||||||||||||||
Joseph M. Fink, Chief Operating Officer | 1,058 (1) | — | 27.90 | 2/17/2019 | — | — | — | — | ||||||||||||||||
634 (2) | — | 50.50 | 2/19/2020 | — | — | — | — | |||||||||||||||||
1,021 (3) | — | 48.61 | 2/23/2021 | — | — | — | — | |||||||||||||||||
968 (4) | — | 36.14 | 1/26/2022 | |||||||||||||||||||||
— | — | — | — | 1,353 (5) | 10,689 (6) | — | — | |||||||||||||||||
— | — | — | — | — | — | 2,439 (7) | 19,268 (6) | |||||||||||||||||
(1) Options granted February 17, 2009 that vested and became exercisable in three equal annual installments (subject to rounding) beginning on the first
anniversary of the grant date.
(2) Options granted February 16, 2010 that vested and became exercisable in three equal annual installments (subject to rounding) beginning on the first
anniversary of the grant date.
(3) Options granted February 23, 2011 that vested and became exercisable in three equal annual installments (subject to rounding) beginning on the first
anniversary of the grant date.
(4) Options granted January 26, 2012 that vested and became exercisable in three equal annual installments (subject to rounding) beginning on the first
anniversary of the grant date.
(5) Restricted stock units granted on January 31, 2014, which vest in three equal annual installments (subject to rounding) beginning on the first anniversary of the grant date.
(6) The market value for restricted stock units and CONSOL Stock Units was determined by multiplying the closing market price for CONSOL common stock on December 31, 2015 ($7.90) by the number of shares underlying the restricted stock unit and CONSOL Stock Unit awards.
(7) These units represent the aggregate number of unvested CONSOL Stock Units as of December 31, 2015. The performance period for the CONSOL Stock Unit awards granted in 2013 is January 1, 2013 through December 31, 2015. The performance share unit amounts presented for the 2013 CONSOL Stock Unit awards are based on achieving performance goals at the target level.
Retirement, Health, Welfare and Additional Benefits.
Our executive officers are eligible to participate in the employee benefit plans and programs that CONSOL and Noble Energy may from time to time offer to their respective employees, subject to the terms and eligibility requirements of those plans. Our executive officers, including Mr. Fink, participate in these programs and CONSOL and Noble Energy remain responsible for 100 percent of the benefits provided thereunder for their respective employees.
With respect to the benefits offered by CONSOL as they relate to Mr. Fink, CONSOL employees are eligible to participate in a variety of employee benefit plans and programs, which include a broad-based defined benefit pension plan and 401(k) savings plan, as well as a supplemental defined contribution retirement plan that provides benefits to executive officers and key employees, including Mr. Fink, in excess of IRS imposed limits under the broad-based pension and savings plan. CONSOL also provides limited executive perquisites, which included an automobile allowance of $13,000 for Mr. Fink in 2015.
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Severance and Change in Control Programs.
CONSOL has entered into change in control severance agreements with Mr. Fink, pursuant to which Mr. Fink would receive certain severance payments and benefits if his employment is terminated or constructively terminated after, or in connection with, a change in control of either CONE Gathering or CONSOL and subject to his executing a satisfactory release of claims. Under these circumstances, Mr. Fink would receive a lump sum cash payment equal to 1.5 times his base pay plus incentive pay and would also receive a pro-rated bonus for the year of termination, continuation of employee benefits (including the value attributable to continued participation in pension and similar benefit plans) for a period of 18 months following termination, and outplacement assistance. In addition, all of Mr. Fink’s equity awards would accelerate and vest in connection with a change in control.
Absent a change in control of CONE Gathering or CONSOL, upon an involuntary termination, (i) under CONSOL’s severance pay plan for salaried employees, Mr. Fink would be entitled to severance in an amount equal to one week of compensation for each completed full year of continuous service, up to a maximum of 25 weeks of compensation and (ii) under CONSOL’s supplemental defined contribution retirement plan, Mr. Fink would be entitled to a contribution for the year in which the termination occurred (this benefit is also applicable upon death, disability and other similar circumstances). In addition, Mr. Fink would generally be entitled to accelerated or continued vesting of CONSOL stock awards in the event of a termination without cause, death, “incapacity retirement” (which requires attaining age 40 and ten years of service and being deemed disabled and entitled to receive a Social Security disability benefit) or disability, provided that such vesting is only on a pro-rated basis through the date of termination in the event of disability if such event is not also an “incapacity retirement.” Severance costs would be allocated to us in accordance with the terms of the omnibus agreement, which, for Mr. Fink, would initially result in us being responsible for up to 100% of the applicable severance costs.
Compensation of Our Directors
The officers or employees of our general partner or of our Sponsors who also serve as directors of our general partner do not receive additional compensation for their service as a director of our general partner. Directors of our general partner who are not officers or employees of our general partner or of our Sponsors, or “non-employee directors,” will receive cash and equity-based compensation for their services as directors. The non-employee director compensation program will consist of the following:
• | an annual retainer of $60,000; |
• | an additional annual retainer of $20,000 for service as the lead director (if established) or chair of the audit committee and $10,000 for service as the chair of the conflicts committee; and |
• | an annual equity-based award granted under the LTIP, having a value as of the grant date of approximately $80,000. |
Non-employee directors also receive reimbursement for out-of-pocket expenses they incur in connection with attending meetings of the board of directors or its committees. Each director will be indemnified for his or her actions associated with being a director to the fullest extent permitted under Delaware law.
The following table provides information regarding the compensation earned by our non-employee directors during the year ended December 31, 2015.
Name | Fees Earned or Paid in Cash ($) | Stock Awards (1) | Option Awards | All Other Compensation | Total | ||||||||||
Angela A. Minas | $ | 80,000 | $ | 80,000 | $ | — | $ | — | $ | 160,000 | |||||
John Chandler | $ | 67,500 | $ | 80,000 | $ | — | $ | — | $ | 147,500 | |||||
John Jackson (2) | $ | 60,000 | $ | 80,000 | $ | — | $ | — | $ | 140,000 | |||||
(1) | The values set forth in this column are based on the aggregate grant date fair value of awards computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation-Stock Compensation” (“FASB ASC Topic 718”). The grant date fair value is computed based upon the closing price of CONE Midstream’s stock on the date of grant. The values reflect the awards’ fair market value at the date of grant, and do not correspond to the actual value that will be recognized by the directors. As of December 31, 2015, the number of phantom units held by each of our current non-employee directors was 4,232. |
(2) | Mr. Jackson was appointed a director of our general partner and member of our audit committee effective January 20, 2015. |
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS |
The following table sets forth, as of January 21, 2016, the beneficial ownership of common units and subordinated units of CONE Midstream Partners LP and held by:
• | each unitholder known by us to beneficially hold 5% or more of our outstanding units; |
• | each director or director nominee of our general partner; |
• | each named executive officer of our general partner; and |
• | all of the directors, director nominee and named executive officers of our general partner as a group. |
In addition, our general partner owns a 2% general partner interest in us and all of our incentive distribution rights.
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Unless indicated below, to our knowledge, the persons and entities named in the following table have sole voting and sole investment power with respect to all units beneficially owned by them, subject to community property laws where applicable.
Name of Beneficial Owner(1) | Common Units Beneficially Owned | Percentage of Common Units Beneficially Owned | Subordinated Units Beneficially Owned | Percentage of Subordinated Units Beneficially Owned | Percentage of Total Common Units and Subordinated Units Beneficially Owned | ||||||||||
CNX Gas Company LLC(2) | 4,519,060 | 20 | % | 14,581,561 | 50 | % | 35 | % | |||||||
Noble Midstream Services, LLC(3) | 4,519,061 | 20 | % | 14,581,560 | 50 | % | 35 | % | |||||||
(1) Unless otherwise indicated, the address for all beneficial owners in this table is c/o CONE Midstream GP LLC, 1000 CONSOL Energy Drive, Canonsburg, Pennsylvania 15317.
(2) CNX Gas Company LLC owns a 50% membership interest in CONE Gathering LLC, the sole owner of the membership interests in our general partner. CNX Gas Company LLC is a wholly owned subsidiary of CONSOL Energy Inc.
(3) Noble Energy, Inc. beneficially owns a 50% membership interest in CONE Gathering LLC, the sole owner of the membership interests in our general partner. Noble Midstream Services, LLC, a wholly owned subsidiary of Noble Energy, Inc., owns the common units and subordinated units beneficially owned by Noble Energy, Inc.
Directors/Named Executive Officers | Common Units Beneficially Owned | Percentage of Common Units Beneficially Owned | Purchase/Dispositions of Common Units | Conversion (vesting) of Phantom Units into Common Units | Total Common Units Beneficially Owned | |||||||||
John T. Lewis | 7,500 | * | — | — | 7,500 | |||||||||
David M. Khani | 7,500 | * | — | — | 7,500 | |||||||||
Joseph M. Fink | 1,100 | * | — | 1,114 | 2,214 | |||||||||
Brian R. Rich | — | — | — | — | — | |||||||||
Kirk A. Moore | 4,500 | * | — | — | 4,500 | |||||||||
Kenneth M. Fisher | 7,500 | * | — | — | 7,500 | |||||||||
Stephen W. Johnson | 7,000 | * | — | — | 7,000 | |||||||||
Angela A. Minas | 12,500 | * | — | 4,232 | 16,732 | |||||||||
John Chandler | 1,000 | * | 2,000 | 4,232 | 7,232 | |||||||||
John Jackson | 4,000 | * | — | 4,232 | 8,232 | |||||||||
All Directors and Executive Officers as a group (10 persons) | 52,600 | * | 2,000 | 14,458 | 68,410 | |||||||||
* Less than 1%.
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The following table sets forth, as of December 31, 2015, the number of shares of CONSOL common stock beneficially owned by each of the directors and named executive officers of our general partner and all of the directors and named executive officers of our general partner as a group. The percentage of total shares is based on 229,054,236 shares outstanding as of December 31, 2015. Amounts shown below include options that are currently exercisable or that may become exercisable within 60 days of December 31, 2015 and the shares underlying deferred stock units and the shares underlying restricted stock units that will be settled within 60 days of December 31, 2015. Unless otherwise indicated, the named person has the sole voting and dispositive powers with respect to the shares of CONSOL common stock set forth opposite such person’s name.
Directors/Named Executive Officers | Total Common Stock Beneficially Owned | Percent of Total Outstanding | ||||
John T. Lewis | — | — | ||||
David M. Khani | 36,720 | * | ||||
Joseph M. Fink | 17,670 | * | ||||
Brian R. Rich | 90 | * | ||||
Kirk A. Moore | — | — | ||||
Kenneth M. Fisher | — | — | ||||
Stephen W. Johnson | 226,665 | * | ||||
Angela A. Minas | — | — | ||||
John Chandler | — | — | ||||
John Jackson | — | — | ||||
All Directors and Executive Officers as a group (10 persons) | 281,145 | * | ||||
* Less than 1%.
The following table sets forth, as of December 31, 2015, the number of shares of Noble Energy common stock beneficially owned by each of the directors and named executive officers of our general partner and all of the directors and named executive officers of our general partner as a group. The percentage of total shares is based on 428,843,495 shares outstanding as of December 31, 2015. Amounts shown below include options that are currently exercisable or that may become exercisable within 60 days of December 31, 2015 and the shares underlying restricted stock awards that will be settled within 60 days of December 31, 2015. Unless otherwise indicated, the named person has the sole voting and dispositive powers with respect to the shares of Noble Energy common stock set forth opposite such person’s name.
Directors/Named Executive Officers | Total Common Stock Beneficially Owned | Percent of Total Outstanding | ||||
John T. Lewis | 210,970 | * | ||||
David M. Khani | — | — | ||||
Joseph M. Fink | — | — | ||||
Brian R. Rich | — | — | ||||
Kirk A. Moore | 83,013 | * | ||||
Kenneth M. Fisher | 483,547 | * | ||||
Stephen W. Johnson | — | — | ||||
Angela A. Minas | — | — | ||||
John Chandler | — | — | ||||
John Jackson | — | — | ||||
All Directors and Executive Officers as a group (10 persons) | 777,530 | * | ||||
* Less than 1%.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information regarding the number of common units that are available for issuance under our existing long-term incentive plan as of December 31, 2015.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)(c) | ||||||
Equity compensation plans approved by security holders | 33,885 | — | 5,766,115 | ||||||
Equity compensation plans not approved by security holders | — | — | — | ||||||
Total | 33,885 | — | 5,766,115 | ||||||
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Our Sponsors collectively own 9,038,121 common units and 29,163,121 subordinated units, representing an aggregate 64.2% limited partner interest. In addition, our general partner owns a 2% general partner interest in us and all of our incentive distribution rights.
Distributions and Payments to Our General Partner and Its Affiliates
The following summarizes the distributions and payments to be made by us to our general partner and its affiliates in connection with the formation, ongoing operation and liquidation of us. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of arm’s-length negotiations.
Formation Stage
The consideration received by our general partner and its affiliates for our formation
• | 2% general partner interest; and |
• | 98% limited partner interest. |
IPO Stage
The consideration received by our general partner and its affiliates in connection with the IPO for the contribution to us of a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems
• | 9,038,121 common units; |
• | 29,163,121 subordinated units; |
• | a 2% general partner interest in us; |
• | the incentive distribution rights; and |
• | a distribution of approximately $408.0 million from the net proceeds of the IPO. |
Post-IPO Operational Stage
Distributions of available cash to our general partner and its affiliates
• | We will generally make cash distributions of 98% to the unitholders pro rata, including our Sponsors, as holders of an aggregate of 9,038,121 common units and 29,163,121 subordinated units, and 2% to our general partner, assuming it makes any capital contributions necessary to maintain its 2% general partner interest in us. In addition, if distributions exceed the minimum quarterly distribution and target distribution levels, the incentive distribution rights held by our general partner will entitle our general partner to increasing percentages of the distributions, up to 48% of the distributions above the highest target distribution level. |
Payments to our general partner and its affiliates
• | Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement and operational services agreement, our general partner determines the amount of these expenses and such determinations must be made in good faith under the terms of our partnership agreement. Under our omnibus agreement, we will reimburse our Sponsors for expenses incurred by our Sponsors and their affiliates in providing certain general and administrative services to us, including the provision of executive management services by certain officers of our general partner. The expenses of other employees will be allocated to us based on the amount of time actually spent by those employees on our business. These reimbursable expenses also include an allocable portion of the compensation and benefits of employees and executive officers of other affiliates of our general partner who provide services to us. We will also reimburse our Sponsors for any additional out-of-pocket costs and expenses incurred by our Sponsors and their affiliates in providing general and administrative services to us. The costs and expenses for which we are required to reimburse our general partner and its affiliates are not subject to any caps or other limits. |
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• | Under our operational services agreement, we will pay CONSOL for any direct costs actually incurred by CONSOL in providing our gathering pipelines and dehydration, treating and compressor stations and facilities with certain maintenance, operational, administrative and construction services. |
• | Pursuant to the employee secondment agreement, we will reimburse Noble Energy, for allocable salary, benefits, insurance, payroll taxes and other employment expenses related to an employee of Noble Energy who is seconded to us to provide investor relations and similar functions. |
• | Please read “Certain Relationships and Related Transactions and Director Independence - Agreements Governing the IPO Transactions” below. |
Withdrawal or removal of our general partner
• | If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests. |
Liquidation Stage
• | Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their respective capital account balances. |
Agreements Governing the IPO Transactions
We and other parties entered into the various agreements that effected the transactions in connection with the IPO, including the vesting of assets in, and the assumption of liabilities by, us and our subsidiaries, and the application of the proceeds from the IPO. While not the result of arm’s-length negotiations, we believe the terms of all of our initial agreements with our Sponsors and their affiliates are, and specifically intend the rates to be, generally no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services. All of the transaction expenses incurred in connection with these transactions, including the expenses associated with transferring assets into our subsidiaries, were paid for with the proceeds from the IPO.
Omnibus Agreement
At the closing of the IPO, we entered into an omnibus agreement with CONSOL, Noble Energy, CONE Gathering and our general partner that addresses the following matters:
• | our payment of an annual administrative support fee, initially in the amount of $0.6 million (prorated for the first year of service), for the provision of certain services by CONSOL and its affiliates; |
• | our payment of an annual administrative support fee, initially in the amount of approximately $0.6 million (pro rated for the first year of service), for the provision of certain executive services by CONSOL and its affiliates; |
• | our payment of an annual administrative support fee, initially in the amount of approximately $0.2 million (prorated for the first year of service), for the provision of certain executive services by Noble Energy and its affiliates; |
• | our obligation to reimburse our Sponsors for all other direct or allocated costs and expenses incurred by our Sponsors in providing general and administrative services (which reimbursement is in addition to certain expenses of our general partner and its affiliates that are reimbursed under our partnership agreement); |
• | our right of first offer to acquire (i) CONE Gathering’s retained interests in each of our Anchor Systems, Growth Systems and Additional Systems, (ii) CONE Gathering’s other ancillary midstream assets that it retained after the completion of the IPO and (iii) any additional midstream assets that CONE Gathering develops; and |
• | an indemnity from CONE Gathering for liabilities associated with the use, ownership or operation of our assets, including environmental liabilities, to the extent relating to the period of time prior to the closing of the IPO; and our obligation to indemnify CONE Gathering for events and conditions associated with the use, ownership or operation of our assets that occur after the closing of the IPO, including environmental liabilities. |
So long as CONE Gathering controls our general partner, the omnibus agreement will remain in full force and effect. If CONE Gathering ceases to control our general partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.
Payment of administrative support fee and reimbursement of expenses. We pay CONSOL an administrative support fee, initially in the amount of $0.6 million (payable in equal monthly installments and prorated for the first year of service), for the
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provision of certain services for our benefit, including: financial and administrative services (including treasury and accounting); information technology; legal services; corporate health, safety and environmental services; facility services; human resources services; procurement services; corporate engineering services, including asset integrity and regulatory services; logistical services; asset oversight, such as operational management and supervision; business development services; investor relations; tax matters; and public company reporting services. These allocated portions are based on our proportionate share of CONSOL’s property, plant and equipment and equity-method investments associated with the operations overseen by the applicable officer. We also pay CONSOL an administrative support fee, initially in the amount of approximately $0.6 million (payable in equal monthly installments and prorated for the first year of service), for the provision of certain executive services for our benefit. We pay Noble Energy an administrative support fee, initially in the amount of approximately $0.2 million (payable in equal monthly installments and prorated for the first year of service), for the provision of certain executive services for our benefit. Each of the CONSOL administrative support fees and the Noble Energy administrative support fee may change each calendar year, as determined by the applicable Sponsor in good faith, to accurately reflect the degree and extent of the general and administrative services provided to us by such Sponsor and may be adjusted to reflect, among other things, the contribution, acquisition or disposition of assets to or by us or to reflect any change in the cost of providing general and administrative services to us due to changes in any law, rule or regulation applicable to our Sponsors and their affiliates or to us, including any interpretation of such laws, rules or regulations.
Under the omnibus agreement, we will also reimburse our Sponsors for all other direct and allocated costs and expenses incurred by our Sponsors in providing these services to us, including salaries, bonuses and benefits costs, for certain officers of our Sponsors, including those who also serve as officers and directors of our general partner. This reimbursement will be in addition to our reimbursement of our general partner and its affiliates for certain costs and expenses incurred on our behalf for managing and controlling our business and operations as required by our partnership agreement.
Right of first offer. Under the omnibus agreement, until the date that CONE Gathering no longer controls our general partner, if CONE Gathering decides to sell, transfer or otherwise dispose of all or part of its (i) retained interests in each of our Anchor Systems, Growth Systems and Additional Systems, (ii) other ancillary midstream assets that it will retain after the completion of the IPO or (iii) any additional midstream assets that it develops, CONE Gathering will provide us with the opportunity to make the first offer to acquire such interests and assets.
The consummation and timing of any acquisition by us of the interests covered by our right of first offer will depend upon, among other things, CONE Gathering’s decision to sell any of the interests covered by the right of first offer and our ability to reach an agreement with CONE Gathering on price and other terms. Accordingly, we can provide no assurance whether, when or on what terms we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and CONE Gathering is under no obligation to accept any offer that we may choose to make. Please read “Risk Factors — Risks Related to Our Business — We may be unable to grow by acquiring the non-controlling interests in our operating subsidiaries owned by CONE Gathering, which could limit our ability to increase our distributable cash flow.”
Indemnification. Under the omnibus agreement, CONE Gathering will indemnify us for all liabilities that are associated with the use, ownership or operation of our assets and due to occurrences before the closing of the IPO, including environmental liabilities. Indemnification for any liabilities will be limited to liabilities identified prior to the third anniversary of the closing of the IPO, and will be subject to a deductible of $0.5 million per claim before we are entitled to indemnification. For purposes of calculating the deductible, a “claim” will include all liabilities that arise from a discrete act or event. There is no limit on the amount for which CONE Gathering will indemnify us under the omnibus agreement once we meet the deductible, if applicable. CONE Gathering will also indemnify us for failure to obtain certain consents, licenses and permits necessary to conduct our business, including the cost of curing any such condition, in each case that are identified prior to the third anniversary of the closing of the IPO, and will be subject to an aggregate deductible of $0.5 million before we are entitled to indemnification.
CONE Gathering will also indemnify us for liabilities relating to:
• | the consummation of the transactions contemplated by our contribution agreement or the assets contributed to us that arise out of the ownership or operation of the assets prior to the closing of the IPO; |
• | events and conditions associated with any assets retained by CONE Gathering; |
• | litigation matters attributable to the ownership or operation of the contributed assets prior to the closing of the IPO; |
• | the failure to have any consent, license, permit or approval necessary for us to own or operate the contributed assets in substantially the same manner as owned or operated by CONE Gathering prior to the IPO; and |
• | all tax liabilities attributable to the assets contributed to us arising prior to the closing of the IPO or otherwise related to CONE Gathering’s contribution of those assets to us in connection with the IPO. |
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We have agreed to indemnify CONE Gathering for liabilities associated with the use, ownership or operation of our assets, including environmental liabilities, related to the use, ownership or operation of our assets and due to occurrences on or after the closing of the IPO. Our obligation to indemnify CONE Gathering for any liabilities will be subject to a deductible of $0.5 million per claim before CONE Gathering is entitled to indemnification. For purposes of calculating the deductible, a “claim” will include all liabilities that arise from a discrete act or event. There is no limit on the amount for which we will indemnify CONE Gathering under the omnibus agreement once CONE Gathering meets the deductible, if applicable.
Operational Services Agreement
In connection with the IPO, we entered into an operational services agreement with CONSOL under which CONSOL provides certain operational services to us in support of our gathering pipelines and dehydration, treating and compressor stations and facilities, including routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and CONSOL may mutually agree upon from time to time. CONSOL will prepare and submit for our approval a maintenance, operating and capital budget on an annual basis. CONSOL will submit actual expenditures for reimbursement on a monthly basis and we will reimburse CONSOL for any direct third-party costs actually incurred by CONSOL in providing these services.
The operational services agreement will have an initial term of 20 years and will continue in full force and effect thereafter unless terminated by either party at the end of the initial term or any time thereafter by giving not less than six months’ prior notice to the other party of such termination. CONSOL may terminate the operational services agreement if (1) we become insolvent, declare bankruptcy or take any action in furtherance of, or indicating our consent to, approval of, or acquiescence in, a similar proceeding or (2) upon not less than 180 days notice. We may immediately terminate the agreement (1) if CONSOL becomes insolvent, declares bankruptcy or takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, a similar proceeding, (2) upon a finding of CONSOL’s willful misconduct or gross negligence that has had a material adverse effect on any of our gathering pipelines and dehydration, treating and compressor stations and facilities or our business or (3) CONSOL is in material breach of the operational services agreement and falls to cure such default within 45 days.
Under the operational services agreement, CONSOL will indemnify us from any claims, losses or liabilities incurred by us, including third-party claims, arising from CONSOL’s performance of the agreement to the extent caused by CONSOL’s gross negligence or willful misconduct. We will indemnify CONSOL from any claims, losses or liabilities incurred by CONSOL, including any third-party claims, arising from CONSOL’s performance of the agreement, except to the extent such claims, losses or liabilities are caused by CONSOL’s gross negligence or willful misconduct.
Gathering Agreements
CNX Gas Gathering Agreement
On September 30, 2014, in connection with the closing of the IPO, the Partnership entered into a Gathering Agreement (the "CNX Gas Gathering Agreement") by and between the Partnership, as gatherer, and CNX Gas Company LLC ("CNX Gas"), a wholly owned subsidiary of CONSOL, as shipper. Under the CNX Gas Gathering Agreement, which has an initial term of 20 years, CNX Gas (i) dedicated to the Partnership for natural gas midstream services all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with Noble Energy to the extent covering the Marcellus Shale in the dedication area and (ii) granted the Partnership a right of first offer to provide natural gas midstream services with respect to all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with Noble Energy to the extent covering the Marcellus Shale in the right of first offer area.
Under the CNX Gas Gathering Agreement, the Partnership receives a fee based on the type and scope of midstream services it provides. Unless the Sponsors mutually agree to a reset rate with the Partnership, the fees per the gathering agreements will escalate by 2.5% on January 1 each year beginning in 2016. For the services we provide with respect to natural gas that does not require downstream processing, or dry gas, we received a fee of $0.40 per MMBtu in 2015 (which increased to $0.41 per MMBtu effective January 1, 2016.) For the services we provide with respect to the natural gas that requires downstream processing, or wet gas, the Partnership received a fee of $0.275 per MMBtu in the Moundsville (Marshall County, West Virginia) and Pittsburgh International Airport areas and $0.55 per MMBtu for all other areas in the dedication area throughout 2015. Our 2015 fee for condensate services was $5.00 per Bbl in the Majorsville area and $2.50 per Bbl in the Moundsville area. Each of these rates increased by 2.5% on January 1, 2016.
Under the CNX Gas Gathering Agreement, if the Partnership fails to timely complete the construction of the facilities necessary to provide midstream services to CNX Gas’ dedicated acreage or has an uncured default of any of the Partnership’s material obligations that has caused an interruption in the Partnership’s services for more than 90 days, the affected acreage will be permanently released from the Partnership’s dedication. Also, effective September 30, 2019, if CNX Gas drills a well that is
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located more than a certain distance from the Partnership’s current gathering system (and not included in the detailed drilling plan provided by CNX Gas and Noble Energy) and a third-party gatherer offers a lower cost of services, then the acreage associated with such well will be permanently released from the Partnership’s dedication.
NBL Gas Gathering Agreement
On September 30, 2014, in connection with the closing of the IPO, the Partnership entered into a Gathering Agreement (the “NBL Gas Gathering Agreement”) by and between the Partnership, as gatherer, and Noble Energy, as shipper. Under the NBL Gas Gathering Agreement, which has an initial term of 20 years, Noble Energy (i) dedicated to the Partnership for natural gas midstream services all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with CNX Gas to the extent covering the Marcellus Shale in the dedication area and (ii) granted the Partnership a right of first offer to provide natural gas midstream services with respect to all of its existing acres and any acres acquired in the future, in each case, that are jointly owned with CNX Gas to the extent covering the Marcellus Shale in the right of first offer area.
Under the NBL Gas Gathering Agreement, the Partnership receives a fee based on the type and scope of midstream services it provides. Unless the Sponsors mutually agree to a reset rate with the Partnership, the fees per the gathering agreements will escalate by 2.5% on January 1 each year beginning in 2016. For the services we provide with respect to natural gas that does not require downstream processing, or dry gas, we received a fee of $0.40 per MMBtu in 2015 (which increased to $0.41 per MMBtu effective January 1, 2016.) For the services we provide with respect to the natural gas that requires downstream processing, or wet gas, the Partnership received a fee of $0.275 per MMBtu in the Moundsville (Marshall County, West Virginia) and Pittsburgh International Airport areas and $0.55 per MMBtu for all other areas in the dedication area throughout 2015. Our 2015 fee for condensate services was $5.00 per Bbl in the Majorsville area and $2.50 per Bbl in the Moundsville area. Each of these rates increased by 2.5% on January 1, 2016.
Under the NBL Gas Gathering Agreement, if the Partnership fails to timely complete the construction of the facilities necessary to provide midstream services to Noble Energy’s dedicated acreage or has an uncured default of any of the Partnership’s material obligations that has caused an interruption in the Partnership’s services for more than 90 days, the affected acreage will be permanently released from the Partnership’s dedication. Also, effective September 30, 2019, if Noble Energy drills a well that is located more than a certain distance from the Partnership’s current gathering system (and not included in the detailed drilling plan provided by CNX Gas and Noble Energy) and a third-party gatherer offers a lower cost of services, then the acreage associated with such well will be permanently released from the Partnership’s dedication.
Contribution Agreement
At the closing of the IPO, we entered into a contribution, conveyance and assumption agreement, which we refer to as our contribution agreement, with CONSOL, Noble Energy, CONE Gathering and our general partner under which our Sponsors, through CONE Gathering, contributed to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. More specifically, obtained controlling interests in each of our Anchor Systems, Growth Systems and Additional Systems as follows:
CONE Midstream Operating Company LLC, a Delaware limited liability company (“CONE Operating”), owns 100% of the membership interests in each of CONE Midstream DevCo I GP LLC, a Delaware limited liability company (“DevCo I GP”), CONE Midstream DevCo II GP LLC, a Delaware limited liability company (“DevCo II GP”), and CONE Midstream DevCo III GP LLC, a Delaware limited liability company (“DevCo III GP” and, together with DevCo I GP and DevCo II GP, the “DevCo General Partners”). DevCo I GP is the sole general partner of CONE Midstream DevCo I LP, a Delaware limited partnership (“DevCo I LP”), and owns a 75% general partner interest in DevCo I LP. DevCo II GP is the sole general partner of CONE Midstream DevCo II LP, a Delaware limited partnership (“DevCo II LP”), and owns a 5% general partner interest in DevCo II LP. DevCo III GP is the sole general partner of CONE Midstream DevCo III LP, a Delaware limited partnership (“DevCo III LP” and, together with DevCo I LP and DevCo II LP, the “DevCo Limited Partnerships”), and owns a 5% general partner interest in DevCo III LP. CONE Gathering owns a 25% limited partner interest in DevCo I LP, a 95% limited partner interest in DevCo II LP and a 95% limited partner interest in DevCo III LP.
Pursuant to the partnership agreement of each DevCo Limited Partnership, the general partner interest held by the applicable DevCo General Partner (and, ultimately, us through our direct control of CONE Operating and indirect control of the applicable DevCo General Partner upon the completion of the IPO) entitles such DevCo General Partner to voting control over, and the exclusive right to manage, the day-to-day operations, business and affairs of the applicable DevCo Limited Partnership. Although the limited partner interest in each DevCo Limited Partnership provides the holder economic rights to profits, losses, gains, deductions and credits in proportion to such holder’s percentage interest in the applicable DevCo Limited Partnership, the limited partner interests in each DevCo Limited Partnership do not entitle the holder to any rights with respect to controlling and managing the day-to-day operations, business and affairs of the applicable DevCo Limited Partnership or the ability to remove the general partner.
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Prior to the completion of the IPO, CONE Gathering contributed 100% of the Anchor Systems to DevCo I LP, 100% of the Growth Systems to DevCo II LP and 100% of the Additional Systems to DevCo III LP. In connection with the IPO, CONE Gathering contributed to us 100% of the membership interests in CONE Operating pursuant to the contribution agreement. After the closing of the IPO, we (a) directly own 100% of the membership interests in CONE Operating, (b) indirectly own (through our ownership interest in CONE Operating) 100% of the membership interests in each of the DevCo General Partners, (c) indirectly own (through our indirect ownership interest in DevCo I GP) a 75% general partner interest in DevCo I LP, (d) indirectly own (through our indirect ownership interest in DevCo II GP) a 5% general partner interest in DevCo II LP, and (e) indirectly own (through our indirect ownership interest in DevCo III GP) a 5% general partner interest in DevCo III LP. Consequently, after the IPO, we (through our indirect ownership interests in the DevCo General Partners and the DevCo Limited Partnerships) indirectly own a 75% interest in the Anchor Systems, a 5% interest in the Growth Systems and a 5% interest in the Additional Systems. Furthermore, through our direct control of CONE Operating and indirect control of the DevCo General Partners, we control and manage the day to day operations, business and affairs of the DevCo Limited Partnerships.
In addition, pursuant to the contribution agreement, CONE Gathering distributed 50% of the cash, common units and subordinated units it received in connection with the IPO to each of CONSOL and Noble Energy.
Employee Secondment Agreement
We entered into an employee secondment agreement, effective September 8, 2014, with Noble Energy. Pursuant to the employee secondment agreement, an employee of Noble Energy is seconded to us to provide investor relations and similar functions. We reimburse Noble Energy for allocable salary, benefits, insurance, payroll taxes and other employment expenses related to the seconded employee.
Other Related Party Transactions
Please see Note 4 to our audited consolidated financial statements contained in Item 8 of Part II of this Annual Report on Form 10-K for a description of certain other transactions with related parties, which descriptions are incorporated by reference herein.
Director Independence
Our disclosures in Item 10. “Directors, Executive Officers and Corporate Governance” are incorporated herein by reference.
Procedures for Review, Approval and Ratification of Related Person Transactions
The board of directors of our general partner adopted a code of business conduct and ethics in connection with the completion of the IPO that provides that the board of directors of our general partner or its authorized committee will review on at least a quarterly basis all transactions with related persons that are required to be disclosed under SEC rules and, when appropriate, initially authorize or ratify all such transactions. In the event that the board of directors of our general partner or its authorized committee considers ratification of a transaction with a related person and determines not to so ratify, the code of business conduct and ethics will provide that our management will make all reasonable efforts to cancel or annul the transaction.
The code of business conduct and ethics provides that, in determining whether or not to recommend the initial approval or ratification of a transaction with a related person, the board of directors of our general partner or its authorized committee should consider all of the relevant facts and circumstances available, including (if applicable) but not limited to: (i) whether there is an appropriate business justification for the transaction; (ii) the benefits that accrue to us as a result of the transaction; (iii) the terms available to unrelated third parties entering into similar transactions; (iv) the impact of the transaction on a director’s independence (in the event the related person is a director, an immediate family member of a director or an entity in which a director or an immediate family member of a director is a partner, shareholder, member or executive officer); (v) the availability of other sources for comparable products or services; (vi) whether it is a single transaction or a series of ongoing, related transactions; and (vii) whether entering into the transaction would be consistent with the code of business conduct and ethics.
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ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Ernst & Young LLP served as the Partnership’s independent auditor for the years ended December 31, 2015 and 2014. The fees billed to the Partnership by Ernst & Young LLP during 2015 and 2014 were approximately $0.4 million and $0.7 million.
Audit fees include fees for the audit of the Partnership’s annual financial statements, reviews of the Partnership’s financial statements included in the Partnership’s quarterly reports, and services that are normally provided in connection with statutory and regulatory filings or engagements, including subsidiary attest engagements and consents.
The audit committee of the Partnership’s general partner has adopted a policy regarding the services of its independent auditors under which the Partnership’s independent accounting firm is not allowed to perform any service which may have the effect of jeopardizing the registered public accountant’s independence. Without limiting the foregoing, the independent accounting firm shall not be retained to perform the following:
• | Bookkeeping or other services related to the accounting records or financial statements |
• | Financial information systems design and implementation |
• | Appraisal or valuation services, fairness opinions or contribution-in-kind reports |
• | Actuarial services |
• | Internal audit outsourcing services |
• | Management functions |
• | Human resources functions |
• | Broker-dealer, investment adviser or investment banking services |
• | Legal services |
• | Expert services unrelated to the audit |
• | Prohibited tax services |
All audit and permitted non-audit services must be pre-approved by the audit committee. All professional fees incurred during 2015 and 2014 that were reported as audit-related fees were pre-approved pursuant to the above policy.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Schedules.
The information required by this Item is included in Part II, Item 8 of this report. Financial statement schedules required under SEC rules but not included in this Annual Report on Form 10-K are omitted because they are not applicable or the required information is contained in the consolidated financial statements or notes thereto.
(b) Exhibits.
In reviewing any agreements incorporated by reference in this Form 10-K or filed with this 10-K, please remember that such agreements are included to provide information regarding their terms. They are not intended to be a source of financial, business or operational information about the Partnership. The representations, warranties and covenants contained in these agreements are made solely for purposes of the agreements and are made as of specific dates; are solely for the benefit of the parties; may be subject to qualifications and limitations agreed upon by the parties in connection with negotiating the terms of the agreements, including being made for the purpose of allocating contractual risk between the parties instead of establishing matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors or security holders. Investors and security holders should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of the Partnership, in connection with acquisition agreements, of the assets to be acquired. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the agreements. Accordingly, these representations and warranties alone may not describe the actual state of affairs as of the date they were made or at any other time.
Incorporated by Reference | |||||||||||
Exhibit Number | Exhibit Description | Form | SEC File Number | Exhibit | Filing Date | ||||||
3.1* | Certificate of Limited Partnership of CONE Midstream Partners LP | S-1 | 333-198352 | 3.1 | 8/25/2014 | ||||||
3.2* | First Amended and Restated Agreement of Limited Partnership of CONE Midstream Partners LP, dated as of September 30, 2014 | 8-K | 001-36635 | 3.1 | 10/3/2014 | ||||||
10.1* | Contribution, Conveyance and Assumption Agreement, dated as of September 30, 2014, by and among CONE Midstream Partners LP, CONE Midstream GP LLC, CONSOL Energy Inc., Noble Energy, Inc., CONE Gathering LLC and CONE Midstream Operating Company LLC | 8-K | 001-36635 | 10.1 | 10/3/2014 | ||||||
10.2* | Omnibus Agreement, dated September 30, 2014, by and among CONE Midstream Partners LP, CONE Midstream GP LLC, CONSOL Energy Inc., Noble Energy, Inc., CONE Gathering LLC, CONE Midstream Operating Company LLC, CONE Midstream DevCo I LP, CONE Midstream DevCo II LP and CONE Midstream DevCo III LP | 8-K | 001-36635 | 10.2 | 10/3/2014 | ||||||
10.3* | Operational Services Agreement, dated September 30, 2014, by and between CONE Midstream Partners LP and CNX Gas Company LLC | 8-K | 001-36635 | 10.3 | 10/3/2014 | ||||||
10.4* | Gas Gathering Agreement, dated September 30, 2014, by and between CNX Gas Company LLC and CONE Midstream Partners LP | 8-K | 001-36635 | 10.4 | 10/3/2014 | ||||||
10.5* | Gas Gathering Agreement, dated September 30, 2014, by and between Noble Energy, Inc. and CONE Midstream Partners LP | 8-K | 001-36635 | 10.5 | 10/3/2014 | ||||||
10.6* | Employee Secondment Agreement, dated effective September 8, 2014, by and between CONE Midstream Partners LP and Noble Energy, Inc. | 8-K | 001-36635 | 10.6 | 10/3/2014 | ||||||
10.7*# | CONE Midstream Partners LP 2014 Long-Term Incentive Plan# | 8-K | 001-36635 | 10.7 | 10/3/2014 | ||||||
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10.8* | Credit Agreement, dated September 30, 2014, by and among CONE Midstream Partners LP, as Borrower, certain subsidiaries of the Borrower as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto | 8-K | 001-36635 | 10.8 | 10/3/2014 | ||||||
10.9*# | Form of Phantom Unit Award Agreement | 8-K | 001-36635 | 10.1 | 1/22/2015 | ||||||
21.1† | List of Subsidiaries of CONE Midstream Partners LP | ||||||||||
23.1† | Consent of Ernst & Young LLP, independent registered public accounting firm | ||||||||||
24.1† | Power of Attorney of Directors and Officers of CONE Midstream GP LLC | ||||||||||
31.1† | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | ||||||||||
31.2† | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | ||||||||||
32.1† | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | ||||||||||
32.2† | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | ||||||||||
101.INS† | XBRL Instance Document. | ||||||||||
101.SCH† | XBRL Taxonomy Extension Schema Document. | ||||||||||
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||||||
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document. | ||||||||||
101.LAB† | XBRL Taxonomy Extension Labels Linkbase Document. | ||||||||||
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||||||||
* Incorporated by reference into this Annual Report on Form 10-K as indicated.
† Filed herewith.
# Compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 17, 2016
CONE MIDSTREAM PARTNERS LP | |||
By: CONE MIDSTREAM GP LLC, its General Partner | |||
By: | /S/ JOHN T. LEWIS | ||
John T. Lewis | |||
Chairman of the Board and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer) | |||
By: | /S/ JOHN T. LEWIS | ||
John T. Lewis | |||
Chairman of the Board and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer) | |||
By: | /S/ DAVID M. KHANI | ||
David M. Khani | |||
Chief Financial Officer and Director (Duly Authorized Officer and Principal Financial Officer) | |||
By: | /S/ BRIAN R. RICH | ||
Brian R. Rich | |||
Chief Accounting Officer (Duly Authorized Officer and Principal Accounting Officer) | |||
By: | /S/ KENNETH M. FISHER | ||
Kenneth M. Fisher | |||
Director | |||
By: | /S/ STEPHEN W. JOHNSON | ||
Stephen W. Johnson | |||
Director | |||
By: | /S/ ANGELA MINAS | ||
Angela Minas | |||
Director | |||
By: | /S/ JOHN CHANDLER | ||
John Chandler | |||
Director | |||
By: | /S/ JOHN JACKSON | ||
John Jackson | |||
Director | |||
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