XNYS:KWK Quicksilver Resources Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)     
þ      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
¨      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: 001-14837

Quicksilver Resources Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   75-2756163
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)  
801 Cherry Street, Suite 3700, Unit 19, Fort Worth, Texas   76102
(Address of principal executive offices)   (Zip Code)

(817) 665-5000

(Registrant’s telephone number, including area code)

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  þ  No  ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No   ¨

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 þ   Accelerated filer ¨    Non-accelerated filer ¨   Smaller reporting company ¨
     (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No   þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Title of Class    Outstanding as of July 31, 2012
Common Stock, $0.01 par value    172,971,660 shares

 

 

 


Table of Contents

DEFINITIONS

As used in this Quarterly Report unless the context otherwise requires:

ABR” means alternate base rate

AOCI” means accumulated other comprehensive income

Bbl” or “Bbls” means barrel or barrels

Bbld” means barrel or barrels per day

Bcf” means billion cubic feet

Bcfe” means Bcf of natural gas equivalents

Canada” means our oil and natural gas operations located principally in British Columbia and Alberta, Canada

C$” means Canadian dollars

DD&A” means Depletion, Depreciation and Accretion

GPT” means gathering, processing and transportation expense

LIBOR” means London Interbank Offered Rate

MBbl” or “MBbls” means thousand barrels

MBbld” means MBbl per day

Mcf” means thousand cubic feet

Mcfe” means Mcf natural gas equivalents, calculated as one Bbl of oil or NGLs equaling six Mcf of gas

MMcf” means million cubic feet

MMcfd” means million cubic feet per day

MMcfe” means MMcf of natural gas equivalents

MMcfed” means MMcfe per day

NGL” or “NGLs” means natural gas liquids

OCI” means other comprehensive income

Oil” includes crude oil and condensate

RSU” means restricted stock unit

COMMONLY USED TERMS

Other commonly used terms and abbreviations include:

2007 Senior Secured Credit Facility” means collectively our U.S. senior secured revolving credit facility and our Canadian senior secured revolving credit facility, each dated as of February 9, 2007, which were terminated September 6, 2011 and replaced at that time by the Initial U.S. Credit Facility and the Initial Canadian Credit Facility

Amended and Restated Canadian Credit Facility” means our new Canadian senior secured revolving credit facility which was amended and restated, effective December 22, 2011

Amended and Restated U.S. Credit Facility” means our new U.S. senior secured revolving credit facility which was amended and restated, effective December 22, 2011

Bakken Asset” means our operations and our assets in the Southern Alberta basin in the Bakken formation of northern Wyoming and Montana, including our Cutbank field operations and assets

Barnett Shale Asset” means our operations and our assets in the Barnett Shale located in the Fort Worth basin of North Texas

BBEP” means BreitBurn Energy Partners L.P.

BBEP Unit” means BBEP limited partner unit

CMLP” means Crestwood Midstream Partners LP

Combined Credit Agreements” means collectively our Amended and Restated U.S. Credit Facility and our Amended and Restated Canadian Credit Facility

Crestwood” means Crestwood Holdings LLC

Crestwood Transaction” means the sale to Crestwood of all our interests in KGS, including general partner interests and incentive distribution rights

Eni” means, depending on the context, either or both Eni Petroleum US LLC and Eni US Operating Co. Inc., which are subsidiaries of Eni SpA

FASB” means the Financial Accounting Standards Board, which promulgates accounting standards in the U.S.

 

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Fortune Creek” means Fortune Creek Gathering and Processing Partnership, a midstream partnership formed December 2011 with KKR for the construction and operation of assets to provide natural gas midstream services within the Horn River, Liard and Cordova basins of British Columbia, Canada

GAAP” means accounting principles generally accepted in the U.S.

Horn River Asset” means our operations and our assets in the Horn River basin of northeast British Columbia

Horseshoe Canyon Asset” means our operations and our assets in Horseshoe Canyon, the coalbed methane fields of southern and central Alberta

Initial Canadian Credit Facility” means our initial Canadian senior secured revolving credit facility, dated as of September 6, 2011, which was amended and restated by the Amended and Restated Canadian Credit Facility on December 22, 2011

Initial U.S. Credit Facility” means our initial U.S. senior secured revolving credit facility, dated as of September 6, 2011, which was amended and restated by the Amended and Restated U.S. Credit Facility on December 22, 2011

KGS” means Quicksilver Gas Services LP, a publicly-traded partnership, which we formerly owned that traded under the ticker symbol of “KGS” and subsequent to the Crestwood Transaction renamed itself Crestwood Midstream Partners LP and trades under the ticker symbol “CMLP”

KKR” means Kohlberg Kravis Roberts & Co. L.P. with whom we formed Fortune Creek

Mercury” means Mercury Exploration Company, which is owned by members of the Darden family

NGTL” means NOVA Gas Transmission Ltd., a subsidiary of TransCanada PipeLines Limited

NGTL Project” means the series of contracts with NGTL for the construction of a pipeline and meter station, which will serve our and others’ operations in the Horn River basin

Sand Wash Asset” means our operations and our assets in the Sand Wash basin located in Colorado and southern Wyoming

SEC” means the U.S. Securities and Exchange Commission

VIE” means variable interest entity

West Texas Asset” means our operations and our assets in the Midland and Delaware basins in West Texas prospective in the Bone Springs and Wolfcamp formations, principally concentrated in three areas: Jeff Davis and Reeves Counties, Upton and Crockett Counties, and Pecos County

 

3


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INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2012

 

PART I. FINANCIAL INFORMATION

    6   

Item 1. Condensed Consolidated Interim Financial Statements (Unaudited)

    6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

    28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    49   

Item 4. Controls and Procedures

    51   

PART II. OTHER INFORMATION

    52   

Item 1. Legal Proceedings

    52   

Item 1A. Risk Factors

    52   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

    52   

Item 3. Defaults Upon Senior Securities

    52   

Item 4. Mine Safety Disclosures

    52   

Item 5. Entry into a Material Definitive Agreement

    53   

Item 6. Exhibits

    54   

Signature

    56   

Except as otherwise specified and unless the context otherwise requires, references to the “Company,” “Quicksilver,” “we,” “us,” and “our” refer to Quicksilver Resources Inc. and its subsidiaries.

 

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Forward-Looking Information

Certain statements contained in this Quarterly Report and other materials we file with the SEC, or in other written or oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. 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:

 

   

changes in general economic conditions;

   

fluctuations in natural gas, NGL and oil prices;

   

failure or delays in achieving expected production from exploration and development projects;

   

uncertainties inherent in estimates of natural gas, NGL and oil reserves and predicting natural gas, NGL and oil reservoir performance;

   

effects of hedging natural gas, NGL and oil prices;

   

fluctuations in the value of certain of our assets and liabilities;

   

competitive conditions in our industry;

   

actions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters, customers and counterparties;

   

changes in the availability and cost of capital;

   

delays in obtaining oilfield equipment and increases in drilling and other service costs;

   

delays in construction of transportation pipelines and gathering, processing and treating facilities;

   

operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;

   

the effects of existing and future laws and governmental regulations, including environmental and climate change requirements;

   

the effects of existing or future litigation;

   

failure or delays in completing Quicksilver’s proposed initial public offering of common units representing limited partner interests in a master limited partnership holding portions of our Barnett Shale Asset; and

   

additional factors described elsewhere in this Quarterly Report.

This list of factors is not exhaustive, and new factors may emerge or changes to these factors may occur that would impact our business. Additional information regarding these and other factors may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. All such risk factors are difficult to predict, and are subject to material uncertainties that may affect actual results and may be beyond our control. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report, and we undertake no obligation to update any of these forward-looking statements to reflect subsequent events or circumstances except to the extent required by applicable law.

All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

 

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PART I    FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Interim Financial Statements (Unaudited)

QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

In thousands, except for per share data – Unaudited

 

      For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
      2012      2011      2012      2011  

Revenue

           

Production

   $         150,503          $ 207,706          $         322,323          $ 398,006      

Sales of purchased natural gas

     9,442            19,560            21,529            39,986      

Other

     8,617            21,180            (29,820)          22,641      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     168,562            248,446            314,032            460,633      
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expense

           

Lease operating

     21,599            24,484            50,290            45,693      

Gathering, processing and transportation

     42,624            46,726            85,701            91,088      

Production and ad valorem taxes

     7,189            8,506            13,952            16,087      

Costs of purchased natural gas

     9,337            19,557            21,274            39,300      

Depletion, depreciation and accretion

     51,942            54,704            106,381            107,175      

Impairment

     991,921            -            1,054,668            49,063      

General and administrative

     18,405            15,770            37,501            34,161      

Other operating

     134            23            150            183      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expense

     1,143,151            169,770            1,369,917            382,750      

Crestwood earn-out

     -            -            41,097            -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (974,589)          78,676            (1,014,788)          77,883      

Loss from earnings of BBEP

     -            (26,207)          -            (47,091)    

Other income - net

     65            123,178            157            124,299      

Fortune Creek accretion

     (4,830)          -            (9,571)          -      

Interest expense

     (40,076)          (47,552)          (80,246)          (93,730)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     (1,019,430)          128,095            (1,104,448)          61,361      

Income tax (expense) benefit

     346,889            (19,508)          371,983            (23,532)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (672,541)        $ 108,587          $ (732,465)        $ 37,829      
  

 

 

    

 

 

    

 

 

    

 

 

 

Reclassification adjustments related to settlements of derivative contracts - net of income tax

     (37,133)          (10,798)          (69,667)          (27,017)    

Net change in derivative fair value - net of income tax

     20,219            10,482            112,008            (6,713)    

Foreign currency translation adjustment

     (8,598)          (1,572)          (670)          10,432      
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     (25,512)          (1,888)          41,671            (23,298)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ (698,053)        $ 106,699          $ (690,794)        $ 14,531      
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per common share - basic

   $ (3.96)        $ 0.63          $ (4.31)        $ 0.22      

Earnings (loss) per common share - diluted

   $ (3.96)        $ 0.61          $ (4.31)        $ 0.22      

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except for share data – Unaudited

 

      June 30,
2012
     December 31,
2011
 
ASSETS  

Current assets

     

Cash

   $ 14,003          $ 13,146      

Accounts receivable - net of allowance for doubtful accounts

     64,667            95,282      

Derivative assets at fair value

     189,536            162,845      

Other current assets

     36,690            29,154      
  

 

 

    

 

 

 

Total current assets

     304,896            300,427      

Property, plant and equipment - net

     

Oil and gas properties, full cost method (including unevaluated costs of $481,735 and $433,341, respectively)

     2,346,209            3,226,476      

Other property and equipment

     249,857            234,043      
  

 

 

    

 

 

 

Property, plant and equipment - net

     2,596,066            3,460,519      

Derivative assets at fair value

     159,189            183,982      

Deferred income taxes

     134,190            -      

Other assets

     50,183            50,534      
  

 

 

    

 

 

 
   $ 3,244,524          $ 3,995,462      
  

 

 

    

 

 

 
LIABILITIES AND EQUITY  

Current liabilities

     

Current portion of long-term debt

   $ -          $ 18      

Accounts payable

     111,941            142,672      

Accrued liabilities

     139,257            142,193      

Derivative liabilities at fair value

     -            4,028      

Current deferred tax liability

     45,968            45,262      
  

 

 

    

 

 

 

Total current liabilities

     297,166            334,173      

Long-term debt

     2,069,726            1,903,431      

Partnership liability

     130,357            122,913      

Asset retirement obligations

     94,872            85,568      

Derivative liabilities at fair value

     6,538            -      

Other liabilities

     28,461            28,461      

Deferred income taxes

     38,611            258,997      

Commitments and contingencies (Note 8)

     

Stockholders' equity

     

Preferred stock, par value $0.01, 10,000,000 shares authorized, none outstanding

     -            -      

Common stock, $0.01 par value, 400,000,000 shares authorized, and 178,811,191 and 176,980,483 shares issued, respectively

     1,788            1,770      

Paid in capital in excess of par value

     747,029            737,015      

Treasury stock of 5,735,074 and 5,379,702 shares, respectively

     (48,715)          (46,351)    

Accumulated other comprehensive income

     256,529            214,858      

Retained earnings (deficit)

     (377,838)          354,627      
  

 

 

    

 

 

 

Total stockholders' equity

     578,793            1,261,919      
  

 

 

    

 

 

 
   $     3,244,524          $     3,995,462      
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

In thousands – Unaudited

 

     Quicksilver Resources Inc. Stockholders’ Equity         
      Common
Stock
     Additional
Paid-in
Capital
     Treasury
Stock
     Accumulated
Other
Comprehensive
Income
     Retained
Earnings
     Total  

Balances at December 31, 2010

   $ 1,755         $ 714,869         $ (41,487)        $ 130,187         $ 264,581         $ 1,069,905     

Net income

     -            -            -            -            37,829           37,829     

Hedge derivative contract settlements reclassified into earnings from AOCI, net of income tax of $12,703

     -            -            -            (27,017)          -            (27,017)    

Net change in derivative fair value, net of income tax of $3,924

     -            -            -            (6,713)          -            (6,713)    

Foreign currency translation adjustment

     -            -            -            10,432           -            10,432     

Issuance & vesting of stock compensation

     11           10,376           (4,801)          -            -            5,586     

Stock option exercises

     1           620           -            -            -            621     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at June 30, 2011, restated (1)

   $ 1,767         $ 725,865         $ (46,288)        $ 106,889         $ 302,410         $ 1,090,643     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at December 31, 2011

   $ 1,770         $ 737,015         $ (46,351)        $ 214,858         $ 354,627         $ 1,261,919     

Net loss

     -            -            -            -            (732,465)          (732,465)    

Hedge derivative contract settlements reclassified into earnings from AOCI, net of income tax of $35,711

     -            -            -            (69,667)          -            (69,667)    

Net change in derivative fair value, net of income tax of $54,270

     -            -            -            112,008           -            112,008     

Foreign currency translation adjustment

     -            -            -            (670)          -            (670)    

Issuance & vesting of stock compensation

     17           10,004           (2,364)          -            -            7,657     

Stock option exercises

     1           10           -            -            -            11     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at June 30, 2012

   $     1,788         $ 747,029         $ (48,715)        $ 256,529         $ (377,838)        $ 578,793     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Note 1 contains additional information.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands – Unaudited

 

      For the Six Months Ended
June 30,
 
      2012      2011  

Operating activities:

     

Net income (loss)

   $     (732,465)        $     37,829      

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

     

Depletion, depreciation and accretion

     106,381            107,175      

Impairment expense

     1,054,668            49,063      

Crestwood earn-out

     (41,097)          -      

Deferred income tax expense (benefit)

     (372,741)          17,667      

Non-cash (gain) loss from hedging and derivative activities

     61,503            (19,933)    

Stock-based compensation

     10,021            10,386      

Non-cash interest expense

     3,469            7,872      

Fortune Creek accretion

     9,571            -      

Gain on disposition of BBEP Units

     -            (123,752)    

Loss from BBEP in excess of cash distributions

     -            60,050      

Other

     328            1,111      

Changes in assets and liabilities

     

Accounts receivable

     30,600            (8,608)    

Prepaid expenses and other assets

     (5,031)          (4,426)    

Accounts payable

     (21,838)          (25,859)    

Accrued and other liabilities

     (3,853)          14,777      
  

 

 

    

 

 

 

Net cash provided by operating activities

     99,516            123,352      
  

 

 

    

 

 

 

Investing activities:

     

Purchases of property, plant and equipment

     (307,169)          (396,156)    

Proceeds from Crestwood earn-out

     41,097            -      

Proceeds from sale of BBEP Units

     -            134,423      

Proceeds from sale of properties and equipment

     3,372            3,123      
  

 

 

    

 

 

 

Net cash used by investing activities

     (262,700)          (258,610)    
  

 

 

    

 

 

 

Financing activities:

     

Issuance of debt

     255,775            256,445      

Repayments of debt

     (88,115)          (170,172)    

Debt issuance costs paid

     (148)          -      

Distribution of Fortune Creek Partnership funds

     (1,845)       

Proceeds from exercise of stock options

     11            622      

Purchase of treasury stock

     (2,364)          (4,801)    
  

 

 

    

 

 

 

Net cash provided by financing activities

     163,314            82,094      
  

 

 

    

 

 

 

Effect of exchange rate changes in cash

     727            (1,771)    
  

 

 

    

 

 

 

Net increase (decrease) in cash

     857            (54,935)    

Cash at beginning of period

     13,146            54,937      
  

 

 

    

 

 

 

Cash at end of period

   $ 14,003          $ 2      
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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QUICKSILVER RESOURCES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. ACCOUNTING POLICIES AND DISCLOSURES

The accompanying condensed consolidated interim financial statements have not been audited. In management’s opinion, the accompanying condensed consolidated interim financial statements contain all adjustments necessary to fairly present our financial position as of June 30, 2012 and our results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of annual results.

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during each reporting period. Management believes its estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from management’s estimates.

Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2011 Annual Report on Form 10-K.

Immaterial Restatement

The consolidated financial statements as of and for the year ended December 31, 2010 were restated as disclosed within Item 8, Note 2 in the 2011 Annual Report on Form 10-K to increase the previously recognized gain related to the sale of our interests in KGS by $20.7 million and to provide additional deferred taxes on the increased gain. The previously reported gain excluded certain liabilities for intercompany transactions related to services performed by KGS for our U.S. exploration and production segment, which should have been included in the gain calculation. Additional depletion expense was recognized due to the inclusion of additional future development costs in the 2010 depletion calculation. The results of this restatement, which had no impact on our total cash flow from operations, investing and financing activities as reported, impacted the retained earnings and the total stockholder’s equity as of June 30, 2011. Previously, retained earnings and total stockholder’s equity were reported as $291.9 million and $1,080 million, respectively, in the Form 10-Q for the quarter ended June 30, 2011. These balances have been restated to $302.4 million and $1,091 million, respectively, within the Condensed Consolidated Statement of Equity as of June 30, 2011.

Recently Issued Accounting Standards

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements.

In June 2011, the FASB issued an amendment to accounting guidance to update the presentation of comprehensive income in consolidated financial statements. Under the amended guidance, the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income may be made either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance became effective for us beginning with the quarter ended March 31, 2012, and requires retrospective application to earlier periods presented. Our condensed consolidated statements of income (loss) and comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011 contain the required disclosures. The implementation of this accounting pronouncement also resulted in increased disclosure in Note 12.

In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurement and disclosure. Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in stockholders’ equity. This guidance became effective for us beginning with the quarter ended March 31, 2012. The adoption of this accounting pronouncement did not have an effect on the fair value measurement, but rather expanded upon existing disclosures.

 

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In December 2011, the FASB issued an amendment to the accounting guidance for disclosure of arrangements that permit offsetting assets and liabilities. The amendment expands the disclosure requirements to require both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendment will be effective for us, beginning on January 1, 2013, and must be applied retrospectively. We do not expect the adoption of this accounting pronouncement to have a material impact on our financial statements when implemented.

No other pronouncements materially affecting our financial statements have been issued since the filing of our 2011 Annual Report on Form 10-K.

2. CRESTWOOD EARN-OUT

In October 2010, we completed the sale of all of our interests in KGS to Crestwood. As part of the sale, we have the right to collect future earn-out payments through 2013. In February 2012, we collected $41 million of these earn-out payments which is presented as “Crestwood earn-out” in the condensed consolidated statement of income. We have the right to collect up to an additional $31 million in future earn-out payments in 2013. As of June 30, 2012, we do not anticipate receiving any additional payment and have recognized no assets related to these opportunities.

Note 3 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains additional information regarding the Crestwood Transaction.

3. DERIVATIVES AND FAIR VALUE MEASUREMENTS

The following table categorizes our commodity derivative instruments based upon the use of input levels:

 

     Asset Derivatives      Liability Derivatives  
      June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 
     (in thousands)      (in thousands)  

Level 2 inputs

   $ 296,842         $ 195,838         $ -         $ 4,028     

Level 3 inputs

     51,883           150,989           6,538           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   348,725         $   346,827         $   6,538         $   4,028     
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of “Level 2” derivative instruments included in these disclosures was estimated using prices quoted in active markets for the periods covered by the derivatives and the value reported by counterparties. The fair value of derivative instruments designated “Level 3” was estimated using prices quoted in markets where there is insufficient market activity for consideration as “Level 2” instruments. Currently, only our natural gas derivatives with an original tenure of 10 years utilize “Level 3” inputs, primarily due to comparatively less market data available for the later portion of their term compared with our other shorter term derivatives. The fair value of both the “Level 2” and the “Level 3” assets and liabilities are determined using a discounted cash flow model using the terms of the derivative instrument, market prices for the periods covered by the derivatives, and the credit adjusted risk-free interest rates. The “Level 3” unobservable inputs are the market prices for the latter half of the 10-year term as there is not an active market for that period of time. These unobservable inputs included within the fair value calculation range from $3.59 to $5.44 and are based upon prices quoted in active markets for the period of time available and applying the differential from this period of time to the market prices for the later years in the term. Changes in the “Level 3” inputs are correlated to the changes in the quoted market prices for the period of time available. Estimates were determined by applying the differential between the prices in each derivative and market prices for future periods to the amounts stipulated in each contract to arrive at an estimated future value. This estimated future value was discounted on each contract at the credit adjusted risk-free rate.

 

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The following table identifies the changes in “Level 3” net asset derivative fair values for the periods indicated:

 

     For the Three Months Ended
June 30,
 
     2012      2011  
     (In thousands)  

Balance at beginning of period

   $     24,857         $ -     

Total gains (losses) for the period:

     

Unrealized gain on commodity hedges

     -           19,115     

Gain from hedge ineffectiveness

     4,319           -     

Settlements in Production Revenue

     (4,101)          -     

Settlements in Other Revenue

     (10,731)          -     

Changes included in Other Revenue

     2,645           -     

Unrealized gains reported in OCI

     28,356           -     
  

 

 

    

 

 

 

Balance at end of period

   $ 45,345         $ 19,115     
  

 

 

    

 

 

 

The amount of total gains or losses for the period included in other revenue attributable to the change in unrealized gains or losses related to assets still held at the reporting date

   $ 6,964         $ 19,115     
  

 

 

    

 

 

 

 

     For the Six Months Ended
June 30,
 
     2012      2011  
     (In thousands)  

Balance at beginning of period

   $     150,989         $ -     

Total gains (losses) for the period:

     

Unrealized gain (loss) on commodity hedges

     (21,670)          19,115     

Realized loss on hedge restructure

     (14,555)          -     

Gain from hedge ineffectiveness

     3,709           -     

Transfers out of Level 3

     (109,685)          -     

Settlements in Production Revenue

     (10,675)          -     

Settlements in Other Revenue

     (10,731)          -     

Changes included in Other Revenue

     2,645           -     

Unrealized gains reported in OCI

     55,318           -     
  

 

 

    

 

 

 

Balance at end of period

   $ 45,345         $ 19,115     
  

 

 

    

 

 

 

The amount of total gains or losses for the period included in other revenue attributable to the change in unrealized gains or losses related to assets still held at the reporting date

   $ (15,316)        $     19,115     
  

 

 

    

 

 

 

Transfers from Level 3 to Level 2 represent our ten-year derivative instruments that were exchanged in January and February 2012 for derivative instruments with shorter durations.

 

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Commodity Price Derivatives

As of June 30, 2012, we had price collars and swaps hedging our anticipated natural gas and NGL production as follows:

 

Production

Year

   Daily Production
Volume
   Gas    NGL
   MMcfd    MBbld

2012

   230    7

2013

   150    -

2014-2015

   110    -

2016-2021

   45    -

In July 2012, we entered into a 10 MMcfd natural gas derivative covering January 2013 to December 2014 for $3.91 per Mcf.

Interest Rate Derivatives

In 2010, we executed early settlements of our interest rate swaps that were designated as fair value hedges of our senior notes due 2015 and our senior subordinated notes. We received cash of $41.5 million in the settlements, including $10.7 million for interest previously accrued and earned. Upon the early settlements, we recorded the resulting gain as a fair value adjustment to our debt and began to recognize the deferred gain of $30.8 million as a reduction of interest expense over the lives of our senior notes due 2015 and our senior subordinated notes.

During the six months ended June 30, 2012 and 2011, we recognized $2.5 million and $2.4 million, respectively of those deferred gains as a reduction of interest expense. The remaining $19.4 million deferral of the 2010 early settlements from all interest rate swaps will continue to be recognized as a reduction of interest expense over the life of the associated underlying debt instruments currently scheduled as follows:

 

(In thousands)

 

Remainder of 2012

   $ 2,604     

2013

     5,539     

2014

     6,012     

2015

     4,669     

2016

     569     
  

 

 

 
   $ 19,393     
  

 

 

 

Fair Value Disclosures

The estimated fair value of our derivative instruments at June 30, 2012 and December 31, 2011 were as follows:

 

     Asset Derivatives     Liability Derivatives  
      June 30,
2012
     December 31,
2011
    June 30,
2012
     December 31,
2011
 
     (In thousands)     (In thousands)  

Derivatives designated as hedges:

    

Commodity contracts reported in:

          

Current derivative assets

   $     189,536         $     165,484        $ -         $     2,639     

Noncurrent derivative assets

     159,189           183,982          -           -     

Current derivative liabilities

     -           -          -           4,028     

Noncurrent derivative liabilities

     -           -          6,538           -     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivatives designated as hedges

   $ 348,725         $ 349,466        $     6,538         $ 6,667     
  

 

 

    

 

 

   

 

 

    

 

 

 

Derivatives not designated as hedges:

   $ -         $ -        $ -         $ -     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total derivatives

   $ 348,725         $ 349,466        $ 6,538         $ 6,667     
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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The change in carrying value of our commodity price derivatives since December 31, 2011 principally resulted from the overall decrease in market prices for natural gas relative to the prices in our open derivative instruments as well as additional derivative instruments entered into during the six months ended June 30, 2012, offset by settlements during the period.

The changes in the carrying value of our derivatives for the three and six months ended June 30, 2012 and 2011 are presented below:

 

     For the Three Months
Ended June 30,
 
     2012      2011  
      Cash Flow
Derivatives
     Cash Flow
Derivatives
 
     (In thousands)  

Derivative fair value at beginning of period

   $     373,467         $ 96,203     

Change in net amounts receivable and payable

     (3,368)          (167)    

Settlements in production revenue

     (56,495)          (15,546)    

Settlements in other revenue

     (19,744)          -     

Ineffectiveness reported in other revenue

     8,100           872     

Unrealized gains reported in other revenue

     -           19,115     

Other changes reported in other revenue

     (2,630)          -     

Unrealized gains reported in OCI

     42,857           15,872     
  

 

 

    

 

 

 

Derivative fair value at end of period

   $ 342,187         $     116,349     
  

 

 

    

 

 

 
     For the Six Months
Ended June 30,
 
     2012      2011  
      Cash Flow
Derivatives
     Cash Flow
Derivatives
 
     (In thousands)  

Derivative fair value at beginning of period

   $     342,799         $ 146,762     

Change in net amounts receivable and payable

     (7,811)          (384)    

Settlements in production revenue

     (105,379)          (39,328)    

Settlements in other revenue

     (19,744)          -     

Ineffectiveness reported in other revenue

     4,899           818     

Realized losses reported in other revenue

     (14,555)          -     

Unrealized gains (losses) reported in other revenue

     (21,670)          19,115     

Other changes reported in other revenue

     (2,630)          -     

Unrealized gain (losses) reported in OCI

     166,278           (10,634)    
  

 

 

    

 

 

 

Derivative fair value at end of period

   $ 342,187         $     116,349     
  

 

 

    

 

 

 

Gains and losses from the effective portion of derivative assets and liabilities held in AOCI expected to be reclassified into earnings during the following twelve months would result in a gain of $91.2 million net of income taxes. Hedge derivative ineffectiveness resulted in gains of $4.9 million and $0.8 million for the six months ended June 30, 2012 and 2011, respectively. In January and February 2012, we terminated a number of our ten-year derivative instruments in exchange for derivative instruments with shorter durations at above market terms. The decrease in the fair value between the terminated ten-year instrument and the new shorter-term instrument was recognized in the current period as a realized loss. Unrealized losses recognized in 2012 is the difference between the estimated fair value at the inception date and transaction cost for ten-year derivative instruments entered into during the period.

 

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4. INVESTMENT IN BBEP

At June 30, 2011, we owned 8.6 million BBEP Units, or 15%, of BBEP, whose price closed at $19.46 per unit as of that date. During the six months ended June 30, 2011, gains of $123.8 million were recognized in Other Income from the sale of 7.1 million BBEP Units. During the fourth quarter of 2011, we sold all of our remaining BBEP Units.

Changes in the balance of our investment in BBEP were as follows:

 

(In thousands)

 

Balance at December 31, 2010

   $ 83,341     

Equity loss in BBEP

     (47,091)    

Distributions from BBEP

     (12,959)    

BBEP Units sold

     (10,671)    
  

 

 

 

Balance at June 30, 2011

   $ 12,620     
  

 

 

 

We accounted for our investment in BBEP Units using the equity method, utilizing a one-quarter lag from BBEP’s publicly available information. Summarized estimated financial information for BBEP is as follows:

 

     For the Three Months
Ended March 31,
     For the Six Months
Ended March 31,
 
     2011      2011  
     (In thousands)      (In thousands)  

Revenue (1)

   $ (12,704)        $ 5,461     

Operating expense

     73,937           153,420     
  

 

 

    

 

 

 

Operating income (loss)

     (86,641)          (147,959)    

Interest and other (2)

     9,074           19,063     

Income tax expense (benefit)

     (1,002)          (1,441)    

Noncontrolling interests

     34           69     
  

 

 

    

 

 

 

Net income (loss) available to BBEP

   $     (94,747)        $     (165,650)    
  

 

 

    

 

 

 

 

  (1) 

For the three months ended March 31, 2011, unrealized losses of $112.6 million on commodity derivatives were recognized. For the six months ended March 31, 2011, unrealized losses of $194.9 million on commodity derivatives were recognized.

 

  (2) 

The three months ended March 31, 2011 included unrealized gains of $1.4 million from interest rate swaps. The six months ended March 31, 2011 included unrealized gains of $4.5 million from interest rate swaps.

 

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5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

      June 30,
2012
     December 31,
2011
 
     (In thousands)  

Oil and gas properties

     

Subject to depletion

   $ 5,529,652         $ 5,309,330     

Unevaluated costs

     481,735           433,341     

Accumulated depletion

     (3,665,178)          (2,516,195)    
  

 

 

    

 

 

 

Net oil and gas properties

     2,346,209           3,226,476     

Other plant and equipment

     

Pipelines and processing facilities

     360,596           340,242     

General properties

     75,418           71,297     

Accumulated depreciation

     (186,157)          (177,496)    
  

 

 

    

 

 

 

Net other property and equipment

     249,857           234,043     
  

 

 

    

 

 

 

Property, plant and equipment, net of accumulated depletion and depreciation

   $ 2,596,066         $ 3,460,519     
  

 

 

    

 

 

 

Ceiling Test Analysis

We recorded impairment expense of $898.7 million and $93.2 million at June 30, 2012 and $62.3 million and $0.4 million at March 31, 2012 for our U.S. and Canadian oil and gas properties, respectively. For our U.S. oil and gas properties, we computed the June 30, 2012 and March 31, 2012 ceiling amounts using Henry Hub prices of $3.15 and $3.73 per MMBtu of natural gas, respectively, calculated as the unweighted average of the preceding 12 month first-day-of-the-month prices. The Henry Hub natural gas prices used to compute the ceiling amounts at June 30, 2012 and March 31, 2012 were 23.5% and 9.5% lower than the comparable price used at December 31, 2011. For our Canadian oil and gas properties, we computed the June 30, 2012 and March 31, 2012 ceiling amounts using AECO prices of $2.72 and $3.64 per MMBtu of natural gas, respectively, calculated as the unweighted average of the preceding 12-month first-day-of-the-month prices. The AECO natural gas prices used to compute the ceiling amount at June 30, 2012 and March 31, 2012 were 25.5% and 1% lower than the comparable price used at December 31, 2011. For our U.S. oil and gas properties, we computed the June 30, 2012 ceiling amounts using a Mont Belvieu, Texas price of $35.61 per Bbl of NGL, calculated as the unweighted average of the preceding 12-month first-day-of-the-month prices. The Mont Belvieu, Texas NGL price used to compute the ceiling amounts at June 30, 2012 was 24.5% lower than the comparable price used at December 31, 2011. These charges resulted in the recognition of a deferred tax asset at June 30, 2012.

As of June 30, 2012, our U.S. and Canadian ceiling tests included $337 million and $125 million, respectively, in value for our derivatives treated as hedges. Absent this recognition, after tax we would have recognized $337 million of additional impairment expense for our U.S. oil and gas properties and $125 million for our Canadian oil and gas properties. Because of the volatility of petroleum prices and prevailing prices subsequent to June 30, 2012, it is reasonably possible we may experience additional impairment in future periods.

Notes 2 and 8 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contain additional information regarding our property, plant and equipment and our quarterly ceiling test analysis.

 

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6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

     June 30,
2012
     December 31,
2011
 

Combined Credit Agreements

   $ 394,223         $ 227,482     

Senior notes due 2015, net of unamortized discount

     435,436           435,020     

Senior notes due 2016, net of unamortized discount

     578,343           576,977     

Senior notes due 2019, net of unamortized discount

     292,332           292,055     

Senior subordinated notes due 2016

     350,000           350,000     

Convertible debentures, net of unamortized discount

     -           18     
  

 

 

    

 

 

 

Total debt

     2,050,334           1,881,552     

Unamortized deferred gain-terminated interest rate swaps

     19,392           21,897     

Current portion of long-term debt

     -           (18)    
  

 

 

    

 

 

 

Long-term debt

   $ 2,069,726         $ 1,903,431     
  

 

 

    

 

 

 

Credit Facilities

The Combined Credit Agreements’ global borrowing base remained at $1.075 billion as of June 30, 2012 and the global letter of credit capacity increased from $175 million to $200 million in June 2012 in accordance with the Combined Credit Agreements. At June 30, 2012, we had $619 million available under the facility.

In light of current prices for natural gas and NGLs, we amended our Combined Credit Agreements in August 2012 primarily to loosen the financial covenants contained therein through the second quarter of 2014. The next semi-annual redetermination of our global borrowing base was scheduled to be completed in October 2012. However, in conjunction with the amendments to our Combined Credit Agreements, our borrowing base was also redetermined. As a result of the amendment and the redetermination process, the following changes were made to the Combined Credit Agreements:

 

   

Reduction of the currently applicable global borrowing base to $850 million from $1.075 billion

 

   

Increase of the applicable margin by 0.50% for each type of loan and issued letters of credit, and setting of the commitment fee on unutilized availability to 0.50%

 

   

Reduction of the minimum required interest coverage ratio from 2.5 to 1.5 for the quarter ending September 30, 2012 through the quarter ending March 31, 2014, then increasing to 2.0 for the quarter ending June 30, 2014, and reverting to 2.5 thereafter

 

   

Addition of a maximum senior secured debt leverage ratio of 2.5 beginning in the quarter ending September 30, 2012

 

   

Until the later of June 30, 2013, or such time as the total leverage ratio for the prior twelve month period is less than or equal to 4.0:

 

   

Restrict the ability to issue certain additional types of debt;

 

   

Limit the aggregate amount of restricted payments to $15 million;

 

   

Restrict the ability to repay existing debt securities if global borrowing base utilization equals or exceeds 25%; and

 

   

Require a dollar for dollar repayment of the Combined Credit Agreements together with any repayment of existing debt securities if the global borrowing base utilization is less than 25% until the Combined Credit Agreements are paid in full, at which time existing debt securities may be repaid in any amounts; and

 

   

Restrict the ability to terminate certain oil and gas hedging arrangements through 2014.

Summary of All Outstanding Debt

As of June 30, 2012, the following subsidiaries are guarantors under our debt obligations: Cowtown Pipeline Management, Inc., Cowtown Pipeline Funding, Inc., Cowtown Gas Processing L.P., Cowtown Pipeline L.P., Silver Stream Pipeline Company LLC, and Barnett Shale Operating LLC and, with respect to only our senior notes and senior subordinated notes, QPP Parent LLC and QPP Holdings LLC. The following table summarizes other significant aspects of our long-term debt outstanding at June 30, 2012:

 

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     Priority on Collateral and Structural Seniority (1)
     Highest priority   LOGO   Lowest priority
     Equal priority   Equal Priority    
     Combined Credit
Agreements
 

2015

Senior Notes

 

2016

Senior Notes

 

2019

Senior Notes

 

Senior

Subordinated Notes

Principal amount

   $1.075 billion (2)   $438 million   $591 million   $298 million   $350 million

Scheduled maturity date

   September 6, 2016   August 1, 2015   January 1, 2016   August 15, 2019   April 1, 2016
Interest rate on outstanding borrowings at           

June 30, 2012 (3)

   2.42%   8.25%   11.75%   9.125%   7.125%

Base interest rate options

   LIBOR, ABR, CDOR
(4) (5)
  N/A   N/A   N/A   N/A

Financial covenants (6)

   - Minimum current ratio

of 1.0

  N/A   N/A   N/A   N/A
     - Minimum EBITDA
to cash interest expense
ratio of 2.5
               

Significant restrictive covenants (6)

   - Incurrence of debt

- Incurrence of liens
- Payment of dividends

- Equity purchases

- Asset sales

- Affiliate transactions

- Limitations on
derivatives

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends

- Equity purchases

- Asset sales

- Affiliate transactions

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends

- Equity purchases

- Asset sales

- Affiliate transactions

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends

- Equity purchases

- Asset sales

- Affiliate transactions

  - Incurrence of debt

- Incurrence of liens

- Payment of dividends

- Equity purchases

- Asset sales

- Affiliate transactions

Optional redemption (6)

   Any time   August 1,

2012: 103.875

2013: 101.938

2014: par

  July 1,

2013: 105.875

2014: 102.938

2015: par

  August 15,

2014: 104.563

2015: 103.042

2016: 101.521

2017: par

  April 1,

2012: 102.375

2013: 101.188

2014: par

Make-whole redemption (6)

   N/A   N/A   Callable prior to

July 1, 2013 at

make-whole call price

of Treasury + 50 bps

  Callable prior to

August 15, 2014 at

make-whole call price of

Treasury + 50 bps

  N/A

Change of control (6)

   Event of default   Put at 101% of

principal plus

accrued interest

  Put at 101% of

principal plus

accrued interest

  Put at 101% of

principal plus

accrued interest

  Put at 101% of

principal plus

accrued interest

Equity clawback (6)

   N/A   N/A   N/A   Redeemable until

August 15, 2012 at

109.125%, plus accrued

interest for up to 35%

  N/A

Estimated fair value (7)

   $394.2 million   $409.5 million   $572.9 million   $271.2 million   $268.6 million

 

  (1) 

Borrowings under the Amended and Restated U.S. Credit Facility are guaranteed by certain of Quicksilver’s domestic subsidiaries and are secured by 100% of the equity interests of each of Cowtown Pipeline Management, Inc., Cowtown Pipeline Funding, Inc., Cowtown Gas Processing L.P., Cowtown Pipeline L.P., Barnett Shale Operating LLC, Silver Stream Pipeline Company LLC, Quicksilver Production Partners Operating Ltd., QPP Parent LLC and QPP Holdings LLC (collectively, the “Domestic Pledged Equity”), 65% of the equity interests of Quicksilver Resources Canada Inc. (“QRCI”) and certain oil and gas properties and related assets of Quicksilver. Borrowings under the Amended and Restated Canadian Credit Facility are guaranteed by Quicksilver and certain of its domestic subsidiaries and are secured by the Domestic Pledged Equity, 100% of the equity interests of QRCI and any of its Canadian subsidiaries, and certain oil and gas properties and related assets of Quicksilver and QRCI. The other debt presented is based upon structural seniority and priority of payment.

 

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  (2) 

The principal amount for the Combined Credit Agreements represents the global borrowing base as of June 30, 2012.

 

  (3)

Represents the weighted average borrowing rate payable to lenders.

 

  (4)

Amounts outstanding under the Amended and Restated U.S. Credit Facility bear interest, at our election, at (i) adjusted LIBOR (as defined in the Amended and Restated U.S. Credit Facility) plus an applicable margin between 1.50% to 2.50%, (ii) ABR (as defined in the Amended and Restated U.S. Credit Facility), which is the greatest of (a) the prime rate announced by JPMorgan, (b) the federal funds rate plus 0.50% and (c) adjusted LIBOR for an interest period of one month plus 1.0%, plus, in each case under scenario (ii), an applicable margin between 0.50% to 1.50%. We also pay a per annum fee on the LC Exposure (as defined in the Amended and Restated U.S. Credit Facility) of all letters of credit issued under the Amended and Restated U.S. Credit Facility equal to the applicable margin, with respect to adjusted LIBOR loans, and a commitment fee on the unused availability under the Amended and Restated U.S. Credit Facility of 0.375% to 0.50%. In connection with the August 2012 amendment to Combined Credit Agreements, the commitment fee on the unused availability will be set at 50 basis points and all other above stated applicable margin percentages will increase by 50 basis points.

 

  (5)

Amounts outstanding under the Amended and Restated Canadian Credit Facility bear interest, at our election, at (i) the CDOR Rate (as defined in the Amended and Restated Canadian Credit Facility) plus an applicable margin between 1.50% and 2.50%, (ii) the Canadian Prime Rate (as defined in the Amended and Restated Canadian Credit Facility) plus an applicable margin between 0.50% and 1.50%, (iii) the U.S. Prime Rate (as defined in the Amended and Restated Canadian Credit Facility) plus an applicable margin between 0.50% and 1.50% and (iv) adjusted LIBOR (as defined in the Amended and Restated Canadian Credit Facility) plus an applicable margin between 1.50% to 2.50%. We pay a per annum fee on the LC Exposure (as defined in the Amended and Restated Canadian Credit Facility) of all letters of credit issued under the Amended and Restated Canadian Credit Facility equal to the applicable margin, with respect to adjusted LIBOR loans, and a commitment fee on the unused availability under the Amended and Restated Canadian Credit Facility of 0.375% to 0.50%. In connection with the August 2012 amendment to Combined Credit Agreements, the commitment fee on the unused availability will be set at 50 basis points and all other above stated applicable margin percentages will increase by 50 basis points.

 

  (6)

The information presented in this table is qualified in all respects by reference to the full text of the covenants, provisions and related definitions contained in the documents governing the various components of our debt.

 

  (7) 

The estimated fair value is determined using market quotations based on recent trade activity for fixed rate obligations (“Level 2” inputs). We consider debt with variable interest rates to have a fair value equal to its carrying value (“Level 1” input).

7. ASSET RETIREMENT OBLIGATIONS

The following table provides a reconciliation of the changes in the estimated asset retirement obligation for the six months ended June 30, 2012.

 

(In thousands)

 

Beginning asset retirement obligations

   $     85,822     

Additional liability incurred

     2,125     

Change in estimates

     4,665     

Accretion expense

     1,969     

Asset retirement costs incurred

     (917)    

Settlement of liability in excess of obligation recorded

     1,544     

Currency translation adjustment

     (82)    
  

 

 

 

Ending asset retirement obligations

     95,126     

Less current portion

     (254)    
  

 

 

 

Long-term asset retirement obligation

   $ 94,872     
  

 

 

 

 

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8. COMMITMENTS AND CONTINGENCIES

Contractual Obligations, Commitments and Contingencies

On July 26, 2011, we received a subpoena duces tecum from the SEC requesting certain documents. The SEC has informed us that their investigation arises out of press releases in 2011 questioning the projected decline curves and economics of shale gas wells.

On June 15, 2012, we received a subpoena duces tecum from the SEC requesting certain information regarding our assessment for impairment of unevaluated properties and plans for development of unevaluated properties.

In July 2012, we increased our letters of credit provided by C$35.6 million to a total of C$68.3 million in accordance with the agreement for construction of the NGTL Project. Subsequently, construction has been delayed for one year. This delay is the result of the in-service date having been moved to the summer of 2015. Accordingly, we anticipate the financial assurances will be reduced by approximately C$45 million and the schedule for increasing financial assurances will also be adjusted for the delay in construction with no additional letters of credit to be provided until 2014.

There have been no other significant changes to our contractual obligations and commitments as reported in our 2011 Annual Report on Form 10-K. Note 14 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains a more complete description of our contractual obligations, commitments and contingencies for which there are no other significant updates during the quarter ended June 30, 2012.

9. FORTUNE CREEK

In December 2011, we entered into an agreement with KKR to form Fortune Creek to construct and operate midstream assets for natural gas produced by us and others primarily in British Columbia. The partnership established an area of mutual interest for the midstream business covering approximately 30 million potential acres which includes transportation and processing infrastructure and agreements.

In forming Fortune Creek, our Canadian subsidiary contributed an existing 20-mile, 20-inch gathering line and its related compression facilities, committed to minimum expenditures of $300 million for drilling and completion activities in our Horn River Asset between 2012 and 2014, and committed gas production from our Horn River Asset for ten years beginning 2012, as more fully described below. KKR contributed $125 million cash in exchange for a 50% interest in Fortune Creek. Our Canadian subsidiary has responsibility for the day-to-day operations of Fortune Creek.

Our Canadian subsidiary entered into a firm gathering agreement with Fortune Creek which is guaranteed by us. At our election, KKR has the responsibility to fund up to C$130 million of the capital required for construction of a new gas treatment facility in exchange for preferential cash flow distributions. If our subsidiary does not meet its obligations under the gathering agreement, KKR has the right to liquidate the partnership and consequently we have recorded the funds contributed by KKR as a liability in our consolidated financial statements. We recognize accretion expense to reflect the rate of return earned by KKR via its investment. During May 2012, Fortune Creek made cash distributions to KKR, which is reported as cash used by financing activities.

Based on an analysis of the partners’ equity at risk, we have determined the partnership to be a VIE. Further, based on our ability to direct the activities surrounding the production of natural gas and our direct management of the operations of the Fortune Creek facilities, we have determined we are the primary beneficiary and, therefore, we consolidate Fortune Creek.

Note 12 contains financial information for Fortune Creek in our condensed consolidating financial statements.

 

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10. QUICKSILVER STOCKHOLDERS’ EQUITY

Common Stock, Preferred Stock and Treasury Stock

We are authorized to issue 400 million shares of common stock with a $0.01 par value per share and 10 million shares of preferred stock with a $0.01 par value per share. At June 30, 2012 and December 31, 2011, we had 173.1 million and 171.6 million shares of common stock outstanding, respectively.

Note 17 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains additional information about our equity-based compensation plan.

Stock Options

Options to purchase shares of common stock were granted in 2012 with an estimated fair value of $8.5 million. The following summarizes the values from and assumptions for the Black-Scholes option pricing model for stock options issued during the six months ended June 30:

 

     2012   2011

Weighted avg grant date fair value

   $4.21   $9.16

Weighted avg risk-free interest rate

   1.14%   2.38%

Expected life (in years)

   6.0   6.0

Wtd avg volatility

   68.2%   66.8%

Expected dividends

   -   -

The following table summarizes our stock option activity for the six months ended June 30, 2012:

 

     Shares      Wtd Avg
Exercise
Price
     Wtd Avg
Remaining
Contractual Life
     Aggregate
Intrinsic Value
 
                   (In years)      (In thousands)  

Outstanding at January 1, 2012

     3,760,696         $ 12.01         

Granted

     2,020,685           6.90         

Exercised

     (1,572)          6.21         

Forfeited

     (469,976)          8.79         

Expired

     (84,349)          12.05         
  

 

 

          

Outstanding at June 30, 2012

     5,225,484         $ 10.33         7.5       $ 56   
  

 

 

          

Exercisable at June 30, 2012

     2,904,497         $   11.14         6.1       $           -   
  

 

 

          

As of June 30, 2012, we estimate that a total of 5.2 million stock options will become vested including those options already exercisable. As of December 31, 2011, the unrecognized compensation cost related to outstanding unvested stock options was $7.5 million, which is expected to be recognized in expense through January 2014. Compensation expense related to stock options of $3.4 million and $3.5 million was recognized for each of the six months ended June 30, 2012 and 2011, respectively. Cash received from the exercise of stock options totaled less than $0.1 million for the six months ended June 30, 2012. The total intrinsic value of those options exercised was less than $0.1 million.

 

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Restricted Stock

The following table summarizes our restricted stock and stock unit activity for the six months ended June 30, 2012:

 

     Payable in shares      Payable in cash  
     Shares      Wtd Avg
Grant Date
Fair Value
     Shares      Wtd Avg
Grant Date
Fair Value
 

Outstanding at January 1, 2012

     2,460,300         $     12.29         369,846         $     13.12   

Granted

     2,975,885           6.43         653,195           6.19   

Vested

     (1,256,620)          10.71         (186,526)          11.22   

Forfeited

     (764,429)          8.97         (135,624)          9.68   
  

 

 

       

 

 

    

Outstanding at June 30, 2012

     3,415,136         $ 8.51         700,891         $ 7.83   
  

 

 

       

 

 

    

As of December 31, 2011, the unrecognized compensation cost related to outstanding unvested restricted stock was $17.3 million, which is expected to be recognized in expense through March 2014. Grants of restricted stock and RSUs during the six months ended June 30, 2012 had an estimated grant date fair value of $23.2 million. The fair value of RSUs settled in cash was $3.8 million at June 30, 2012. For the six months ended June 30, 2012 and 2011, compensation expense of $7.3 million and $6.8 million, respectively, was recognized. The total fair value of shares vested during the six months ended June 30, 2012 was $9.6 million.

11. EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator used for the computation of basic and diluted net income (loss) per common share.

 

     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  
     (In thousands, except per share data)  

Net income (loss) attributable to Quicksilver

   $ (672,541)        $ 108,587         $ (732,465)        $ 37,829     

Basic income allocable to participating securities (1)

     -           (1,331)          -           (454)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income (loss) attributable to Quicksilver

   $ (672,541)        $ 107,256         $ (732,465)        $ 37,375     

Impact of assumed conversions – interest on 1.875% convertible debentures, net of income taxes

     -           1,880           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) available to stockholders assuming conversion of convertible debentures

   $ (672,541)        $ 109,136         $ (732,465)        $ 37,375     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares – basic

     170,043           168,984           169,991           168,928     

Effect of dilutive securities (2):

           

Share-based compensation awards

     -           868           -           858     

Contingently convertible debentures

     -           9,816           -           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares – diluted

     170,043           179,668           169,991           169,786     
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per common share – basic

   $ (3.96)        $ 0.63         $ (4.31)        $ 0.22     

Earnings (loss) per common share – diluted

   $ (3.96)        $ 0.61         $ (4.31)        $ 0.22     

 

  (1)

Restricted share awards that contain nonforfeitable rights to dividends are participating securities and, therefore, should be included in computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net losses.

 

  (2)

For the six months ended June 30, 2012, we had the following antidilutive shares excluded from the dilution calculation: 5.2 million shares associated with our stock options and 0.3 million shares associated with our unvested restricted stock units. For the three months ended June 30, 2012, we had the following antidilutive shares excluded from the dilution calculations: 5.2 million shares associated with our stock options and 0.3 million shares associated with our unvested restricted stock units. For the six months ended

 

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  June 30, 2011, we had the following antidilutive shares excluded from the dilution calculation: 9.8 million shares associated with our contingently convertible debt, 1.9 million shares associated with our stock options and 1.3 million shares associated with our unvested restricted stock units. For the three months ended June 30, 2011, we had the following antidilutive shares excluded from the dilutive calculation: 1.9 million shares associated with our stock options and 1.3 million shares associated with our unvested restricted stock units.

12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Note 19 to the consolidated financial statements in our 2011 Annual Report on Form 10-K contains a more complete description of our guarantor, non-guarantor, restricted and unrestricted subsidiaries.

The following tables present financial information about Quicksilver and our restricted subsidiaries for the three-month periods covered by the consolidated financial statements. Under the indentures for our senior notes and senior subordinated notes, Fortune Creek is not considered to be a subsidiary and therefore it is presented separately from the other subsidiaries for these purposes.

Condensed Consolidating Balance Sheets

 

     June 30, 2012  
   Quicksilver
Resources Inc.
    Restricted
Guarantor
Subsidiaries
    Restricted
Non-
Guarantor
Subsidiaries
    Restricted
Subsidiary
Eliminations
    Quicksilver
and
Restricted
Subsidiaries
    Unrestricted
Non-
Guarantor
Subsidiaries
    Fortune
Creek
    Consolidating
Eliminations
    Quicksilver
Resources Inc.
Consolidated
 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   (In thousands)  

ASSETS

                  

Current assets

   $ 327,459        $ 89,675      $ 89,179        $ (203,093)       $ 303,220        $ 9,375        $ 11,049        $ (18,748)       $ 304,896     

Property and equipment

     1,824,415          37,768        644,780          -          2,506,963          -          89,103          -          2,596,066     

Investment in subsidiaries (equity method)

     166,008          -          (33,991)         (166,008)        (33,991)         (36,384)         -          70,375          -     

Other assets

     531,863          -          55,319          (243,620)        343,562          -          -          -          343,562     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,849,745        $ 127,443        $ 755,287        $ (612,721)      $ 3,119,754        $ (27,009)      $ 100,152        $ 51,627        $ 3,244,524     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

                  

Current liabilities

   $ 293,146        $ 111,207        $ 99,182        $ (203,093)       $ 300,442        $ 9,375        $ 6,097        $ (18,748)       $ 297,166     

Long-term liabilities

     1,977,806          21,969          484,364          (243,620)         2,240,519          -          82          127,964          2,368,565     

Stockholders' equity

     578,793          (5,733)         171,741          (166,008)         578,793          (36,384)         93,973          (57,589)         578,793     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 2,849,745        $ 127,443        $ 755,287        $ (612,721)       $ 3,119,754        $ (27,009)       $ 100,152        $ 51,627        $ 3,244,524     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2011  
   Quicksilver
Resources
Inc.
    Restricted
Guarantor
Subsidiaries
    Restricted
Non-
Guarantor
Subsidiaries
    Restricted
Subsidiary
Eliminations
    Quicksilver
and
Restricted
Subsidiaries
    Unrestricted
Non-
Guarantor
Subsidiaries
    Fortune
Creek
    Consolidating
Eliminations
    Quicksilver
Resources
Inc.
Consolidated
 
     (In thousands)  

ASSETS

                  

Current assets

   $ 336,893        $ 87,767        $ 63,711        $ (200,727)       $ 287,644        $ -        $ 27,533        $ (14,750)       $ 300,427     

Property and equipment

     2,743,379          37,936          598,443          -          3,379,758          -          80,761          -          3,460,519     

Investment in subsidiaries (equity method)

     241,680          -          (29,449)         (241,680)         (29,449)         (29,449)         -          58,898          -     

Other assets

     401,279          -          76,857          (243,620)         234,516          -          -          -          234,516     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,723,231        $ 125,703        $ 709,562        $ (686,027)       $ 3,872,469        $ (29,449)       $ 108,294        $ 44,148        $ 3,995,462     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

                  

Current liabilities

   $ 348,512        $ 109,938        $ 76,450        $ (200,727)       $ 334,173        $ -        $ 14,750        $ (14,750)       $ 334,173     

Long-term liabilities

     2,112,800          21,903          385,294          (243,620)         2,276,377          -          80          122,913          2,399,370     

Stockholders' equity

     1,261,919          (6,138)         247,818          (241,680)         1,261,919          (29,449)         93,464          (64,015)         1,261,919     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 3,723,231        $ 125,703        $ 709,562        $ (686,027)       $ 3,872,469        $ (29,449)       $ 108,294        $ 44,148        $ 3,995,462     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Income

 

     For the Three Months Ended June 30, 2012  
      Quicksilver
Resources Inc.
     Restricted
Guarantor
Subsidiaries
     Restricted
Non-

Guarantor
Subsidiaries
     Restricted
Subsidiary
Eliminations
     Quicksilver
and

Restricted
Subsidiaries
     Unrestricted
Non-

Guarantor
Subsidiaries
     Fortune
Creek
     Consolidated
Eliminations
     Quicksilver
Resources Inc.
Consolidated
 
     (In thousands)  

Revenue

   $ 149,333         $ 1,078         $ 18,846         $ (695)        $ 168,562         $ -         $ 3,202         $ (3,202)        $ 168,562     

Operating expenses

     1,023,740           893           120,599           (695)          1,144,537           -           1,816           (3,202)          1,143,151     

Equity in net earnings of subsidiaries

     (78,560)          -           (1,051)          78,560           (1,051)          1,386           -           (335)          -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     (952,967)          185           (102,804)          78,560           (977,026)          1,386           1,386           (335)          (974,589)    

Fortune Creek Accretion

     -           -           -           -           -           -           -           (4,830)          (4,830)    

Interest expense and other

     (37,971)          -           (2,040)          -           (40,011)          -           -           -           (40,011)    

Income tax (expense) benefit

     318,397           (65)          26,164           -           344,496           -           -           2,393           346,889     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ (672,541)        $ 120         $ (78,680)        $ 78,560         $ (672,541)        $ 1,386         $ 1,386         $ (2,772)        $ (672,541)    

Other comprehensive income

     (15,218)          -           (10,294)          10,294           (15,218)          -           -           -           (15,218)    

Equity in OCI of subsidiaries

     (10,294)          -           -           -           (10,294)          -           -           -           (10,294)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ (698,053)        $ 120         $ (88,974)        $ 88,854         $ (698,053)        $ 1,386         $ 1,386         $ (2,772)        $ (698,053)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Three Months Ended June 30, 2011  
     Quicksilver
Resources Inc.
     Restricted
Guarantor
Subsidiaries
     Restricted
Non-Guarantor
Subsidiaries
     Consolidating
Eliminations
     Quicksilver
Resources Inc.
Consolidated
 
     (In thousands)  

Revenue

   $ 202,788         $ 1,222         $ 45,383         $ (947)        $ 248,446     

Operating expenses

     142,389           782           27,546           (947)          169,770     

Equity in net earnings of subsidiaries

     11,855           -           -           (11,855)          -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     72,254           440           17,837           (11,855)          78,676     

Loss from earnings of BBEP

     (26,207)          -           -           -           (26,207)    

Interest expense and other

     77,085           -           (1,459)          -           75,626     

Income tax expense (benefit)

     (14,545)          (154)          (4,809)          -           (19,508)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 108,587         $ 286         $ 11,569         $ (11,855)        $ 108,587     

Other comprehensive income

     3,270           -           (5,158)          5,158           3,270     

Equity in OCI of subsidiaries

     (5,158)          -           -           -           (5,158)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ 106,699         $ 286         $ 6,411         $ (6,697)        $ 106,699     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended June 30, 2012  
      Quicksilver
Resources
Inc.
     Restricted
Guarantor
Subsidiaries
     Restricted
Non-

Guarantor
Subsidiaries
     Restricted
Subsidiary
Eliminations
     Quicksilver
and

Restricted
Subsidiaries
     Unrestricted
Non-

Guarantor
Subsidiaries
     Fortune
Creek
     Consolidated
Eliminations
     Quicksilver
Resources Inc.
Consolidated
 
   (In thousands)  

Revenue

   $ 280,796         $ 2,208         $ 32,626         $ (1,598)        $ 314,032         $ -         $ 5,599         $ (5,599)        $ 314,032     

Operating expenses

     1,223,655           1,802           148,574           (1,598)          1,372,433           -           3,083           (5,599)          1,369,917     

Crestwood earn-out

     41,097           -           -           -           41,097           -           -           -           41,097     

Equity in net earnings of subsidiaries

     (93,893)          -           (4,662)          93,893           (4,662)          2,516           -           2,146           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     (995,655)          406           (120,610)          93,893           (1,021,966)          2,516           2,516           2,146           (1,014,788)    

Fortune Creek Accretion

     -           -           -           -           -           -           -           (9,571)          (9,571)    

Interest expense and other

     (76,615)          -           (3,474)          -           (80,089)          -           -           -           (80,089)    

Income tax (expense) benefit

     339,805           (142)          29,927           -           369,590           -           -           2,393           371,983     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ (732,465)        $ 264         $ (94,157)        $ 93,893         $ (732,465)        $ 2,516         $ 2,516       $ (5,032)        $ (732,465)    

Other comprehensive income

     23,589           -           18,082           (18,082)          23,589           -           -           -           23,589     

Equity in OCI of subsidiaries

     18,082           -           -           -           18,082           -           -           -           18,082     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ (690,794)        $ 264         $ (76,075)        $ 75,811         $ (690,794)        $ 2,516         $ 2,516       $ (5,032)        $ (690,794)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended June 30, 2011  
     Quicksilver
Resources Inc.
     Restricted
Guarantor
Subsidiaries
     Restricted
Non-

Guarantor
Subsidiaries
     Consolidating
Eliminations
     Quicksilver
Resources Inc.
Consolidated
 
     (In thousands)  

Revenue

   $ 382,359         $ 2,489         $ 77,724         $ (1,939)        $ 460,633     

Operating expenses

     279,559           2,804           102,326           (1,939)          382,750     

Equity in net earnings of subsidiaries

     (21,954)          -           -           21,954           -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     80,846           (315)           (24,602)          21,954           77,883     

Loss from earnings of BBEP

     (47,091)          -           -           -           (47,091)    

Interest expense and other

     33,815           -           (3,246)          -           30,569     

Income tax (expense) benefit

     (29,741)          109           6,100           -           (23,532)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 37,829         $ (206)        $ (21,748)        $ 21,954         $ 37,829     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income

     (24,975)          -           1,677           (1,677)          (24,975)    

Equity in OCI of subsidiaries

     1,677           -           -           -           1,677     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ 14,531         $ (206)        $ (20,071)        $ 20,277         $ 14,531     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Condensed Consolidating Statements of Cash Flows

 

     For the Six Months Ended June 30, 2012  
     Quicksilver
Resources Inc.
     Restricted
Guarantor
Subsidiaries
     Restricted
Non-Guarantor
Subsidiaries
     Quicksilver
and Restricted
Subsidiaries
     Unrestricted
Non-Guarantor
Subsidiaries
     Fortune
Creek
     Quicksilver
Resources Inc.
Consolidated
 
     (In thousands)  

Net cash flow provided (used) by operating activities

   $ 57,359         $ 590         $ 32,987         $ 90,936         $ 2         $ 8,578         $ 99,516     

Purchases of property, plant and equipment

     (140,256)          (590)          (157,508)          (298,354)          -           (8,815)          (307,169)    

Proceeds from Crestood earn-out

     41,097           -           -           41,097           -           -           41,097     

Proceeds from sale of properties and equipment

     3,060           -           312           3,372           -           -           3,372     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash flow used by investing activities

     (96,099)          (590)          (157,196)          (253,885)          -           (8,815)          (262,700)    

Issuance of debt

     119,000           -           136,775           255,775           -           -           255,775     

Repayments of debt

     (75,018)          -           (13,097)          (88,115)          -           -           (88,115)    

Debt issuance costs

     (148)          -           -           (148)          -           -           (148)    

Distribution of Fortune Creek Partnership funds

     -           -           -           -           -           (1,845)          (1,845)    

Proceeds from exercise of stock options

     11           -           -           11           -           -           11     

Purchase of treasury stock

     (2,364)          -           -           (2,364)          -           -           (2,364)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash flow provided (used) by financing activities

     41,481           -           123,678           165,159           -           (1,845)          163,314     

Effect of exchange rates on cash

     -           -           531           531           -           196           727     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and equivalents

     2,741           -           -           2,741           2             (1,886)          857     

Cash and equivalents at beginning of period

     363           -           -           363           -           12,783           13,146     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and equivalents at end of period

   $     3,104         $ -         $ -         $ 3,104         $ 2         $ 10,897         $ 14,003     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended June 30, 2011  
            Restricted      Restricted             Quicksilver  
     Quicksilver      Guarantor      Non-Guarantor      Consolidating      Resources Inc.  
     Resources Inc.      Subsidiaries      Subsidiaries      Eliminations      Consolidated  
     (In thousands)  

Net cash flow provided by operations

   $ 96,029         $ 1,137         $ 26,186         $         -         $ 123,352     

Capital expenditures

     (275,753)          (1,137)          (119,266)          -           (396,156)    

Proceeds from sale of BBEP units

     134,423           -           -           -           134,423     

Proceeds from sale of properties and equipment

     1,925           -           1,198           -           3,123     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash flow used by investing activities

     (139,405)          (1,137)          (118,068)          -           (258,610)    

Issuance of debt

     153,500           -           102,945           -           256,445     

Repayments of debt

     (160,880)          -           (9,292)          -           (170,172)    

Proceeds from exercise of stock options

     622           -           -           -           622     

Purchase of treasury stock

     (4,801)          -           -           -           (4,801)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash flow provided (used) by financing activities

     (11,559)          -           93,653           -           82,094     

Effect of exchange rates on cash

     -           -           (1,771)          -           (1,771)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net decrease in cash and equivalents

     (54,935)          -           -           -           (54,935)    

Cash and equivalents at beginning of period

     54,937           -           -           -           54,937     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and equivalents at end of period

   $ 2         $ -         $ -         $ -         $ 2     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

13. SEGMENT INFORMATION

We operate in two geographic segments, the U.S. and Canada, where we are engaged in the exploration and production segment of the oil and gas industry. Additionally, we operate a significantly smaller midstream segment in the U.S. and Canada, where we provide natural gas gathering and processing services, primarily to our U.S. and Canadian exploration and production segments. Following the formation of our partnership with KKR, beginning in January 2012, we have additional midstream operations in Canada through Fortune Creek. Based on the immateriality of our midstream segment, we have combined U.S. and Canadian information. We evaluate performance based on operating income and property and equipment costs incurred.

 

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Table of Contents
     Exploration &
Production
                         

Quicksilver

 
     U.S.      Canada      Midstream      Corporate      Elimination      Consolidated  

For the Three Months Ended June 30:

     (In thousands)   

2012

                 

Revenue

   $ 149,333         $ 18,847         $ 4,280         $ -         $ (3,898)          168,562     

DD&A

     39,416           10,627           1,314           585           -           51,942     

Impairment expense

     898,715           93,206           -           -           -           991,921     

Operating income (loss)

     (856,498)          (100,671)          1,570           (18,990)          -           (974,589)    

Property and equipment costs incurred

     44,546           103,778           5,459           1,914           -           155,697     

2011

                 

Revenue

   $ 202,788         $ 45,383         $ 1,222         $ -         $ (947)        $ 248,446     

DD&A

     41,580           12,087           466           571           -           54,704     

Operating income (loss)

     75,615           18,962           440           (16,341)          -           78,676     

Property and equipment costs incurred

     136,454           23,640           1,339           -           -           161,433     

For the Six Months Ended June 30:

  

2012

                 

Revenue

   $ 280,796         $ 32,627         $ 7,807         $ -         $ (7,198)          314,032     

DD&A

     81,239           21,442           2,515           1,185           -           106,381     

Impairment expense

     961,057           93,611           -           -           -           1,054,668     

Operating income (loss)

     (865,239)          (113,786)          2,922           (38,685)          -           (1,014,788)    

Property and equipment costs incurred

     116,977           157,401           11,439           5,447           -           291,264     

2011

                 

Revenue

   $ 382,359         $ 77,724         $ 2,489         $ -         $ (1,939)        $ 460,633     

DD&A

     80,335           23,511           2,179           1,150           -           107,175     

Impairment expense

     -           49,063           -           -           -           49,063     

Operating income (loss)

     135,862           (22,352)          (316)          (35,311)          -           77,883     

Property and equipment costs incurred

     259,146           98,868           1,730           506           -           360,250     

Property, plant and equipment-net

                 

June 30, 2012

   $ 1,833,524         $ 643,274         $ 110,279         $ 8,989         $ -         $ 2,596,066     

December 31, 2011

     2,752,101           596,935           102,237           9,246           -           3,460,519     

14. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid (received) for interest and income taxes was as follows:

 

    

For the

Six Months

Ended

 
     June 30,  
     2012     2011  
     (In thousands)  

Interest, net of capitalized interest

   $ 77,940      $ 86,198   

Income taxes

     (1,565     5,904   

Other significant non-cash transactions were as follows:

 

     For the
Six  Months
Ended June 30,
 
     2012      2011  
     (In thousands)  

Working capital related to capital expenditures

   $ 98,692       $ 64,285   

 

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Table of Contents

15. TRANSACTIONS WITH RELATED PARTIES

As of June 30, 2012, members of the Darden family and entities controlled by them beneficially own approximately 30% of our outstanding common stock. Thomas Darden, Glenn Darden and Anne Darden Self are officers and directors of Quicksilver.

During both the first six months of 2012 and 2011, we paid $0.3 million for use of an airplane owned by an entity controlled by members of the Darden family. Usage rates were determined based upon comparable rates charged by third parties.

Payments received from Mercury for sublease rentals, employee insurance coverage and administrative services were negligible for the first six months of 2012 and 2011.

We paid $0.1 million in the first six months of 2011 for rent on buildings owned by entities controlled by members of the Darden family. Rental rates were determined based on comparable rates charged by third parties. No similar payments were made in the first six months of 2012.

 

27


Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) is intended to help readers of our financial statements understand our business, results of operations, financial condition, liquidity and capital resources. MD&A is provided as a supplement to, and should be read in conjunction with, the other sections of this Quarterly Report as well as our 2011 Annual Report on Form 10-K. We conduct our operations in two segments: (1) our more dominant exploration and production segment, and (2) our significantly smaller midstream segment. Except as otherwise specifically noted, or as the context requires otherwise, and except to the extent that differences between these segments or our geographic segments are material to an understanding of our business taken as a whole, we present this MD&A on a consolidated basis.

Our MD&A includes the following sections:

 

   

2012 Highlights – a summary of significant activities and events affecting Quicksilver

 

   

2012 Capital Program – a summary of our planned capital expenditures during 2012

 

   

Results of Operations – an analysis of our consolidated results of operations for the three- and six-month periods presented in our financial statements

 

   

Liquidity, Capital Resources and Financial Position – an analysis of our cash flows, sources and uses of cash, contractual obligations and commercial commitments

2012 HIGHLIGHTS

Master Limited Partnership

On February 10, 2012, we filed a Form S-1 with the SEC to begin the registration and sale of limited partnership interests in a master limited partnership holding certain of our mature properties in our Barnett Shale Asset. We amended the registration statement in May to include financial statements for 2011 and to address comments received from the SEC and in June to include financial statements for the first quarter of 2012 and to address further comments received from the SEC. In July 2012, we were informed that the SEC had no further comments. We have been advised by our investment bankers that current market conditions are not conducive for a launch of an initial public offering, however we plan to continue to monitor market conditions.

Emerging Basins

We deployed a rig in March 2012 to commence drilling operations in our West Texas Asset to target oil production. In the second quarter of 2012, we drilled two vertical wells to the Wolfcamp and Bone Springs formations, and re-entered an existing well to drill a horizontal lateral. Our plan for the remainder of 2012 is to drill and complete two wells. We hold a position of approximately 155,000 net acres in the Delaware and Midland basins. In the first quarter of 2012, we retained an investment bank to help evaluate opportunities for a joint venture partner to acquire an interest in and participate in the development of our West Texas acreage. We will evaluate the results of our drilling program prior to recommencing the marketing effort. At December 31, 2011, we had recognized no proved reserves in our West Texas Asset.

We deployed a rig in April 2012 to commence drilling operations in our Sand Wash Asset to target oil production. In the second quarter, we drilled two vertical wells and recompleted a 2011 well. Our plan for the remainder of 2012 is to drill one well and complete two wells. We hold approximately 210,000 net acres in the Sand Wash Basin. At December 31, 2011, we had recognized no proved reserves in our Sand Wash Asset.

Horn River Development

We completed our first multi-well pad in our Horn River Asset during June and July 2012, and have begun flowback activities. Our initial production results are consistent with our existing producing wells. Three of the wells on this pad targeted the Klua formation and five wells targeted the Muskwa formation.

 

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Table of Contents

Crestwood Earn-Out

In October 2010, we completed the sale of all of our interests in KGS to Crestwood. As part of the sale, we have the right to collect future earn-out payments through 2013. In February 2012, we collected $41 million of these earn-out payments, which is presented as Crestwood earn-out in the condensed consolidated statement of income for the six-months ended June 30, 2012. We have the right to collect up to an additional $31 million in future earn-out payments in 2013. As of June 30, 2012, we do not anticipate receiving any additional payment and have recognized no assets related to these opportunities.

2012 CAPITAL PROGRAM

We incurred costs related to our capital program of $291.3 million for the first six months of 2012. In response to the continued depression in natural gas prices and the sharp decline in NGL prices in the second quarter of 2012, we have reduced our capital program in the second half of 2012 to approximately $70 million, for a total 2012 capital program of approximately $360 million.

Average production is expected to be between 365 MMcfed and 380 MMcfed for all of 2012.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2012 and 2011

The following discussion compares the results of operations for the three months ended June 30, 2012 and 2011, or the 2012 quarter and 2011 quarter, respectively. “Other U.S.” refers to the combined amounts for our Sand Wash Asset and Bakken Asset.

Revenue

Production Revenue:

 

                                                                                                                               
    Natural Gas     NGL     Oil     Total  
    2012     2011     2012     2011     2012     2011     2012     2011  
    (In millions)  

Barnett Shale

  $ 41.7        $ 98.7        $ 34.3        $ 59.6          $ 3.0        $ 4.1        $ 79.0        $ 162.4     

Other U.S.

    0.1          0.2          0.1          0.3            3.3          3.1          3.5          3.6     

Hedging

    45.4          21.5          6.3          (12.6)          -          -          51.7          8.9     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

U.S.

    87.2          120.4          40.7          47.3          6.3          7.2          134.2          174.9     

Horseshoe Canyon

    8.9          20.2          -          -            -          -          8.9          20.2     

Horn River

    2.6          5.8          -          -            -          -          2.6          5.8     

Hedging

    4.8          6.8          -          -            -          -          4.8          6.8     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Canada

    16.3          32.8          -          -          -          -          16.3          32.8     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

  $ 103.5        $ 153.2        $ 40.7        $ 47.3          $ 6.3        $ 7.2        $ 150.5        $ 207.7     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

Average Daily Production Volume:

 

    Natural Gas     NGL     Oil     Equivalent Total  
    2012     2011     2012     2011     2012     2011     2012     2011  
    (MMcfd)     (Bbld)     (Bbld)     (MMcfed)  

Barnett Shale

        216.8              256.9              11,339              13,165              366            448              287.1              338.6     

Other U.S.

    0.7          0.7          26          22          441        375          3.5