Eagle Rock announced its unaudited financial results for the three months ended March 31, 2010. Notable events with respect to first-quarter 2010 included the following:
First-quarter 2010 results, relative to those reported in 2009, were negatively impacted by the Partnership's commodities derivative portfolio. For example, the weighted average strike price on Eagle Rock's crude hedges in the first quarter of 2010 was $75.48 per barrel, as compared to $101.06 per barrel in the fourth quarter of 2009. As a result, cash flow from realized commodity derivative settlements fell by $15.6 million to a realized net loss of $2.7 million for the first-quarter 2010 as compared to a realized net gain of $12.9 million in fourth-quarter 2009.
First-quarter 2010 Adjusted EBITDA and Distributable Cash Flow excluded $2.6 million in amortization of commodity hedge costs for the period, primarily related to hedge reset transactions. Including the amortization costs, first-quarter 2010 Adjusted EBITDA would have been $34.2 million and Distributable Cash Flow would have been $19.3 million, representing a decrease of 8% and 2%, respectively, compared to the fourth quarter of 2009 (presented on same basis).
"Our first quarter financial results highlight the opportunities and challenges we currently face. We continue to benefit from our diversified business model. While our Midstream operating income, excluding impairment, fell by approximately 4%, our Upstream and Minerals operating income, excluding impairment, increased by 53% and 12%, respectively. We initiated a robust drilling plan in the Permian Basin, with one well drilled and completed, two wells completing, and one well in the process of drilling as of March 31st. We continue to be excited about the areas in which we operate and are looking forward to expanding our current footprint in the Texas Panhandle through the deployment of our new Phoenix Plant and in East Texas / Louisiana through our recently announced ETML expansion project. Despite these positive developments, throughput volumes in our Midstream Business continue to be impacted by the low natural gas price environment, emphasizing the importance of our efforts to improve our liquidity," said Joseph A. Mills, Chairman and Chief Executive Officer.
Mr. Mills added, "We continue to make preparations for our May 14th unitholder meeting where we will seek to gain approval of our proposed recapitalization and related transactions, as outlined in the definitive proxy we filed with the Securities and Exchange Commission on March 30th and mailed to our unitholders on April 9th."
First-Quarter 2010 Financial and Operating Results
Eagle Rock analyzes and manages its operations under seven distinct segments: four segments in its Midstream Business - the Texas Panhandle, East Texas/Louisiana, South Texas and Gulf of Mexico Segments - and the Upstream, Minerals and Corporate Segments. The Corporate Segment includes the Partnership's risk management (derivatives) and other corporate activities. The following discussion of Eagle Rock's operating income by business segment compares the Partnership's financial results in the first quarter of 2010 to those of the fourth quarter of 2009. The Partnership believes comparing these periods is more illustrative of current operating trends than comparing the current quarter to results achieved in the first quarter of 2009. Please refer to the financial tables at the end of this release for further detailed information.
Upstream Business -- Operating income for Eagle Rock's Upstream Business in the first quarter of 2010, excluding the impact of impairments, increased by $1.7 million, or 53%, compared to the fourth quarter of 2009. The increase was attributable to 2.7% higher production volumes and higher realized natural gas, NGL and sulfur prices. The Partnership recorded sulfur revenues associated with its South Alabama and East Texas production of $1.1 million and realized sulfur prices of $43.87 per long ton for the three months ended March 31, 2010. Management continues to see a strengthening in sulfur demand and anticipates additional positive cash flow from its sulfur production over the next three to six months.
Minerals Business -- Segment operating income from the Minerals Business in the first quarter of 2010 increased by $0.4 million, or 11.6%, compared to the fourth quarter of 2009. The increase was due to higher natural gas production and prices. Total production attributable to the Minerals Segment increased 22.5% over fourth-quarter 2009 due to initial production from wells drilled on the Partnership's minerals interests in the Haynesville Shale.
Revenue for first-quarter 2010, including the impact of Eagle Rock's realized and unrealized derivative gains and losses, increased 51% to $228.6 million, compared with $151.4 million reported for fourth-quarter 2009, and an increase of 14.5% over the $199.7 million reported for first-quarter 2009. The primary contributor to this increase was the Partnership's unrealized commodity derivative gains in the quarter. Eagle Rock recorded an unrealized gain on commodity derivatives of $13.5 million in first-quarter 2010, as compared to unrealized losses on commodity derivatives of $62.0 million and $4.5 million in fourth-quarter 2009 and first-quarter 2009, respectively. The unrealized gain (loss) on commodity derivatives is a non-cash, mark-to-market amount which includes the amortization of commodity hedging costs. First-quarter 2010 revenues included a realized loss on commodity derivatives of $2.7 million, as compared to a realized gain of $12.9 million in fourth-quarter 2009.
Adjusted EBITDA was $36.8 million and Distributable Cash Flow was $21.9 million for the first quarter of 2010. The Partnership's distribution of $0.025 per common and general partner unit with respect to the first quarter of 2010 will be paid on May 14, 2010 to the Partnership's general partner and its common unitholders who held of record at the close of business on May 7, 2010. Because the distribution paid for the quarter will be below the minimum quarterly distribution (the "MQD"), an arrearage of $0.3375 will accrue on the common units and the cumulative arrearage attributable to the common units will increase to a total of $1.6875 per unit. The Partnership is under no obligation to pay the arrearages, but all cumulative arrearages must be paid before any distributions can be made to the Partnership's subordinated units. For a more detailed discussion of the common unit arrearages, please refer to the Eagle Rock partnership agreement (filed as part of the Partnership's filings with the U.S. Securities and Exchange Commission ("SEC")).
First-quarter 2010 Adjusted EBITDA and Distributable Cash Flow excluded $2.6 million in amortization of commodity hedge costs for the period (including costs of hedge reset transactions -- transactions undertaken by the Partnership to increase the strike prices on commodity swaps and/or collars that settled in the period). Including the amortization costs, first-quarter 2010 Adjusted EBITDA would have been $34.2 million, and Distributable Cash Flow would have been $19.3 million.
Capitalization and Liquidity Update
Total debt outstanding under the Partnership's revolving credit facility as of March 31, 2010 was approximately $737.4 million. Outstanding borrowings were reduced by $17 million during the first quarter of 2010. The Partnership has reduced outstanding borrowings by a total of $100 million from April 30, 2009 to March 31, 2010 as a result of the reduction in the quarterly distribution. This $100 million of debt repayment was achieved slightly ahead of management's original timeframe of 12 months.
The revolving credit facility has aggregate commitments of approximately $971 million after adjusting for the unfunded portion of Lehman Brothers' commitment. The Partnership is in compliance with its financial covenants and has no maturities under its credit facility until December 2012. Availability under the credit facility is a function of undrawn commitments and the limitations imposed by the borrowing base for the Upstream Business and traditional cash-flow based covenants for the Midstream and Minerals Businesses. The borrowing base for the Upstream Business was set at $130 million effective April 1, 2010 as part of the Partnership's regularly scheduled semi-annual redetermination, with no increase in fees or borrowing costs. Unused capacity available under the credit facility, based on financial covenants, was approximately $61 million as of March 31, 2010.
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