S-1 1 d527029ds1.htm FORM S-1 Form S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on June 27, 2013

Registration No. 333-            

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Marlin Midstream Partners, LP

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   4922   46-2627595
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2105 CityWest Boulevard

Suite 100

Houston, Texas 77042

(832) 200-3702

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

Terry D. Jones

Executive Vice President and General Counsel

2105 CityWest Boulevard

Suite 100

Houston, Texas 77042

(832) 217-1848

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

Brett E. Braden
Latham & Watkins LLP
811 Main Street, Suite 3700
Houston, Texas 77002
(713) 546-5400
 

David C. Buck
Stephanie C. Beauvais
Andrews Kurth LLP

600 Travis Street, Suite 4200

Houston, TX 77002

(713) 220-4200

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration
Fee

Common units representing limited partner interests

  $150,000,000   $20,460

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents
Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JUNE 27, 2013

PROSPECTUS

 

 

 

LOGO

Common Units

Representing Limited Partner Interests

Marlin Midstream Partners, LP

 

 

This is Marlin Midstream Partners, LP’s initial public offering. We are selling              common units.

We currently expect the public offering price to be between $         and $         per common unit. Currently, no public market exists for our common units. After the pricing of the offering, we expect that the common units will trade on the NASDAQ Global Market under the symbol “FISH.”

 

 

Investing in our common units involves risks that are described in the “Risk Factors” section beginning on page 18.

 

 

These risks include the following:

 

   

We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to holders of our common and subordinated units.

   

On a pro forma basis we would not have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2012 or for the twelve months ended March 31, 2013.

   

We depend on a relatively small number of customers for a significant portion of our gross margin. The loss of any one or more of these customers could materially and adversely affect our ability to make distributions to our unitholders.

   

Our commercial agreements subject us to renewal risks.

   

We are a relatively small enterprise, and our management has no experience in managing our business as a publicly traded partnership. As a result, operational, financial and other events in the ordinary course of business could disproportionately affect us, and our ability to grow our business could be significantly limited.

   

Certain of our gathering and processing agreements contain provisions that can reduce the cash flow stability that the agreements were designed to achieve.

   

Our sponsor owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner has conflicts of interest with and owes limited fiduciary duties to us, and may favor our general partner’s and our sponsor’s interests to the detriment of us and our unitholders.

   

Our sponsor and its affiliates, including Associated Energy Services, LP, are not limited in their ability to compete with us and, other than as provided in the omnibus agreement that we will enter into with our sponsor and general partner at the closing of this offering, are not obligated to offer us the opportunity to acquire additional assets or businesses, which could limit our ability to grow and could materially and adversely affect our results of operations and our ability to make cash distributions to our unitholders.

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

   

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our distributable cash flow would be substantially reduced.

   

Our unitholders’ share of our income will be taxable to them for U.S. federal income tax purposes even if they do not receive any cash distributions from us.

We are an “emerging growth company” within the meaning of the federal securities laws and will be eligible for reduced reporting requirements.

 

     Per Common Unit      Total  

Public offering price

   $                                     $                

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to Marlin Midstream Partners, LP

   $         $     

 

(1)

Excludes a structuring fee payable to Stifel, Nicolaus & Company, Incorporated and Robert W. Baird & Co. Incorporated that is equal to     % of the gross proceeds of this offering. Please read “Underwriting.”

The common units will be ready for delivery on or about                     , 2013.

The underwriters may also exercise their option to purchase up to an additional              common units from us, at the public offering price, less the underwriting discount, for 30 days after the date of the prospectus.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Joint Book-Running Managers

 

Stifel   Baird

The date of this prospectus is                     , 2013.

 


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

Marlin Midstream Partners, LP

     1   

Our Sponsor

     3   

Our Fee-Based Commercial Agreements

     4   

Risk Factors

     5   

Formation Transactions and Partnership Structure

     5   

Ownership of Marlin Midstream Partners, LP

     6   

Our Management

     7   

Principal Executive Offices and Internet Address

     7   

Implications of Being an Emerging Growth Company

     8   

The Offering

     9   

Summary Historical and Unaudited Pro Forma Financial and Operating Data

     13   

RISK FACTORS

     18   

Risks Related to our Business

     18   

Risks Inherent in an Investment in Us

     37   

Tax Risks to Common Unitholders

     45   

USE OF PROCEEDS

     50   

CAPITALIZATION

     51   

DILUTION

     52   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     53   

General

     53   

Our Minimum Quarterly Distribution

     55   

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2012 and the Twelve Months Ended March 31, 2013

     56   

Estimated Distributable Cash Flow for the Twelve Months Ending June 30, 2014

     58   

Assumptions and Considerations

     61   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     67   

Distributions of Available Cash

     67   

Operating Surplus and Capital Surplus

     68   

Capital Expenditures

     70   

Subordinated Units and Subordination Period

     70   

Distributions of Available Cash from Operating Surplus during the Subordination Period

     72   

Distributions of Available Cash from Operating Surplus after the Subordination Period

     72   

General Partner Interest and Incentive Distribution Rights

     72   

Percentage Allocations of Available Cash from Operating Surplus

     73   

NuDevco’s Right to Reset Incentive Distribution Levels

     73   

Distributions from Capital Surplus

     76   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     77   

Distributions of Cash Upon Liquidation

     77   

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA

     80   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     82   

Overview

     82   

How We Generate Revenues

     82   

How We Evaluate Our Operations

     84   

Factors Affecting the Comparability of Our Financial Results

     85   

Factors Impacting Our Business

     87   

Results of Operations

     89   

 

i


Table of Contents
Index to Financial Statements
     Page  

Liquidity and Capital Resources

     93   

Sources of Liquidity

     93   

Cash Flows

     95   

Capital Expenditures

     96   

Off-balance Sheet Arrangements

     96   

Contractual Obligations

     97   

Quantitative and Qualitative Disclosures about Market Risk

     97   

Impact of Seasonality

     98   

Critical Accounting Policies and Estimates

     98   

New Accounting Standards

     100   

INDUSTRY OVERVIEW

     101   

General

     101   

Midstream Natural Gas Services

     101   

Crude Oil Transportation & Logistics

     103   

U.S. Natural Gas Fundamentals

     103   

U.S. Natural Gas Liquids Fundamentals

     104   

U.S. Crude Oil Fundamentals

     104   

BUSINESS

     106   

Overview

     106   

Our Fee-Based Commercial Agreements

     107   

Business Strategies

     108   

Competitive Strengths

     108   

Our Sponsor

     109   

Our Assets

     110   

Commercial Agreements

     113   

Growth Opportunities

     115   

Customers

     116   

Competition

     116   

Safety and Maintenance

     117   

Regulation of Operations

     118   

Environmental Matters

     120   

Title to Properties and Rights-of-Way

     125   

Employees

     125   

Legal Proceedings

     126   

MANAGEMENT

     127   

Management Biographies

     128   

Compensation Discussion and Analysis

     129   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     135   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     136   

Distributions and Payments to our General Partner and its Affiliates

     136   

Ownership Interests of Certain Executive Officers and Directors of Our General Partner and its Affiliates

     137   

Agreements with Affiliates

     137   

Procedures for Review, Approval and Ratification of Related-Person Transactions

     139   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     141   

Conflicts of Interest

     141   

Duties of the General Partner

     147   

DESCRIPTION OF THE COMMON UNITS

     150   

The Units

     150   

Transfer Agent and Registrar

     150   

Transfer of Common Units

     150   

 

ii


Table of Contents
Index to Financial Statements
     Page  

THE PARTNERSHIP AGREEMENT

     152   

Organization and Duration

     152   

Purpose

     152   

Capital Contributions

     152   

Voting Rights

     152   

Limited Liability

     154   

Issuance of Additional Securities

     155   

Amendment of Our Partnership Agreement

     155   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     157   

Termination and Dissolution

     158   

Liquidation and Distribution of Proceeds

     158   

Withdrawal or Removal of Our General Partner

     158   

Transfer of General Partner Interest

     160   

Transfer of Ownership Interests in Our General Partner

     160   

Transfer of Incentive Distribution Rights

     160   

Change of Management Provisions

     160   

Limited Call Right

     160   

Redemption of Ineligible Holders

     161   

Meetings; Voting

     161   

Status as Limited Partner

     162   

Indemnification

     162   

Reimbursement of Expenses

     162   

Books and Reports

     163   

Right to Inspect Our Books and Records

     163   

Registration Rights

     163   

Exclusive Forum

     163   

UNITS ELIGIBLE FOR FUTURE SALE

     165   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     166   

Partnership Status

     167   

Limited Partner Status

     168   

Tax Consequences of Unit Ownership

     168   

Tax Treatment of Operations

     174   

Disposition of Common Units

     175   

Uniformity of Units

     177   

Tax-Exempt Organizations and Other Investors

     178   

Administrative Matters

     178   

Recent Legislative Developments

     181   

State, Local, Foreign and Other Tax Considerations

     181   

INVESTMENT IN MARLIN MIDSTREAM PARTNERS, LP BY EMPLOYEE BENEFIT PLANS

     183   

UNDERWRITING

     185   

Commissions and Discounts

     185   

Option to Purchase Additional Common Units

     186   

No Sales of Similar Securities

     186   

NASDAQ Global Market Listing

     186   

Price Stabilization, Short Positions and Penalty Bids

     187   

Electronic Distribution

     188   

Conflicts of Interest

     188   

Other Relationships

     188   

Directed Unit Program

     188   

Selling Restrictions

     188   

VALIDITY OF THE COMMON UNITS

     191   

 

iii


Table of Contents
Index to Financial Statements
     Page  

EXPERTS

     191   

WHERE YOU CAN FIND MORE INFORMATION

     191   

FORWARD-LOOKING STATEMENTS

     191   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MARLIN MIDSTREAM PARTNERS, LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS

     B-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

iv


Table of Contents
Index to Financial Statements

 

SUMMARY

This summary provides a brief overview of information contained elsewhere in this prospectus. Because it is abbreviated, this summary does not contain all of the information that you should consider before investing in our common units. You should read the entire prospectus carefully, including the historical combined financial statements and unaudited pro forma condensed combined financial statements and notes to those financial statements. The information presented in this prospectus assumes (i) an initial public offering price of $         per common unit (the mid-point of the range set forth on the cover page of this prospectus) and (ii) unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” beginning on page 18 for more information about important risks that you should consider carefully before investing in our common units.

Unless the context otherwise requires, references in this prospectus to (i) “we,” “our,” “us” or like terms, when used in a historical context, refer to the combined businesses and assets of Marlin Midstream, LLC and its subsidiaries and Marlin Logistics, LLC, and when used in the present tense or prospectively, refer to Marlin Midstream Partners, LP and its subsidiaries; (ii) “Marlin Midstream GP” or our “general partner” refer to Marlin Midstream GP, LLC; (iii) “NuDevco” or “our sponsor” refer to NuDevco Partners, LLC and its subsidiaries, other than Marlin Midstream Partners, LP and its subsidiaries and Marlin Midstream GP; (iv) “NuDevco Midstream Development” refer to NuDevco Midstream Development, LLC, a wholly owned subsidiary of NuDevco; (v) “Spark Energy” refer to Spark Energy Ventures, LLC and its subsidiaries, other than Associated Energy Services, LP; and (vi) “AES” refer to Associated Energy Services, LP. We have provided definitions for some terms we use to describe our business and industry and other terms used in this prospectus as Appendix B.

Marlin Midstream Partners, LP

Overview

We are a fee-based, growth-oriented Delaware limited partnership recently formed by NuDevco to develop, own, operate and acquire midstream energy assets. We currently provide natural gas gathering, transportation, treating and processing services and NGL transportation services, which we refer to as our midstream natural gas business, and crude oil transloading services, which we refer to as our crude oil logistics business.

Our primary midstream natural gas assets currently consist of (i) two related natural gas processing facilities located in Panola County, Texas, (ii) a natural gas processing facility located in Tyler County, Texas, (iii) two natural gas gathering systems connected to our Panola County processing facilities, and (iv) two NGL transportation pipelines that connect our Panola County and Tyler County processing facilities to third party NGL pipelines. Our primary midstream natural gas assets are located in long-lived oil and natural gas producing regions in East Texas and gather and process NGL-rich natural gas streams associated with production primarily from the Cotton Valley Sands, Haynesville Shale, Austin Chalk and Eaglebine formations.

Our crude oil logistics assets currently consist of two crude oil transloading facilities: (i) our Wildcat facility located in Carbon County, Utah, where we currently operate one skid transloader and two ladder transloaders, and (ii) our Big Horn facility located in Big Horn County, Wyoming, where we currently operate one skid transloader and one ladder transloader. Our transloaders are used to unload crude oil from tanker trucks and load crude oil into railcars and temporary storage tanks. Our Wildcat and Big Horn facilities provide transloading services for production originating from well-established crude oil producing basins, such as the Uinta and Powder River Basins, which we believe are currently underserved by our competitors.

 

 

1


Table of Contents
Index to Financial Statements

 

For the year ended December 31, 2012 and the twelve months ended March 31, 2013, on a pro forma basis we had net income of approximately $6.2 million and $4.7 million, gross margin of approximately $35.6 million and $35.0 million and adjusted EBITDA of approximately $15.3 million and $13.9 million, respectively. Approximately 88% and 92% of our gross margin on a pro forma basis for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively, was generated under fee-based contractual arrangements with customers. For definitions of gross margin and adjusted EBITDA and a reconciliation of gross margin and adjusted EBITDA to their most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Summary Historical and Unaudited Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”

Following the closing of this offering, substantially all of our gross margin will be generated under fee-based commercial agreements, the substantial majority of which will have minimum volume commitments. We believe these commercial arrangements will promote stable cash flows and minimal direct commodity price exposure for our business. Please read “Business—Commercial Agreements” for a description of these agreements.

Business Strategies

Our principal business objectives are to maintain stable cash flows and to increase our quarterly cash distribution per unit over time. We expect to achieve these objectives by executing the following strategies:

 

   

Focus on Stable, Fee-Based Business. We intend to continue to focus on opportunities to provide fee-based midstream energy services to our customers. Following this offering, substantially all of our gross margin will be supported by minimum volume commitments that we believe will promote stable cash flows.

 

   

Pursue Strategic and Accretive Acquisitions. We plan to pursue accretive acquisitions of midstream natural gas and crude oil logistics assets from our sponsor and, to a lesser extent, third parties, that we believe will provide attractive returns and are complementary to our existing assets in existing or new geographic areas or business lines.

 

   

Focus on Underserved Producing Regions with Attractive Characteristics. We intend to focus on growing our businesses in regions that we believe are underserved by our competitors and will require midstream natural gas or crude oil logistics assets to handle existing and anticipated liquids-rich natural gas and crude oil production.

 

   

Pursue Organic Growth Opportunities Associated with Our Existing Assets. In addition to pursuing acquisition opportunities, we intend to grow our midstream natural gas business primarily by identifying and pursuing economically attractive organic expansion and asset enhancement opportunities that leverage our existing asset footprint, operational expertise and strategic relationships with our customers.

 

   

Maintain Financial Flexibility and Conservative Leverage. We intend to maintain a conservative capital structure with ample liquidity that will enable us to pursue strategic acquisitions and organic expansion opportunities.

Competitive Strengths

We believe that we will be able to successfully execute our business strategies because of the following competitive strengths:

 

   

Strategically Located Assets. Our assets are located in areas that we believe provide opportunities to access increasing liquids-rich natural gas and crude oil supplies from existing and new customers.

 

   

Modern and Efficient Assets. All of our processing plants and transloaders were recently constructed and operate with flexibility and efficiency, allowing us to tailor our commercial agreements to meet specific customer needs, which we believe provides us with a competitive advantage.

 

 

2


Table of Contents
Index to Financial Statements

 

   

Relationship with our Sponsor. We believe that our relationship with our sponsor will provide us with opportunities to acquire additional midstream natural gas and crude oil logistics assets that it owns and develops, as well as opportunities to minimize our direct commodity price exposure with fee-based contracts supporting the assets it may offer to us.

 

   

Strong Customer Relationships. We have a strong customer base consisting of large and small independent producers, large pipeline companies and marketers, and we believe that we have established a reputation as a responsive and reliable operator by providing high quality services and tailoring solutions to meet the needs of our customers.

 

   

Entrepreneurial and Experienced Energy Industry Management Team. Our executive management team has an average of over 24 years of experience in the energy industry and has demonstrated a successful track record of growing businesses and of identifying and developing midstream energy opportunities.

Our Sponsor

Our sponsor, NuDevco Partners, LLC, is the ultimate parent company of Spark Energy. NuDevco is wholly owned by W. Keith Maxwell III, who founded the predecessor of Spark Energy in 1999 and grew the company from a Houston-based regional retail natural gas company to a multi-state certified retail electricity and natural gas supplier operating in 17 states and 45 local markets, with revenues of $648.8 million for the year ended December 31, 2012. In addition to Spark Energy, NuDevco also owns NuDevco Midstream Development and indirectly owns AES. NuDevco Midstream Development’s primary strategy is to purchase and develop midstream natural gas and crude oil logistics assets. AES primarily purchases, sells and markets natural gas, NGLs and crude oil. Following the closing of this offering, we will enter into fee-based commercial agreements with AES with minimum volume commitments and annual inflation adjustments under which we will not be subject to direct commodity price risk. Through its gathering and processing agreement with us, AES will also provide gathering and processing services to its natural gas customers in connection with its producer services business.

NuDevco Midstream Development and AES plan to work together to seek opportunities to provide value-added midstream services to producers of crude oil, natural gas and NGLs. In addition, AES will be one of our principal customers following the closing of this offering. We believe that our relationship with our sponsor and its affiliates provides us with significant potential long-term growth opportunities through the development and acquisition of additional midstream energy assets, as well as opportunities to minimize our direct commodity price exposure through fee-based midstream service agreements with AES.

For example, NuDevco Midstream Development recently ordered several transloaders and made a deposit to acquire certain specialized railcars that could, once commercially operational, be utilized in our crude oil logistics business. In addition, NuDevco Midstream Development plans to purchase and construct crude oil storage tanks at or near our Wildcat and Big Horn facilities and is evaluating the acquisition of crude oil tanker trucks to deliver crude oil for transloading at these facilities and other similar facilities that may be developed in the future. NuDevco Midstream Development also plans to develop certain unutilized natural gas processing and treating assets that it currently owns and plans to construct and develop additional gas processing facilities at or near our facilities and in other areas underserved by existing gas processing facilities. We anticipate that, once these natural gas processing and treating assets are placed into commercial service, they could be acquired by us.

Under the terms of the omnibus agreement that we will enter into with our general partner, NuDevco and NuDevco Midstream Development at the closing of this offering, NuDevco Midstream Development will grant us a right of first offer on certain midstream energy assets, including transloaders, storage tanks, railcars, tanker trucks and gas processing and treating assets, during the five-year period following the closing of this offering. In addition, in connection with our acquisition of any transloaders, storage tanks, railcars or tanker trucks, AES would be obligated to negotiate in good faith a service agreement

 

 

3


Table of Contents
Index to Financial Statements

 

with us covering such assets to the extent such assets are not subject to an existing service agreement at the time of acquisition. However, we are under no obligation to purchase any assets from our sponsor or enter into any service agreements, and our sponsor has no obligation to accept any offer we may make for such assets or to enter into any such service agreements. Please read “Certain Relationships and Related Party Transactions—Agreements with Affiliates—Omnibus Agreement.”

After the closing of this offering, NuDevco will also indirectly own our general partner and will indirectly hold     % of our common units and     % of our subordinated units, or an aggregate of     % of our total limited partner interests, and all of our incentive distribution rights. We believe our sponsor will promote and support the successful execution of our business strategies given its significant ownership in us following this offering.

Our Fee-Based Commercial Agreements

Following the closing of this offering, we will have multiple fee-based commercial agreements in place with Anadarko Petroleum Corporation, or Anadarko, and AES, substantially all of which will include minimum volume commitments and annual inflation adjustments that will initially be the source of a substantial portion of our revenues.

On a pro forma basis, the minimum volume commitments under these agreements would have accounted for approximately 69% and 78% of our gross margin for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively, and 87% of our forecast gross margin for the twelve months ending June 30, 2014. For a reconciliation of gross margin to operating income, its most directly comparable GAAP measure, please read “Summary Historical and Unaudited Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.” The following table sets forth additional information regarding our commercial agreements:

 

Agreement

   Current Term
Expiration
   Renewal    Minimum Volume
Commitment

Anadarko Panola County Agreement I

   July 31, 2015    Year-to-year    Yes

Anadarko Panola County Agreement II

   March 31, 2019    Month-to-month    Yes

AES Panola County Agreement(1)

   Three years    Year-to-year    80 MMcf/d

Anadarko Tyler County Agreement

   October 31, 2015    Year-to-year    No

AES Wildcat Skid Transloading Agreement(1)

   Three years    Year-to-year    7,600 Bbls/d

AES Big Horn Skid Transloading Agreement(1)

   Three years    Year-to-year    7,600 Bbls/d

AES Master Ladder Transloading Agreement(1)

   Three years    Year-to-year    3,780 Bbls/d

 

(1)

The AES agreements will be entered into between us and AES at the closing of this offering. The initial term of these agreements will expire on the third anniversary of the closing of this offering. AES is an affiliate under common control with our sponsor. Please read “—Our Sponsor.”

For more information related to our commercial agreements, as well as the revenues we expect to receive in connection with these agreements for the twelve months ending June 30, 2014, please read “Our Cash Distribution Policy and Restrictions on Distributions—Assumptions and Considerations” and “Business—Commercial Agreements.”

 

 

4


Table of Contents
Index to Financial Statements

 

Risk Factors

An investment in our common units involves risks associated with our business, regulatory and legal matters, our limited partnership structure and the tax characteristics of our common units. Please read carefully the risks described under the caption “Risk Factors” beginning on page 18 and the other information in this prospectus before investing in our common units.

Formation Transactions and Partnership Structure

We are a fee-based, growth-oriented Delaware limited partnership recently formed by NuDevco to develop, own, operate and acquire midstream energy assets. In connection with this offering, NuDevco and its affiliates will convey Marlin Midstream, LLC, which we refer to as Marlin Midstream, and Marlin Logistics, LLC, which we refer to as Marlin Logistics, to us.

Additionally, at or prior to the closing of this offering, the following transactions will occur:

 

   

our general partner will maintain its 2.0% general partner interest in us, and we will issue all of our incentive distribution rights to Marlin IDR Holdings, LLC;

 

   

we will issue              common units to the public, representing a     % limited partner interest in us, and will apply the net proceeds therefrom as specifically described in “Use of Proceeds”;

 

   

we will issue to NuDevco Midstream Development              common units and              subordinated units;

 

   

we will enter into a new $50.0 million senior secured revolving credit facility, which we refer to as our new revolving credit facility, containing an accordion feature that allows us to increase our borrowing capacity under our new revolving credit facility to $150.0 million, subject to certain conditions, and we will borrow $25.0 million under our new revolving credit facility at the closing of this offering;

 

   

we will terminate our existing commodity-based gas gathering and processing agreement with AES, assign to AES all of our remaining keep-whole and other commodity-based gathering and processing agreements with third party customers and enter into a new three-year fee-based gathering and processing agreement with AES with a minimum volume commitment and annual inflation adjustments;

 

   

we will enter into transloading services agreements, including two skid transloading agreements and one master ladder transloading agreement, with AES, each with three-year terms, minimum volume commitments and annual inflation adjustments;

 

   

we will transfer to affiliates of our sponsor (i) our 50% interest in a CO2 processing facility located in Monell, Wyoming, (ii) certain transloading assets and purchase commitments owned by Marlin Logistics that are not currently under a service contract, (iii) certain property, plant and equipment and other equipment not yet in service and (iv) certain other immaterial contracts;

 

   

NuDevco will assume $11.7 million of the non-current accounts payable balance owed by Marlin Midstream to affiliates of Spark Energy and Marlin Midstream will be released from such obligations; and

 

   

we will enter into an omnibus agreement with our general partner and its affiliates that will address (i) the management and administrative services to be provided by NuDevco to us and the corresponding fees and expense reimbursements we will pay to NuDevco in connection therewith, (ii) the indemnification obligations between NuDevco and us for environmental and other liabilities and the operation of our assets and (iii) our right of first offer on certain of NuDevco Midstream Development’s midstream energy assets.

 

 

5


Table of Contents
Index to Financial Statements

 

Ownership of Marlin Midstream Partners, LP

The diagram below illustrates our organization and ownership after giving effect to this offering and the related formation transactions and assumes that the underwriters’ option to purchase additional common units is not exercised.

 

Public Common Units

         

NuDevco Midstream Development, LLC

  

Common Units

         

Subordinated Units

         

Marlin Midstream GP, LLC

  

General Partner Interest

     2.0
  

 

 

 

Total

     100.0
  

 

 

 

 

LOGO

 

 

6


Table of Contents
Index to Financial Statements

 

Our Management

We are managed and operated by the board of directors and executive officers of our general partner, Marlin Midstream GP, LLC. Upon the closing of this offering, NuDevco will indirectly own all of the member interests in our general partner. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operation. W. Keith Maxwell III and Terry D. Jones serve on the board of directors of our general partner and are also executive officers of NuDevco and/or one or more of its affiliates. For information about the executive officers and directors of our general partner, please read “Management.” Our general partner will be liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are nonrecourse to it. Our general partner intends to cause us to incur indebtedness or other obligations that will be, whenever possible, nonrecourse to it.

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, Marlin Midstream, Marlin Logistics and their respective subsidiaries. At the closing of this offering, we, Marlin Midstream, Marlin Logistics and their respective subsidiaries will not have any employees. Although all of the employees that conduct our business will be employed by affiliates of our sponsor, we sometimes refer to these individuals in this prospectus as our employees.

Following the closing of this offering, other than an annual executive management fee paid by us to NuDevco for the services provided to us by W. Keith Maxwell III, Terry D. Jones and certain other employees of NuDevco, our general partner and its affiliates will not be entitled to receive any management fee or other compensation in connection with our general partner’s management of our business, but will be reimbursed for all direct and allocable expenses incurred on our behalf, including the costs of employee and director compensation and benefits properly allocable to us. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us.

Our general partner will own              general partner units representing a 2.0% general partner interest in us, which entitles it to receive 2.0% of all the distributions we make. NuDevco will indirectly own all of our incentive distribution rights, which will entitle it to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $         per unit per quarter after the closing of this offering. Please read “Certain Relationships and Related Party Transactions.”

Principal Executive Offices and Internet Address

Our principal executive offices are located at 2105 CityWest Boulevard, Suite 100, Houston, Texas 77042, and our telephone number is (832) 200-3702. Our website is located at www.                    .com. We expect to make available our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, which we refer to as the SEC, free of charge through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.

 

 

7


Table of Contents
Index to Financial Statements

 

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenues during its last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements for up to five years that are otherwise applicable generally to public companies. These provisions include:

 

   

a requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Conditions and Results of Operations (“MD&A”);

 

   

exemption from the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting;

 

   

exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and

 

   

reduced disclosure about executive compensation arrangements.

We will remain an emerging growth company for five years unless, prior to that time, we have more than $1.0 billion in annual revenues, have a market value for our common units held by non-affiliates of more than $700 million as of June 30 of the year a determination is made whether we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or issue more than $1.0 billion of non-convertible debt over a three-year period. We have availed ourselves of the reduced reporting obligations with respect to audited financial statements and related MD&A and executive compensation disclosure in this prospectus, and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

As a result of our decision to avail ourselves of certain provisions of the JOBS Act, the information that we provide may be different than what you may receive from other public companies in which you hold an equity interest.

 

 

8


Table of Contents
Index to Financial Statements

 

The Offering

 

Common units offered to the public

             common units.

 

               common units, if the underwriters exercise in full their option to purchase additional common units.

 

Units outstanding after this offering

             common units and              subordinated units, each representing a 49.0% limited partner interest in us. Our general partner will own              general partner units, representing a 2.0% general partner interest in us.

 

Use of proceeds

We intend to use the net proceeds from this offering of approximately $         million, after deducting underwriting discounts, commissions and the structuring fee, but before paying offering expenses, to (i) pay offering expenses of approximately $         million and (ii) repay a portion of our outstanding borrowings under our existing term loan and revolving credit facility, which we refer to collectively as our existing credit facility, and settle our related interest rate swap liability. We will use any remaining net proceeds for general partnership purposes.

 

  If the underwriters exercise their option to purchase additional common units, we will use the net proceeds from that exercise to redeem from our sponsor a number of common units equal to the number of common units issued upon such exercise, at a price per common unit equal to the proceeds per common unit in this offering before expenses but after deducting underwriting discounts, commissions and the structuring fee.

 

  Please read “Use of Proceeds.”

 

Cash distributions

We intend to pay a minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) to the extent we have sufficient available cash at the end of each quarter after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash.” Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.” For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the closing of this offering through                     , 2013, based on the actual length of that period.

 

  Our partnership agreement requires that we distribute all of our available cash each quarter in the following manner:

 

   

first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received the minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

 

9


Table of Contents
Index to Financial Statements

 

   

second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received the minimum quarterly distribution of $         ; and

 

   

third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $         per unit in any quarter, the owner of our incentive distribution rights will receive increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions on the incentive distribution rights as “incentive distributions.” Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

  The amount of distributable cash flow generated during the year ended December 31, 2012 and the twelve months ended March 31, 2013 would have been insufficient to support the full minimum quarterly distribution ($         per unit per quarter, or $         on an annualized basis) on all of our common and subordinated units, as well as the corresponding distribution on our 2.0% general partner interest, for such periods. Specifically, the amount of distributable cash flow that we generated during the year ended December 31, 2012 and the twelve months ended March 31, 2013 would have been sufficient to support a distribution of $         per common unit per quarter ($         per common unit on an annualized basis) and $         per common unit per quarter ($         per common unit on an annualized basis), respectively, or approximately     % and     % of the minimum quarterly distribution, respectively, and would not have supported any distributions on our subordinated units for either period. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  We believe that, based on our financial forecast and related assumptions included in “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Distributable Cash Flow for the Twelve Months Ending June 30, 2014,” we will generate sufficient distributable cash flow to support the annualized minimum quarterly distribution of $         per unit on all common and subordinated units, as well as the corresponding distribution on our 2.0% general partner interest, for the twelve months ending June 30, 2014.

 

Subordinated units

NuDevco will initially indirectly own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution of cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly

 

 

10


Table of Contents
Index to Financial Statements

 

 

distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid at least (i) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit, as well as the corresponding distribution on our 2.0% general partner interest, for each of three consecutive, non-overlapping four-quarter periods ending on or after                     , 2016 or (ii) $         (150% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit, as well as the corresponding distribution on our 2.0% general partner interest and incentive distribution rights, for any four-quarter period ending on or after                     , 2014; provided in each case that there are no arrearages on our common units at that time.

 

  In addition, the subordination period will end upon the removal of our general partner other than for cause if the units held by our general partner and its affiliates are not voted in favor of such removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its directors on an annual or continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding limited partner units voting together as a single class, including any limited partner units owned by our general partner and its affiliates, including NuDevco. Upon the closing of this offering, NuDevco will indirectly own an aggregate of     % of our common and subordinated units. This will give NuDevco the ability to prevent the involuntary removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80.0% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price that is not less than the then-current market price of the common units.

 

Eligible holders and redemption

If our general partner determines that a holder of our common units is not an Eligible Holder, it may elect not to make distributions or allocate income or loss to such holder. Eligible Holders are:

 

   

individuals or entities subject to U.S. federal income taxation on the income generated by us; or

 

 

11


Table of Contents
Index to Financial Statements

 

   

entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity’s owners are domestic individuals or entities subject to such taxation.

 

  We have the right, which we may assign to any of our affiliates, but not the obligation, to redeem all of the common units of any holder that is not an Eligible Holder or that has failed to certify or has falsely certified that such holder is an Eligible Holder. The purchase price for such redemption would be equal to the lesser of the holder’s purchase price and the then-current market price of the common units. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.

 

  Please read “The Partnership Agreement—Redemption of Ineligible Holders.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending                     , you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than $         per unit. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

 

Material federal income tax consequences

For a discussion of other material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, or the U.S., please read “Material Federal Income Tax Consequences.”

 

Directed Unit Program

At our request, the underwriters have reserved for sale up to 5.0% of the common units being offered by this prospectus for sale at the initial public offering price to the directors, prospective directors and executive officers of our general partner and NuDevco and certain other employees and consultants of NuDevco and its affiliates. We do not know if these persons will choose to purchase all or any portion of these reserved common units, but any purchases they do make will reduce the number of common units available to the general public. Please read “Underwriting—Directed Unit Program.”

 

Exchange listing

We intend to apply to list our common units on the NASDAQ Global Market under the symbol “FISH.”

 

 

12


Table of Contents
Index to Financial Statements

 

Summary Historical and Unaudited Pro Forma Financial and Operating Data

The following table presents our summary historical and unaudited pro forma financial and operating data as of the dates and for the periods indicated.

The historical combined financial statements of Marlin Midstream Partners, LP included elsewhere in this prospectus reflect the combined results of operations of Marlin Midstream and Marlin Logistics, which will be contributed to us by NuDevco upon the closing of this offering. As of or prior to March 31, 2013, Marlin Logistics did not have any material assets or operations. The summary historical financial data presented as of and for the years ended December 31, 2011 and 2012 and the three months ended March 31, 2012 and 2013 are derived from the audited historical combined financial statements and the interim unaudited historical condensed combined financial statements of Marlin Midstream Partners, LP, respectively, that are included elsewhere in this prospectus. The summary unaudited pro forma financial data for the year ended December 31, 2012 and the three months ended March 31, 2013 are derived from the unaudited pro forma condensed combined financial statements of Marlin Midstream Partners, LP that are included elsewhere in this prospectus. The pro forma adjustments have been prepared as if certain transactions to be effected at the closing of this offering had taken place on March 31, 2013 in the case of the pro forma balance sheet, or as of January 1, 2012, in the case of the pro forma statements of operations for the year ended December 31, 2012 and the three months ended March 31, 2013. The transactions reflected in the pro forma adjustments assume the following transactions will occur:

 

   

the transfer to affiliates of our sponsor of our 50% interest in a CO2 processing facility located in Monell, Wyoming;

 

   

the transfer to affiliates of our sponsor of certain transloading assets and purchase commitments owned by Marlin Logistics that are not currently under a service contract;

 

   

the transfer to affiliates of our sponsor of certain property, plant and equipment and other equipment not yet in service and certain other immaterial contracts;

 

   

our entry into a new $50.0 million senior secured revolving credit facility, which we have assumed was drawn in the amount of $25.0 million during the pro forma periods presented, and the amortization of deferred financing costs and unused commitment fee associated with the revolving credit facility;

 

   

the assignment to AES of multiple third party keep-whole and other commodity-based gas gathering and processing agreements, and recognition of any revenues and cost of revenues under those agreements that have not been previously recorded in our historical combined financial statements;

 

   

the termination of Marlin Midstream’s existing commodity-based gas gathering and processing agreement with AES;

 

   

our entry into a new fee-based gathering and processing agreement with AES;

 

   

the assumption by NuDevco of $11.7 million of the non-current accounts payable balance owed by Marlin Midstream to affiliates of Spark Energy and the release of Marlin Midstream from such obligations;

 

   

the consummation of this offering and our issuance of              common units to the public, general partner units to our general partner and              common units,              subordinated units and the incentive distribution rights to affiliates of our sponsor;

 

   

the payment of underwriting discounts and a structuring fee and the accrual of estimated transaction costs in connection with this offering; and

 

   

the application of the net proceeds of this offering as specifically described in “Use of Proceeds.”

 

 

13


Table of Contents
Index to Financial Statements

 

For a detailed discussion of the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table should also be read in conjunction with our audited historical combined financial statements and related notes and our unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus. Among other things, those historical combined financial statements include more detailed information regarding the basis of presentation for the information in the following table.

The following table also presents the non-GAAP financial measures of adjusted EBITDA and gross margin that we use in our business and view as important supplemental measures of our performance. These measures are not calculated or presented in accordance with GAAP. We explain these measures under “—Non-GAAP Financial Measures” and reconcile each to its most directly comparable financial measure calculated and presented in accordance with GAAP.

 

    Historical     Pro Forma (Unaudited)  
    Year Ended December 31,     (Unaudited)
Three
Months  Ended March 31,
    Year Ended
December 31,
    Three Months
Ended
March 31,
 
        2011             2012             2012             2013             2012             2013      
   

(In thousands, except operating data)

             

Statements of Income Data:

           

Revenues:

           

Natural gas, NGLs and condensate revenue

  $ 55,558      $ 34,708      $ 7,964      $ 3,236      $ 33,531      $ 3,195   

Gathering, processing and other revenue

    10,006        16,087        2,606        4,223        13,986        4,077   

Gathering, processing and other revenue—affiliates

    254        254        63        44        16,656        3,972   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    65,818        51,049        10,633        7,503        64,173        11,244   

Operating expenses:

           

Cost of natural gas, NGLs and condensate revenue

    11,449        13,355        2,155        1,076        3,750        861   

Cost of natural gas, NGLs and condensate revenue—affiliates

    17,407        7,668        1,218        1,452        24,786        2,504   

Operation and maintenance

    12,031        15,035        3,806        3,657        14,592        3,494   

Operation and maintenance—affiliates

    327        793        83        248        793        248   

General and administrative

    3,260        3,045        545        1,125        3,045        1,125   

General and administrative—affiliates

    907        1,021        276        341        1,021        341   

Property and other taxes

    425        994        209        245        994        245   

Depreciation expense

    5,365        7,689        1,856        1,984        7,481        1,932   

Loss on disposals of equipment

    217        —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    51,388        49,600        10,148        10,128        56,462        10,750   

Operating income

    14,430        1,449        485        (2,625     7,711        494   

Other (expense) income:

           

Interest expense, net of amounts capitalized

    (3,733     (4,927     (1,140     (1,299     (1,531     (383

Interest and other income

    20        23        —         —         23        —    

Loss on interest rate swap

    (2,176     (851     (368     (10     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 8,541      $ (4,306   $ (1,023   $ (3,934   $ 6,203      $ 111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General partner interest in net income

          $      

Common unitholders interest in net income

          $       

Subordinated unitholders interest in net income

          $       

Pro forma net income (loss) per common unit (basic and diluted)

          $       

Balance Sheet Data (at period end):

           

Property, plant and equipment, net

  $ 161,639      $ 165,139        $ 169,801        $ 162,185   

Total assets

    172,206        180,796          179,507          182,566   

Total liabilities

    139,932        148,517          150,838          36,318   

Total member’s equity and partners’ capital

    32,274        32,279          28,669          146,248   

 

 

14


Table of Contents
Index to Financial Statements

 

    Historical     Pro Forma (Unaudited)  
    Year Ended December 31,     (Unaudited)
Three
Months  Ended March 31,
    Year Ended
December 31,
    Three Months
Ended
March 31,
 
        2011             2012             2012             2013             2012             2013      
   

(In thousands, except operating data)

             

Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

  $ 16,102      $ 11,214      $ 6,009      $ (607    

Investing activities

    (25,658     (12,445     (4,696     (3,264    

Financing activities

    8,097        6,355        (1,625     1,261       

Other Financial Data:

           

Adjusted EBITDA

  $ 19,730      $ 9,239      $ 2,344      $ (630   $ 15,293      $ 2,451   

Gross margin

  $ 36,962      $ 30,026      $ 7,260      $ 4,975      $ 35,637      $ 7,879   

Operating Data:

           

Midstream Natural Gas(1):

           

Processing throughput (MMcf/d)

    130        151        125        132       

NGL pipeline throughput (Bbls/d)

    6,277        7,847        5,735        6,499       

Crude Oil Logistics(2):

           

Transloader throughput (Bbls/d)

    —         —         —         —        

 

(1)

Includes our Panola County and Tyler County processing facilities and our two Turkey Creek NGL pipelines.

(2)

Our crude oil logistics segment had no material assets or operations as of or prior to March 31, 2013.

Non-GAAP Financial Measures

We include in this prospectus the non-GAAP financial measures of adjusted EBITDA and gross margin. We provide reconciliations of these non-GAAP financial measures to their most directly comparable financial measures as calculated and presented in accordance with GAAP.

Adjusted EBITDA

We define adjusted EBITDA as net income:

 

   

Plus:

 

   

Interest expense, net of amounts capitalized;

 

   

State franchise taxes;

 

   

Depreciation expense; and

 

   

Loss on interest rate derivatives.

 

   

Less:

 

   

Interest income; and

 

   

Gain from interest rate derivatives.

 

Adjusted EBITDA is used as a supplemental performance measure by management and by external users of our financial statements, such as investors and lenders, to assess:

 

   

the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

 

   

the ability of our assets to generate earnings sufficient to support our decision to make cash distributions to our unitholders and general partner;

 

   

our ability to fund capital expenditures and incur and service debt;

 

   

our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing or capital structure; and

 

 

15


Table of Contents
Index to Financial Statements

 

   

the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.

The GAAP measure most directly comparable to adjusted EBITDA is net income. Our non-GAAP financial measure of adjusted EBITDA should not be considered as an alternative to net income. Adjusted EBITDA is not a presentation made in accordance with GAAP and has important limitations as an analytical tool. You should not consider adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because adjusted EBITDA excludes some, but not all, items that affect net income and is defined differently by different companies in our industry, our definition of adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Management compensates for the limitations of adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating these data points into management’s decision-making process.

The following table presents a reconciliation of adjusted EBITDA to net income (loss) attributable to our unitholders for each of the periods indicated:

 

    Historical     Pro Forma
(Unaudited)
 
    Year Ended
December 31,
    (Unaudited)
Three Months
Ended March 31,
    Year Ended
December 31,
    Three Months
Ended
March 31,
 
    2011     2012     2012     2013     2012     2013  
    (In thousands)  

Reconciliation of adjusted EBITDA to net income:

           

Net income (loss)

  $ 8,541      $ (4,306   $ (1,023   $ (3,934   $ 6,203      $ 111   

Interest expense, net of amounts capitalized

    3,733        4,927        1,140        1,299        1,531        383   

State franchise tax

    (65     101        3        11        101        25   

Depreciation expense

    5,365        7,689        1,856        1,984        7,481        1,932   

Loss from interest rate derivatives

    2,176        851        368        10        —          —     

Interest and other income

    (20     (23     —          —          (23     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 19,730      $ 9,239      $ 2,344      $ (630   $ 15,293      $ 2,451   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin

We define gross margin as revenues from natural gas, NGLs and condensate sales, gathering and processing fees and transloading fees, less the cost of revenues. Gross margin is included as a supplemental disclosure because it is a primary performance measure used by our management as it represents the results of service fee revenues and cost of revenues, which are key components of our operations. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate gross margin in the same manner.

 

 

16


Table of Contents
Index to Financial Statements

 

The following table presents a reconciliation of gross margin to operating income (loss), its most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:

 

     Historical     Pro Forma
(Unaudited)
 
     Year Ended
December 31,
     (Unaudited)
Three Months
Ended March 31,
    Year Ended
December 31,
     Three Months
Ended
March 31,
 
     2011      2012      2012      2013     2012      2013  
    

(In thousands)

 

Reconciliation of gross margin to operating income:

                

Total operating income (loss)

   $ 14,430       $ 1,449       $ 485       $ (2,625   $ 7,711       $ 494   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Operation and maintenance

     12,031         15,035         3,806         3,657        14,592         3,494   

Operation and maintenance—affiliates

     327         793         83         248        793         248   

General and administrative

     3,260         3,045         545         1,125        3,045         1,125   

General and administrative—affiliates

     907         1,021         276         341        1,021         341   

Property and other taxes

     425         994         209         245        994         245   

Depreciation expense

     5,365         7,689         1,856         1,984        7,481         1,932   

Loss on disposals of equipment

     217         —           —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Gross margin

   $ 36,962       $ 30,026       $ 7,260       $ 4,975      $ 35,637       $ 7,879   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

 

17


Table of Contents
Index to Financial Statements

RISK FACTORS

Limited partner units are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. We urge you to carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, we might not be able to pay the minimum quarterly distribution on our common units, the trading price of our common units could decline and you could lose all or part of your investment in us.

Risks Related to our Business

We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to holders of our common and subordinated units.

In order to support the payment of the minimum quarterly distribution of $         per unit per quarter, or $         per unit on an annualized basis, we must generate distributable cash flow of approximately $         million per quarter, or $         million per year, based on the number of common and subordinated units and the general partner interest to be outstanding immediately after completion of this offering. We may not generate sufficient distributable cash flow each quarter to support the payment of the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

our ability to contract successfully for throughput volumes of natural gas and crude oil;

 

   

the volume of natural gas we gather and process and the volume of NGLs we transport;

 

   

the volume of crude oil that we transload;

 

   

the level of production of crude oil and natural gas and the resultant market prices of crude oil, natural gas and NGLs;

 

   

the level of competition from other midstream natural gas companies and crude oil logistics companies in our geographic markets;

 

   

the level of our operating expenses;

 

   

regulatory action affecting the supply of, or demand for, crude oil or natural gas, the transportation rates we can charge on our pipelines, how we contract for services, our existing contracts, our operating costs or our operating flexibility;

 

   

capacity charges and volumetric fees that we pay for NGL fractionation services;

 

   

realized pricing impacts on our revenues and expenses that are directly subject to commodity price exposure;

 

   

damage to pipelines, facilities, plants, related equipment and surrounding properties caused by hurricanes, earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism including damage to third party pipelines or facilities upon which we rely for transportation services;

 

   

outages at the processing or fractionation facilities owned by us or third parties caused by mechanical failure and maintenance, construction and other similar activities; and

 

   

leaks or accidental releases of products or other materials into the environment, whether as a result of human error or otherwise.

 

18


Table of Contents
Index to Financial Statements

In addition, the actual amount of cash we will have available for distribution will depend on other factors, including:

 

   

the level and timing of our expansion capital expenditures and our maintenance capital expenditures;

 

   

the cost of acquisitions, if any;

 

   

the level of our general and administrative expenses, including reimbursements to our general partner and its affiliates for services provided to us;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

restrictions contained in our debt agreements;

 

   

the amount of cash reserves established by our general partner; and

 

   

other business risks affecting our cash levels.

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis we would not have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2012 or for the twelve months ended March 31, 2013.

We must generate approximately $         million of distributable cash flow to support the payment of the minimum quarterly distribution for four quarters on all of our common and subordinated units that will be outstanding immediately following this offering, as well as the corresponding distribution on our 2.0% general partner interest. The amount of pro forma distributable cash flow generated during the year ended December 31, 2012 and the twelve months ended March 31, 2013 would not have been sufficient to support the payment of the full minimum quarterly distribution on our common and subordinated units, as well as the corresponding distribution on our 2.0% general partner interest, during those periods. Specifically, the amount of pro forma distributable cash flow generated during the year ended December 31, 2012 and the twelve months ended March 31, 2013 would have been sufficient to support a distribution of $         per common unit per quarter ($         per common unit on an annualized basis) and $         per common unit per quarter ($         per common unit on an annualized basis), respectively, or     % and     % of the minimum quarterly distribution, respectively, and would not have supported any distributions on our subordinated units. For a calculation of our ability to make cash distributions to our unitholders based on our pro forma results for the year ended December 31, 2012 and the twelve months ended March 31, 2013, please read “Our Cash Distribution Policy and Restrictions on Distributions.” If we are unable to generate sufficient distributable cash flow in future periods, we may not be able to support the payment of the full minimum quarterly distribution or any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

The assumptions underlying the forecast of distributable cash flow that we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

The forecast of distributable cash flow set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, adjusted EBITDA and distributable cash flow for the twelve months ending June 30, 2014. The financial forecast has been prepared by management, and we have not received an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks, including risks that expansion projects do not result in an increase in gathered, transported or transloaded volumes, and uncertainties that could cause actual results to differ materially from those forecasted. If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or

 

19


Table of Contents
Index to Financial Statements

any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

We depend on a relatively small number of customers for a significant portion of our gross margin. The loss of any one or more of these customers could materially and adversely affect our ability to make distributions to our unitholders.

A significant portion of our gross margin is attributable to a relatively small number of customers. On a pro forma basis, Anadarko and AES accounted for a substantial majority of our gross margin for the year ended December 31, 2012 and the three months ended March 31, 2013. Although we have, or will have at the closing of this offering, gathering and processing agreements with both of these customers, these agreements have remaining terms ranging from two to six years. As these contracts expire, we will have to renegotiate extensions or renewals with these customers or replace the existing contracts with new arrangements with other customers. If either of these customers were to default on its contract or if we were unable to renew our contract with either of these customers on favorable terms, we may not be able to replace such customers in a timely fashion, on favorable terms or at all. In any of these situations, our gross margin and cash flows and our ability to make cash distributions to our unitholders would be materially and adversely affected. We expect our exposure to concentrated risk of non-payment, non-performance or nonrenewal to continue as long as we remain substantially dependent on a relatively small number of customers for a substantial portion of our gross margin.

In addition, AES is our sole customer with respect to our crude oil logistics business, and we expect to continue to derive the substantial majority of our transloading revenues from AES. Such concentration subjects us to increased risk in the case of nonpayment, nonperformance or nonrenewal by AES under the transloading services agreements that we will enter into with AES at the closing of this offering. Any adverse developments concerning AES could materially and adversely affect our crude oil logistics business and could materially and adversely affect our ability to make distributions to our unitholders.

Our commercial agreements subject us to renewal risks.

We currently gather, process and transport most of the natural gas, and purchase, transport and sell NGLs, on our midstream natural gas systems under commercial agreements with terms of various durations. In addition, at the closing of this offering, we will provide gathering, processing, NGL transport and transloading services to AES under agreements with three-year terms. As our commercial agreements expire, we will have to negotiate extensions or renewals with our customers, including AES and Anadarko, or enter into new agreements with customers. We may be unable to renew, or enter into new, agreements on favorable commercial terms, if at all. We also may be unable to maintain the economic structure of a particular agreement with an existing customer or the overall mix of our contract portfolio.

If the economic benefit to AES or Anadarko of their minimum volume commitments at our Panola County processing facilities is less than they have projected, whether because the volumes of natural gas actually delivered by them are below the committed amount or otherwise, they may be unwilling to negotiate extensions or renewals of their commercial agreements with us on terms acceptable to us. For example, we expect that there could be volatility in the volumes of natural gas delivered by AES and Anadarko to our Panola County processing facilities, and at times the volumes delivered by AES and Anadarko could be below their minimum volume commitments. As a result, AES and Anadarko may make shortfall payments to us from time to time with respect to their minimum volume commitments. Similarly, if the economic benefit to AES of its minimum volume commitment at our Wildcat and Big Horn facilities is less than AES has projected, whether because the volumes of crude oil actually delivered by AES are below the committed amount or otherwise, AES may be unwilling to negotiate extensions or renewals of its transloading services agreements with us on terms acceptable to us. For example, we expect there could be volatility in the volumes of crude oil delivered by AES for transloading at our Wildcat and Big Horn facilities, and at times the volumes delivered by AES could be below the aggregate minimum volume commitment under the transloading services agreements that we will enter into with AES at the closing of this offering.

To the extent we are unable to renew our existing contracts or enter into new contracts on terms that are favorable to us or to successfully manage our overall contract mix over time, our revenues, gross margin and

 

20


Table of Contents
Index to Financial Statements

cash flows could decline and our ability to make distributions to our unitholders could be materially and adversely affected.

Our industry is highly competitive, and increased competitive pressure could materially and adversely affect our business and results of operations.

We compete with other midstream natural gas and crude oil logistics companies in our areas of operation. Some of our competitors are large companies that have greater financial, managerial and other resources than we do. Our competitors may expand or construct gathering, compression, treating, processing or transportation systems or transloading facilities that would create additional competition for the services we provide to our customers. In addition, our customers may develop their own gathering, compression, treating, processing or transportation systems or transloading facilities in lieu of using ours. While we seek to provide transloading services in markets that we believe are currently underserved by our competitors, the barriers to entry in such markets are low, which may induce more of our competitors to attempt to provide similar transloading services in such markets. All of these competitive factors could materially and adversely affect our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

We are a relatively small enterprise, and our management has no experience in managing our business as a publicly traded partnership. As a result, operational, financial and other events in the ordinary course of business could disproportionately affect us, and our ability to grow our business could be significantly limited.

We will be smaller than many other publicly traded partnerships in our industry for the foreseeable future, not only in terms of market capitalization but also in terms of managerial, operational and financial resources. Consequently, an operational incident, customer loss or other event that would not significantly impact the business and operations of larger publicly traded partnerships in our industry may have a material adverse impact on our business and results of operations. In addition, our executive management team is relatively small with no experience in managing our business as a publicly traded partnership. As a result, we may not be able to anticipate or respond to material changes or other events in our business as effectively as if our executive management team had such experience. Furthermore, acquisitions and other growth projects may place a significant strain on our management resources. As a result, our ability to execute our growth strategy and to integrate acquisitions and expansion projects successfully into our existing operations could be significantly limited.

Because of the natural decline in production from existing wells in our areas of operation, our success depends in part on our customers replacing declining production and also on our ability to obtain new sources of natural gas and crude oil, which is dependent on factors beyond our control. Any decrease in the volumes of natural gas that we gather, process or transport, or the volume of crude oil that we transload, could materially and adversely affect our business and results of operations.

The natural gas volumes that support our midstream natural gas business are dependent on the level of production from crude oil and natural gas wells connected to our systems, the production of which will naturally decline over time. Likewise, the crude oil volumes that support our crude oil logistics business are dependent on the level of production from oil wells in our areas of operation. As a result, our cash flows associated with these wells will also decline over time unless we obtain new sources of natural gas and crude oil to maintain or increase throughput and transloading volumes. The primary factors affecting our ability to obtain non-dedicated sources of natural gas and crude oil include (i) the level of successful drilling activity in our areas of operation, (ii) our or AES’s ability to compete for volumes from successful new wells or from wells in which existing contractual arrangements with us and our competitors are expiring and (iii) our or AES’s ability to compete successfully for volumes from sources connected to other pipelines.

Neither we nor AES have control over the level of drilling activity in our areas of operation, the amount of reserves associated with wells connected to our systems or the rate at which production from a well declines. In addition, neither we nor AES have control over producers or their drilling or production decisions, which are affected by, among other things:

 

   

the availability and cost of capital;

 

21


Table of Contents
Index to Financial Statements
   

prevailing and projected commodity prices, including the prices of crude oil, natural gas and NGLs;

 

   

demand for crude oil, natural gas and NGLs;

 

   

levels of reserves;

 

   

geological considerations;

 

   

environmental or other governmental regulations, including the availability of drilling permits and the regulation of hydraulic fracturing; and

 

   

the availability of drilling rigs and other production and development costs.

 

Fluctuations in energy prices can also greatly affect the development of new crude oil and natural gas reserves. Drilling and production activity generally decreases as crude oil and natural gas prices decrease. In general terms, the prices of natural gas, crude oil and other hydrocarbon products fluctuate in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. These factors include:

 

   

worldwide economic and political conditions;

 

   

weather conditions and seasonal trends;

 

   

the levels of domestic production and consumer demand;

 

   

the availability of imported liquefied natural gas, or LNG;

 

   

the ability to export LNG;

 

   

the availability of transportation systems with adequate capacity;

 

   

the volatility and uncertainty of regional pricing differentials and premiums;

 

   

the price and availability of alternative fuels;

 

   

the effect of energy conservation measures;

 

   

the nature and extent of governmental regulation and taxation; and

 

   

the anticipated future prices of crude oil, natural gas, LNG and other commodities.

Because of these factors, even if new natural gas or crude oil reserves are known to exist in areas served by our assets, producers may choose not to develop those reserves. Further declines in natural gas prices could have a negative impact on exploration, development and production activity, and if sustained, could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in our areas of operation would lead to reduced utilization of our assets. If reductions in this activity result in our inability to maintain the current levels of natural gas throughput on our systems and the volumes of crude oil that we transload, it could reduce our revenues and cash flows and materially and adversely affect our ability to make cash distributions to our unitholders.

In addition, many of our operating costs are fixed and do not vary with our throughput. These costs may not decline ratably or at all should we experience a reduction in throughput, which would result in a decrease in our margins and materially and adversely affect our ability to make cash distributions to our unitholders.

Certain of our gathering and processing agreements contain provisions that can reduce the cash flow stability that the agreements were designed to achieve.

Our fee-based gathering and processing agreements are generally designed to generate stable cash flows to us over the life of the contract term while also minimizing our direct commodity price risk. However, our gathering and processing agreements with Anadarko at our Panola County processing facilities contain provisions that can reduce the cash flow stability that these agreements were designed to achieve. The primary mechanism on which we rely to generate our stable cash flows under our agreements with Anadarko at our

 

22


Table of Contents
Index to Financial Statements

Panola County processing facilities is a minimum volume commitment. If Anadarko’s actual throughput volumes are less than its minimum volume commitment for a given year, it must make a shortfall payment to us at the end of that year. The amount of the shortfall payment is based on the difference between the actual throughput volume for the year and the minimum volume commitment over that year, multiplied by the applicable gathering and processing fees. To the extent that Anadarko’s actual throughput volumes exceed its minimum volume commitment for the applicable period, the agreements contain provisions that allow Anadarko to use that surplus volume as a credit against future shortfall payments in subsequent periods during the primary term, and during the renewal terms for certain of the agreements. Because Anadarko has a crediting mechanism that allows it to build a “bank” of credits (to the extent its throughput volumes exceed its minimum volume commitment for a given year) that it can utilize in the future to reduce shortfall payments owed in future years, we may receive lower gathering and processing fees in a particular contract year than we would otherwise be entitled to receive under Anadarko’s minimum volume commitment.

The combined effect of the minimum volume commitment and the ability to build a surplus credit could result in our receiving no revenues or cash flows from Anadarko in a future period because Anadarko could cease delivering throughput volumes at a time when their respective year-end minimum volume commitment has been satisfied with previous throughput volume deliveries. Similarly, because these minimum volume commitments are assessed on an annual basis, we may not receive revenues or cash flows during a given sub-period if Anadarko anticipates satisfying its minimum volume commitment in a later sub-period during the same year.

If either of these circumstances were to occur, it could materially and adversely affect our results of operations, financial condition and cash flows and our ability to make distributions to our unitholders.

If credits under certain third-party material gathering, processing and transportation agreements exist, and cash reserves are not made for potential application of the credits to shortfalls on future minimum commitments, or if the customer is able and elects to use any applicable credits upon the expiration or termination of such agreement, actions taken by our general partner may affect the amount of cash available to unitholders or accelerate the conversion of subordinated units.

The amount of cash that is available for distribution to unitholders is affected by decisions of our general partner. These decisions may include whether cash received in connection with surplus volumes above minimum volume commitments with significant third-party customers, including Anadarko, may result in lower fees, and therefore less cash received, in future periods as credits are applied against future minimum volume commitments. Please read “Risk Factors—Certain of our gathering and processing agreements contain provisions that can reduce the cash flow stability that the agreements were designed to achieve.”

Distributions of available cash relating to surplus volumes in earlier periods may have the purpose or effect of (1) enabling our general partner or its affiliates to receive distributions on either subordinated units or incentive distribution rights held by them, or (2) accelerating the conversion of subordinated units. Please read “Conflicts of Interest and Fiduciary Duties—Actions taken by our general partner may affect the amount of cash available for distributions to unitholders or accelerate the right to convert subordinated units.”

If our customers do not increase the volumes of natural gas and crude oil they provide to our gathering and processing facilities or transloading facilities, our growth strategy and ability to increase cash distributions to our unitholders may be materially and adversely affected.

Our ability to increase the throughput on our gathering and processing facilities and the volumes of crude oil that we transload at our transloading facilities is dependent on receiving increased volumes from our existing customers, including AES. Our customers, including AES, are not obligated to provide additional volumes to our gathering and processing systems or to our transloading facilities, and they may determine in the future that areas outside of our current areas of operation are strategically more attractive to them.

 

23


Table of Contents
Index to Financial Statements

A decrease in demand for natural gas, NGLs or condensate by the petrochemical, refining, agricultural, or electric power industries, or a decrease in demand for crude oil, could materially and adversely affect the profitability of our midstream energy business.

A decrease in demand for natural gas, NGLs or condensate by the petrochemical, refining, agricultural or electric power industries, could materially and adversely affect the profitability of our midstream natural gas business. Various factors impact the demand for natural gas, NGLs and condensate, including general economic conditions, extended periods of ethane rejection, which can occur when the price of ethane is less than the price of methane, increased competition from petroleum-based products due to pricing differences, adverse weather conditions, availability of natural gas processing and transportation capacity and government regulations affecting prices and production levels of natural gas, NGLs and condensate. Likewise, a decrease in demand for crude oil could materially and adversely affect the profitability of our crude oil logistics business. The volume of crude oil we transload depends on the availability of attractively priced crude oil produced or received in the areas serviced by our crude oil logistics assets. A period of sustained increases in the price of crude oil in areas serviced by our crude oil logistics assets, as compared to alternative sources of crude oil available to our customers, could materially reduce demand for crude oil in these areas. As a result, the volumes of crude oil that we transload at our transloading facilities could decline.

Significant prolonged changes in natural gas prices or NGL prices could affect supply and demand, reducing throughput on our midstream natural gas systems and materially and adversely affecting our revenues and distributable cash flow over the long-term.

Lower natural gas prices or NGL prices over the long-term could result in a decline in the production of natural gas and result in reduced throughput on our midstream natural gas systems. Recently, the price of natural gas has been at historically low levels, with the prompt month NYMEX natural gas futures price reaching $4.15/MMBtu as of May 29, 2013, compared to a high of $13.58/MMBtu in July 2008. The average annual price of ethane, typically the largest NGL component in the natural gas stream processed by our facilities, decreased by 48% from $0.77 in 2011 to $0.40 in 2012, and the average annual price of propane decreased by 32% from $1.46 in 2011 to $1.00 in 2012. Similarly, the average annual price of isobutane, normal butane and natural gasoline decreased by 12%, 10%, and 8%, respectively, from 2011 to 2012. The lower price of natural gas and NGLs is due in part to increased natural gas production, especially from unconventional sources, such as natural gas shale plays, high levels of natural gas in storage and the effects of the economic downturn starting in 2008. Furthermore, the amount of natural gas in storage in the continental United States has increased due to the decisions of many producers to store natural gas in the expectation of higher prices in the future. We believe that over the short term, until the supply overhang has been reduced and the economy sees more robust growth, natural gas and NGL pricing is likely to be constrained.

The decline in natural gas and NGL prices has had a negative impact on exploration, development and production activity in our areas of operation and has resulted in a decrease in throughput on our midstream natural gas systems from our producer customers. In addition, the natural gas volumes that we obtain from customers that are natural gas marketers, such as AES, are adversely impacted by low NGL prices, particularly for ethane, due to less favorable NGL sale economics for such marketers in low NGL price environments. If natural gas prices or NGL prices remain depressed or decrease further, it could cause sustained reductions in exploration or production activity in our areas of operation, reduce the economic benefit of recovering NGLs from the natural gas stream and result in a further reduction in throughput on our midstream natural gas systems. Also, higher natural gas and NGL prices over the long-term could result in a decline in the demand for natural gas and NGLs and, therefore, in the throughput on our midstream natural gas systems.

As a result, significant prolonged changes in natural gas or NGL prices could materially and adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.

 

24


Table of Contents
Index to Financial Statements

If third-party pipelines or other midstream facilities interconnected to our gathering and processing facilities become partially or fully unavailable, or if the volumes we gather, process or transport do not meet the natural gas quality requirements of such pipelines or facilities, our revenues and gross margin and our ability to make cash distributions to our unitholders could be materially and adversely affected.

Our natural gas gathering and processing and transportation assets are dependent upon third-party pipelines and other facilities for natural gas supply and NGL takeaway capacity. For example, our Tyler County processing facility is entirely dependent on volumes received from a gathering system owned and operated by an affiliate of Anadarko. In addition, our only NGL transportation option is TEPPCO Partners, L.P.’s Panola Pipeline. The continuing operation of such third-party pipelines and other midstream facilities is not within our control. These pipelines and other midstream facilities may become unavailable because of testing, turnarounds, line repair, reduced operating pressure, lack of operating capacity, regulatory requirements, curtailments of receipt or deliveries due to insufficient capacity or because of damage from hurricanes or other operational hazards. In addition, if the costs to us to access and transport on these third-party pipelines significantly increase, our profitability could be reduced. If any such increase in costs occurred, if any of these pipelines or other midstream facilities becomes unable to receive or transport natural gas or NGLs, or if the volumes we gather or transport do not meet the natural gas quality requirements of such pipelines or facilities, our revenues and gross margin and our ability to make cash distributions to our unitholders could be materially and adversely affected.

Our right of first offer on certain of NuDevco Midstream Development’s midstream energy assets is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.

Our omnibus agreement provides us with a right of first offer on certain of NuDevco Midstream Development’s midstream energy assets during the five-year period following the closing of this offering. The consummation and timing of any acquisition by us of the assets covered by our right to first offer will depend upon, among other things, our ability to reach an agreement with NuDevco Midstream Development on price and other terms, our ability to reach an agreement with AES on the services to be provided by us utilizing any acquired assets, where applicable, and our ability to obtain financing on acceptable terms. Accordingly, we can provide no assurance whether, when or on what terms we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and NuDevco is under no obligation to accept any offer that we may choose to make or to enter into any commercial agreements with us. For these or a variety of other reasons, we may decide not to exercise our right of first offer when we are permitted to do so, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by NuDevco Midstream Development at any time after it no longer controls our general partner. Please read “Certain Relationships and Related Party Transactions—Agreements with Affiliates—Omnibus Agreement—Right of First Offer.”

The long-term growth of our crude oil logistics business is substantially dependent on the availability of railcars.

We do not own or maintain a fleet of railcars, and the long-term growth of our crude oil logistics business is substantially dependent on the availability of railcars to transport crude oil received by our transloaders. The availability of such railcars is not within our control and they may become unavailable due to increased demand or other logistical constraints. AES, our sole transloading customer, has in the past experienced periods of railcar shortages, and may experience such shortages in the future. If AES is unable to obtain a sufficient supply of railcars to enable us to transload the crude oil delivered to us by AES, our business and results of operations could be materially and adversely affected.

Our success depends on drilling activity and our ability to attract and maintain customers in a limited number of geographic areas.

A significant portion of our assets is located in East Texas, the Uinta Basin and the Powder River Basin, and we intend to focus our future capital expenditures substantially on developing our business in these areas. As a result, our financial condition, results of operations and cash flows are significantly dependent upon the demand for our services in these areas. Due to our focus on these areas, an adverse development in natural gas or crude oil production from these areas would have a significantly greater impact on our financial condition and results

 

25


Table of Contents
Index to Financial Statements

of operations than if we spread expenditures more evenly over a wider geographic area. For example, a change in the rules and regulations governing operations in or around the East Texas area, the Uinta Basin or the Powder River Basin could cause producers to reduce or cease drilling operations or to permanently or temporarily shut-in their production within the area, which could materially and adversely affect our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

We are exposed to the creditworthiness and performance of our customers, suppliers and contract counterparties, and any material nonpayment or nonperformance by one or more of these parties could materially and adversely affect our financial condition and results of operations.

Any inaccuracies, miscalculations or declines in the creditworthiness of our customers, suppliers and contract counterparties may have an adverse impact on our business, results of operations, financial condition and ability to make cash distributions to our unitholders. There can be no assurance that our counterparties will perform or adhere to existing or future contractual arrangements. In addition, there can be no assurance that our assessments as to the creditworthiness of our customers, suppliers and contract counterparties will be accurate or that such creditworthiness will not deteriorate in a rapid and/or unanticipated manner.

The procedures and policies we use to manage our exposure to counterparty credit risk, such as credit analysis, credit monitoring and, in some cases, requiring credit support, cannot fully eliminate counterparty credit risks. To the extent our procedures and policies prove to be inadequate, our financial and operational results may be negatively impacted.

Some of our counterparties may be highly leveraged or have limited financial resources and will be subject to their own operating and regulatory risks. Even if our credit review and analysis mechanisms work properly, we may experience financial losses in our dealings with such parties. In addition, volatility in commodity prices might have an impact on many of our counterparties, which, in turn, could have a negative impact on their ability to meet their obligations to us and may also increase the magnitude of these obligations.

Any material nonpayment or nonperformance by our counterparties could require us to pursue substitute counterparties for the affected operations, reduce operations or provide alternative services, and there can be no assurance that any such efforts would be successful or would provide similar financial and operational results. If we are unable to adequately mitigate the risk of nonpayment or nonperformance by our counterparties, our business, financial condition, results of operations and ability to make cash distributions to our unitholders may be materially and adversely affected.

We intend to grow our business in part by seeking strategic acquisition opportunities. If we are unable to make acquisitions on economically acceptable terms from third parties, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our distributable cash flow on a per unit basis.

Our ability to grow depends, in part, on our ability to make acquisitions that increase our distributable cash flow on a per unit basis. The acquisition component of our strategy is based, in large part, on our expectation of ongoing divestitures of midstream energy assets by industry participants. A material decrease in such divestitures would limit our opportunities for future acquisitions and could materially and adversely affect our ability to grow our operations and increase our distributions to our unitholders.

If we are unable to make accretive acquisitions, whether because we are (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, (ii) unable to obtain financing for these acquisitions on economically acceptable terms, (iii) outbid by competitors or (iv) unable to obtain necessary governmental or third-party consents or for any other reason, then our future growth and ability to increase distributions will be limited. Furthermore, even if we do make acquisitions that we believe will be accretive, these acquisitions may nevertheless result in a decrease in our distributable cash flow on a per unit basis.

Any acquisition, whether from third parties or affiliates, involves potential risks, including, among other things:

 

   

mistaken assumptions about volumes, revenues and costs, including synergies and potential growth;

 

26


Table of Contents
Index to Financial Statements
   

an inability to secure adequate customer commitments to use the acquired systems or facilities;

 

   

the risk that natural gas or crude oil reserves expected to support the acquired assets may not be of the anticipated magnitude or may not be developed as anticipated;

 

   

an inability to integrate successfully the assets or businesses we acquire, particularly given the relatively small size of our management team;

 

   

the assumption of unknown liabilities;

 

   

coordinating geographically disparate organizations, systems and facilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s and employees’ attention from other business concerns;

 

   

unforeseen difficulties operating in new geographic areas and business lines; and

 

   

customer or key employee losses at the acquired businesses.

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and our unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

Our construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our results of operations and financial condition.

One of the ways that we intend to grow our midstream natural gas business is through organic growth projects. The construction of additions or modifications to our existing systems and the construction of new midstream natural gas assets involve numerous regulatory, environmental, political, legal and economic uncertainties that are beyond our control. Such expansion projects may also require the expenditure of significant amounts of capital, and financing may not be available on economically acceptable terms or at all. If we undertake these projects, they may not be completed on schedule, at the budgeted cost, or at all. Moreover, our revenues may not increase immediately upon the expenditure of funds on a particular project.

For instance, if we expand a pipeline, the construction may occur over an extended period of time, yet we will not receive any material increases in revenues until the project is completed and placed into service. Moreover, we could construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize or only materializes over a period materially longer than expected. Since we are not engaged in the exploration for and development of natural gas and crude oil reserves, we often do not have access to third-party estimates of potential reserves in an area prior to constructing facilities in that area. To the extent we rely on estimates of future production in our decision to construct additions to our systems, such estimates may prove to be inaccurate as a result of the numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not attract enough throughput to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition.

In addition, the construction of additions to our existing gathering and transportation assets may require us to obtain new rights-of-way or federal and state environmental permits or other authorizations. Such authorization may not be granted or, if granted, such authorization may include burdensome or expensive conditions. As a result, we may be unable to obtain such rights-of-way and may, therefore, be unable to connect new natural gas volumes to our systems or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or authorizations or to modify existing rights-of-way or authorizations. If the cost of modifying or obtaining new rights-of-way or authorizations increases materially, our cash flows could be materially and adversely affected.

 

27


Table of Contents
Index to Financial Statements

Our growth strategy requires access to new capital. Tightened capital markets or increased competition for investment opportunities could impair our ability to grow.

We continuously consider and enter into discussions regarding potential acquisitions or growth capital expenditures. Any limitations on our access to new capital will impair our ability to execute this strategy. If the cost of capital becomes too expensive, our ability to develop or acquire strategic and accretive assets will be limited. We may not be able to raise the necessary funds on satisfactory terms, if at all. The primary factors that influence our initial cost of equity include market conditions, including our then current unit price, fees we pay to underwriters and other offering costs, which include amounts we pay for legal and accounting services. The primary factors influencing our cost of borrowing include interest rates, credit spreads, covenants, underwriting or loan origination fees and similar charges we pay to lenders.

Weak economic conditions and the volatility and disruption in the financial markets could increase the cost of raising money in the debt and equity capital markets substantially while diminishing the availability of funds from those markets. In addition, we are experiencing increased competition for the types of assets we contemplate purchasing. Weak economic conditions and competition for asset purchases could limit our ability to fully execute our growth strategy.

We do not intend to obtain independent evaluations of natural gas or crude oil reserves connected to our gathering and transportation assets or serviced by our crude oil logistics assets on a regular or ongoing basis; therefore, in the future, volumes of natural gas on our systems and volumes of crude oil served by our crude oil logistics assets could be less than we anticipate.

We do not intend to obtain independent evaluations of natural gas or crude oil reserves connected to our systems or served by our crude oil logistics assets on a regular or ongoing basis. Moreover, even if we did obtain such independent evaluations of natural gas or crude oil reserves, such evaluations may prove to be incorrect. Oil and natural gas reserve engineering requires subjective estimates of underground accumulations of crude oil and natural gas and assumptions concerning future crude oil and natural gas prices, future production levels and operating and development costs. Accordingly, we may not have independent estimates of total reserves dedicated to some or all of our systems and assets or the anticipated life of such reserves. If the total reserves or estimated life of the reserves connected to our gathering and transportation assets or served by our crude oil logistics assets are less than we anticipate and we are unable to secure additional sources of natural gas or crude oil, it could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

Our businesses involve many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which we are not adequately insured or if we fail to recover all anticipated insurance proceeds for significant accidents or events for which we are insured, our operations and financial results could be materially and adversely affected.

Our midstream natural gas operations are subject to all of the risks and hazards inherent in the gathering, compressing, treating and processing of natural gas and transportation of NGLs, including:

 

   

damage to pipelines and plants, related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and acts of terrorism;

 

   

inadvertent damage from construction, vehicles, farm and utility equipment;

 

   

leaks of natural gas and other hydrocarbons or losses of natural gas as a result of the malfunction of equipment or facilities;

 

   

ruptures, fires and explosions; and

 

   

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

In addition, our crude oil logistics operations are subject to all of the risks and hazards inherent in the transloading of crude oil, including:

 

   

damage to transloading facilities, related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and acts of terrorism;

 

28


Table of Contents
Index to Financial Statements
   

spills of crude oil and other hydrocarbons as a result of operator error or the malfunction of equipment or facilities;

 

   

ruptures, fires and explosions; and

 

   

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of facilities and equipment and pollution or other environmental damage. These risks may also result in curtailment or suspension of our operations. A natural disaster or other hazard affecting the areas in which we operate could have a material adverse effect on our operations. We are not fully insured against all risks inherent in our business. In addition, although we are insured for environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, we may not be insured against all environmental accidents that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which we are not fully insured, it could materially and adversely affect our operations and financial condition. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Additionally, when future acquisitions are made, we may be unable to recover from the prior owners, pursuant to negotiated indemnification rights, for potential environmental liabilities.

A change in the jurisdictional characterization or regulation of our assets by federal, state or local regulatory agencies or a change in policy by those agencies could result in increased regulation of our assets which could materially and adversely affect our financial condition, results of operations and cash flows.

Our natural gas gathering operations are generally exempt from regulation by FERC under the Natural Gas Act of 1938, or NGA, but FERC regulation still affects these businesses and the markets for products derived from these businesses. FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on open access transportation, ratemaking, capacity release and market center promotion, indirectly affect intrastate markets. In recent years, FERC has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, we cannot assure you that FERC will continue this approach as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity. In addition, the distinction between FERC-regulated transmission services and federally unregulated gathering services has been the subject of extensive litigation; accordingly, the classification and regulation of some of our pipelines may be subject to change based on future determinations by FERC, the courts or Congress.

State regulation of natural gas gathering facilities generally includes various safety, environmental and, in some circumstances, complaint-based rate regulation and nondiscriminatory take requirements. Natural gas gathering may receive greater regulatory scrutiny at both the state and federal levels because FERC has taken a more light-handed approach to regulation of the gathering activities of interstate pipeline transmission companies and as a number of such companies have transferred gathering facilities to unregulated affiliates. The Railroad Commission of Texas, or TRRC, has adopted regulations that generally allow natural gas producers and shippers to file complaints with the TRRC in an effort to resolve grievances relating to intrastate pipeline access and rate discrimination. Our natural gas gathering operations could be materially and adversely affected in the future should they become subject to the application of state or federal regulation of rates and services. Our gathering operations also may be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of gathering facilities. Additional rules and legislation pertaining to these matters are considered or adopted from time to time. We cannot predict what effect, if any, such changes might have on our operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes. Other state and local regulations also may affect our business. Please read “Business—Regulation of Operations.”

 

29


Table of Contents
Index to Financial Statements

We may incur significant costs and liabilities as a result of pipeline integrity management program testing and related repairs.

Pursuant to the Pipeline Safety Improvement Act of 2002, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006, the U.S. Department of Transportation, or DOT, has adopted regulations requiring pipeline operators to develop integrity management programs for pipelines located where a leak or rupture could harm “high consequence areas,” including high population areas, areas that are sources of drinking water, ecological resource areas that are unusually sensitive to environmental damage from a pipeline release and commercially navigable waterways, unless the operator effectively demonstrates by risk assessment that the pipeline could not affect the area. The regulations require operators, including us, to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

   

maintain processes for data collection, integration and analysis;

 

   

repair and remediate pipelines as necessary; and

 

   

implement preventive and mitigating actions.

Our pipelines may be subject to more stringent safety regulation.

The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, which was signed into law on January 3, 2012, reauthorizes funding for federal pipeline safety programs through 2015, increases penalties for safety violations, establishes additional safety requirements for newly constructed pipelines, and requires studies of certain safety issues that could result in the adoption of new regulatory requirements for existing pipelines. The PHMSA, which is part of DOT, has also published advanced notices of proposed rulemaking to solicit comments on the need for changes to its safety regulations, including whether to revise the integrity management requirements and extend the integrity management requirements to certain gathering lines. In addition, PHMSA has issued Advisory Bulletins which, among other things, advise pipeline operators to review whether existing records of the operating parameters and conditions of their pipelines are able to provide adequate support for determining whether such pipelines are operating at a safe pressure. Locating such records and, in the absence of any such records, verifying maximum pressures through physical testing, could increase our costs or result in reductions of allowable operating pressures. While we expect any legislative or regulatory changes to allow us time to become compliant with new requirements, costs associated with compliance may have a material effect on our operations. We cannot predict with any certainty at this time the terms of new laws, rules or regulatory interpretations, or the costs of compliance associated with such requirements. These types of legislative and regulatory changes could have a material effect on our operations and could increase the amount of our regulatory compliance expenditures.

We are subject to stringent environmental laws and regulations that may expose us to significant costs and liabilities.

Our natural gas gathering, compression, treating, processing and transportation operations, NGL transportation operations and transloading operations are subject to stringent and complex federal, state and local environmental laws and regulations that govern the discharge of materials into the environment or otherwise relate to environmental protection. Examples of these laws include:

 

   

the federal Clean Air Act and analogous state laws that impose obligations related to air emissions;

 

   

the federal Comprehensive Environmental Response, Compensation and Liability Act, also known as CERCLA or the Superfund law, and analogous state laws that regulate the cleanup of hazardous substances that may be or have been released at properties currently or previously owned or operated by us or at locations to which our wastes are or have been transported for disposal;

 

   

the federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws that regulate discharges from our facilities into state and federal waters, including wetlands;

 

30


Table of Contents
Index to Financial Statements
   

the federal Oil Pollution Act, also known as OPA, and analogous state laws that establish strict liability for releases of oil into waters of the United States;

 

   

the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous state laws that impose requirements for the storage, treatment and disposal of solid and hazardous waste from our facilities;

 

   

the Endangered Species Act, also known as the ESA; and

 

   

the Toxic Substances Control Act, also known as TSCA, and analogous state laws that impose requirements on the use, storage and disposal of various chemicals and chemical substances at our facilities.

These laws and regulations may impose numerous obligations that are applicable to our operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our pipelines and facilities, and the imposition of substantial liabilities and remedial obligations for pollution resulting from our operations. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly corrective actions. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of our operations. In addition, we may experience a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt our operations and limit our growth and revenues.

There is a risk that we may incur significant environmental costs and liabilities in connection with our operations due to historical industry operations and waste disposal practices, our handling of hydrocarbon wastes and potential emissions and discharges related to our operations. Joint and several, strict liability may be incurred, without regard to fault, under certain of these environmental laws and regulations in connection with discharges or releases of hydrocarbon wastes on, under or from our facilities and pipelines, a few of which have been used for natural gas gathering and NGL transportation activities for a number of years. Private parties, including the owners of the properties through which our gathering or transportation systems pass and facilities where our wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. For example, an accidental release from one of our pipelines could subject us to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage and fines or penalties for related violations of environmental laws or regulations. In addition, changes in environmental laws occur frequently, and any such changes that result in more stringent and costly waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on our operations or financial position. We may not be able to recover all or any of these costs from insurance. Please read “Business—Environmental Matters” for more information.

Our operations may impact the environment or cause environmental contamination, which could result in material liabilities to us.

Our operations use hazardous materials, generate limited quantities of hazardous wastes and may affect runoff or drainage water. In the event of environmental contamination or a release of hazardous materials, we could become subject to claims for toxic torts, natural resource damages and other damages and for the investigation and clean-up of soil, surface water, groundwater, and other media. Such claims may arise out of conditions at sites that we currently own or operate. Our liability for such claims may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share. These and other impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could have a material adverse effect on us. Please read “Business—Environmental Matters.”

 

31


Table of Contents
Index to Financial Statements

Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the natural gas services we provide.

There is a growing belief that emissions of greenhouse gases (“GHGs”), such as carbon dioxide and methane, may be linked to climate change. Climate change and the costs that may be associated with its impacts and the regulation of GHGs have the potential to affect our business in many ways, including negatively impacting the costs we incur in providing our products and services and the demand for and consumption of our products and services (due to change in both costs and weather patterns).

In recent years, the U.S. Congress has from time to time considered legislation to restrict or regulate emissions of greenhouse gases. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although energy legislation and other initiatives are expected to be proposed that may be relevant to GHG emissions issues. In addition, almost half of the states, either individually or through multi-state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs. Most of these cap and trade programs work by requiring either major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year until the overall GHG emission reduction goal is achieved. Depending on the scope of a particular program, we could be required to purchase and surrender allowances for GHG emissions resulting from our operations (e.g., at compressor stations). Although most of the state-level initiatives have to date been focused on large sources of GHG emissions, such as electric power plants, it is possible that smaller sources such as our operations could become subject to GHG-related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for GHG emissions resulting from our operations.

Independent of Congress, the EPA has adopted regulations controlling GHG emissions under its existing Clean Air Act authority. For example, on December 15, 2009, the EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings by the EPA allow the agency to proceed with the adoption and implementation of regulations that would restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act. In 2009, the EPA adopted rules regarding regulation of GHG emissions from motor vehicles. In 2010, EPA also issued a final rule, known as the “Tailoring Rule,” that makes certain large stationary sources and modification projects subject to permitting requirements for greenhouse gas emissions under the Clean Air Act. In addition, on September 22, 2009, the EPA issued a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States beginning in 2011 for emissions occurring in 2010. We are required to report under this rule. On November 30, 2010, the EPA published a final rule expanding its existing GHG emissions reporting rule for petroleum and natural gas facilities, including natural gas transmission compression facilities that emit 25,000 metric tons or more of carbon dioxide equivalent per year. The rule, which went into effect on December 30, 2010, requires reporting of greenhouse gas emissions by regulated facilities to EPA by September 2012 for emissions during 2011 and annually thereafter.

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business, any future federal laws or implementing regulations that may be adopted to address greenhouse gas emissions could require us to incur increased operating costs and could materially and adversely affect demand for the natural gas we gather, treat or otherwise handle in connection with our services. The potential increase in the costs of our operations resulting from any legislation or regulation to restrict emissions of greenhouse gases could include new or increased costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our greenhouse gas emissions, pay any taxes related to our greenhouse gas emissions and administer and manage a greenhouse gas emissions program. While we may be able to include some or all of such increased costs in the rates charged by our pipelines or other facilities, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for natural gas, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.

 

32


Table of Contents
Index to Financial Statements

Increased regulation of hydraulic fracturing could result in reductions or delays in natural gas production by our customers, which could materially and adversely impact our revenues.

A portion of our customers’ crude oil and gas production is developed from unconventional sources that require hydraulic fracturing as part of the completion process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate gas production. The United States Congress has in the past introduced, and may introduce again in the future, legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing from definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process. If adopted this legislation could establish an additional level of regulation and permitting at the federal level.

Federal scrutiny of hydraulic fracturing activities is the subject of ongoing agency and congressional review, including an EPA multi-year study of the potential environmental impacts of hydraulic fracturing, for which EPA released a progress report on December 21, 2012, expects a final report in late 2014. In addition, on October 20, 2011, the EPA announced its intention to propose regulations by 2014 under the federal Clean Water Act to develop standards for wastewater discharges from hydraulic fracturing and other natural gas production activities. On May 24, 2013, the Bureau of Land Management published a supplemental notice of proposed rulemaking governing hydraulic fracturing on federal and Indian lands that replaces a prior draft of proposed rulemaking issued by the agency in May 2012. The revised proposed rule would continue to require public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, and development of appropriate plans for managing flowback water that returns to the surface. Other federal agencies and bodies are also considering or have proposed actions relating to hydraulic fracturing, including the White House Council on Environmental Quality, a committee of the United States House of Representatives has conducted an investigation of hydraulic fracturing practices, and the U.S. Department of Energy. Depending on the outcome of these initiatives, there may be further federal regulation of hydraulic fracturing activities.

Several states have also proposed or adopted legislative or regulatory restrictions on hydraulic fracturing, including Texas and Wyoming. We cannot predict whether any such legislation will ever be enacted and if so, what its provisions would be. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level, that could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of natural gas that move through our gathering systems which would materially and adversely affect our revenues and results of operations.

We do not own all of the land on which our midstream natural gas pipelines and facilities and transloading facilities are located, which could result in disruptions to our operations.

We do not own all of the land on which our midstream natural gas pipelines and facilities have been constructed, and we are, therefore, subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way or if our pipelines are not properly located within the boundaries of such rights-of-way. Under the majority of our right-of-way contracts, we obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies until abandonment. However, certain of our right-of-way contracts are for a specified period of time. In addition, we do not own the sites on which our Wildcat and Big Horn transloading facilities are located or where we conduct our transloading operations. We have a site access agreement and a rail siding lease at our Wildcat facility with initial terms that expire September 5, 2013 and August 20, 2013, respectively, and a rail siding lease and service agreement at our Big Horn facility with an initial term that expires March 31, 2014.

Our loss of these rights, through our inability to renew right-of-way contracts, site access agreements or rail siding leases or otherwise, could materially and adversely affect our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

 

33


Table of Contents
Index to Financial Statements

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results timely and accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including the rules thereunder that will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to provide reliable and timely financial reports, prevent fraud and to operate successfully as a publicly traded partnership. We prepare our combined financial statements in accordance with GAAP, but our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, which we refer to as Section 404. For example, Section 404(a) requires us, among other things, to review and report annually on the effectiveness of our internal control over financial reporting. We must comply with Section 404(a) for our fiscal year ending December 31, 2014. In addition, our independent registered public accountants will be required to assess the effectiveness of an internal control over financial reporting at the end of the fiscal year after we are no longer an “emerging growth company” under the JOBS Act, which may be for up to five fiscal years after the completion of this offering.

Prior to this offering, we have been a private company and have not been required to file reports with the SEC. We currently have limited accounting personnel, and while we have begun the process of evaluating the adequacy of our accounting personnel staffing level and other matters related to our internal controls over financial reporting, we cannot predict the outcome of our review at this time.

Given the difficulties inherent in the design and operation of internal controls over financial reporting, in addition to our limited accounting personnel and management resources, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to implement and maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

Restrictions in our new revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.

At the closing of this offering, we intend to enter into, and borrow $25.0 million under, a new $50.0 million senior secured revolving credit facility. Our new revolving credit facility is likely to limit our ability to, among other things:

 

   

incur certain additional indebtedness;

 

   

grant certain liens;

 

   

engage in certain asset dispositions;

 

   

merge or consolidate;

 

   

make certain payments, investments or loans;

 

   

enter into transactions with affiliates;

 

   

make certain changes in our lines of business or accounting practices, except as required by FASB or its successor;

 

   

store inventory in certain locations;

 

   

place certain amounts of cash in accounts not subject to control agreements;

 

34


Table of Contents
Index to Financial Statements
   

engage in certain prohibited transactions;

 

   

enter into burdensome agreements; and

 

   

transmit utilities.

We expect that our new revolving credit facility also will contain covenants that, among other things, will require us to maintain specified ratios or conditions. We must maintain a consolidated senior secured leverage ratio, consisting of consolidated indebtedness under our new revolving credit facility to consolidated EBITDA of not more than 4.0 to 1.0, as of the last day of each fiscal quarter. In addition, we must maintain a consolidated interest coverage ratio, consisting of our consolidated EBITDA minus capital expenditures to our consolidated interest expense, letter of credit fees and commitment fees of not less than 2.5 to 1.0, as of the last day of each fiscal quarter. Our ability to meet those financial ratios and conditions can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and conditions.

The provisions of our new revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our new revolving credit facility could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment.

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

Our future level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flows required to make interest payments on our debt;

 

   

we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

   

our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our results of operations are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to effect any of these actions on satisfactory terms or at all.

Increases in interest rates could materially and adversely impact our unit price, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

Interest rates may increase in the future. As a result, interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by our level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

 

35


Table of Contents
Index to Financial Statements

Our ability to operate our business effectively could be impaired if we fail to attract and retain key management personnel.

Our ability to operate our business and implement our strategies depends on the continued contributions of certain executive officers and key employees of our general partner, particularly W. Keith Maxwell III. The loss of Mr. Maxwell or any of our other senior executives could materially and adversely affect our business. In addition, we believe that our future success will depend on our continued ability to attract and retain highly skilled management personnel with midstream energy industry experience, and competition for these persons in the midstream energy industry is intense. Given our small size, we may be at a disadvantage, relative to our larger competitors, in the competition for these personnel. We may not be able to continue to employ our senior executives and key personnel or attract and retain qualified personnel in the future, and our failure to retain or attract our senior executives and key personnel could adversely affect our business, financial condition and results of operations.

A shortage of skilled labor in the midstream energy industry could reduce labor productivity and increase costs, which could have a material adverse effect on our business and results of operations.

The gathering, treating, processing and transporting of natural gas and NGLs and transloading of crude oil requires skilled laborers in multiple disciplines such as equipment operators, mechanics and engineers, among others. We have from time to time encountered shortages for these types of skilled labor. If we experience shortages of skilled labor in the future, our labor and overall productivity or costs could be materially and adversely affected. If our labor prices increase or if we experience materially increased health and benefit costs with respect to our general partner’s and its affiliates’ employees, our results of operations could be materially and adversely affected.

Our work force could become unionized in the future, which could materially and adversely affect the stability of our production and materially reduce our profitability.

All of our midstream natural gas assets are operated by non-union employees of our general partner and its affiliates. Our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If our employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly different from our current compensation and job assignment arrangements with our employees, these arrangements could materially and adversely affect the stability of our operations and materially reduce our profitability.

The amount of cash we have available for distribution to holders of our common and subordinated units depends primarily on our cash flows rather than on our profitability, which may prevent us from making distributions, even during periods in which we record net income.

The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses for financial accounting purposes and may not make cash distributions during periods when we record net earnings for financial accounting purposes.

Terrorist attacks and threats, cyber-attacks, escalation of military activity in response to these attacks or acts of war could materially and adversely affect our business, financial condition or results of operations.

Terrorist attacks and threats, cyber-attacks, escalation of military activity or acts of war may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Future terrorist or cyber-attacks, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers may significantly affect our operations and those of our customers. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future attacks than other targets in the United States. Disruption or significant increases in energy prices could result in government-imposed price controls. Any of these occurrences, or a combination of them, could materially and adversely affect our business, financial condition and results of operations.

 

36


Table of Contents
Index to Financial Statements

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies, including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, (ii) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (iv) provide certain disclosures regarding executive compensation required of larger public companies or (v) hold unitholder advisory votes on executive compensation.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies.

Risks Inherent in an Investment in Us

NuDevco owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner has conflicts of interest with and owes limited fiduciary duties to us, and may favor our general partner’s and NuDevco’s interests to the detriment of us and our unitholders.

Following this offering, NuDevco will indirectly own and control our general partner, as well as appoint all of the officers and directors of our general partner, some of whom will also be officers of NuDevco. W. Keith Maxwell III, the Chairman of the Board of Directors of our general partner, is the sole owner of NuDevco, which in turn controls AES, one of our principal customers. Although our general partner has a fiduciary duty to manage us in a manner that is beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner that is beneficial to its owner. Conflicts of interest may arise between our general partner and its affiliates, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of NuDevco, AES and their respective affiliates over our interests and the interests of our unitholders. These conflicts include the following situations, among others:

 

   

Neither our partnership agreement nor any other agreement requires our general partner and its affiliates to pursue a business strategy that favors us.

 

   

Our general partner is allowed to take into account the interests of parties other than us, such as NuDevco, AES and their respective affiliates, in resolving conflicts of interest.

 

   

Our partnership agreement limits the liability of and reduces the fiduciary duties owed by our general partner, and also restricts the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty.

 

   

Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.

 

   

Our general partner determines the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of reserves, each of which can affect the amount of cash that is distributed to our unitholders.

 

37


Table of Contents
Index to Financial Statements
   

Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner and the ability of the subordinated units to convert to common units.

 

   

Our general partner determines which costs incurred by it are reimbursable by us.

 

   

Our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period.

 

   

Our partnership agreement permits us to classify up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or to NuDevco in respect of the incentive distribution rights.

 

   

Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.

 

   

Our general partner intends to limit its liability regarding our contractual and other obligations.

 

   

Our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if they own more than 80% of the common units.

 

   

Our general partner controls the enforcement of the obligations that it and its affiliates owe to us.

 

   

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

 

   

NuDevco may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our sponsor’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Please read “Conflicts of Interest and Fiduciary Duties.”

NuDevco and its affiliates, including AES, are not limited in their ability to compete with us and, other than as provided in the omnibus agreement that we will enter into with NuDevco, NuDevco Midstream Development and our general partner at the closing of this offering, are not obligated to offer us the opportunity to acquire additional assets or businesses, which could limit our ability to grow and could materially and adversely affect our results of operations and our ability to make cash distributions to our unitholders.

NuDevco and its affiliates are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, in the future, NuDevco or its affiliates may acquire, construct or dispose of additional midstream natural gas, crude oil logistics or other assets and may be presented with new business opportunities, without any obligation to offer us the opportunity to purchase or construct such assets or to engage in such business opportunities, other than such obligations as set forth in the omnibus agreement that we will enter into with NuDevco, NuDevco Midstream Development and our general partner at the closing of this offering. Moreover, except for the obligations set forth in the omnibus agreement, neither NuDevco nor any of its affiliates has a contractual obligation to offer us the opportunity to purchase additional assets from it, and we are unable to predict whether or when such an offer may be presented and acted upon.

Future sales of our common units could cause the market price of our common units to decline.

The market price of our common units could decline as a result of sales of a large number of our common units in the market or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell our common units in the future at a time and at a price that we deem appropriate. In addition, any additional common units that we issue, including under any equity incentive plans, would dilute the percentage ownership of the existing holders of our common units.

 

38


Table of Contents
Index to Financial Statements

In connection with this offering, we, our general partner, certain of our general partner’s executive officers and directors and certain of our affiliates have agreed with the underwriters, subject to certain exceptions, not to sell or transfer any common units or securities convertible into, exchangeable for, exercisable for or repayable with common units, during the period ending 180 days after the date of this prospectus, except with the prior written consent of Stifel, Nicolaus & Company, Incorporated. Please read “Underwriting.” Stifel, Nicolaus & Company, Incorporated may, in its sole discretion, waive or release all or any portion of the common units subject to lock-up agreements prior to expiration of the lock-up period. Subject to the terms of the lock-up agreements, we also may issue common units or securities convertible into, exchangeable for, exercisable for or repayable with common units from time to time in connection with financings, acquisitions, investments or otherwise. Any such issuance could result in substantial dilution to our existing unitholders. As restrictions on resale end or if we register additional common units, the market price of our common units could decline if the holders of restricted units sell them or are perceived by the market as intending to sell them.

Upon the expiration of the lock-up agreements              common units will no longer be subject to the restrictions set forth in the lock-up agreements and will generally be freely transferable without restriction or further registration under the Securities Act, except that any common units held by an “affiliate” of ours may not be resold publicly except in compliance with the registration requirements of the Securities Act or under an exemption under Rule 144 or otherwise. Please read “Units Eligible for Future Sale.”

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common units. After this offering, assuming no exercise of the underwriters’ option to purchase additional common units, there will be only              publicly traded common units, and NuDevco will indirectly own              common units and              subordinated units, representing an aggregate     % limited partner interest in us. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

the loss of a large customer;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic conditions;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

other factors described in these “Risk Factors.”

Common units held by persons who are non-taxpaying assignees will be subject to the possibility of redemption.

Our partnership agreement gives our general partner the power to amend the agreement to avoid any adverse effect on the maximum applicable rates chargeable to customers by us under FERC regulations, or in order to

 

39


Table of Contents
Index to Financial Statements

reverse an adverse determination that has occurred regarding such maximum rate. If our general partner determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by us, then our general partner may adopt such amendments to our partnership agreement as it determines are necessary or advisable to obtain proof of the U.S. federal income tax status of our limited partners (and their owners, to the extent relevant) and permit us to redeem the units held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the procedures instituted by our general partner to obtain proof of the U.S. federal income tax status. Please read “The Partnership Agreement—Redemption of Ineligible Holders.”

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Because we distribute all of our available cash to our unitholders, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

In addition, because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement, and we do not anticipate there being limitations in our new revolving credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the available cash that we have to distribute to our unitholders.

Our partnership agreement limits our general partner’s fiduciary duties to holders of our common and subordinated units.

Our partnership agreement contains provisions that modify and reduce the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner or otherwise, free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

how to allocate corporate opportunities among us and its affiliates;

 

   

whether to exercise its limited call right;

 

   

how to exercise its voting rights with respect to the units it owns;

 

   

whether to elect to reset target distribution levels; and

 

40


Table of Contents
Index to Financial Statements
   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Duties of the General Partner.”

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

   

provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith, meaning that it believed that the decision was in the best interest of our partnership, taking into account the totality of the circumstances or the totality of the relationships between the parties involved, including other relationships or transactions that may be particularly favorable or advantageous to us;

 

   

provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or their assignees resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

provides that our general partner will not be in breach of its obligations under the partnership agreement or its fiduciary duties to us or our unitholders if a transaction with an affiliate or the resolution of a conflict of interest is:

(1) approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;

(2) approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;

(3) on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

(4) fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in subclauses (3) and (4) above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties—Conflicts of Interest.”

 

41


Table of Contents
Index to Financial Statements

NuDevco, as the owner of all of our incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

NuDevco, as the owner of all of our incentive distribution rights, has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Following a reset election by NuDevco, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

We anticipate that NuDevco would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion; however, it is possible that NuDevco could exercise this reset election at a time when we are experiencing declines in our aggregate cash distributions or at a time when NuDevco expects that we will experience declines in our aggregate cash distributions in the foreseeable future. In such situations, NuDevco may be experiencing, or may expect to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued common units, which are entitled to specified priorities with respect to our distributions and which therefore may be more advantageous for NuDevco to own in lieu of the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then current business environment. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued common units to NuDevco in connection with resetting the target distribution levels related to NuDevco’s incentive distribution rights. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—NuDevco’s Right to Reset Incentive Distribution Levels.”

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner will be chosen by NuDevco. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

The unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the closing of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding limited partner units voting together as a single class is required to remove our general partner. Following the closing of this offering, NuDevco will indirectly own     % of our outstanding common and subordinated units. Also, if our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on our common units will be extinguished. A removal of our general partner under

 

42


Table of Contents
Index to Financial Statements

these circumstances would materially and adversely affect our common units by prematurely eliminating their distribution and liquidation preference over our subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Cause is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholder’s dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the termination of the subordination period and conversion of all subordinated units to common units.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Unitholders’ voting rights are further restricted by a provision of our partnership agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, our partnership agreement does not restrict the ability of NuDevco to transfer all or a portion of its ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers.

The incentive distribution rights indirectly held by NuDevco may be transferred to a third party without unitholder consent.

NuDevco, as the indirect owner of the incentive distribution rights, may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If NuDevco transfers the incentive distribution rights to a third party, NuDevco and its affiliates may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by NuDevco could reduce the likelihood of NuDevco accepting offers made by us relating to assets subject to the right of first offer contained in our omnibus agreement or renewing contractual arrangements with us in the future, as NuDevco and its affiliates would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

You will experience immediate and substantial dilution in net tangible book value of $ per common unit.

The estimated initial public offering price of $         per common unit (the midpoint of the range set forth on the cover of this prospectus) exceeds our net tangible book value of $         per unit. Based on the estimated initial public offering price of $         per common unit, you will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed by our general partner and its affiliates are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”

We may issue additional units without your approval, which would dilute your existing unitholder interests.

Our partnership agreement does not limit the number of additional general partner interests or limited partner interests that we may issue at any time without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such general partner interests or limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that are equal or senior to our common units with respect to distributions or liquidation

 

43


Table of Contents
Index to Financial Statements

preference or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of cash we have available to distribute on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline.

The issuance by us of additional general partner units will have the following effects, among others, if such general partner interests are issued to a person who is not an affiliate of NuDevco:

 

   

our business will no longer be solely managed by our general partner’s current owner, NuDevco;

 

   

the newly admitted general partner may have sufficient ownership to be in a position to replace the board of directors and officers of our general partner with its own nominees; and

 

   

affiliates of the newly admitted general partner may compete with us, and neither our general partner nor such affiliates will have any obligation to present business opportunities to us.

NuDevco may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the sale of the common units offered by this prospectus, assuming that the underwriters do not exercise their option to purchase additional common units, NuDevco will hold an aggregate of              common units and              subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the closing of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, NuDevco will indirectly own approximately     % of our outstanding common units. At the end of the subordination period, assuming no additional issuances of common units (other than upon the conversion of the subordinated units), NuDevco will indirectly own approximately     % of our outstanding common units. For additional information about this right, please read “The Partnership Agreement—Limited Call Right.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. You could be liable for any and all of our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

44


Table of Contents
Index to Financial Statements
   

your right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement—Limited Liability.”

Unitholders may have liability to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable both for the obligations of the assignor to make contributions to the partnership that were known to the substituted limited partner at the time it became a limited partner and for those obligations that were unknown if the liabilities could have been determined from the partnership agreement. Neither liabilities to partners on account of their partnership interest nor liabilities that are non-recourse to the partnership are counted for purposes of determining whether a distribution is permitted.

We will incur increased costs as a result of being a publicly traded partnership.

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and The NASDAQ Stock Market LLC, or the NASDAQ, have required changes in the corporate governance practices of publicly traded companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our publicly traded partnership reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for our general partner to obtain director and officer liability insurance and to possibly result in our general partner having to accept reduced policy limits and coverage. As a result, it may be more difficult for our general partner to attract and retain qualified persons to serve on its board of directors or as executive officers. We have included $2.8 million of estimated annual incremental costs associated with being a publicly traded partnership in our financial forecast included elsewhere in this prospectus. However, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our distributable cash flow would be substantially reduced.

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe based upon our operations that we are or will be so treated, a change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

45


Table of Contents
Index to Financial Statements

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35.0%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to our unitholders. Since a tax would be imposed upon us as a corporation, our distributable cash flow would be reduced substantially. Therefore, if we were treated as a corporation for federal income tax purposes there would be material reduction in the anticipated cash flows and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our distributable cash flow.

Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce distributable cash flow. Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the existing federal income tax laws that affect certain publicly traded partnerships. We are unable to predict whether any such proposals will ultimately be enacted. However, it is possible that a change in law could affect us and may be applied retroactively. Any such changes could negatively impact the value of an investment in our common units.

Our unitholders’ share of our income will be taxable to them for U.S. federal income tax purposes even if they do not receive any cash distributions from us.

Because a unitholder will be treated as a partner to whom we will allocate taxable income which could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability resulting from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our distributable cash flow.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and

 

46


Table of Contents
Index to Financial Statements

the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our distributable cash flow.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price the unitholder receives is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of a unitholder’s common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. Our counsel is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from a unitholder’s sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

We will prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction for U.S. federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and although the U.S. Treasury Department issued proposed regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we will adopt. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge this method or new Treasury regulations

 

47


Table of Contents
Index to Financial Statements

were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any items of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units; therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

We will adopt certain valuation methodologies and monthly conventions for U.S. federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner, our unitholders and IDR holders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders, our general partner and IDR holders. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for tax purposes. If treated as a new

 

48


Table of Contents
Index to Financial Statements

partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

As a result of investing in our common units, a unitholder may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We will initially own property or conduct business in Texas, Utah, Arizona, Louisiana and Wyoming. Utah, Arizona and Louisiana currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may own property or conduct business in additional states that impose a personal income tax. It is your responsibility to file all U.S. federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

Compliance with and changes in tax laws could adversely affect our performance.

We are subject to extensive tax laws and regulations, including federal, state and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future. Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes as well as interest and penalties.

 

49


Table of Contents
Index to Financial Statements

USE OF PROCEEDS

We expect to receive net proceeds of approximately $         million (based upon the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts, commissions and the structuring fee, but before paying offering expenses, from the issuance and sale of common units offered by this prospectus. We will use the net proceeds from this offering to:

 

   

pay offering expenses of approximately $         million; and

 

   

repay a portion of our outstanding borrowings under our existing credit facility and settle our related interest rate swap liability.

We will use any remaining net proceeds for general partnership purposes.

At the closing of this offering, we will enter into, and borrow $25.0 million under, our new revolving credit facility. A portion of these borrowings will be used to repay the remaining portion of our outstanding borrowings under our existing credit facility. Immediately following the repayment of our outstanding borrowings under our existing credit facility with the net proceeds of this offering and a portion of the borrowings under our new revolving credit facility, our existing credit facility will be terminated.

A portion of the amounts to be repaid under our existing credit facility with the net proceeds of this offering and borrowings under our new revolving credit facility were used to finance the development of our assets. As of June 26, 2013, we had approximately $131.4 million of indebtedness outstanding under our existing credit facility. This indebtedness had a weighted average interest rate of 3.94% as of June 26, 2013. Our existing credit facility matures in December 2014. As of June 26, 2013, we had liabilities of less than $0.1 million under the interest rate swap related to our existing credit facility.

Our estimates assume an initial public offering price of $         per common unit and no exercise of the underwriters’ option to purchase additional common units. An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, to increase or decrease by $         million. If our net proceeds are reduced, we may not have sufficient funds to pay off our existing credit facility and settle our related interest rate swap liability. If we do not raise sufficient funds to pay off our existing credit facility and settle our related interest rate swap liability, we will have to borrow funds under our new revolving credit facility in addition to the $25.0 million that we will borrow at the closing of this offering, which will increase our interest expense, decrease our distributable cash flow and reduce the amount available for future borrowing under our new revolving credit facility.

If the underwriters exercise their option to purchase additional common units, we will use the net proceeds from that exercise to redeem from NuDevco a number of common units equal to the number of common units issued upon such exercise, at a price per common unit equal to the proceeds per common unit in this offering before expenses but after deducting underwriting discounts, commissions and the structuring fee.

The underwriters may, from time to time, engage in transactions with and perform services for us and our affiliates in the ordinary course of business. Please read “Underwriting.”

 

50


Table of Contents
Index to Financial Statements

CAPITALIZATION

The following table shows:

 

   

Our historical cash and capitalization as of March 31, 2013; and

 

   

our pro forma as adjusted cash and capitalization, as of March 31, 2013, giving effect to:

 

   

our receipt and use of net proceeds of $         million from the issuance and sale of              common units to the public at an assumed initial offering price of $         (based upon the mid-point of the price range set forth on the cover page of this prospectus) in the manner described in “Use of Proceeds”;

 

   

the entry into our new senior secured revolving credit facility; and

 

   

the other transactions described in “Summary—Formation Transactions and Partnership Structure.”

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our historical combined financial statements and related notes and our unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    

As of March 31, 2013

 
     Historical      Pro Forma,
As
Adjusted
(Unaudited)
 
     (in thousands)  

Cash and cash equivalents

   $ 2,945       $ 13,564   
  

 

 

    

 

 

 

Long-Term Debt:

     

Existing credit facility(1)

     127,438         —     

New senior secured revolving credit facility(2)

     —           25,000   
  

 

 

    

 

 

 

Total long-term debt (including current maturities)

     127,438         25,000   
  

 

 

    

 

 

 

Member’s Equity and Partners’ Capital:

     

Member’s equity

     28,669         —     

Limited partners units:

     

Common units—public

     —        

Common units—sponsor

     —        

Subordinated units—sponsor

     —        

General partner units

     —        
  

 

 

    

 

 

 

Total member’s equity and partners’ capital

     28,669      
  

 

 

    

 

 

 

Total capitalization

   $ 156,107       $     
  

 

 

    

 

 

 

 

(1)

As of June 26, 2013, we had $131.4 million of indebtedness outstanding under our existing credit facility. We will not assume any obligations with respect to our existing credit facility in connection with the transactions contemplated by this offering. As of June 26, 2013, we had liabilities of less than $0.1 million under the interest rate swap related to our existing credit facility.

(2)

We expect the initial interest rate under our new senior secured revolving credit facility to be     %.

 

51


Table of Contents
Index to Financial Statements

DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of March 31, 2013, after giving effect to the offering of common units and the application of the related net proceeds, and assuming the underwriters’ option to purchase additional common units is not exercised, our net tangible book value was $         million, or $         per unit. Net tangible book value excludes $         million of net intangible assets. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table:

 

Assumed initial public offering price per common unit(1)

      $                

Pro forma net tangible book value per unit before the offering(2)

   $                   

Increase in net tangible book value per unit attributable to purchasers in the offering

     
  

 

 

    

Less: Pro forma net tangible book value per unit after the offering(3)

     
     

 

 

 

Immediate dilution in tangible net book value per common unit to purchasers in the offering(4)(5)

      $     
     

 

 

 

 

(1)

The mid-point of the price range set forth on the cover of the prospectus.

(2)

Determined by dividing the number of units (             common units,              subordinated units and              general partner units) held by our general partner and its affiliates, including NuDevco, into the net tangible book value of our assets.

(3)

Determined by dividing the total number of units to be outstanding after this offering (             common units,              subordinated units and              general partner units) into our pro forma net tangible book value, after giving effect to the application of the expected net proceeds of this offering.

(4)

If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $         and $        , respectively.

(5)

Assumes the underwriters’ option to purchase additional common units from us is not exercised. If the underwriters’ option to purchase additional common units from us is exercised in full and the net proceeds are used to redeem an equal number of common units as described under “Use of Proceeds,” the immediate dilution in net tangible book value per common unit to purchasers in this offering will be $        .

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of common units in this offering upon the closing of the transactions contemplated by this prospectus:

 

    

Units Acquired

   

Total Consideration

 
    

Number

  

Percent

   

Amount

    

Percent

 
     (in thousands)  

General partner and affiliates(1)(2)

               $                          

Purchasers in the offering

          
  

 

  

 

 

   

 

 

    

 

 

 

Total

               $               
  

 

  

 

 

   

 

 

    

 

 

 

 

(1)

The units acquired by our general partner and its affiliates, including NuDevco, consist of              common units,              subordinated units and              general partner units.

(2)

Assumes the underwriters’ option to purchase additional common units is not exercised.

 

52


Table of Contents
Index to Financial Statements

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, “Forward-Looking Statements” and “Risk Factors” should be read for information regarding statements that do not relate strictly to historical or current facts and regarding certain risks inherent in our business.

For additional information regarding our historical and pro forma results of operations, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our historical combined financial statements and related notes and our unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no obligation to make quarterly cash distributions in this or any other amount, and our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly. Generally, our available cash is our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax. If we do not generate sufficient available cash from our operations, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no obligation to make cash distributions except as provided in our partnership agreement. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

We expect that our cash distribution policy will be subject to restrictions on cash distributions under our new revolving credit facility. One such restriction would prohibit us from making cash distributions while an event of default has occurred and is continuing under our new revolving credit facility, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Liquidity—Credit Facilities.”

 

   

The amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Specifically, our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

 

53


Table of Contents
Index to Financial Statements
   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. For a description of these limited circumstances, please read “The Partnership Agreement—Amendment of Our Partnership Agreement—No Unitholder Approval.” However, after the subordination period has ended our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units held by NuDevco after the subordination period has ended. At the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional common units, NuDevco will indirectly own our general partner and will indirectly own an aggregate of approximately     % of our outstanding common units and all of our subordinated units. Please read “The Partnership Agreement—Amendment of Our Partnership Agreement.”

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operation and maintenance or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs as well as maintenance capital expenditures. Our available cash is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”

 

   

Our ability to make cash distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make cash distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

   

If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.

To the extent that our general partner determines not to distribute the full minimum quarterly distribution on the common units with respect to any quarter during the subordination period, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. The subordinated units will not accrue any arrearages. Any shortfall in the payment of the minimum quarterly distribution with respect to any quarter during the subordination period may decrease the likelihood that our quarterly distribution rate would increase in subsequent quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we intend to distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. We expect that our revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to

 

54


Table of Contents
Index to Financial Statements

Our Business—Restrictions in our new revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business—Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $         per unit for each whole quarter, or $         per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month in which distributions are made. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on                     , 2013 and ends on the day prior to the closing of this offering. We will adjust the amount of our first distribution for the period from the closing of this offering through                         , 2013 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, subordinated units and general partner units outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

         

Minimum quarterly
distributions

 
          (in thousands)  
     Number of units    One quarter      Annualized
(four
quarters)
 

Publicly held common units(1)

      $         $     

Common units held by NuDevco(1)

        

Subordinated units held by NuDevco

        

General partner units

        
  

 

  

 

 

    

 

 

 

Total

      $                    $                
  

 

  

 

 

    

 

 

 

 

(1)

Assumes no exercise of the underwriters’ option to purchase additional common units.

As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2.0% general partner interest. In addition, NuDevco will indirectly hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $         per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our

 

55


Table of Contents
Index to Financial Statements

partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must subjectively believe that the determination is in the best interests of our partnership. In making such determination, the general partner may take into account the totality of the circumstances or the totality of the relationships between the parties involved, including other relationships or transactions that may be particularly favorable or advantageous to us. Please read “Conflicts of Interest and Fiduciary Duties.”

The provision in our partnership agreement requiring us to distribute all of our available cash quarterly may not be modified without amending our partnership agreement; however, as described above, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement and the amount of available cash from working capital borrowings.

Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution will also automatically be adjusted in connection with the resetting of the target distribution levels related to our sponsor’s incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—NuDevco’s Right to Reset Incentive Distribution Levels.”

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $         per unit for the twelve months ending June 30, 2014. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Distributable Cash Flow,” in which we present the amount of distributable cash flow we would have generated on a historical as adjusted basis for the year ended December 31, 2012 and the twelve months ended March 31, 2013 derived from our audited historical financial statements that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Estimated Distributable Cash Flow for the Twelve Months Ending June 30, 2014,” in which we provide our estimated forecast of our ability to generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution on all of our common units, as well as the corresponding distribution on our 2.0% general partner interest, for the twelve months ending June 30, 2014.

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2012 and the Twelve Months Ended March 31, 2013

If we had completed the transactions contemplated in this prospectus on January 1, 2012, our unaudited pro forma distributable cash flow for the year ended December 31, 2012 would have been approximately $10.4 million. If we had completed the transactions contemplated in this prospectus on January 1, 2012, our unaudited pro forma distributable cash flow for the twelve months ended March 31, 2013 would have been approximately $8.2 million. This amount would have been insufficient to support the payment of the minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) on all of our common units and subordinated units and general partner’s 2.0% interest for that period. Specifically, the amount of distributable cash flow that we generated during the twelve months ended March 31, 2013 would have been sufficient to

 

56


Table of Contents
Index to Financial Statements

support the payment of a distribution of $         per common unit per quarter ($         per common unit on an annualized basis), or approximately     % of the minimum quarterly distribution, and we would not have been able to support the payment of any distributions on our subordinated units for that period.

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, distributable cash flow is primarily a cash accounting concept, while our unaudited pro forma condensed combined financial data have been prepared on an accrual basis. As a result, you should view the amount of pro forma distributable cash flow only as a general indication of the amount of distributable cash flow that we might have generated had we been formed in earlier periods.

The following table illustrates, on a pro forma basis, for the year ended December 31, 2012 and the twelve months ended March 31, 2013 the amount of distributable cash flow we would have generated, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated on January 1, 2012.

Marlin Midstream Partners, LP

Unaudited Pro Forma Distributable Cash Flow

 

     Year Ended
December 31, 2012
    Twelve Months
Ended
March 31, 2013
 
     (In thousands)     (In thousands)  

Pro Forma Net Income:

   $ 6,203        4,701   

Add:

    

Interest expense, net of amounts capitalized

     1,531        1,532   

Depreciation expense

     7,481        7,611   

State franchise tax

     101        100   

Interest and other income

     (23     (23
  

 

 

   

 

 

 

Adjusted EBITDA(1)

     15,293        13,921   

Less:

    

Incremental general and administrative expenses of being a publicly traded partnership(2)

     (2,750     (2,750

Maintenance capital expenditures(3)

     (1,979     (1,649

Expansion capital expenditures(3)

     (9,033     (12,516

Cash interest expense(4)

     (203     (1,282

Add:

    

Borrowings to fund expansion capital expenditures

     9,033        12,516   
  

 

 

   

 

 

 

Pro Forma Distributable Cash Flow

   $ 10,361      $ 8,240   
  

 

 

   

 

 

 

Pro Forma Cash Distributions:

    

Distributions per unit

   $        $     
  

 

 

   

 

 

 

Distributions to public common unitholders

   $        $     

Distributions to NuDevco—Common Units

Distributions to NuDevco—Subordinated Units

     —        

Distributions to LTIP participants

    

Distributions to our general partner

     —        
  

 

 

   

 

 

 

Total Distributions

    
  

 

 

   

 

 

 

Shortfall of pro forma distributable cash flow over aggregate minimum distributions

   $ (               $ (            
  

 

 

   

 

 

 

Percent of minimum quarterly distributions payable to public common unitholders

                  

Percent of minimum quarterly distributions payable to subordinated unitholders

                  

 

57


Table of Contents
Index to Financial Statements

 

(1)

For a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Summary Historical and Unaudited Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”

(2)

Represents estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NASDAQ Stock Market; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees and director and officer insurance expenses.

(3)

Historically we did not necessarily distinguish between maintenance capital expenditures and expansion capital expenditures in the same manner that will be required under our partnership agreement following the closing of this offering. For purposes of this pro forma presentation, we have retroactively reclassified our total capital expenditures as either maintenance capital expenditures or expansion capital expenditures in the same manner that will be required prospectively under our partnership agreement following the closing of this offering. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”

(4)

Represents estimated cash interest expenses on borrowing drawn under revolving credit facility assuming annual interest rate at 4.25%.

Estimated Distributable Cash Flow for the Twelve Months Ending June 30, 2014

We forecast that our estimated distributable cash flow for the twelve months ending June 30, 2014 will be approximately $27.4 million. This amount would exceed by $         million the amount needed to support the payment of the total annualized minimum quarterly distribution of $         million on all of our units for the twelve months ending June 30, 2014. The assumed number of outstanding units upon which we based our belief does not include any common units that may be issued under the long-term incentive plan that our general partner will adopt prior to the completion of this offering.

We do not, as a matter of course, make public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated distributable cash flow and related assumptions and considerations set forth below to substantiate our belief that we will generate sufficient distributable cash flow to support the payment of the annualized minimum quarterly distribution to all our unitholders, as well as the corresponding distribution on our 2.0% general partner interest, for the twelve months ending June 30, 2014. This forecast is a forward-looking statement and should be read together with our historical combined financial statements and related notes and our unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The accompanying prospective financial information was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we will generate sufficient distributable cash flow to support the payment of the annualized minimum quarterly distribution to all of our unitholders for the twelve months ending June 30, 2014. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

The prospective financial information included in this prospectus has been prepared by, and is the responsibility of, our management. Neither our independent registered public accounting firm nor any other independent accountants have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information. They therefore assume no responsibility for, and disclaim any association with, the prospective financial information. The reports of our independent registered public accounting firm included in this prospectus relate to the historical combined financial information, and those reports do not extend to the prospective financial information and should not be read to do so.

 

58


Table of Contents
Index to Financial Statements

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate sufficient distributable cash flow to support the payment of the annualized minimum quarterly distribution to all of our unitholders for the twelve months ending June 30, 2014.

We are providing the forecast of estimated distributable cash flow and related assumptions set forth below to supplement the historical combined financial statements and unaudited pro forma condensed combined financial statements included elsewhere in this prospectus in support of our belief that we will generate sufficient distributable cash flow to support the payment of the annualized minimum quarterly distribution to all of our unitholders for the twelve months ending June 30, 2014. Please read below under “Assumptions and Considerations” for further information as to the assumptions we have made for the financial forecast.

 

59


Table of Contents
Index to Financial Statements

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the completion of this offering. In light of this, the statement that we believe that we will generate sufficient distributable cash flow to support the payment of the annualized minimum quarterly distribution on all of our outstanding units for the twelve months ending June 30, 2014, should not be regarded as a representation by us, the underwriters or any other person that we will make such distributions. Therefore, you are cautioned not to place undue reliance on this information.

 

    Quarter Ending     Twelve Months
Ending
 
(In thousands)   September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    June  30,
2014
 

Revenues:

         

Natural gas, NGLs and condensate revenue

  $ 8,436      $ 8,806      $ 8,478      $ 8,445      $ 34,165   

Gathering, processing and other revenue

    6,543        6,707        6,681        6,766        26,697   

Gathering, processing and other revenue—affiliates

    4,078        4,078        3,990        4,034        16,180   

Crude oil logistics revenue—affiliates

    3,464        3,464        3,464        3,464        13,856   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

  $ 22,521      $ 23,055      $ 22,613      $ 22,709      $ 90,898   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Revenues:

         

Cost of natural gas, NGLs and condensate revenue

    1,394        1,812        1,735        1,738        6,679   

Cost of natural gas, NGLs and condensate revenue—affiliates

    6,813        6,729        6,475        6,454        26,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Revenue

  $ 8,207      $ 8,541      $ 8,210      $ 8,192      $ 33,150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin(1)

  $ 14,314      $ 14,514      $ 14,403      $ 14,517      $ 57,748   

Operating expenses:

         

Operation and maintenance—gathering and processing

    2,548        2,458        2,509        2,512        10,027   

Operation and maintenance gathering and processing—affiliates

    1,356        1,365        1,386        1,386        5,493   

Operation and maintenance—crude oil logistics

    504        505        507        513        2,029   

Operation and maintenance—crude oil logistics—affiliates

    216        216        217        220        869   

General and administrative(3)

    702        702        702        702        2,808   

General and administrative—affiliates(2)(3)

    1,023        1,023        1,023        1,023        4,092   

Property and other taxes

    297        297        311        311        1,216   

Depreciation expense

    1,957        1,976        1,986        1,997        7,916   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,603        8,542        8,641        8,664        34,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 5,711      $ 5,972      $ 5,762      $ 5,853      $ 23,298   

Interest expense, net of amounts capitalized(4)

    (459     (459     (454     (451     (1,823
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 5,252      $ 5,513      $ 5,308      $ 5,402      $ 21,475   

Plus:

         

Interest expense, net of amounts capitalized(4)

    459        459        454        451        1,823   

State franchise tax(5)

    25        25        25        25        100   

Depreciation expense

    1,957        1,976        1,986        1,997        7,916   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated adjusted EBITDA(6)

  $ 7,693      $ 7,973      $ 7,773      $ 7,875      $ 31,314   

Less:

         

Cash interest expense(7)

    323        323        319        316        1,281   

Cash state franchise tax

    25        25        25        25        100   

Maintenance capital expenditures(8)

    625        625        627        636        2,513   

Expansion capital expenditures(8)

    900        600        250        250        2,000   

Add:

         

Cash on hand to fund capital expenditures

    900        600        250        250        2,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated distributable cash flow

  $ 6,720      $ 7,000      $ 6,802      $ 6,898      $ 27,420   

Distributions to public common unit holders

         

Distributions to NuDevco—common units

         

Distributions to NuDevco—subordinated units

         

Distributions to general partner

         

Excess distributable cash flow over aggregate minimum quarterly distributions

  $        $        $        $        $     

 

(1)

For a definition of gross margin and a reconciliation of gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Summary Historical and Unaudited Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”

(2)

Consists primarily of employee compensation and benefits expense with respect to employees of our general partner and its affiliates that will provide services to us under the omnibus agreement that we will enter into with our general partner and sponsor in connection with this offering, as well as reimbursements to our general partner and its affiliates for various shared services costs, such as information technology services.

 

60


Table of Contents
Index to Financial Statements
(3)

Includes approximately $2.8 million of estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NASDAQ Global Market; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees and director and officer insurance expenses.

(4)

Includes amortization of debt issuance costs relating to our new revolving credit facility and commitment fees incurred with respect to our new revolving credit facility.

(5)

Amounts are included in the property and other taxes line item.

(6)

For a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Summary Historical and Unaudited Pro Forma Financial and Operating Data—Non-GAAP Financial Measure.”

(7)

Includes commitment fees incurred with respect to our new revolving credit facility. Other than the $25 million to be drawn at the closing of this offering, we do not expect to make any borrowings under our new revolving credit facility during the forecast period.

(8)

Historically we did not necessarily distinguish between maintenance capital expenditures and expansion capital expenditures in the same manner that will be required under our partnership agreement following the closing of this offering. For purposes of this pro forma presentation, we have prospectively classified our total capital expenditures as either maintenance capital expenditures or expansion capital expenditures in the same manner that will be required under our partnership agreement following the closing of this offering. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”

Assumptions and Considerations

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending June 30, 2014. While the assumptions disclosed in this prospectus are not all-inclusive, the assumptions listed below are those that we believe are material to our forecasted results of operations and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and the actual results and those differences could be material. If the forecast is not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate or at all.

General Considerations

Substantially all of our distributable cash flow for the twelve months ending June 30, 2014 will be generated under fee-based commercial agreements, the substantial majority of which will have minimum volume commitments. A significant portion of our revenues and certain of our expenses will be determined by commercial agreements that we will enter into with AES at the closing of this offering. In addition, a significant portion of our revenues and certain of our expenses will be attributable to gathering and processing agreements with Anadarko that we entered into at our Panola County processing facilities in 2012, which are not reflected for an entire twelve months in our historical combined financial statements or unaudited pro forma condensed combined financial statements included elsewhere in this prospectus. Historically, we generated revenues primarily under keep-whole and other commodity-based gathering and processing agreements with third parties and our affiliates. At the closing of this offering, we will assign all of our existing commodity-based gathering and processing agreements with third party customers to AES and enter into a new three-year fee-based gathering and processing agreement with AES with a minimum volume commitment. Accordingly, our forecasted results are not directly comparable with historical periods. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.”

We estimate that distributable cash flow for the twelve months ending June 30, 2014 will be $27.4 million, as compared to pro forma distributable cash flow of $10.4 million and $8.2 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. A significant portion of the increase in distributable cash flow for the twelve months ending June 30, 2014 as compared to the year ended December 31, 2012 and the twelve months ended March 31, 2013 on a pro forma basis is attributable to additional revenues that we expect to generate under:

 

   

fixed fees for transloading services that we will provide to AES; and

 

   

a full year of gathering and processing fees under our existing agreements with Anadarko at our Panola County processing facilities.

 

61


Table of Contents
Index to Financial Statements

Total Revenues and Gross Margin

We estimate that our total revenues for the twelve months ending June 30, 2014 will be $90.9 million, as compared to pro forma revenues of $64.2 million and $61.4 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. We estimate that our total gross margin for the twelve months ending June 30, 2014 will be $57.7 million, as compared to pro forma gross margin of $35.6 million and $35.0 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. Approximately $56.7 million, or 98%, of our gross margin for the twelve months ending June 30, 2014, will be derived from fee-based commercial agreements, the substantial majority of which will have minimum volume commitments.

 

(In thousands)   Pro Forma Year
Ended December 31, 2012
    Twelve Months
Ended March 31, 2013
    Twelve Months
Ending June 30, 2014
 

Revenues:

     

Natural gas, NGLs and condensate revenue

  $ 33,531      $ 29,080      $ 34,165   

Gathering, processing and other revenue

    30,642        32,310        42,877   

Crude oil logistics revenue

    —          —          13,856   
 

 

 

   

 

 

   

 

 

 

Total Revenues

    64,173        61,390        90,898   

Cost of natural gas, NGLs and condensate revenue

    28,536        26,421        33,150   
 

 

 

   

 

 

   

 

 

 

Gross Margin

  $ 35,637      $ 34,969      $ 57,748   
 

 

 

   

 

 

   

 

 

 

For a definition of gross margin and a reconciliation of gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Summary Historical and Unaudited Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”

Natural Gas, NGLs and Condensate Revenue

We estimate that natural gas, NGLs and condensate revenue will be $34.2 million, and approximately 2% of our gross margin, for the twelve months ending June 30, 2014, as compared to pro forma revenues of $33.5 million and $29.1 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. Under our commercial agreements that do not require us to deliver NGLs to the customer in kind, including our gathering and processing agreement with AES that we will enter into in connection with the closing of this offering, we provide NGL transportation services to the customer whereby we purchase the NGLs from the customer at an index price, less fractionation and transportation fees, and simultaneously sell the NGLs to third parties at the same index price, less fractionation fees. The sales price of the NGLs that we sell under these arrangements is recorded in natural gas, NGLs and condensate sales. The transportation fees associated with the services on our NGL pipelines are recorded as gathering, processing and other revenue.

Gathering, Processing and Other Revenue

We estimate that gathering, processing and other revenue will be $42.9 million, and approximately 74% of our gross margin, for the twelve months ending June 30, 2014, as compared to pro forma revenues of $30.6 million and $32.3 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. The increase in gathering, processing and other revenue is primarily attributable to the increase in volumes under our fee-based gathering and processing agreements with Anadarko and other third-party customers at our Panola processing facilities. The twelve months ending June 30, 2014 and pro forma year ended December 31, 2012 and twelve months ended March 31, 2013 include the fee-based revenues, including minimum volume commitment payments, we expect to generate under the fee-based gathering and processing agreement we will enter into with AES at the closing of this offering. For the twelve months ending June 30, 2014, we estimate that our gathering, processing and other revenues under this agreement will be approximately $16.2 million.

 

   

Volumes.

 

   

Affiliates. Pursuant to our gathering and processing agreement that we will enter into with AES at our Panola County processing facilities at the closing of this offering, AES will pay us a fixed fee per Mcf for

 

62


Table of Contents
Index to Financial Statements
 

gathering, treating, compression and processing services and a per gallon fixed fee for NGL transportation services, subject to an annual inflation adjustment. The agreement provides for a minimum volume commitment of 80 MMcf/d which, at the option of AES and subject to the availability of capacity at our Panola facilities, may be increased to 100 MMcf/d. At the closing of this offering, we will terminate our existing commodity-based gas gathering and processing agreement with AES and assign to AES all of our remaining keep-whole and other commodity-based gathering and processing agreements with third party customers, which we believe will not have a significant impact on our gross margin on a pro forma basis. Due to various market-related factors, we cannot predict with reasonable certainty the actual volumes of natural gas that AES will deliver to us on a quarter-by-quarter basis. We therefore have based our projections of distributable cash on AES’ minimum volume commitment rather than forecasted AES volumes. AES, as a marketer of natural gas and NGLs, does not explore for or produce the volumes of natural gas it delivers to us for processing. While we believe AES has a reasonable expectation that it will use its contracted volume on an economic basis over the long term, its actual volumes during any applicable period may be below its minimum volume commitment. The pro forma year ended December 31, 2012 includes both minimum volume commitment payments and excess volume payments based on actual volumes delivered by AES. The twelve months ending June 30, 2014 includes minimum volume commitment payments. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results—Gathering and Processing Agreements.”

 

   

Third parties. We estimate that we will process an average of 143 MMcf/d of third party volumes for the twelve months ending June 30, 2014 at our Panola County and Tyler County processing facilities. A significant portion of these forecasted third party volumes are subject to minimum volume commitments. On a pro forma basis, our average daily processed third party volumes during the year ended December 31, 2012 and the twelve months ended March 31, 2013 were 107 MMcf/d and 111 MMcf/d, respectively. The expected increase in volumes in the forecast period as compared to the year ended December 31, 2012 and the twelve months ended March 31, 2013 is primarily due to an increase in Anadarko’s minimum volume commitment at our Panola County processing facilities.

Crude Oil Logistics Revenue

We estimate that transloading fees will be $13.9 million, and approximately 24% of our gross margin, for the twelve months ending June 30, 2014. All of the revenues estimated for the twelve months ending June 30, 2014 result from fixed fees paid by AES under the transloading service agreements that we will enter into with AES at our Wildcat and Big Horn facilities at the closing of this offering. Under these agreements, AES will pay us a fixed fee per barrel for transloading services, subject to an annual inflation adjustment. The agreements provide for minimum volume commitments of 7,600 Bbls/d at each facility with respect to each of our two skid transloaders and 1,260 Bbls/d with respect to each of our three ladder transloaders, for a total 18,980 Bbls/d. Due to various market-related factors, we cannot predict with reasonable certainty the actual volumes of crude oil that AES will deliver to us on a quarter-by-quarter basis. We therefore have based our projections of distributable cash flow on AES’ minimum volume commitment rather than forecasted AES volumes. AES, as a marketer of crude oil, does not explore for or produce the volumes of crude oil it delivers to us for transloading. While we believe AES has a reasonable expectation that it will use its contracted volume on an economic basis over the long term, its actual volumes during any applicable period may be below its minimum volume commitment. The twelve months ending June 30, 2014 includes twelve months of transloading fees at both the Wildcat and Big Horn facilities at the minimum volume commitment levels.

Revenue from our crude oil logistics business is not included in our historical combined financial statements or unaudited pro forma condensed combined financial statements included elsewhere in this prospectus because our crude oil logistics assets were not in service during the periods covered by such financial statements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.”

 

63


Table of Contents
Index to Financial Statements

Cost of Revenue

We estimate that our cost of natural gas, NGLs and condensate revenue will be approximately $33.2 million for the twelve months ending June 30, 2014, as compared to pro forma cost of natural gas, NGLs and condensate revenue of $28.5 million and $26.4 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. The increase in the cost of natural gas, NGLs and condensate revenue from the year ended December 31, 2012 and the twelve months ended March 31, 2013 to the twelve months ending June 30, 2014 is primarily attributable to changes in our commercial agreements with third parties other than Anadarko. In the pro forma cost of revenues for the year ended December 31, 2012 and the twelve months ended March 31, 2013, certain of our gathering and processing agreements with third parties were primarily keep-whole contracts. Under these contracts, we were required to make up or “keep the producer whole” for the condensate and NGL volumes extracted from the natural gas stream through the delivery, or payment for a thermally equivalent volume, of residue gas. The cost of these “replacement” natural gas volumes was recorded in our cost of natural gas, NGLs and condensate revenues. As reflected in the twelve months ending June 30, 2014, these keep-whole contracts will have been converted to fee-based arrangements at or prior to the closing of this offering. During the year ended December 31, 2012, we purchased 3 MMcf/d of replacement gas at a cost of $3.0 million, and during the twelve months ended March 31, 2013, we purchased 3 MMcf/d of replacement gas at a cost of $2.7 million. The cost of such replacement gas is reflected in the pro forma cost of natural gas, NGLs and condensate revenue for each period.

Under our existing gathering and processing agreements with third parties, we provide NGL transportation services to the customer whereby we purchase the NGLs from the customer at an index price, less fractionation and transportation fees, and simultaneously sell the NGLs to third parties at the same index price, less fractionation fees. The purchase price of the NGLs that are purchased under these arrangements is recorded in cost of natural gas, NGLs and condensate revenue. There are no material costs categorized as cost of revenue directly identified with gathering, processing and other revenue.

Total Operating Expenses Excluding Cost of Revenue

We estimate that total operating expenses excluding cost of revenues for the twelve months ending June 30, 2014 will be approximately $34.5 million, as compared to pro forma operating expenses of $27.9 million and $28.8 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. The increase in total operating expenses excluding cost of revenues is primarily attributable to the commencement of significant operations in our crude oil logistics segment from $0.0 for both the year ended December 31, 2012 and the twelve months ended March 31, 2013 on a pro forma basis to $2.9 million for the twelve months ending June 30, 2014 and an increase of incremental expenses in the amount of $2.8 million as a result of being a publicly traded partnership.

 

(In thousands)    Pro Forma Year
Ended December 31, 2012
     Pro Forma Twelve Months
Ended March 31, 2013
     Twelve Months
Ending June 30, 2014
 

Operation and maintenance—gathering and processing

   $ 15,385       $ 15,407       $ 15,520   

Operation and maintenance—crude oil logistics

     —           —           2,898   

General and administrative expenses

     4,066         4,711         6,900   

Property and other taxes

     994         1,030         1,216   

Depreciation expense

     7,481         7,611         7,916   
  

 

 

    

 

 

    

 

 

 

Total operating expenses excluding cost of natural gas, NGLs and condensate revenue

   $ 27,926       $ 28,759       $ 34,450   
  

 

 

    

 

 

    

 

 

 

Operation and Maintenance Expense—Gathering and Processing

We estimate that operation and maintenance expense for our gathering and processing activities for the twelve months ending June 30, 2014 will be $15.5 million, as compared to pro forma operation and maintenance expense of $15.4 million for both the year ended December 31, 2012 and the twelve months ended

 

64


Table of Contents
Index to Financial Statements

March 31, 2013. Operation and maintenance expense for gathering and processing is primarily composed of expenses related to labor, utilities and chemicals, property insurance premiums, compression costs and maintenance and repair expenses, which generally remain relatively stable across broad ranges of throughput volumes. We anticipate that historical levels of recurring operation and maintenance expense for our gathering and processing activities, adjusted for inflation, will remain relatively constant in the twelve months ending June 30, 2014.

Operation and Maintenance Expense—Crude Oil Logistics

We estimate that operation and maintenance expense for our crude oil logistics activities for the twelve months ending June 30, 2014 will be $2.9 million. Operation and maintenance for crude oil logistics services is primarily composed of expenses related to labor, utilities and site access fees at our Wildcat and Big Horn facilities. At our Wildcat facility, we pay a monthly fee for the first 100 trucks that offload at our facility and an additional fee per truck thereafter pursuant to a site access agreement and a monthly fee pursuant to a rail siding lease. At our Big Horn facility, we pay a monthly fee pursuant to a rail siding lease and service agreement.

Operation and maintenance expense for crude oil logistics is not included in our historical combined financial statements or unaudited pro forma condensed combined financial statements included elsewhere in this prospectus because our crude oil logistics assets had no material operations during the periods covered by such financial statements. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.”

General and Administrative Expense

We estimate that general and administrative expense for the twelve months ending June 30, 2014 will be $6.9 million, compared to pro forma general and administrative expense of $4.1 million and $4.7 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. General and administrative expense for the twelve months ending June 30, 2014 is primarily composed of a $4.1 million overhead allocation from our general partner and the incremental costs associated with being a publicly traded partnership. The increase in general and administrative expense from the year ended December 31, 2012 and the twelve months ended March 31, 2013 on a pro forma basis as compared to the twelve months ending June 30, 2014 includes an estimated $2.8 million of incremental expenses of being a publicly traded partnership.

Property and Other Taxes

We estimate that our property, ad valorem and state margin taxes for the twelve months ending June 30, 2014 will be $1.2 million, compared to pro forma property, ad valorem and state margin taxes of $1.0 million and $1.0 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively.

Depreciation Expense

We estimate that depreciation expense for the twelve months ending June 30, 2014 will be $7.9 million, as compared to pro forma depreciation expense of $7.5 million and $7.6 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. Estimated depreciation expense reflects management’s estimates, which are based on consistent average depreciable asset lives and depreciation methodologies. The increase in depreciation expense is primarily attributable to the completion of our Oak Hill Lateral, the installation of molecular sieves at our Panola 1 processing plant and the addition of transloading assets.

Maintenance Capital Expenditures

We estimate that we will incur $2.5 million for maintenance capital expenditures during the twelve months ending June 30, 2014, as compared to $2.0 million and $1.7 million for pro forma maintenance capital expenditures for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. Maintenance capital expenditures are expenditures made to maintain, over the long term, our operating capacity or operating income. The increase in maintenance capital expenditures reflects the overhauls and upgrades to major equipment at our Panola County and Tyler County processing facilities in order to maintain the reliability and functionality of the equipment.

 

65


Table of Contents
Index to Financial Statements

Expansion Capital Expenditures

We estimate that our expansion capital expenditures for the twelve months ending June 30, 2014 will total $2.0 million, as compared to pro forma expansion capital expenditures of $9.0 million and $12.5 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. Expansion capital expenditures in the twelve months ending June 30, 2014 are primarily attributable to the installation of molecular sieves at our Panola 1 processing plant, which will expand the capacity of our Panola County processing facilities by approximately 4% and reduce ongoing operational expense. Pro forma expansion capital expenditures during the year ended December 31, 2012 and the twelve months ended March 31, 2013 were related to the completion of our Panola 2 processing plant and completion of our Oak Hill Lateral. Expansion capital expenditures are expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity, operating throughput or operating income over the long term.

Historically we did not necessarily distinguish between maintenance capital expenditures and expansion capital expenditures in the same manner that will be required under our partnership agreement following the closing of this offering. For purposes of this presentation, we have classified our total historical capital expenditures as either maintenance capital expenditures or expansion capital expenditures in the same manner that will be required prospectively under our partnership agreement following the closing of this offering.

Financing

We estimate that interest expense will be approximately $1.8 million (including non-cash interest expense related to deferred financing fees) for the twelve months ending June 30, 2014, compared to pro forma interest expense of $1.5 million and $1.5 million for the year ended December 31, 2012 and the twelve months ended March 31, 2013, respectively. Our estimate of interest expense for the forecast period is based on the following assumptions:

 

   

we will have a new senior secured revolving credit facility of $50.0 million, which we have assumed was drawn in the amount of $25.0 million at the closing of this offering;

 

   

we will have no outstanding borrowings during the forecast period;

 

   

our effective interest rate on unutilized revolving credit facility capacity will be 0.5%; and

 

   

we will be in compliance with the covenants under our new revolving credit facility.

Regulatory, Industry and Economic Factors

Our forecast for the twelve months ending June 30, 2014 is based on the following significant assumptions related to regulatory, industry and economic factors:

 

   

there will not be any new federal, state or local regulation of the midstream energy sector, or any new interpretation of existing regulations, that will be materially adverse to our business;

 

   

there will not be any major adverse change in the midstream energy sector, commodity prices, capital or insurance markets or general economic conditions;

 

   

there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our facilities or those of third parties on which we depend; and

 

   

we will not make any acquisitions or other significant expansion capital expenditures (other than as described above).

 

66


Table of Contents
Index to Financial Statements

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending                     , 2013, we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the amount of our distribution for the period from the completion of this offering through                     , 2013 based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business (including reserves for our future capital expenditures and anticipated future debt service requirements and for anticipated shortfalls on future minimum commitment payments to which prior credits may be applied);

 

   

comply with applicable law, any of our debt instruments or other agreements; or

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the effect of the establishment of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

   

plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

Intent to Distribute the Minimum Quarterly Distribution

Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner and its affiliates. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. The amount of distributions paid under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sources of Liquidity—Credit Facilities” for a discussion of the restrictions included in our revolving credit facility that may restrict our ability to make distributions.

General Partner Interest and Incentive Distribution Rights

Initially, our general partner will be entitled to 2.0% of all quarterly distributions from inception that we make prior to our liquidation. This general partner interest will be represented by              general partner units.

 

67


Table of Contents
Index to Financial Statements

Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2.0% interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest.

NuDevco will indirectly hold incentive distribution rights that will entitle it to receive increasing percentages, up to a maximum of 48.0%, of the available cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 48.0% does not include any distributions that our general partner or its affiliates may receive on common, subordinated or general partner units that they own. Please read “—General Partner Interest and Incentive Distribution Rights” below for additional information.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating Surplus

We define operating surplus as:

 

   

$         million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below); plus

 

   

working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such 12-month period with the proceeds of additional working capital borrowings.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures (as described below) and thus reduce operating surplus when repayments are made. However, if working capital borrowings, which increase operating surplus, are not repaid during the twelve months following the borrowing, they will be deemed repaid at the end of such period, thus

 

68


Table of Contents
Index to Financial Statements

decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (ii) sales of equity securities, and (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements.

We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses of our general partner and its affiliates, officer, director and employee compensation, debt service payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its settlement or termination date specified therein will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of a rate hedge contract or a commodity hedge contract will be amortized at the life of such rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings; provided, however, that operating expenditures will not include:

 

   

repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

   

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

payment of transaction expenses (including taxes) relating to interim capital transactions;

 

   

distributions to our partners;

 

   

repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans); or

 

   

any other expenditures or payments using the proceeds of this offering that are specifically described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities;

 

   

sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets; and

 

   

capital contributions received.

Characterization of Cash Distributions

All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed by us since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that

 

69


Table of Contents
Index to Financial Statements

distribution. We anticipate that distributions from operating surplus will generally not represent a return of capital. However, operating surplus, as defined in our partnership agreement, includes certain components, including a $             million cash basket, that represent non-operating sources of cash. Consequently, it is possible that all or a portion of specific distributions from operating surplus may represent a return of capital. Any available cash distributed by us in excess of our cumulative operating surplus will be deemed to be capital surplus under our partnership agreement. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this offering and as a return of capital. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures are cash expenditures made to maintain, over the long term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional processing or pipeline capacity, to the extent such capital expenditures are expected to expand our long-term operating capacity or operating income. Expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date that such capital improvement commences commercial service and the date that such capital improvement is abandoned or disposed of.

Capital expenditures that are made in part for maintenance capital purposes and in part for expansion capital purposes will be allocated as maintenance capital expenditures or expansion capital expenditures by our general partner.

Subordinated Units and Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions until the common units have received the minimum quarterly distribution plus any arrearages from prior quarters. Furthermore, no arrearages will accrue or be payable on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units.

Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and will extend until the first business day following the distribution of available cash in respect of any quarter beginning after                     , 2016, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units subordinated units and general partner units equaled or exceeded $         (the annualized minimum quarterly distribution), for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

70


Table of Contents
Index to Financial Statements
   

the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the outstanding common units subordinated units and general partner units during those periods on a fully diluted basis; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter, beginning with the quarter ending                     , 2014, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $         (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (i) $         (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common units, subordinated units and general partner units during that period on a fully diluted basis and (ii) the corresponding distributions on the incentive distribution rights; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Expiration Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause:

 

   

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an affiliate of the successor general partner;

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end; and

 

   

our general partner will have the right to convert its general partner interest into common units or to receive cash in exchange for that interest.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:

 

   

operating surplus generated with respect to that period (excluding any amount attributable to the item described in the first bullet of the definition of operating surplus); less

 

   

any net increase in working capital borrowings with respect to that period; less

 

   

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

   

any net decrease in working capital borrowings with respect to that period; plus

 

   

any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods; plus

 

71


Table of Contents
Index to Financial Statements
   

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Distributions of Available Cash from Operating Surplus during the Subordination Period

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

   

first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

Distributions of Available Cash from Operating Surplus after the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

General Partner Interest and Incentive Distribution Rights

Our partnership agreement provides that our general partner initially will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest if we issue additional units. Our 2.0% general partner interest, and the percentage of our cash distributions to which it is entitled from such 2.0% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon exercise by the underwriters of their option to purchase additional common units in this offering, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash. Our general partner may instead fund its capital contribution by the contribution to us of common units or other property.

Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. NuDevco will indirectly hold the incentive distribution rights, but may transfer these rights, subject to restrictions in our partnership agreement.

The following discussion assumes that our general partner maintains its 2.0% general partner interest, and that NuDevco continues to own the incentive distribution rights.

 

72


Table of Contents
Index to Financial Statements

If for any quarter:

 

   

we have distributed available cash from operating surplus to the common unitholders and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to NuDevco (in its capacity as the holder of our incentive distribution rights), until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to NuDevco (in its capacity as the holder of our incentive distribution rights), until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to our NuDevco (in its capacity as the holder of our incentive distribution rights).

Percentage Allocations of Available Cash from Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus among the unitholders, our general partner and NuDevco (in its capacity as the holder of our incentive distribution rights) based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions” are the percentage interests of our general partner, NuDevco (in its capacity as the holder of our incentive distribution rights) and our unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total quarterly distribution per unit target amount.” The percentage interests shown for our unitholders, our general partner and NuDevco (in its capacity as the holder of our incentive distribution rights) for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest and that there are no arrearages on common units.

 

     Total Quarterly Distribution
Per Unit Target Amount
   Marginal Percentage
Interest in Distributions
 
     

Common

Unitholders

   

General
Partner
Interest

   

NuDevco (as Holder
of Our Incentive

Distribution

Rights)

 

Minimum Quarterly Distribution

   $                     98.0     2.0     —    

First Target Distribution

   above $                up to $                  98.0     2.0     —    

Second Target Distribution

   above $    up to $      85.0     2.0     13.0

Third Target Distribution

   above $    up to $      75.0     2.0     23.0

Thereafter

   above $         50.0     2.0     48.0

NuDevco’s Right to Reset Incentive Distribution Levels

NuDevco has the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to NuDevco would be set. If NuDevco transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will

 

73


Table of Contents
Index to Financial Statements

be entitled to exercise this right. The following discussion assumes that NuDevco will hold all of the incentive distribution rights at the time that a reset election is made. NuDevco’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to NuDevco are based may be exercised, without approval of our unitholders or the conflicts committee, at any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four consecutive fiscal quarters immediately preceding such time and the amount of each such distribution did not exceed adjusted operating surplus for such quarter, respectively. If NuDevco and its affiliates are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of our general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that NuDevco will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that NuDevco would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to NuDevco.

In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by NuDevco of incentive distribution payments based on the target distributions prior to the reset, NuDevco will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by NuDevco for the two quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period. In addition, our general partner will be issued the number of general partner units necessary to maintain its interest in us immediately prior to the reset election.

The number of common units that NuDevco would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by NuDevco in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to NuDevco (in its capacity as the holder of our incentive distribution rights), until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to NuDevco (in its capacity as the holder of our incentive distribution rights), until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to NuDevco (in its capacity as the holder of our incentive distribution rights).

 

74


Table of Contents
Index to Financial Statements

The following table illustrates the percentage allocations of available cash from operating surplus among the unitholders, our general partner and NuDevco (in its capacity as the holder of our incentive distribution rights) at various cash distribution levels (i) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (ii) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $        .

 

    Quarterly Distribution
Per Unit Prior to Reset
  Marginal Percentage
Interest in Distributions
    Quarterly Distribution
Per Unit Following
Hypothetical Reset
   

Common
Unitholders

   

General
Partner
Interest

   

NuDevco (as
the Holder of
our Incentive
Distribution
Rights

   

Minimum Quarterly Distribution

              $       98.0     2.0     —                   $          

First Target Distribution

  above $           up to $             98.0     2.0     —       above $           up to $        (1)

Second Target Distribution

  above $   up to $     85.0     2.0     13.0   above $        (1)   up to $        (2)

Third Target Distribution

  above $   up to $     75.0     2.0     23.0   above $        (2)   up to $        (3)

Thereafter

  above $       50.0     2.0     48.0   above $        (3)  

 

(1)

This amount is 115.0% of the hypothetical reset minimum quarterly distribution.

(2)

This amount is 125.0% of the hypothetical reset minimum quarterly distribution.

(3)

This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders, our general partner and NuDevco (in its capacity as the holder of our incentive distribution rights), including in respect of incentive distribution rights, based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be              common units outstanding, our 2.0% general partner interest has been maintained, and the average distribution to each common unit would be $         per quarter for the two consecutive non-overlapping quarters prior to the reset.

 

    Quarterly Distributions
per Unit Prior to Reset
  Cash
Distributions
to Common
Unitholders
Prior to
Reset
    Cash Distributions to General Partner and
NuDevco
Prior to Reset
    Total
Distributions
 
     

Common

Units

   

2.0%
General
Partner
Interest

   

Incentive
Distribution
Rights

   

Total

   

Minimum Quarterly Distribution

              $           $                   $           $               $  —        $               $                

First Target Distribution

  above $         up to $               —            —         

Second Target Distribution

  above $         up to $               —             

Third Target Distribution

  above $         up to $               —             

Thereafter

  above $               —             
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $                   $ —        $                   $           $                   $